"Freedom Index" Economist Condemns Corporate Welfare

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"Freedom Index" Economist Condemns Corporate Welfare

by Ari Armstrong, October 13, 2005

Corporate welfare wastes tax dollars, argued Lawrence McQuillan, an economist with the Pacific Research Institute who spoke in Denver on October 12 about a report he helped write, the "U.S. Economic Freedom Index."

McQuillan addressed the arguments of Rob Reuteman, the business editor for the Rocky Mountain News, who said at the event that other states spend even more money on corporate welfare than Colorado does.

My paper, Wasteful Spending by Colorado Government, argues that Colorado's corporate-welfare programs waste money and cheat taxpayers. In this year's budget (SB05-209), "Economic Development Commission [EDC]-- General Economic Incentives and Marketing" is allocated $959,795, all from the general fund. The total 2005-06 budget for "Economic Development Programs" is $13,338,626. Still under review is whether the EDC also spent or allocated federal funds in recent years.

Reuteman said, "It's important to understand that, in terms of economic incentives, for instance, the state of Texas two years ago passed a $300 million economic incentive fund that they use quite liberally to attract companies and jobs to Texas. Kentucky and Pennsylvania have similar economic incentive funds. We compete not very well against our smaller neighbors of New Mexico and Arizona. They offer a lot more in terms of money as an economic incentive. Colorado is never going to create a $300 million economic incentive. We don't have the money. Where would it come from? It's tough. The work of economic development is tough, hard, work."

McQuillan answered, "Economic development is a very slow process. But it probably isn't a good thing to create a $300 million piggy-bank that people can dip into for political purposes that might not actually relate to good strong long-term economic development. So what the important thing is to do, rather than create a fund that politicians can control... to lure business to your state, is just to create a good over-all incentive system through your laws and regulations and tax code that attract business to your state. Make it a friendly, favorable environment, and I think it will pay off in the long run. Don't get sucked into these various schemes and plans of the week that sound good, but probably are going to cost taxpayers more than they're actually going to bring in from the outside. Look at the overall incentive system that your state provides... There is a consensus there that you're doing things right in Colorado. We certainly give more evidence to support that. So don't fall victim to these various schemes, but focus on the big, overall, general picture to provide a good, friendly environment to business... You will suffer less in the downturns, and you will gain more in the upturns."

The analysis of my paper (page 6) mirrors McQuillan's approach: "Colorado politicians can improve the economy by creating a political climate that treats businesses fairly, provides a quality judicial system, keeps taxes low, and ensures that state regulations do not improperly impede business development."

Just because Colorado wastes less money than other states on corporate welfare, that doesn't mean Colorado cannot do better yet. The EDC is allocated nearly a million dollars of general-fund money this year. While that may not seem like a lot when total state spending approaches $15 billion, that kind of money represents nearly twenty $50K-a-year jobs in the voluntary market. That is money transferred out of the voluntary, productive economy, out of the pockets of taxpayers, and handed over to bureaucrats to spend and redistribute.

As the great pop-economist Henry Hazlitt reminds us in Economics in One Lesson (page 37), it is "improbable that the wealth created by government spending will fully compensate for the wealth destroyed by the taxes imposed to pay for that spending."

Hazlitt continues, "The government spenders forget that they are taking money from A in order to pay B. Or rather, they know this very well; but while they dilate upon all the benefits of the process to B, and all the wonderful things he will have which he would not have had if the money had not been transferred to him, they forget the effects of the transaction on A. B is seen; A is forgotten."

See also a summary of the October 12 event, or listen to the audio recording.

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