Tomorrow the Wichita City Council will very likely live up to its part in a deal to award $2.5 million in subsidy to aircraft manufacturer Hawker Beechcraft. Sedgwick County will also be called on to contribute the same amount, and the state has agreed to chip in $40 million.
Undoubtedly the occasion will be used by Wichita Mayor Carl Brewer and others to crow about the city’s effort to retain Hawker Beechcraft in the face of an offer from the State of Louisiana. While our local governments got what they wanted in this instance, it nonetheless provides a lesson in the futility of corporate welfare as economic development policy: Someone is usually willing to pay more. We would be much better off if we start transforming Kansas to a state where all companies are nurtured, not by bureaucratic and political oversight and government handouts, but by a low taxing and spending environment, and a reasonable regulatory regime.
I use “got what they wanted” rather than “success,” as there are important questions surrounding the wisdom of this deal. First, there is some evidence that Hawker may need to shrink substantially in order to survive, handouts notwithstanding. See The Teetering State of Hawker Beechcraft. Besides indicting Hawker for a “bloated and inefficient production process,” the report claims the company’s pension plan is underfunded by $296 million.
Some have called into question the validity of the competing offer. Louisiana had purportedly offered up to $400 million to attract Hawker’s 4,000 jobs. This is a cost of $100,000 per job, a very costly number, but some states have paid even more. If genuine, Kansas got a deal at only $11,250 per job.
But: These are retained jobs, not new jobs. H. Edward Flentje explained in his analysis Brinkmanship with jobs: “But the Hawker Beechcraft deal is different, focused on saving existing jobs, not creating new jobs, and the result diverts millions in limited taxpayer funds, primarily state income tax revenues, from state coffers to a company’s benefit, simply to have an existing business stay put.”
Flentje went on to explain the new economic development policy in Kansas and the precedent the Hawker deal sets: “The barn door has been flung open as well over 500 Kansas businesses are now eligible for state assistance, a tenfold increase over the year 2000, thanks to lawmakers. The expanding game of brinkmanship with jobs leaves state and local officials more vulnerable and can be expected to divert millions more in state tax revenues from state government’s primary obligations in response to the demands of companies that choose to play.”
The major problem, however, is that economic development policy in Wichita and Kansas is not moving in the right direction. We place large bets on old, established industry, when we should be looking to foster dynamism and young companies as the engine to propel the Kansas economy.
Somewhere in Wichita or Kansas there is a small, new, unknown company that has half a dozen or so employees — maybe more, maybe less — that is working on some innovation. If we’re lucky, we have many such companies. These companies could be working on a new technology, manufacturing process, computer software, video game, internet site, food processing technology, retail concept, chemical process, restaurant idea, manufacturing methodology, agricultural process, airplane wing — we just don’t know. Many will fail. But some will succeed, and a few will, hopefully, succeed in a big way.
But these small startup companies may not fit in to the economic development programs the city and state have. Being of entrepreneurial spirit, these people may not even think of looking to government for economic development assistance.
Any of these new and now-small companies could become the next Microsoft, Google, Home Depot, or Pizza Hut. We just don’t know which — and it’s impossible for anyone, government bureaucrats included — to know. But these companies, when in startup phase, struggle to pay the taxes that large companies are able to escape. Being small, they may also be disproportionally impacted by regulation. They don’t qualify for the economic development programs that larger companies benefit from, and they probably couldn’t afford to devote the time and effort to apply.
It’s not necessarily the case that a small startup aviation company is competing directly in aircraft sales with Hawker Beechcraft and is handicapped by the larger company’s government handouts. But these two companies could be competing for the same employees, for example, and that puts the smaller, unsubsidized company at a disadvantage.
But having decided to pursue a policy of giving in to the demands of companies who threaten to leave or build elsewhere, we have a question to answer: How can we identify which companies are deserving of government subsidy? Which companies should have their tax burden softened, their treasury fattened, at the expense of others? Allocating resources and deciding what to do in the face of uncertainty is the crux of entrepreneurship. It’s something that government is not equipped to do, as its incentives and motivations are all wrong.
For politicians, the prime motivation is to be reelected. It is rare that the time horizon of a politician extends beyond the next election. For bureaucrats, the motivation is to expand their sphere of influence and power. Neither of these motivations are compatible with entrepreneurship. Some are not compatible in any way with running a business. For example, a business firm looks at its employees as a cost that must be managed and controlled if a profit is to be made and the firm survive. But to government, spending on employees is a social benefit, and one that is paid for by someone else.
The deal with Hawker continues and expands the same process that Kansas and other states have been using for economic development. Therein lies the problem: Kansas’ approach to economic development is piecemeal. We respond to problems, as in the case of Hawker. But the state’s response gives more companies the incentive to come up with their own “problems” that require state intervention.
In order to succeed, Kansas needs to embrace dynamism in its approach to economic development. For more on this see Kansas economic growth policy should embrace dynamism and Embracing Dynamism: The Next Phase in Kansas Economic Development Policy.
Deals like this with Hawker move Kansas towards towards more state-controlled economic development and away from creating a dynamic economy. We prop up the old and declining at the expense of the new and vibrant.
And, we don’t learn. At the same meeting the Wichita City Council is considering approval of its policies for awarding economic development subsidy in downtown — another example of the very type of government planning that stifles economic dynamism and replaces it with cronyism.