Corporate Welfare’s Hazards
State officials often hail the Redevelopment Assistance Capital Program (RACP or R-Cap) as a tool for “economic development” projects across the commonwealth. The program uses borrowed money—with interest payments financed by taxpayers—to help pay for these projects. But does R-Cap really support economic growth?
R-Cap gives state officials license to hand out grants for private projects meeting certain requirements. These corporate welfare programs transfer wealth to and concentrate power in government at the expense of taxpayers, with little benefit.
A new study authored by Dr. Adam Millsap of the Mercatus Center focuses on the R-Cap program, its effects on state employment, and the inherent problems associated with corporate welfare.
On the employment side, Millsap finds a positive benefit between R-Cap grants and economic growth:
The analysis shows that a one standard deviation increase in the natural log of RACP funding per capita in 2010 resulted in a 1.1 percentage point increase in county employment growth from 2010 to 2013.
Put simply, by increasing R-Cap funding above a certain level, a county could expect to see an increase in job growth. So government spending can create economic growth. Case closed, right? Not quite. Millsap notes:
It should be emphasized that the positive effect found here is not surprising, and it does not show that the grant led to a net increase in Pennsylvania’s economic growth. [Bold mine.]
Yes, government spending increased employment in the areas where it was directed, but this doesn’t mean government spending is good for the entire state. Millsap explains:
Instead of spending time and energy inventing new products or improving production processes, entrepreneurs are incentivized to expend resources pursuing government grants. Since the grant is simply a transfer of resources from one group to another—in this case from taxpayers to the winning businesses—the resources spent on acquiring the grant do not create new output…
Not only does government create perverse incentives for businesses, but it also misuses taxpayer dollars by diverting those dollars to politically-savvy groups, instead of allowing those who earn it to spend it as they wish.
While Millsap's study does not analyze R-Cap's effect on total employment growth in the state, evidence compiled by CF suggests corporate welfare does not improve a state's economy.
Rather than requiring taxpayers to fund government grant programs or horse race prizes, lawmakers should cut corporate welfare and use the savings to lower the tax burden on all business, putting the economic decision-making authority where it belongs: with working people in the private sector.