When Pol’s Pick Losers

by Martin Harris

In both remote and recent history, governmental involvement in private industry and commerce has made, and still makes, its presence felt: Alexander Hamilton would doubtless be pleased at the way his concept of the American urban-industrial future won out over the Jeffersonian vision of highly independent yeomen-freemen with their sole proprietorship farms and trades. From the start, when such governmental efforts were mostly infra-structural in nature (think the Cumberland Road, the Erie Canal, and the trans-continental railroad) and mostly paid for by land sales and excise tariffs, to the present, when such efforts are typically direct aid to favored industries (think solar/wind/bio-fuel, distressed auto manufacturers, and too-big-to-fail bankers) and paid for by printing money, they have been plagued with what’s now called crony capitalism. From Washington’s support for Potomac River and National Road improvements conveniently near his held-for-sale unused thousands of acres to present-day governmental OK’s for wind-power ventures causing bird kills deemed legally unacceptable for non-green oil-drillers, the problem has always been the same: that governmental exercise of such power, using Other Peoples’ Money (a little Thatcherism, there) extracted by threat of force from present or future taxpayers, invariably draws a higher incidence of, to be verbally kind, questionable behavior than free-market ventures constrained by the discipline of the free marketplace. But governments keep on trying. Latest example: Arkansas efforts to use subsidies to help Big River Steel build an in-State mill, even though steel markets are in surplus and presently-operating mills would face a pre-loaded competitive contest. If a long list of past governmental investment-picks –in sports stadia, for example– is any guide, the Arkansas mill, once built, won’t generate the added tax revenues argued to justify tax-increment-financing; won’t generate taxable profits, and won’t generate predicted job boosts. Similar (non) results are being posted for other governmentally-favored friends; for two in “green” power and automobiles, think Solyndra Panels and Chevy Volt.

A few decades back, before such governmental interventions were based on pleasant theories of environmental ideologies and unpleasant realities of campaign-contributions-from-grateful-recipients, they were based on the most basic of tax expectations: Governments wanted something which would pay more in taxes (either directly or through added employees) than it and/or they would require in services: tax-plusses, to subsidize the tax-minuses, most noteably families with school-age children, whose expectations, even in those long-gone years of annual per-pupil costs well below $1 thousand (and students’ academic Proficiencies near 100% because there was once no grade promotion without test proof) who had never been expected to pay the full costs of the services they expect, and still expect, from other taxpayers via government. Picking tax-plus candidates was then, mostly, a mathematical exercise: armed with data on average-value-per-SF and average staffing densities and wage schedules, for various types of industry and commerce, and using applicable tax rates, we could fairly accurately gauge what a given-size enterprise capture would generate in revenues. And just so for service demands (more recently, some jurisdictions try to capture some fraction of these costs in impact fees) where we could use existing jurisdictional stats to run the correlations between wage level, school-age-children per-household, and taxable value of residence. We knew, for example, that research facilities and corporate headquarters were worth a lot more per square foot, and housed higher-on-the-wage-scale employees who would pay more in residential taxes, while sending fewer kids to school, than low-tech manufacturing mills or distribution warehouses, which explained why towns along the then-new Cross-Westchester Expressway (I-287) north of NYC went for corporate headquarters, while towns along the earlier Yankee Division Highway (Route 128) west of Boston went for research facilities.

We also knew that job creation was not a given: some corporate move-ins hired locally and some brought staff with them, and typically kept those percentage intentions from even their site-planning consultants; which explains why the original IBM choice of Essex Junction in Vermont was quickly deemed productive on that score, but the somewhat later Standard Register recruitment by Middlebury, VT, wasn’t equally so.

With all the above as background, the on-going Arkansas foray into new-industry enticement will have transfer value for States like Pennsylvania, which has had a long history, not all pleasant, with steel mills, if not so much for Vermont, which (Humble Scribe guess) wouldn’t even take an inquiry. Further HS guess: the AK experiment in creating either a new tax-plus or more jobs, or both, will fail, not least because nearby Memphis (in TN, not in AK) will doubtless furnish most of the low-skill labor in a still-fairly-low-skill-labor and low-earnings industry. The transfer value, for both PA and VT, is that such outcomes can be fairly reliably predicted, based on well-known mathematical models for data analysis. What can’t be predicted is whether these models will be used. That would require setting aside the crony-capitalism political-subjective-judgment model which has now supplanted the earlier mathematical non-subjective-analysis model in most States, specifically including AK for the steel industry and VT for the green industry.