The October announcement that the Dell plant in Forsyth County would close by January 2010 should serve as a reminder about the folly and arrogance of government-created “economic incentives.”
First, the folly. Targeted economic incentives, such as the tax breaks promised to Dell, make bad economic policy. Politicians and economic planners claim that incentives are needed to “create jobs” and to compete with other states engaging in the incentives game.
But when the government gets involved in picking specific companies to receive tax breaks or handouts, they distort the economy’s allocation of resources. Businesses with the best lobbyists, rather than the most efficient means of satisfying consumer needs, are rewarded.
Targeted government incentives also put the businesses not receiving any breaks at a competitive disadvantage. Those having to pay their full tax bill have a much slimmer margin for error in making ends meet compared to those businesses receiving a tax break.
In the end, any jobs “created” by the company receiving economic incentives may be offset by jobs lost by the companies put at a competitive disadvantage.
The economy is a constantly evolving process in which entrepreneurs compete with each other for scarce resources in order to produce a good or service at a price consumers are willing to pay. Government disruption of this process with its preferential treatment of specific companies serves to impede progress.
Moreover, the practice of granting targeted tax breaks often results in propping up companies that wouldn’t otherwise be profitable. Sustaining such unprofitable companies subverts the economy’s natural process of weeding out inefficient businesses. This weeding out process makes an economy more adaptive to changing conditions, and thus more dynamic and innovative.
The result of government meddling in the market process is fewer jobs and lower wages than would have been produced otherwise.
Secondly, and perhaps more threatening, is the arrogance of economic incentives. In a free society, consumers dictate the flow of resources. That is, consumers freely choose which goods and services to purchase, and at what price. In turn, entrepreneurs attempt to efficiently transform resources into these finished goods at a price consumers are willing to pay. In this manner, individuals in the market control the allocation of resources based on their preferences.
In the form of “economic incentives,” however, politicians feel it is their place to inject their own preferences. Special interests and political favoritism thus replaces the freely exercised choices of millions of market participants in accordance to their localized knowledge and priorities.
In the case of Dell, politicians – no doubt influenced by Dell’s highly paid lobbyists – decided that it was up to them to exert control over the economy’s flow of resources. They arrogantly believed that it was their place to manipulate the market so that tons of steel and concrete, along with acres of land and a mountain of other inputs should be directed toward the Dell plant.
The targeted tax breaks saw to it that consumer and entrepreneurial preferences took a back seat to political meddling. We’ll never know just what other entrepreneurial endeavors those resources consumed by the Dell experiment could have been used for. Perhaps they would have been used for sustainable business ventures and long-term job opportunities.
The continued use of government business incentives serves to further politicize the economy, distorting the allocation of resources and stifling adaptation and innovation. Worse still, it fosters a dangerously cozy relationship between business executives and politicians, a relationship that should alarm all advocates of liberty and economic progress.