The Electric Commentary

Wednesday, March 01, 2006

On Corporate Welfare

I hate corporate welfare. Milwaukee has recently attempted to spur development and attract jobs by handing out millions of dollars in corporate welfare, first to the failed Pabst City project, which would have included condos, restaurants, and a House of Blues in an area just outside of downtown proper (with about $41 millions dollars of aid), and then they offered Mapower Inc., a $20 million parking garage in an attempt to lure them downtown.

Milwaukee could probably use more jobs downtown, and it would be pretty cool to see a House of Blues open up, but the incentives created by these sorts of deals screw up the local economy. They're simply not worth it.

Milwaukee has several music venues already. One of the more prominent theatres is The Rave, which is roughly the size of a House of Blues. The Rave is just west of Downtown on Wisconsin Ave., in a "lackluster" neighborhood, to put it nicely. As far as I know, The Rave has not received any subsidies. Perhaps, if they were $41 million richer, they could have spruced up the place a bit, or moved to a nicer location, or booked bigger acts, or lowered ticket prices, but as they received no subsidy, they book middling acts on 24th and Wisconsin Ave.

The House of Blues would have been given an unfair advantage over The Rave, as well as every other venue in Milwaukee. There is little chance that any given business can compete with an adversary if that adversary is given a $41 million dollar advantage. Their only option, if they want to survive and prosper, is to lobby for their own subsidy or tax break.

Instead of competing with their free-market competitors to increase service and lower prices, they wind up in a bidding war over the favors of public officials. And, while consumers are hurt by the lack of competition, they are also hurt by the increased role of government.

When government officials start giving out these favors, they basically become urban planners. They are put into the position of deciding what businesses should go where, and which should be kept out. If there was truly a demand for a House of Blues in Milwaukee, why wasn't it built before the subsidy idea was explored? What if some official decides that he would like a Cheesecake Factory downtown? Do they get a break? Why not Chili's or Olive Garden?

Perhaps the single worst aspect of corporate welfare is that it disguises the true problems of an unfriendly business climate, high taxes, and cumbersome regulations. Cities offer certain natural advantages for businesses over more rural areas. There is a higher concentration of people, good infrastructure, and a large employee pool. Because of this, cities can get away with taxing at a higher rate. This is rent seeking, pure and simple, however, it is difficult to maintain this situation, and eventually suburbs start to compete by creating business-friendly climates with solid infrastructures. Some cities have adjusted to their suburban competition, and some haven't.

If Milwaukee would simply reform its tax situation there would be no need to grant corporate favors to attract businesses. Unfortunately, politicians like this situation. They can easily extort a few thousand dollars in campaign contributions from any business if they can cut the business some kind of break that will allow them to make a greater profit, especially if that break eliminates competition.

Basically, politicians hit up companies for money, and then repay them several times over with your tax money. Sound like a good deal?

Whenever the government is in a position to grant favors, it is exercising too much power. It doesn't matter if the issue is regulating marriage or granting subsidies, what does matter is that they are playing you off of your fellow citizens for their own benefit.

6 Comments:

  • These were not subsidies, they were tax cuts. The tax revenue lost would have been repaid over the next five years or so. They were more like loans. Not that that affects your annalysis. I'd prefer a more favorable tax system for Businesses in Milwaukee. But since that's not the case, I'm happy to buy Manpower a parking structure. I would have been happy to help bring a Hoffbrahaus and a house of blues to Milwaukee too.

    By Blogger JesusIsJustAlrightWithMe, at 4:38 PM  

  • Yeah, but specialized tax cuts basically are subsidies, at least from the perspective of a competitor.

    I think that all of that stuff sounds cool, it's just unfortunate that the city has to bribe businesses to do business there.

    By Blogger PaulNoonan, at 5:54 PM  

  • I'm with you on this one. I grew up in the Cleveland area (though not the city) and for the past few years the mayor there has been facing $40- to $60-million budget shortfalls. And yet somewhere between $20 and $24 million every year is spent retiring the debt on some of the past projects, including financing Cleveland Browns Stadium and the revitalization projects in The Flats and the Warehouse District (Cleveland's entertainment and restaurant areas, respectively). How they can justify those tax cuts and subsidies for those businesses when they're facing shortfalls that large is really beyond me.

    By Blogger Nye!, at 9:16 PM  

  • Is Cleveland a better place to live than it was before?

    By Anonymous Anonymous, at 9:44 PM  

  • Sounds like the free market to me. Cities competing for businesses against each other because the businesses have something the city wants. Cities that overpay or buy unwisely will do poorly.
    Now in regard to the extent that business money goes to politicians and is sent back (many times multiplied) to the businesses at the expense of taxpayers, well I hate that.

    By Anonymous Scott H, at 12:14 PM  

  • The only downtown jobs that this type of stuff guarantees are government jobs.

    By Anonymous Rashid Muhammad, at 1:03 PM  

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