Corporate Welfare: A Better Way?

Nearly all governments give in to the temptation to try to boost employment and/or economic growth. After all, if possible it’s a worthy aim; and I believe it is possible. But it seems clear that tax credits, such as I described previously, are worse than useless. However, Nigeria appears to have found a better way to expand employment by giving businesses money. The idea was a nation-wide contest: small businesses would submit business plans and the winners would receive the equivalent of about $50,000 each, not in off-budget tax credits but in a simple grant. Names were taken off of applications, and judges were selected from outside Nigeria. Some business plans were eliminated and some selected as winners in the judging stage. For the majority of remaining plans, winners were selected at random, which allowed World Bank economists to study the effects of this natural experiment. In the first year of the program (it is ongoing), around $36 million was given out.

Three years after the initial selection, there were significant benefits for those who randomly won compared to the control group (entrants who were randomly eliminated). Of those who submitted a plan to start a new business, winners were 37 percentage points more likely to have started a business and 23 percentage points more likely to have 10 or more employees. Of existing businesses, winners were 20 percentage points more likely to have survived and 21 percentage points more likely to have 10 or more employees. On average, winners purchased more capital for their businesses and earned higher sales and profits than the control group. Just the random winners from the first year of the program are estimated to have created 7,000 more jobs than the control group.

The researchers also found that “personal, business, and business plan characteristics have low predictive power for identifying which entrepreneurs will grow faster, and…respond best to treatment.” That finding argues against the idea that a group of experts, let alone politicians, have the ability to spot businesses that will turn investment into job growth, which is supposedly what governments that give out tax credits are trying to do (unless the goal really is to buy corporate favor). Basically, the government shouldn’t be trying to pick winners because they lack the ability to effectively do so. But nor should government do nothing. The only reason Nigeria’s program has been successful is that the private sector is failing to pair businesses in need of investment with savings. Nigeria’s government came up with an informed policy to address that market failure, with seeming success.

The question of whether this is in fact a better way for anyone else comes down to external validity. Nigeria is much different from a rich country for example. It would naturally cost more to create a job in the US owing to higher wages and other employment costs. Furthermore, rich countries have more developed financial infrastructure and the average person has greater access to the financial sector. As a result, I expect that any failure of financial markets to match savings with investment is much less significant in the US vs Nigeria. But it still exists: the poor (and small businesses more generally) in the US are largely excluded from the financial sector, have trouble accessing credit, etc. There’s room for improvement, and the government picking winners from among big businesses does not work.

Corporate Welfare in Maryland

Corporate welfare is having a bit of a moment in the sun, particularly after the very public tax credits and threatening that Carrier and its parent company received in order to keep about 800 jobs in Indiana. Incidentally, manufacturing employment in Indiana has decreased by 3,900 jobs year-over-year as of November 2016, or by about 0.8% [1]. Corporate welfare, however, is a bi-partisan endeavor. Even in “deep blue” Maryland, the Democratic controlled legislature and Republican governor can agree on giving hand-outs to large companies. And it’s nothing new; past governors supported such measures.

Most recently, Governor Larry Hogan and legislative leaders have agreed to give a $20 million forgivable loan to Northrop Grumman, on top of about $38 million in refundable tax credits over the next five years, approved last legislative session. They also agreed to pursue around $60-70 million in refundable credits and forgivable loans in order to keep Marriott’s headquarters in Maryland (including $22 million from Montgomery County, where Marriott is currently headquartered). 

Marriott was given about $43 million in 1999 (or $62 million in today’s dollars) for a promise to add 700 jobs (or about $88,600 per job in today’s dollars). Unsurprisingly, the jobs never came. The final value of the incentives was pared down, but Marriott kept a majority of the money despite not fulfilling its promise [2]. This time around Marriott does not need to create any jobs to be paid in full, but only to keep the ones that already exist. There are many other tax credits that reduce state revenues for dubious benefit, such as a film production credit. Altogether, corporate tax credits reduce revenue by over ten million of dollars a year.

In Maryland, a portion of corporate income tax revenue goes towards higher education and the Department of Transportation (MDOT). Tax credits therefore lower investment in higher education and transportation networks. The revenue that goes to MDOT for capital projects often includes matching dollars from the federal government, multiplying the opportunity cost. To the extent that we end up with lower quality education and transportation systems, the state will suffer [3]. Good education systems and transportation networks attract employers, without the choice of who benefits being left up to politicians. Only a portion of corporate income tax goes to those purposes, but the point is that against the dubious supposed benefits, there are real costs in reduced public investment.

In defending corporate welfare, Hogan stated: “In the past eight years, I believe Maryland lost 20 of its 24 Fortune 500 companies. I don’t want to see that happen. We have four left.” He repeatedly made this claim during his campaign, although the numbers cited tend to vary. Whichever quote you use, it's false. But even if it weren't, who gives a shit? What matters is not how large some of our employers are, but whether jobs are being created and how much they pay. Here’s the performance of employment and income over the past eight years, indexed to 2006 Q4:

Neo-Nazis Among Us or If Adolf Hitler Flew in Today, They’d Send a Limousine Anyway

The second part of that title is from a Clash song that is increasing in relevance. Anyway, everyone’s heard of the new iteration of the illiberal right (aka fascists) that recently burst onto the scene in US politics. I’m even avoiding using their name for themselves since they seem to have all damn day to search the internet and bother anyone who mentions them or the spray-tanned asshole president who, whatever his real - probably fascist - views, they support wholeheartedly. It seems like they already have gained some level of acceptance in the media / mainstream politics, at least in the sense that they have succeeded in framing their public image and are treated like a KKK-lite.

This is possible only if one refuses to think through how they could possibly achieve their goals. They want a nation built around and for white men and no one else, where whites remain the majority and white men hold all socio-economic power indefinitely[1]. There is no way such a future could come about with our Constitution intact. There is no way such a future could come about without the wholesale denial of our inalienable rights to vast quantities of US citizens. If they succeed, the best-case scenario may be that they make things so bad for non-whites that they leave, or it may be the unconstitutional revocation of citizenship and mass deportation. The worst-case is genocide. Otherwise, whites will become a minority in the US in about 30 years[2]. This is why they are neo-Nazis, pure and simple. It is not possible for their desired outcome for this nation to include the survival of our constitutional rights. Take them at the logical implications of their word; they mean it.

Rural Privilege

One of the explanations for Trump’s victory is that “Rural America” has been ignored and forgotten by our government, and so a majority of voters in rural areas picked the only outsider/change candidate that was available. In this telling it just so happens that the outsider they voted for is a racist, misogynist, xenophobe. Whatever voters’ reasons, that premise is false. First, it’s somewhat lazy to generalize about such people as a whole, as I’m now doing, because not everyone in any area votes the same way. Second, rural areas are over-represented in our congress and in their voting power for the president. They consistently receive more in federal spending than they pay in taxes. This wasn’t a protest vote to get the attention of our ruling class. Rather, it was a vote to preserve the privileges the (mostly white, male, and native born) ruling class gives them and to warn us off of challenging that status-quo.

Our rural areas are depopulating, but this is an inevitable consequence of economic and technological growth that is occurring the world over. And who is supposedly being pandered to at the expense of Rural America? Urban America? Our cities, excluding the largest few, have suffered from depopulation and job loss as well. Both urban and rural areas would be worse off if people weren't able to move away to find opportunities elsewhere, and better off if we were more accepting of immigrants. The residents of urban areas also feel that no one from outside cares how bad things get, but they lack an equal voice in our system.

What up

I took quite a break from this. Partly because I had less time for it, and partly because I ran out of things I really wanted to post on a website no one looks at. I blame Obama. He's pretty reasonable and moderate on economic issues (except that he's bad at monetary economics, but so are most economists even), so he wasn't giving me much material. I'm pretty confident that's about to change. A halcyon age of heterodox economics is about to be unleashed upon us. To the barricades.