Voice For Liberty

Tag: Entrepreneurship

  • Hawker Beechcraft to receive subsidy from Wichita City Council

    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.

  • Wichita forgivable loan action raises and illustrates issues

    Today the Wichita City Council decided to grant a forgivable loan of $48,000 to The Golf Warehouse. This subsidy was promoted by the city as necessary to properly incentivize the applicant company to expand its operations in Wichita rather than Indiana, where the company has other operations and had also received an offer of subsidy. For more information, see Forgivable loan a test for new Wichita City Council members.

    In presenting the item to the council, Allen Bell, Wichita’s Director of Urban Development said the forgivable loan was a “deal-closing” device intended to “win a competition with other locations.”

    Further discussion brought out the fact that companies often “test the waters,” asking for incentives from cities like Wichita as a location they might consider moving to, only to us that as leverage for getting more incentives back home. (Wichita has suffered at the hands of this ruse, most recently granting a large forgivable loan to a company when the city used as leverage says they did not have discussions with the company.)

    Council Member Michael O’Donnell asked if there was another form of economic development that The Golf Warehouse could have received. Bell said that in this case there wasn’t, that IRB financing with accompanying tax abatements wasn’t available for this project. As he has in the past, Bell pointed to the lack of tools in the toolbox, or “arrows in our quiver” he said today.

    When the CEO of the applicant company spoke to the council, it was easy to get the impression that this company — like the many other companies that plead for incentives and subsidy — feel that because of their past and pending investment in Wichita, they are entitled some form of incentive. When the company’s outside site selection consultant spoke, this sense of entitlement became explicit. She told how the company has made “significant investment and has employed a lot of people and kept a lot of families employed.” She said that instead of forgivable loan, this should be called an “act of goodwill.” She said the company has made a huge investment, never asking for incentives, and that the loan allows the company to continue making investment into the community.

    She also said that the offer made by Indiana amounted to twice Wichita’s offer, on a per-job basis.

    Citizens spoke against the forgivable loan. John Todd asked if this is the economic formula that has blessed our city and county with the wealth and prosperity we enjoy today.

    Clinton Coen told the council that these incentives are a bargaining tool, allowing cities to blackmail each other.

    Susan Estes asked a question that built on O’Donnell’s earlier remarks: Why would we see this forgivable loan as egregious? On the surface, we see jobs, which is good, she said. But the money to pay for this loan comes from other taxpayers, she said, and there are many companies that need help, citing the number of companies filing for bankruptcy and having tax liens filed against them. “Why I find it egregious is that we’re doing something that helps one company at a time. We really need to take an overall look at our tax policy and address the tax issue. We have one of the highest tax rates on the Plains, and that’s why we get in these situations where we have to compete. If we had a better competitive tax rate we could spare all of this.”

    Of interest for the political theater was the vote of three new council members, based on statements they made regarding forgivable loans on the campaign trail (see Forgivable loan a test for new Wichita City Council members). In making the motion to accept staff recommendation of the forgivable loan, council member Pete Meitzner said of the loan: “It is an investment, incentive, whatever you want to call it. It is not a give-away.”

    Meitzner and James Clendenin voted with all the veteran council members to approve the forgivable loan. Only O’Donnell voted consistent with how he campaigned.

    Analysis

    This item before the Wichita City Council today requires analysis from two levels.

    First, the economics and public policy aspects of granting the forgivable loan are this: It is impossible to tell whether The Golf Warehouse would not expand in Wichita if the forgivable loan was not granted. The companies that apply for these subsidies and that cite competitive offers from other states and cities have, in some cases, multi-million dollar motives to make Wichita think they will move away, or not invest any more in Wichita. Most politicians are scared to death of being labeled “anti-job,” and therefore will vote for any measure that has the appearance of creating or saving jobs.

    Particularly inappropriate is the attitude of many of these companies in that they deserve some sort of reward for investing in Wichita and creating jobs. First, companies that make investments do, in fact, deserve a reward. That reward is called profit, but it has to be earned in the marketplace, not granted by government fiat. When a company earns profits in free markets, we have convincing evidence that wealth is being created and capital has been wisely invested. Everyone — the investors certainly but also the customers and employees — is better off when companies profit through competition in free markets.

    But when government steps in with free capital, as was the case today, markets are no longer free. The benefits of capitalism are no longer available and working for us. The distortion that government introduces interferes with market processes, and we can’t be sure if the profit and loss system that is so important is working. Companies, as we saw today, increasingly revert to what economists call rent seeking — profiting through government rather than by pleasing customers in market competition.

    Entrepreneurship, of which Wichita has a proud tradition, is replaced by a check from city hall.

    Wichita’s own Charles Koch explained the harm of government interventionism in his recent recent Wall Street Journal op-ed: “Government spending on business only aggravates the problem. Too many businesses have successfully lobbied for special favors and treatment by seeking mandates for their products, subsidies (in the form of cash payments from the government), and regulations or tariffs to keep more efficient competitors at bay. Crony capitalism is much easier than competing in an open market. But it erodes our overall standard of living and stifles entrepreneurs by rewarding the politically favored rather than those who provide what consumers want.”

    A forgivable loan — despite Council Member Meitzner’s claim to the contrary — is a cash payment to business, which Mr. Koch warns against.

    The focus on job creation is also a confounding factor that obscures the path to true wealth and prosperity for Wichita. When companies ask the city, county, and state for subsidy and incentive, they tout the number of jobs and the payroll that will be created. But jobs are a cost, not a benefit, to business and most firms do all they can to minimize their labor costs just as they seek to minimize all costs. For Wichita to prosper, we need to focus on productivity and wealth creation, not merely employment.

    The actions of the city council today keep Wichita on its path of piecemeal economic development and growth. Movement to a system that embraces economic dynamism, as advocated by Dr. Art Hall and as part of Governor Sam Brownback’s economic development plan for Kansas, is delayed. Economic development in Wichita keeps its present status as a sort of public utility, subject to policy review from time to time, as was mentioned today by the city manager.

    Politically, Wichitans learned today the value of promises or statements made by most candidates while campaigning. Most candidates’ promises along with $3.75 will get you a small cappuccino at Starbucks — if you don’t ask for whipped cream.

    Particularly interesting is the inability of politicians to admit they were wrong, or that they made a mistake, or that they were simply uninformed or misinformed when they made a campaign promise or statement. It was refreshing to hear Republican presidential candidate Tim Pawlenty, when he was in Wichita a few weeks ago, forthrightly admit that he was wrong about his initial position on cap-and-trade energy policies. City council members Clendenin and Meitzner could not bring themselves to admit that their votes today were at odds with their statements made while campaigning. This lack of honesty is one of the reasons that citizens tune out politics, why they have such a cynical attitude towards politicians, and perhaps why voter turnout in city elections is so low.

    As one young Wichitan said on her Facebook page after sharing video of the three new council members today, obviously referring to city council district 2’s Pete Meitzner: “How to use your mouth: 1. Campaign under the guise that you are a fiscal conservative. 2. Insert foot.”

  • Kansas and Wichita quick takes: Tuesday May 3, 2011

    Why not school choice in Kansas? WhyNotKansas.com is a website that holds information about the benefits of giving families the freedom of school choice. The site is new this week, and is a project of Kansas Policy Institute and Foundation for Educational Choice. Innovation in school choice programs is common in many states. Kansas, however, still grants the education bureaucracy a monopoly on the use of public dollars in education.

    Economics in one lesson this Monday. On Monday (May 9), four videos based on Henry Hazlitt’s classic work Economics in One Lesson will be shown in Wichita. The four topics included in Monday’s presentation will be The Curse of Machinery, Disbanding Troops & Bureaucrats, Who’s “Protected” by Tariffs?, and “Parity” Prices. The event is Monday (May 9) at 7:00 pm to 8:30 pm at the Lionel D. Alford Library located at 3447 S. Meridian in Wichita. The library is just north of the I-235 exit on Meridian. The event’s sponsor is Americans for Prosperity, Kansas. For more information on this event contact John Todd at john@johntodd.net or 316-312-7335, or Susan Estes, AFP Field Director at sestes@afphq.org or 316-681-4415.

    Sowell on government intervention. Must government intervene to fix the economy? Politicians face tremendous pressure to be seen as active, writes Thomas Sowell: “It is not politically possible for either the Federal Reserve or the Obama administration to leave the economy alone and let it recover on its own. Both are under pressure to ‘do something.’ If one thing doesn’t work, then they have to try something else. And if that doesn’t work, they have to come up with yet another gimmick. … The idea that the federal government has to step in whenever there is a downturn in the economy is an economic dogma that ignores much of the history of the United States. During the first hundred years of the United States, there was no Federal Reserve. During the first one hundred and fifty years, the federal government did not engage in massive intervention when the economy turned down. No economic downturn in all those years ever lasted as long as the Great Depression of the 1930s, when both the Federal Reserve and the administrations of Hoover and of FDR intervened. The myth that has come down to us says that the government had to intervene when there was mass unemployment in the 1930s. But the hard data show that there was no mass unemployment until after the federal government intervened. Yet, once having intervened, it was politically impossible to stop and let the economy recover on its own. That was the fundamental problem then — and now.”

    Salina’s first TIF district. The Salina Journal looks at issues surrounding that city’s first TIF district. Of note: “TIF districts are prevalent in other cities and states. For instance, Manhattan uses TIF districts so much that it no longer considers it an incentive, [Dennis Lauver, president and CEO of the Salina Area Chamber of Commerce] said.”

    Charles on energy and stuff. “We are making it cool to use less stuff,” says Charles, Prince of Wales, KG KT GCB OM AK QSO CD SOM PC AdC(P) FRS. Irish documentary film makers Ann McElhinney and Phelim McAleer have a new short film that looks at the activities of England’s Prince Charles as compared to what he wants the rest of us to do. Write the documentariasts: “Prince Charles is the latest to be exposed as an eco-Hypocrite in our short film series. The Prince is coming to the US this week to speak at Georgetown University about ‘sustainability’ so we decided to see just how he lives up to his own standards. We’ve made a short film that exposes just how hypocritical the Prince is as he lives a fabulous, luxury life whilst lecturing the rest of us that we have to live with less. Prince Charles — Hypocrite exposes the double standard that is at the center of so much environmentalism. … He is coming to the US to lecture on sustainability and tells people they must live with less in order to save the planet but tells us we must end our ‘age of convenience.’ He wants to make our lives more inconvenient to save the planet from alleged climate change but the Prince refuses to make any changes in his own life.”

    Government and entrepreneurship. From an essay by Dane Stangler titled Entrepreneurship and Government, contained in Back on the Road to Serfdom: The Resurgence of Statism, edited by Thomas E. Woods, Jr.: “The third way in which the state can intrude on entrepreneurship is through distorted incentives: either with misguided regulations or unintended consequences, the government could end up creating the wrong incentives for entrepreneurs. Will Baumol discussed such institutional incentives in a famous article in which he argued. ‘How the entrepreneur acts at a given time and place depends heavily on the rules of the game — the reward structure in the economy — that happen to prevail.’ Problems arise when these rules of the game encourage ‘unproductive’ entrepreneurial behavior. The principal example of such unproductive behavior is rent seeking, which occurs when companies pursue a bigger slick of economic activity by means other than market competition — that is, when they graduate to seeking favors from Washington rather than seeking a competitive edge by means of innovation. A company’s entreaties to government for protective action often indicate a returns curve that has already turned negative.” … While the article mentions “favors from Washington,” we can easily substitute state capitols, city halls, or county courthouses. For example, Wichita’s economic development policy is firmly rooted in the belief that the city can direct entrepreneurial activity with no wrong incentives or ill consequences. Listening to the recent summit of aviation industry leaders with Kansas Governor Sam Brownback, it is apparent that this industry thrives on, and will continue to expect, large doses of incentives and special treatment and favor from government. But is the aviation industry best for the future of Wichita? While government leaders across Kansas pledge not to lose most important industry, we know it can happen (see Detroit). We have to be careful to make sure that our government policies don’t hasten this loss.

  • Wichita should reform its economic development strategy

    Remarks to the Wichita City Council, February 15, 2011.

    Mayor and members of the council, last week Governor Sam Brownback released his plan for economic development in Kansas. While his plan specifically addressed the state and its activities, the principles apply to local government. In fact, we need to harmonize our strategy with the state’s if we are to succeed.

    Besides reorganizing the state’s economic development agencies, the governor’s plan calls for a shift in economic development strategy. Instead of targeting industries or specific companies, Kansas should seek to establish a strategy that is simple, fair, and of high capacity.

    The governor’s plan seeks to promote an economy where a diversity of companies can thrive, each engaging in entrepreneurship or business experimentation. This is the type of environment that creates the conditions where the next Apple Computer, Google, Microsoft, or Pizza Hut might be launched.

    Can we identify the companies that may be — or may not be — future successes? Will they satisfy the city’s criteria for receiving various forms of economic development assistance? Or being of entrepreneurial mind and spirit, will these young companies even consider coming to city hall for assistance?

    There are those on this council and in city hall who believe we can formulate policies that identify these companies. I don’t think that’s possible, and the governor’s economic development plan doesn’t think it’s possible.

    We need an environment that nurtures these unknown futures success stories, and as many as possible. Not only large success stores, but smaller-scale success, too. That’s what we don’t have, and this is what the governor’s plan seeks to create.

    I mentioned capacity. When each economic development deal must pass through city hall bureaucracy, we can have capacity constraints, not to mention high cost. As an example, last April this applicant company received a forgivable loan from the city of just $15,000. How much effort did it take to process that loan? I would suggest it was a sizable fraction of the loan amount. And the same thing happened across the street at the county commission.

    Mayor, you said in your recent State of the City address that in 2010, economic development efforts saved 745 jobs and created 435 jobs, for a total impact of 1,180 jobs. To place those numbers in context, the U.S. Census Bureau indicates the labor force in Wichita is 191,760 persons. This means that the economic development efforts of the City of Wichita and its agencies affected a number of jobs equivalent to 0.6 percent of the city workforce.

    This small number of jobs impacted — representing less than one percent of the city’s labor force — is overwhelmed by the natural flow of economic events. Yet, to accomplish this, we have a large and costly bureaucracy in place. We increase costs for the numerous young companies that we now know are the engine of job growth.

    Mayor and members of the council, we can start moving towards an environment that promotes diverse economic growth by voting against this item and the other targeted economic development incentives on today’s agenda. But if the council decides to approve each item, I would ask that the council identify specific spending somewhere else to cut, so that the cost of these programs are not spread among all the residents and businesses in the city.

  • Kansas Governor Parkinson says “thank you”

    This week outgoing Kansas Governor Mark Parkinson released a “thank you” to Kansans that has been commented on — favorably — in many Kansas newspapers and media outlets. The entire piece may be read at the governor’s site at Thanks So Much.

    The governor’s list of “achievements” — his language, not mine — is a reminder that under Parkinson and his predecessor Kathleen Sebelius Kansans have lost economic and personal freedom. It’s nothing that we should thank Parkinson for, and nothing he should be proud of.

    Under achievement number one (“Steering the state budget through a very challenging time”) Parkinson wrote “Suffice it to say that I cut state spending more than any governor in Kansas history.” He doesn’t mention that he was forced to make these cuts, as Kansas can’t run deficits like the federal government.

    Achievements two, three, and four have to do with his promotion of wind power in Kansas. It’s almost impossible to overstate how unwise these policies are. See Wind power: a wise investment for Wichita and Kansas? for a recent discussion of why wind power is a bad investment. Relying on the manufacturing of wind power equipment as an economic development strategy is an even worse idea. The governor praises legislation that requires utilities to increase their usage of renewable power such as wind. But I’d ask the governor this: If electricity from wind is so desirable, why do utilities have to be forced — and heavily subsidized — to produce it?

    Achievement seven highlights “Economic development wins,” mentioning Black and Veatch, Cerner, Bombardier LearJet, and Hawker Beechcraft in particular. Each of these “wins” required large subsidy from the state. Worse, these taxpayer giveaways cement our practice of bureaucratic management of economic development instead of creating a vibrant Kansas business climate where innovation and entrepreneurship thrive. This state policy filters down to counties and cities, to the point where the first consideration for businesses and entrepreneurs is not is this something that will create value for customers and profit for me and my investors but rather what type of government help can I get?

    Achievement eight is the statewide smoking ban. Parkinson’s championing of it means that he doesn’t believe that adult Kansans can decide for themselves whether they want to be around smokey places, and that he has little respect for private property rights.

    Achievement nine is the new transportation plan. The governor claims it will create or keep 175,000 jobs. Most of these must be highway construction jobs, as it is that industry that heavily supported the plan. As usual, the governor and other advocates of government spending fail to see the jobs that are lost due to the government spending and the taxes necessary to pay for it. Veronique de Rugy explains: “Taxes simply transfer resources from consumers to government, displacing private spending and investment. Families whose taxes have increased will have less money to spend on themselves. They are poorer and will consume less. They also save less money, which in turn reduces the resources available for lending.” In addition, Kansas roads rate very well, even number one among the states in one highly-publicized study. Why the need to so much new investment?

    Finally, achievement number ten is “Keeping Kansas a great place to do business.” If this is true, I wonder why do we have to spend so much on subsidies to keep Kansas companies from expanding elsewhere or packing up and leaving entirely, as with Hawker Beechcraft?

  • Hawker Beechcraft deal not proud moment for Kansas

    This week the State of Kansas, City of Wichita, and Sedgwick County struck a deal with Hawker Beechcraft that allows Hawker to stay in Wichita rather than moving to another state.

    While outgoing Governor Mark Parkinson and other leaders praise the deal, it was not a good day for Kansas.

    It’s difficult to blame Hawker. That company saw similar Wichita-based companies receive corporate welfare, most recently Bombardier Learjet. Who can blame Hawker for wanting the same? In fact, when the state and local governments are willing to readily hand out corporate welfare, you can make a case that Hawker has a fiduciary duty to its shareholders to seek the same.

    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.

    When recruiting or retaining companies, the state and its local governments presume they have the ability to select which companies are deserving of public subsidy.

    What we have is a situation where a relatively small number of companies receive help from the state and its taxpayers, which only serves to increase the cost of business for everyone else.

    Nonetheless, politicians and bureaucrats call this making an investment in, say, Hawker Beechcraft or whatever company is asking for handouts or tax breaks. The problem is that we don’t know if investing in these companies is the right investment, if government should be making these investments at all. (In the case of Hawker Beechcraft, there is some evidence that this company may need to shrink substantially in order to survive, handouts notwithstanding. See Report: Hawker should divest all but King Air.)

    We need economic development policies that nurture all companies. Somewhere in Wichita or Kansas there is a small 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, engineering methodology, agricultural process, airplane wing — we just don’t know. Many will fail. But some will succeed, and 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. Any of these now-small companies could become the next Cessna, LearJet, Beechcraft, or Pizza Hut. We just don’t know — we can’t know — which small companies will succeed. But these companies, when in small startup stage, struggle to pay the taxes that large companies are able to escape. Being small, they may also be disproportionally impacted by regulation. It’s not necessarily the case that a small startup aviation company is competing directly with Hawker Beechcraft and is handicapped by the larger company’s tax advantages and handouts. But these two companies could be competing for the same employees, for example, and that puts the smaller company at a disadvantage.

    How can we identify which companies are deserving of government subsidy? Which companies should have their tax burden softened at the expense of others? Allocating resources — 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.

    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.

    Unfortunately, the Hawker Beechcraft deal, along with most of the policies of the state and the City of Wichita move in the opposite direction: towards more state-controlled economic development.

  • Business can oppose incentives and use them

    In the campaign for United States Congress from the fourth district of Kansas, Democrat Raj Goyle criticizes leading opponent Republican Mike Pompeo for accepting economic development incentives while opposing their existence.

    A Goyle press release reads: “Already a known outsourcer, Pompeo, in an act of hypocrisy, took government incentivized aid for three of his companies, including Sunflower, Thayer and Sentry. He did this despite repeatedly denouncing government assistance in the private sector.”

    This criticism — that those who oppose government programs nonetheless hypocritically take advantage of them — is an important topic to examine, not only as a campaign issue, but because the conflict that leads to this form of criticism arises often. It’s something that libertarians struggle with daily — and I don’t think Mike Pompeo would describe himself as libertarian.

    In an article examining whether presidential candidate Ron Paul should accept federal matching campaign funds, the libertarian scholar Walter Block described the pervasiveness of government and the impossibility of escaping it:

    For the modern state is so involved in the lives of its citizens that it is the rare individual who does not accept some form of government largesse, whether in the form of money payments, services, or goods of one type or another.

    For example, while not everyone goes to a public school or teaches there, it is the rare individual who does not: walk on statist sidewalks, drive on public roads, carry currency in his pocket, avail himself of the services of governmental libraries, museums, parks, stadiums, etc. Which of us has not entered the premises of the motor vehicle bureau, sued someone in court, posted a letter, attempted to attain a passport, or interacted with government in any of the thousand and one other ways it touches upon our lives?

    This hints at part of the conflict — angst even — that libertarians digest internally as we go about our business in a world dominated by government. I, for example, firmly believe that we would be better off with private ownership of the streets and highways. Each time I drive my car from my driveway onto the government street in front of my house, I think of this. I get it. I understand the conflict that government thrusts on me. It bothers me daily.

    But there’s no other way for me to get to where I want to go. I’m consoled somewhat by the fact that the motor fuel taxes I paid go to building and maintaining the roads. This doesn’t mean, however, that I agree that our system of primarily government ownership of streets and highways is the best system. But it’s the system I am forced to live with, and I try to change it.

    Business firms are generally aware, although not always, of government incentives available for economic development. These incentives are part of the economic and political landscape that business firms face. They have to be recognized and dealt with, just like any other factor such as regulation. If business firm “A” decides not to accept incentives and subsidies when firm “B” does, is this wise, even if accepting subsidy is against the principles of firm “A”?

    I would recommend firm “A” to apply for and accept the subsidy. For one thing, if firm “A” is a public corporation and doesn’t pursue these incentives when they are available, the company is likely to be sued by its shareholders.

    Second, these subsidies are part of the competitive landscape. Even though from a libertarian and conservative view they are wrong and harmful, they still exist. It does no good for a firm to pretend they don’t exist and thereby create a competitive disadvantage for itself. This is especially the case if firms “A” and “B” are direct competitors in the same industry. But even if they are not, these two firms still compete in the same markets for land, labor, capital, and other generic factors.

    Third, firm “A,” like all of us, is paying for these incentives and subsidies. While this may seem like conceding to the power of the state, firm “A” might as well get some back of what it paid for.

    So yes, business firms need to use government incentives and subsidies. At the same time, we need to work for the elimination of these programs. This is difficult, as the more government becomes involved in management and direction of the economy, it becomes harder to get government to stop. We see this in play at Wichita city hall, as more and more firms ask the city council for various forms of assistance or corporate welfare.

    The fight is important, too. The factors that made our country and its economy great are at peril. Gary North wrote in The Snare of Government Subsidies: “… those within the government possess an extremely potent device for expanding political power. By a comprehensive program of direct political intervention into the market, government officials can steadily reduce the opposition of businessmen to the transformation of the market into a bureaucratic, regulated, and even centrally-directed organization. Bureaucracy replaces entrepreneurship as the principal form of economic planning.”

    Returning to the politics of the day: Isn’t is a little strange to hear Goyle, who favors expansion of public-private partnerships, criticize those who use them, even if they are opposed to the idea in principle? Doesn’t Goyle want everyone to be in “the snare” that North describes?

  • In Wichita and Kansas, economic development is not working

    The effort of Wichita and Kansas to retain Hawker Beechcraft, one of our leading employers and a Wichita institution, provides a lesson in the futility of corporate welfare as an 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 handouts, but by a low taxing and spending environment, and a reasonable regulatory regime.

    Recently I was shown a listing of all the industrial revenue bonds (IRBs) that Hawker Beechcraft and its predecessors have been authorized over the last 20 years. The number is large: $1.2 billion. This is not money that any governmental body has lent to Hawker Beechcraft. The purpose, instead, of the IRB program is to allow companies to escape paying property tax on property purchased with the bond proceeds. In some cases, companies escape paying sales tax as well.

    It would be difficult to calculate how much tax Hawker Beechcraft and its predecessors have not paid due to the abatements, but it is a lot. The company still pays some property tax. Records from the Sedgwick County Treasurer’s system indicate the company paid $971,073 in tax year 2009.

    When asking for tax breaks like this, companies often point out that they hire many people and pay good wages, so the taxing entities make up their money in other ways. That may be true. In fact, the cost-benefit analysis the city and county use make just that reckoning: if we give up collecting some tax from a company, how much additional tax will we collect from everyone else? Perhaps government officials don’t realize that much of this “benefit” is simply taxes shifted to someone else.

    Nonetheless, politicians and bureaucrats call this making an investment in, say, Hawker Beechcraft or whatever company is asking for tax breaks at the moment. The problem is that we don’t know if investing in these companies is the right investment, if government should be making these investments at all.

    Somewhere in Wichita or Kansas there a small 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, engineering methodology, agricultural process, airplane wing — we just don’t know. Many will fail. But some will succeed, and 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. Some people may not even think of looking to government for economic development assistance, as when I interviewed a successful Vietnamese grocer in Wichita. He didn’t know “where to dig” for government handouts.

    Any of these now-small companies could become the next Microsoft, Google, Home Depot, or Pizza Hut. We just don’t know which. But these companies, when in small startup stage, struggle to pay the taxes that large companies are able to escape. Being small, they may also be disproportionally impacted by regulation. It’s not necessarily the case that a small startup aviation company is competing directly with Hawker Beechcraft and is handicapped by the larger company’s tax advantages. But these two companies could be competing for the same employees, for example, and that puts the smaller company at a disadvantage.

    How can we identify which companies are deserving of government subsidy? Which companies should have their tax burden softened at the expense of others? Allocating resources — 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.

    Another problem is the nature of knowledge. In a recent issue of Cato Policy Report, Arnold King wrote:

    As Hayek pointed out, knowledge that is important in the economy is dispersed. Consumers understand their own wants and business managers understand their technological opportunities and constraints to a greater degree than they can articulate and to a far greater degree than experts can understand and absorb.

    When knowledge is dispersed but power is concentrated, I call this the knowledge-power discrepancy. Such discrepancies can arise in large firms, where CEOs can fail to appreciate the significance of what is known by some of their subordinates. … With government experts, the knowledge-power discrepancy is particularly acute.

    I emphasized the last sentence to highlight the problem of the dispersed nature of knowledge.

    There are other problems with government management of economic development. We need to move away from this and towards a free market approach to economic development. This will take some time, and until then, we’re forced to defend our industry from other states, as we are presently doing with Hawker Beechcraft.

    But if we don’t start transforming Kansas, we’ll be doing this forever. And someone else always seems to have more money to spend.

  • ‘The Power of the Poor’ to be shown in Wichita

    On Monday October 11, the video “The Power of the Poor” will be shown in Wichita, with discussion following.

    “The Power of the Poor is a compelling look at the surprising and vital role of inclusive laws and titled property in establishing peace and prosperity. It is also the story of real people with real struggles — all of whom share a commitment to entrepreneurship.”

    “De Soto and his team have proven that, even hobbled by great obstacles, the world’s hard-working poor entrepreneurs have created far more wealth than anyone had ever imagined possible — even with the absence of the legal frameworks people in the rich north take for granted. Prosperity is possible, if only we simplify the rules of the game. That means giving the poor titled property and the legal business tools we in the West enjoy. Such will enable them to harness the power of their considerable assets, as these stories illustrate.”

    The presentation will be at the Lionel D. Alford Library located at 3447 S. Meridian in Wichita. The time is from 7:00 pm to 8:30 pm.

    For more information on this event contact John Todd at john@johntodd.net or 316-312-7335, or Susan Estes, AFP Field Director at sestes@afphq.org or 316-681-4415.