Bail on These Bonds

If Pennsylvania is the next state to tax, borrow or spend its way to prosperity, it will also be the first. The historical and economic reality is that government is an inept manager of the economy. No central planner in Harrisburg will ever be able to do what the unencumbered free-market does best—create jobs and increase wealth.

Despite these facts, Gov. Ed Rendell recently presented a budget that would raise taxes on Pennsylvania families and businesses by more than $160 million, increase taxpayer debt by nearly $3 billion, and increase government spending at a rate 152% faster than last year’s rate of inflation. So much for the governor’s inaugural commitment to “find a way to make government live within its means.”

However, the governor’s most insidious proposals are his so-called “economic development” programs. Funded through billions of dollars in taxpayer debt, it will be your children and your children’s children who will be forced pick up the tab for these plans.

Over the past several decades, state governments have gradually abandoned their traditional role in economic development, which primarily focused on providing “public goods” such as roads or water and sewer systems, and started giving taxpayer money as grants, loans and guarantees to select corporations to create or retain jobs. While Gov. Rendell’s proposal envisions new funding for traditional infrastructure, the main focus of his plan is expanding business subsidies.

But government-directed business subsidy programs have proven to be both ineffective and costly. Indeed, Pennsylvania is a case study in failed centralized planning and corporate welfare. As recently as 1998, it outpaced every other state in terms of government-directed economic subsidies. Yet despite the Commonwealth’s heavy reliance on these programs, Pennsylvania’s economic health remains in critical condition—and its experience is typical of other big-spending states.

Using data from the Pennsylvania Legislative Budget and Finance Committee and the U.S. Departments of Commerce and Labor, we find that the 10 states that spent the most per capita on government-directed economic development in 1997-98 experienced cumulative personal income, population and employment growth rates much lower than the 10 lowest-spending states between 1997 and 2002. Indeed, the personal income growth rate was nearly 29% lower in high-spending states than in low-spending states. The population growth rate was more than 124% lower, and the employment growth rate was almost 167% lower.

Of course, there are important factors other than state government economic development policies that influence economic performance, but the argument cannot be made that states which spend more on economic development are more successful than those that spend less.

The high costs and ineffectiveness of economic development programs should cause great concern to taxpayers—but even more disturbing is the mindset that they reveal. Although the governor’s cabinet boasts some private sector experience, this does not necessarily mean that they will be able to reliably predict which businesses will succeed and which ones will fail.

The Rendell plan is predicated on the supposition that the judgment of government managers is superior to that of individual Pennsylvanians—the ones risking their own money to stay in business. They won’t get a government bailout if they fail. Worst of all, it is their tax dollars being used by government bureaucrats masquerading as venture capitalists. Simply put, one business’s subsidy is another’s tax burden.

So while the governor’s speculative economic development plans attempt to retain existing businesses or lure new ones to Pennsylvania, they will severely punish those job providers who have stuck it out over the years despite the state’s job-crushing taxes. Of course, that number is likely to continue to drop in the coming years, given that Gov. Rendell and the Republican-led General Assembly just increased the cost of doing business in Pennsylvania by more than $1 billion with a slew of tax and fee increases in the last budget.

Instead of redistributing wealth through the political process, state economic development policy should focus on creating a more favorable climate for ALL private sector investors and job creators. By cutting taxes on families and businesses, reducing state spending, and using existing state resources for legitimate infrastructure that can be used by all firms—not just the politically selected few—all Pennsylvania businesses can create jobs and increase wealth. These are public policies that will truly turn around Pennsylvania’s economy.

# # #

Matthew J. Brouillette is president at the Commonwealth Foundation, a free-market public policy research and educational institute based in Harrisburg.