Carrying on a new tradition, the president of the United States once again stood next to the CEO of a private company and announced a deal. The company will get a package of taxpayer-financed privileges and the president will get to say he is making America great again. Meanwhile, the rest of us get to move another step away from what made the American economy great in the first place.
This week, Wisconsin state legislators will hold a committee hearing to decide whether to bless a deal struck by Gov. Scott Walker and President Donald Trump with a Taiwanese manufacturing giant called Foxconn.
Foxconn is a leading maker of iPhone components and says it is planning to open its first major manufacturing plant in Wisconsin, a liquid-crystal-display facility. In 2013, the firm promised to open a similar plant in Harrisburg, Pa., but eventually reneged. This time, Foxconn will reportedly benefit from a lucrative incentive package of tax credits worth $3 billion. In exchange, it promises to create 3,000 jobs initially, though that number could eventually grow to 13,000. Unfortunately (and unsurprisingly), taxpayers will be footing the bill for this giveaway, paying between $230,000 and $1 million for each job created.
When governments fund what should be private projects with special tax breaks and subsidies, taxpayers bear the cost. Money that will now go to Foxconn could have instead financed a tax cut for all Wisconsinites -- whose effective income tax rates are the third-highest in the nation -- or gone toward a public good such as public safety.
And since taxation discourages economic activity (such as a business hiring more workers), every dollar taxed out of the economy actually costs society more than a dollar. When the government taxes a transaction, some people -- mainly those who were on the fence about it -- will not find it worthwhile to take part as often, or at all. One estimate by Harvard's Martin Feldstein suggests that one dollar in income taxation discourages up to 76 cents of labor exchange. This means that as much as $5.3 billion may be drained from the Wisconsin economy in order to fund a $3 billion transfer to Foxconn.
Consumers also lose because deals like this encourage firms to expend valuable time, money and effort currying favor with politicians. Since these efforts create no new wealth, but are instead aimed at simply redirecting existing resources, they are extraordinarily wasteful. When governments allow and even encourage such privilege-seeking activity, a country's best and brightest minds spend their time thinking of new ways to create value for politicians rather than new ways to create value for customers.
Over the long run, even those firms that receive special treatment often end up losing. For one thing, firms must make costly concessions to politicians in order to obtain special treatment. For another, subsidies often encourage risk-taking. Because public subsidies allow firms to unload some costs on to taxpayers, they divorce these firms from the economic risk of their ventures and encourage bad choices.
This helps explain why historically privileged industries such as agriculture, steel and autos typically fail to outperform the rest of the economy.
Ultimately, privileging certain firms over others is economically destructive. The American economy's greatest strength lies in its dynamism, in the ability of firms and individuals alike to make decisions to allocate their scarce resources toward their most productive ends. Government-granted privileges encourage the opposite. They prod firms to make decisions that they wouldn't make but for the subsidy. With enough subsidies, Mr. Walker could conceivably get orange growers to relocate to Wisconsin and build greenhouses. But that wouldn't be a wise choice, now would it?
Favoritism muddies the signals typically generated through profit and loss, and further eliminates the natural flow or "churn" that keeps markets evolving and changing to meet new needs.
The American economy grew great because it was the most open and competitive in the world. With rare exceptions, any entrepreneur with a good idea could enter any market and expect to compete on a level playing field. But as lawmakers, governors and now presidents increasingly seek to pick winners and losers, the playing field grows ever more tilted. And perceptions of the great American dream grow ever more jaded.