“Nobody spends somebody else’s money as carefully as he spends his own,” the Nobel Prize-winning economist Milton Friedman once remarked. For decades, Pennsylvania’s state government has spent billions of taxpayer dollars in hopes of reclaiming the commonwealth’s past economic glory. Yet those dollars have been largely wasted, as companies and entrepreneurs fled to states with more hospitable investment climates.
Faced with the disappointing record of state government’s attempts to stimulate lasting economic growth, Gov. Ed Rendell responded not by scaling back failed programs but by dramatically expanding government’s role in determining how and where investment occurs in the Keystone State. Now, the people in charge of doling all of that new taxpayer largesse want to help as many Pennsylvania businesses as possible to get on the gravy train.
Recently, the Society for Marketing Professional Services sponsored a Harrisburg forum at which state officials promoted the Rendell “economic stimulus” package and urged the attendees to apply for their share of somebody else’s money. According to a newspaper account of the meeting, one official told attendees that “There’s an opportunity to make money and we’d love to help you explore those possibilities.”
At first glance, it seems logical that Pennsylvania businesses would line up to grab as much “free money” as they possibly can from state government. A longer look, however, reveals crippling flaws in the Rendell plan — indeed, in all government-directed economic development initiatives — that negate any benefit those firms may initially derive from the taxpayer dollars they receive. These flaws are encapsulated in another famous statement often associated with Friedman — “There’s no such thing as a free lunch” — meaning that every economic transaction has costs, even if it appears to be costless. Nowhere is this truth more acutely apparent than in transactions involving government.
Since government has no money of its own, every dollar it spends or redistributes must first be forcibly confiscated from taxpaying businesses and families. And those funds, if left in the private sector, would not have remained dormant, but would have been spent, saved or invested and earned some rate of return. Yet governments consistently make “investments” with tax dollars that generate rates of return lower than they would have earned had those dollars remained in the private sector economy. In fact, despite government spending nearly $14 billion of other people’s money on “job-creating economic development” between 1995 and 2003, Pennsylvania still ranked 39th in the nation in job growth.
Why is government’s record at “picking winners” so atrocious? Because those decisions are driven by political calculation first and foremost, rather than by market forces and investment viability. One Harrisburg-area economic development consultant recognized this fact, saying “My own prediction is that it is going to become a very political process” — referring to projects that will require the approval of the politically appointed board of the newly created Commonwealth Financing Authority.
Political calculation also leads to a major flaw in assessing the impact of government-funded economic development — the lack of measurement of “unseen” costs that can offset any tangible benefits. Political decision makers, in their zeal to claim credit for creating economic activity, regularly overlook economic warning signs regarding a particular project and instead make choices based on that project’s perceived political benefits. These unseen costs are a main reason why transfers of private investment dollars to the government usually produce net losses for the economy as a whole.
The reality is that, intentionally or not, economic development spending creates a class of “politically favored” industries or businesses. Usually, such businesses are those that have the resources to enlist the services of “economic development professionals” who can attend Harrisburg seminars showing them how to access state taxpayer dollars. This creates a competitive disadvantage for firms not receiving subsidies, thus inducing them to seek subsidies as well. This vicious cycle ultimately leads to higher costs for consumers, as companies are forced to spend time and money searching for state subsidies that would have otherwise been invested in improving their products and services.
While Gov. Rendell remains wedded to the discredited notion that Pennsylvania can tax, borrow and spend its way to prosperity, California Gov. Arnold Schwarzenegger — who considers Milton Friedman his economic mentor — seems to know better. In a recent newspaper editorial board meeting, “The Terminator” showed how well he has absorbed the great economist’s lessons: “Taking money out of the private sector is a no-no. We don’t want to feed the monster. … We want to feed the private sector and starve the public sector.”
It sounds as if the era of California’s taxpayer-provided “free lunch” may be coming to an end. Pennsylvania should become the next state to say “Hasta la vista, baby” to government-directed economic development.
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Grant R. Gulibon is senior policy analyst at the Commonwealth Foundation (CommonwealthFoundation.org), an independent public policy research and educational institute based in Harrisburg, PA. Permission is hereby granted to reprint in whole or in part, provided the author and his affiliation are cited.