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May 10, 2011

“Government Economic Development Program” is an Oxymoron

"I can't believe I'm hearing that from a Republican," said Ann Cummings (D - Montpelier), Chair of the Finance Committee of the Vermont Senate.

"As I said, Madame Chair, I'm speaking only for myself," I responded; "grants and loans from the government to businesses are more likely to be harmful than helpful." The committee had invited me to testify on money for the Clean Energy Development Fund, of which I'm a board member; however, I was testifying as an individual and not as a board member. Most of my fellow board members would probably not have agreed with my position that providing us with a few more million dollars wouldn't do significant good for the environment or the Vermont economy and could well hurt. The committee hadn't asked my opinion of government financial aid for economic development in general, but it just slipped out.

IMHO a much better case can be made for giving some people public welfare than for giving ANYBODY wealthfare (and I am, usually, a Republican). Welfare has to be used sparingly, as much for the sake of the recipients as for the taxpayers; dependence can become a multi-generational affliction. But public aid to business, wealthfare, is always bad policy. Public money drives out private investment; political correctness and the desire to reward political supporters drive investment decisions; energy spent in lobbying and grant-grubbing trumps innovation in products and services; good money is often thrown after bad; the net effect of economic development programs can't be measured; and government does a lousy job of policing areas where it is, itself, an investor.

Besides all that, government has no money to give out that it hasn't first removed from the economy. Why in the world would we think that this money will be better invested by politicians and bureaucrats (I've been both) than by the people who had the money before it was taxed or borrowed away?

These may seem heretical thoughts for someone who was once a "stimulus czar"; but my experience with the private sector grants in the stimulus bill was that, on a national basis, they probably retarded the economy more than they stimulated it (see Stimulus Delayed Is Depressing and Confessions of a Stimulator).

Public money drives out private investment. This is a corollary to Gresham's Law, which states that bad money drives out good. It makes no sense for someone to put private money into an idea or company whose competitors may get no-cost capital from the government. If you were to invest in a politically-favored area, you'd pick the company with the best political connections rather than the one with the best product. Investment in telecommunications, for example, flagged in the great recession; that wasn't the fault of government grants. However, private investment in rural broadband practically stopped for the almost eighteen months between passage of the stimulus bill and the first actual awards. No one wanted to risk private money where public money would soon be available; and no one knew where and when the public money would be available.

In the end Vermont received more in broadband grants and loans per capita than any other state; I worked as hard as I knew how to help make that happen and have no apologies. Once government aid becomes the only game in town, you have no choice but to go after it. The money'll probably be good for Vermonters (assuming we execute well); but the national program set back rural broadband on the whole more than it helped it – and, ironically, assured that no jobs were created in this field while the recession was at its worst; most awards weren't announced until midway through 2010 and they came with at least six months' of paper work before the money could actually be spent.

But, some may say, these grants come with match requirements so they actually attract private investment. Baloney, that money (and more) would've been invested SOMEWHERE if there had been no government program – but it might not have gone where politicians or grant-givers wanted it to go. All you do by putting a match requirement on a grant is assure that private as well as public money will be allocated by other than market forces. Of course that's exactly what some people do want – but why Republicans?

Political correctness and the desire to reward political supporters drive investment decisions. Need I say more than "corny ethanol" and "Iowa has the first in the nation presidential primary." But we can't seem to stop the .45/gallon per gallon subsidy, the $.54/gallon tariff on competing ethanol from Brazilian sugar, or the REQUIREMENT, passed by Congress, that an increasing amount of our fuel supply come from ethanol. Government doesn't like to lose; if no one wants to buy the product it subsidizes, it just passes a law to mandate use of the product and punishes competition. Despite all the heavy-handed support for corny ethanol, it looks much more like natural gas will be the fuel that takes us a long way towards both energy independence and less CO2 use (see Natural Gas Disrupts the Energy Industry). Of course people are already calling for subsidies for natural gas adoption (see The Pickens Plan Bill: The Wrong Way to Get the Right Result) on the grounds that everything else is subsidized.

There has been "economic stimulus" as a result of subsidies for ethanol. We've successfully convinced farmers to take land out of producing food and driven up food prices; we created a plethora of ethanol distilleries, some of which have folded and the rest which will fold if we stop the subsidies. Which brings us to…

The net effect of economic development programs can't be measured. For my sins, I was appointed to a state panel which, among other tasks, was supposed to come up with a way to measure the effectiveness of the state's many economic development efforts. We asked the state economists; they said it couldn't be done – "too many exogenous factors"; we asked the economic development "community" – some felt measurement was inappropriate; someone suggested that we ask the recipients of aid whether they were satisfied with the programs. When an economic development bill is debated in the legislature, people who've benefitted from the program (or might benefit) are trooped in to testify. Of course, the beneficiaries benefit (at least for a while until the politically correct spotlight shifts elsewhere and unsustainable businesses collapse); but those who didn't get grants or loans are disadvantaged – especially when you consider that they contributed some of the money to subsidize their competitors.

Government economic development is much like the lottery; the winners win (no doubt about that); the losers lose, and overall more is lost than is won. At a time when we need faster economic growth and less government spending, we could get both by eliminating the wealthfare called economic development.

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