October 11, 2005
Economic Stimulus or Corporate Welfare?
by John Andrews
When Boss Tweed dumped a few million dollars in taxpayer money into the pockets of his private sector friends, it was called corruption. Today we call this economic stimulus. The term creates visions of abundant jobs and a healthy economy. But surprisingly, some economists argue that poorly-conceived economic stimulus programs are just a form of corporate welfare that may actually be costing us jobs.
Few economic stimulus programs are based on a careful economic planning. Most are brazen efforts to reward a narrow sector of corporate interests that are big donors to political campaigns. This shouldn’t be surprising. Under our current campaign financing system, the careers of politicians are dependent upon campaign donations from business interests. There is continuing pressure to find ways to reward big donors with tax breaks or gifts of taxpayer money. Being able to point to your sponsorship of such benefits helps tremendously when you’re dialing for dollars during your next re-election campaign.
The problem legislators face is how to reward big donors without suffering political consequences. Two tactics are commonly employed. The first is to make the bill’s language so arcane and incomprehensible that no one knows what you’re doing – and to rush it through without allowing opportunity for questions to be asked. The second tactic is to label the measure “economic stimulus”and pass it off as a “jobs bill”. This term allows a multitude of sins to be whitewashed, because any gift to a corporation can be said to “create jobs”.
Why doesn’t all this “economic stimulus” work? Here are some of the reasons:
• Subsidies using taxpayer money cost jobs first, and create jobs later. Taking money out of the pockets of taxpayers to fund subsidies reduces local spending immediately. Local businesses see lower revenues and higher costs, and respond by hiring fewer employees. It is only later, after the subsidies are handed out, that job creation can begin. Any subsidy scheme starts out in a hole and has to work hard just to break even. It is especially unwise to use subsidies at a time when the economy is in a downturn – because the current distress is worsened and the benefits arrive years later when the stimulus may not be unneeded.
• The tax cuts and hand-outs featured in most stimulus packages don’t work. A review of the literature on business tax cuts by Oregon State University noted that “Most empirical analyses continue to support the view that state and local fiscal policy . . . is not a major determinant of business location or expansion choices.” Massachusetts concluded that a recent $66 million job creation package resulted in only 343 jobs.
• Prioritizing corporate welfare leads to neglect of the real foundations of a healthy economy. The Joint Economic Committee of the U.S. Congress reports that a city’s quality of life is more important than purely business-related factors when it comes to attracting new businesses, particularly in the rapidly growing high-tech and service industries. Furthermore Oregon State researchers noted that: “Business tax cuts–and cuts must be substantial to encourage business growth–are likely to be coupled with reductions in education, infrastructure, and other public service spending which will discourage business growth.”
The corporations that are dependent upon government handouts are poor candidates for building a healthy state economy. They are often corporations that survive through political intrigue, that constantly threaten to move out of state if they do not get more favors, and which have a disturbing tendency to go bankrupt. You don’t want to count on an Enron or Worldcom to secure your future. According to PricewaterhouseCooper few of the nation’s fastest growing companies have been the beneficiaries of government largesse–only one in four has ever obtained tax or other incentives for expanding to new sites. The companies that are not looking for payoffs are the ones you want to expand in your state.
What is good for favor-seeking corporations is often bad for the economy as a whole. When a polluting corporation is given weaker environmental standards, its profits go up. But in some other corporation, a key employee is exposed to more pollution and comes down with brain cancer. Doing favors for business friends is definitely not the same as helping the economy as a whole.
To really help the economy, legislators need to take care of the key governmental responsibilities entrusted to them. Good businesses thrive under good governments.
Good businesses need a quality education system that delivers skilled, well-educated graduates for the workforce. They need healthy communities so that the talented people they are trying to recruit want to live in Massachusetts. They need a healthy workforce, that shows up for work rather than calling in sick and making claims on health insurance. Sadly, the programs that deliver these things are the very programs that are cut to deliver corporate welfare.
Since 2001, the Massachusetts legislature has responded to a lingering budget crisis by making massive cuts in school aid, higher education, public health, the environment, and affordable housing. Until these programs are restored, every dollar spent on corporate welfare is a net loss for the economy.
John Andrews is the policy coordinator for the Massachusetts Coalition for Healthy Communities (www.masschc.org)