With bailout mania sweeping the nation, it is hardly a surprise to see the struggling Boscov’s department store with its hand out. But the current proposal to give Boscov's $35 million in taxpayer backing for a loan is bad economic policy.
While county commissioners from a handful of counties have agreed to go along with this scheme, Snyder County officials have rejected it outright, and officials in Blair and Butler counties are still considering putting their taxpayers on the hook. Pennsylvania state officials are pressuring the counties to go along, arguing the loan would be "risk free" and guaranteed to revitalize Boscov's and the local economy.
However, if the loan is risk free, why doesn’t the private sector put up the money? Investors are always looking for a no-risk, guaranteed return. However, state (along with federal and local) government officials might be assessing the level of risk a little differently—since they are "investing" other people’s money.
In fact, an Allegheny County economic development official recently admitted to a WTAE reporter that taxpayer loans are frequently granted to businesses after private lenders reject their business plan. It should be noted that he made this statement explaining why so many government loans had never been repaid.
Boscov’s must find a sustainable business model, using bankruptcy to restructure and develop a plan private lenders will support. This restructuring does not mean all employees, or every supplier of products, will lose their jobs.
Even if Boscov''s went out of business, Pennsylvania's economy would survive. Consumers will still shop, and other businesses will step in fill the void left by Boscov’s.
Here in Pennsylvania, almost 52,000 businesses closed shop in 2007, but 54,000 new ones were created. Governor Rendell stated that these "start-ups" would never have received the loan Boscov’s did—yet small businesses now employ over half of all workers in Pennsylvania. Furthermore, all of the job growth from 2002-05 occurred among small businesses; large employers lost workers. Our state economy is not dependent on Boscov's to survive.
Decisions such as whether to bail out Boscov's are almost always based on political, rather than economic grounds. That Mr. Boscov is a well-regarded figure in the Pennsylvania community (not to mention a major campaign donor) is a much greater factor for county officials than Boscov's restructuring model. The intense lobbying effort of Boscov's and the Rendell administration will likely weigh more heavily on this decision than a consideration of the economic effects of supporting—or rejecting—the loan.
Boscov's is hardly alone in this scheme. Many big businesses and sports teams often extort money from government, threatening to move or shut down if they don't get taxpayer funds. Yet these threats—along with news releases from Governor Rendell celebrating the "jobs created" from taxpayer gifts—are deceitful.
Mario Lemieux admitted last August that he never thought of moving the Pittsburgh Penguins (during a groundbreaking ceremony for the new $290 million hockey arena.) Yet his threats and ransom demand earned him and the Penguins a great deal in which state taxpayers pick up the bulk of the cost of his arena.
Likewise, filmmakers have recently benefited from the corporate welfare mentality, partaking in both a grant program and a tax credit. Yet some of the filmmakers admitted they would film in Pennsylvania even if they hadn't received state aid. In other words, no new jobs were "created" by taxpayer subsidies, but wealthy team owners and businessmen profited heavily from the lobbying efforts.
Even when government grants and loans do attract new businesses, they do so at a cost (i.e. higher taxes) to existing businesses and residents. At the end of the day, the process of rewarding politically selected firms is bad long-term economic policy. There is little to no evidence of its benefits.
Bailouts—along with all corporate welfare—harm successful businesses. Stores competing with Boscov's have operated successfully, but Boscov’s failure gets rewarded with taxpayer-backed loans. If policymakers continue to offer perverse incentives like this, there will be little reward for running an effective business, but a payoff for lobbying for taxpayer subsidies.
"Economic development" spending like the Boscov's bailout doesn't grow the economy. It is based on political merit rather than economic merit and represents a perverse incentive—redistributing funds from successful business to failing enterprises. When government tries to picks winners, it is taxpayers and the economy who lose.
# # #
Nathan A. Benefield is Director of Policy Research with the Commonwealth Foundation (www.CommonwealthFoundation.org), an independent, nonprofit public policy research and educational institute based in Harrisburg.