Why corporate welfare is not only unfair, but bad for the economy
Published October 3, 2019
Corporate welfare deals may make for nice headlines and ribbon-cutting ceremonies for politicians, but basic economics tells us they likely make us poorer.
One of the first concepts any Econ 101 course teaches about is opportunity costs. An opportunity cost is what is foregone when an economic actor chooses how to use a scarce resource. It is the next-best alternative use for that scarce good, according to the preferences of the actor.
For instance, say you spend five dollars for a gallon of milk. Most would think that the cost of the milk was five dollars. But because your five dollars had alternative uses, the story is somewhat more nuanced.
The cost to you for the milk was not just the five dollars, but the other things you could have purchased with that five dollars. Perhaps a loaf of bread and a dozen eggs. Or a t-shirt for sale on the clearance rack. There are near countless other items you could have purchased with that dollar amount, but when you chose to buy the milk your action revealed that your highest valued use for that money was the milk.
Moreover, when you bought the milk, you had to forego the opportunity to buy any of those other items the five dollars could have bought. Specifically, the highest-valued good you had to forego when you bought the milk is your opportunity cost.
To be clear, the concept of opportunity costs applies to all scarce resources, not just money. For instance, lumber used in the building of a house could have been used to make baseball bats or grand pianos or any number of other items. Or steel and concrete used to make a bridge could instead have been used to build a parking garage or an office building.
What does this have to do with corporate welfare?
How an economy allocates scarce resources is one of the keys to prosperity. When resources are directed to their most highly valued uses, as evaluated by consumers in society, we are better off. If, however, resources are directed to uses that are valued lower than their opportunity costs, our standard of living suffers.
In a free market economy, scarce productive resources are directed towards those firms most efficiently producing goods and products that are most highly valued by consumers. It is the buying decisions of consumers that determine which companies succeed, and therefore consumers who decide how society’s scarce productive resources are allocated. This process increases the amount of resources being utilized toward producing society’s most urgently needed goods.
When government interferes with taxpayer subsidies or targeted tax breaks to specific companies, those companies gain an unfair advantage over their competitors. Companies that would not survive in a competitive market now have ownership over more resources, productive goods that otherwise would be in the hands of those firms more efficiently producing more highly valued goods for consumers.
In such cases, the opportunity costs – the goods and services society must forego – can be more highly valued than what is produced by the politically-privileged companies.
When Gov. Roy Cooper issues a press release bragging about the latest corporate investment resulting from a government handout, the cost is not just the taxpayer dollars involved, but also the cost of the alternate uses for which the scarce resources being used by the incentivized company could have been utilized.
The labor, capital goods, raw materials and other inputs used by that incentivized company are no longer available for other companies to use to produce other goods that may provide higher value to consumers. Society is deprived of goods that would satisfy more urgently desired needs; we are made poorer.
And this loss of value creation harms low-income households disproportionately, as they can least afford a drop in their standard of living.
Moreover, in the crony system of corporate welfare, political decisions override the voluntary decisions of consumers in determining how scarce productive resources are used. This represents a shift in economic power from the many (consumers) to the few in the political class.
Not only does corporate welfare make us poorer, it also creates a political culture ripe for corruption. With more economic power concentrated in the hands of a few in Raleigh, there is far greater benefits for corporate lobbyists to gain in pay-to-play schemes.
Want to reduce government corruption? Start by eliminating corporate welfare “economic incentive” programs. The fewer things that politicians control, the less we have to worry about who controls the politicians.
A great way to strike a blow against crony corporate welfare practices is to eliminate the state’s corporate income tax. With no tax at all, all corporations would be equally incentivized to invest and create jobs in North Carolina; drastically reducing the perceived need to offer sweetheart deals to politically connected companies.
The corporate tax only generates about three percent of total state tax revenue, and it is the most volatile form of revenue. Compensating for the lost revenue could easily be achieved through a combination of eliminating corporate welfare taxpayer handouts, increased revenue growth from other taxes due to increased economic growth and eliminating pork spending.
Corporate tax elimination would not only create a fair playing field but facilitate greater economic growth as well.