Coyote Blog

I return to an old favorite topic of mine this week, government subsidies for business relocation, in my column at Forbes.com.  An excerpt:

To see this clearer, lets take the example of Major League Baseball (MLB).  We all know that cities and states have for years been massively subsidizing new baseball stadiums for billionaire team owners.  Let’s for a minute say this never happened – that somehow, the mayors of the 50 largest cities got together in 1960 and made a no-stadium-subsidy pledge.  Would baseball still exist?  Sure!  Teams like the Giants have proven that baseball can work financially in a private park, and baseball thrived for years with private parks.  But would baseball be in the same cities?  Well, without subsidies, baseball would likely be in the largest cities, like New York and LA and Chicago, which is exactly where they are now.  The odd city here or there might be different, e.g. Tampa Bay might never have gotten a team, but that might in retrospect have been a good thing.

The net effect in baseball is the same as it is in every other industry:  Relocation subsidies, when everyone is playing the game, do nothing to substantially affect the location of jobs and businesses, but rather just transfer taxpayer money to business owners and workers.

In the past, local governments and the legislature have blithely hit up taxpayers to pay for new sports stadiums for local teams.  You may think you have it bad in your city with 4 major sports teams, but we have 4 major sports teams PLUS about seven or eight baseball spring training stadiums.

It seems like the legislature and local government finally got tired of putting all taxpayers on the hook for these stadiums, and had the radical idea that maybe actual, you know, fans who want to use the stadiums should pay for them.  This turned out to be too expensive for ticket prices at the proposed new Cubs spring training facility -- fans aren't used to paying for the full price of their sporting event in their ticket price -- they are used to getting subsidized by non-sports fans.  As a compromise, the legislature proposed a tax on tickets for all spring training games at all stadiums to pay for this one new field.  This seems stupid to me, but it elicited this hilarious response from the baseball commissioner:

Selig told reporters at HoHoKam Park that it was a "dangerous precedent" to tax all ticket buyers primarily to benefit one team and that Major League Baseball has taken over negotiations for a new Cubs spring home.

Right, but it is A-OK if all taxpayers, including those who will never see a baseball game, are taxed to pay for the new stadium.

Via Overlawyered:

Score another one for personal responsibility: 29-year old St. Louis
Cardinals pitcher Josh Hancock killed himself in April when he drove --
faster than the speed limit, drunk, on a cell phone, and not wearing a
seat belt -- into a tow truck stopped on the side of a road. Obviously,
we ought to blame... everyone except Josh Hancock for this. Three and a
half weeks after the accident, his father has filed suit
in St. Louis against: the restaurant where Hancock was drinking, the
manager of the restaurant, the tow truck driver, the towing company,
and (!) the driver of the stalled vehicle that the tow truck was
assisting, for having the temerity to get his car stuck on the side of
the road.

So far, he hasn't sued the Cardinals or Major League Baseball, but, while praising the team, his lawyer pointedly refused to rule out suing them.

Apparently I am required by law to fill out an "annual accommodation report" from the US Census.  Just what I needed.  The IRS, state sales tax authorities, and the Department of Commerce all gather this same information, but for some reason the Census Bureau needs me to repackage it for them  ("estimate time only 34 minutes -- thanks alot").  In fact, they need the data so bad that I am required by law to respond to their request. 

Here is the weird part.  First they ask for revenues including both lodging revenues and sales of merchandise, all as one single number.  Then, they ask for "operating expenses" in which they want me to exclude the cost of any merchandise sold.  What is the point of gathering a revenue number that includes merchandise sales but a cost number that excludes the cost of goods purchased for resale?  Bizarre.  My only guess is that this is so they can stack industries up without double counting, but that makes no sense either.  If this were the case, they would ask me to eliminate all product purchases (e.g. toilet paper for the bathrooms, cleaning supplies).  Also, wouldn't they in that case also ask me to leave out services purchased from other companies?

Postscript: The form has this notice:  "Your report to the Census Bureau is confidential by law.  It may be seen only by persons sworn to uphold the confidentiality of Census Bureau information and may be used only for statistical purposes.  The law also provides that copies retained in your files are immune from legal process."

Does anyone above the age of eight really believe this?  Ask major league baseball players what they think about promises of confidentiality and immunity from legal process.  (emphasis added)

With Barry Bonds still in their sights,
federal investigators probing steroids in sports can now use the
names and urine samples of about 100 Major League Baseball players
who tested positive for performance enhancing drugs, following a
ruling Wednesday from a federal appeals court.

The 2-1 decision by the 9th U.S. Circuit Court of Appeals
overturned three lower court decisions and could help authorities
pinpoint the source of steroids in baseball. It could also bolster
the perjury case against the star outfielder, who is under
investigation for telling a grand jury he never knowingly used
performance-enhancing drugs.

Investigators seized computer files containing the test results
in 2004 during raids of labs involved in MLB's testing program. The
samples were collected at baseball's direction the previous year as
part of a survey to gauge the prevalence of steroid use. Players
and owners agreed in their labor contract that the results would be
confidential, and each player was assigned a code number to be
matched with his name.

Well, probably not.  But Seattle voters did take the great step of banning public subsidies for pro sports teams, which usually take the form of sweetheart stadium deals.  Of course, this being Seattle, the proposition's promoters were motivated less by libertarianism than by the desire to spend more government money on other things.  But since public funding of stadium's is a personal pet peeve, I will give them one cheer.

A while back I compared the escalating public subsidies of pro sports teams to a prisoner's dilemma problem:

To see this clearer, lets take the example of Major League Baseball
(MLB).  We all know that cities and states have been massively
subsidizing new baseball stadiums for billionaire team owners.  Lets
for a minute say this never happened - that somehow, the mayors of the
50 largest cities got together in 1960 and made a no-stadium-subsidy
pledge.  First, would MLB still exist?  Sure!  Teams like the Giants
have proven that baseball can work financially in a private park, and
baseball thrived for years with private parks.  OK, would baseball be
in the same cities?  Well, without subsidies, baseball would be in the
largest cities, like New York and LA and Chicago, which is exactly
where they are now.  The odd city here or there might be different,
e.g. Tampa Bay might never have gotten a team, but that would in
retrospect have been a good thing.

The net effect in baseball is the same as it is in every other
industry:  Relocation subsidies, when everyone is playing the game, do
nothing to substantially affect the location of jobs and businesses,
but rather just transfer taxpayer money to business owners and workers.

This subsidy game reminds me of the line at the end of the movie Wargames: 

A strange game.  The only winning move is not to play.

As I have written before, one of the favorite past-times of local and state politicians is to hand out grants, subsidies, and tax breaks for businesses to relocate to their district.  Billions and billions of dollars are given out every year to everyone from movie producers to sports teams to Wal-marts in order to "bring jobs" to the local community.

Economists have argued for years that these subsidies are a total waste (more on this below) but the Club for Growth links a great article demonstrating that they are not only a waste, they also are downright fraudulent.

Gov. George Pataki's administration gives millions of dollars every year to businesses that promise to hire more people or retain jobs. It's a promise that is often broken.

Almost half of those companies helped by New York taxpayers fell short of the job targets that are part of their deals with the state, records show.

In fact, a quarter of the businesses took taxpayers' money and loans, then cut jobs.

The article is quite detailed, but here is one example:

Take the case of Ingram Micro, a global computer-parts wholesaler with a distribution center near Buffalo.

In 1999, it accepted $675,000 in taxpayers' money and promised to add 542 workers. Instead, it cut its workforce by nearly 400.

The state demanded a penalty of $176,985, but an Ingram spokesman said it has not paid and is negotiating with the state.

Last month, Ingram Micro announced it will lay off another 120 Buffalo workers and send the work overseas.

OOPS!  One is driven to ask the obvious question - why are these subsidy programs so popular?  I can think of at least three explanations.

The first explanation is political.  These subsidy programs tend to satisfy important bases from both political parties, thereby ensuring their bipartisan support.  Democrats like the idea of spending government money to create jobs, while Republicans like tax breaks and supporting business.  This explanation is unsatisfying.

The second explanation probably hits closer to the mark, and it is the cynical-political explanation that politicians like buying votes with other people's money.  When they campaign for re-election, politicians like to have a couple of "scalps" they can wave around to show the voters that they are doing something (a consistent history of sober fiscal responsibility seems to be unappealing, I guess).  Being able to say "I brought Microsoft to the town of West Nowheresville" or better yet "I brought 1000 jobs to this community" are political favorites of both parties (Here is what New Yorkers are really paying for - the ability of George Pataki to post on his web site a press release saying "Bedding Company to Create 240 New Jobs in New Baltimore").   These are priceless campaign slogans that didn't cost the politician a dime, since they were funded by taxpayers.

The third explanation comes from economics and is the most interesting.  If you shed any notion of morality or ethics (e.g. that one has no right to give one person's money to another just to make their re-election more likely) then politicians who are approached by a company looking for a handout for business relocation faces what is called the prisoner's dilemma.  Many of you may know what that is, but for those who don't, here is a quick explanation, via the Stanford Encyclopedia of Philosophy:

Tanya and Cinque have been arrested for robbing the Hibernia Savings Bank and placed in separate isolation cells. Both care much more about their personal freedom than about the welfare of their accomplice. A clever prosecutor makes the following offer to each. "You may choose to confess or remain silent. If you confess and your accomplice remains silent I will drop all charges against you and use your testimony to ensure that your accomplice does serious time. Likewise, if your accomplice confesses while you remain silent, they will go free while you do the time. If you both confess I get two convictions, but I'll see to it that you both get early parole.  If you both remain silent, I'll have to settle for token sentences on firearms possession charges. If you wish to confess, you must leave a note with the jailer before my return tomorrow morning."

The "dilemma" faced by the prisoners here is that, whatever the other does, each is better off confessing than remaining silent. But the outcome obtained when both confess is worse for each than the outcome they would have obtained had both remained silent.

I hope you can see the parallel to subsidizing business relocations (replace prisoner with "governor" and confess with "subsidize").  In a libertarian world where politicians all just say no to subsidizing businesses, then businesses would end up reasonably evenly distributed across the country (due to labor markets, distribution requirements, etc.) and taxpayers would not be paying any subsidies.  However, because politicians fear that their community will lose if they don't play the subsidy game like everyone else (the equivalent of staying silent while your partner is ratting you out in prison) what we end up with is still having businesses reasonably evenly distributed across the country, but with massive subsidies in place.

To see this clearer, lets take the example of Major League Baseball (MLB).  We all know that cities and states have been massively subsidizing new baseball stadiums for billionaire team owners.  Lets for a minute say this never happened - that somehow, the mayors of the 50 largest cities got together in 1960 and made a no-stadium-subsidy pledge.  First, would MLB still exist?  Sure!  Teams like the Giants have proven that baseball can work financially in a private park, and baseball thrived for years with private parks.  OK, would baseball be in the same cities?  Well, without subsidies, baseball would be in the largest cities, like New York and LA and Chicago, which is exactly where they are now.  The odd city here or there might be different, e.g. Tampa Bay might never have gotten a team, but that would in retrospect have been a good thing.

The net effect in baseball is the same as it is in every other industry:  Relocation subsidies, when everyone is playing the game, do nothing to substantially affect the location of jobs and businesses, but rather just transfer taxpayer money to business owners and workers.

This subsidy game reminds me of the line at the end of the movie Wargames:

A strange game.  The only winning move is not to play.

Postscript:  As a libertarian, I have gone through phases on targeted tax breaks. There have been times in my life when I have supported tax breaks of any kind to any person for any reason, by the logic that any reduction in taxation is a good thing.  I know there are many libertarians that take this position.  Over time, I have changed my mind.  First, targeted tax breaks seldom in practice reduce the overall tax burden - they tend to be made up somewhere else.  Second, these tax breaks tend to be gross examples of the kind of government coercive technocratic meddling in commerce and individual decision-making that I despise. Almost always, they are trying to get individuals to do something they would not otherwise do, so in practice they tend to be distorting and carry all kinds of unintended consequences (as well as being philosophically repugnant).

Update 9/29/05:  We are suddenly getting a bunch of visitors from Econ.Aplia.com, which I presume is related to a university assignment or blog post somewhere.  Can someone email me in at the email in the right bar if folks are coming here from a particular site or university.  Just curious.

Update 9/30/05:  Thanks to a couple of emailers, the cat (err, bulldog?) is out of the bag and I know that Yalies are in the house.  Welcome.  I don't know if they teach free-markets any more in college, but your welcome to look around and take a walk on the libertarian dark side.  Good luck with economics, even if you did pick the wrong school.  --Coyote, Princeton '84, Harvard MBA '89

Update Again:  By the way, I discuss here the odd issue of why I and so many people misspell "dilemma" as "dilemna", as I did in this post.