Last week, Governor McCrory’s office trumpeted the news that Sturm, Ruger & Company would be opening a new manufacturing facility in Rockingham County. While this may appear to be good news, the deal struck with Ruger is just another instance of cronyism in the form of economic development.
The deal was orchestrated through the state’s Job Development Investment Grant (JDIG) program, which recently made headlines for its poor oversight of public money. In the agreement reached with Ruger, the state agreed to provide nearly $13 million in tax breaks and other incentives.
Now, at first glance, this all seems OK. 450 new jobs – what’s not to love?
Well, here the economist Frederic Bastiat has some lessons for the governor and the Department of Commerce:
There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.
Bastiat wanted people to consider not only “what is seen,” but also “what is not seen.” When you think about this deal with Ruger, it is quickly apparent what Bastiat meant.
What Is Seen
- 450 “new” jobs
- Higher wages for Ruger workers compared to Rockingham average
What Is Not Seen
- Harm done to other businesses
- With government subsidies, Ruger can operate inefficiently yet be propped up due to government favoritism, enabling them to waste resources but stay in business. This provides Ruger with an unfair competitive advantage.
- With the handouts and tax breaks granted to Ruger, taxes on all other businesses remain higher than they otherwise would be, placing them at a further disadvantage.
- Distortion of market incentives
- While Ruger “cheats” the market by using government subsidies, other companies feel compelled to do the same in order to stay competitive. This leads to widespread lobbying, which wastes precious resources on political maneuvering that could otherwise be used to more efficiently meet consumer needs.
- Of the 450 people Ruger hires, many will likely be bid away from other companies, disrupting their staff and imposing costs associated with employee turnover.
- Other states feel compelled to “attract businesses” by offering the “best” incentives: States try to outdo each other and end up more actively interfering in the economy in a “race to the bottom.”
- Wasted public resources
- Money for “economic development programs” does not go towards essential government services like education, public safety, and transportation.
When you consider “what is not seen,” this new deal with Ruger is a loser – it’s just more of the same cronyism in the guise of “economic development.”