By the time lobbyists in Washington, D.C. (or at any of the state capitols or local city governments across the country) convince lawmakers that a subsidy is needed for a particular industry, it might just be that the company is already taking a turn for the worse, says a new study.
The researchers looked at some $5 billion in spending from 1998 to 2008 in their study that will be published in the fall. Their findings showed that on average, the more a company shelled out for government affairs and political interests at the federal level, the worse it performed financially.
“If you look at most of the literature on business management and strategy, the implication is that these investments really pay off,” Doug Schuler, study co-author and professor of business and public policy at Rice, told Reuters.
“But we found a really persistent negative relationship” between political activity and market performance, he said.
The research also found that in terms of return on sales, higher political spending on average had either marginally negative, or statistically insignificant impacts.
The only exception? About 10 percent of the companies surveyed did better only when they were already highly regulated.
This isn’t just a problem for the federal government, either. When local and state governments shell out money to prop up a “pet industry,” the government must, of necessity, take from Peter to give to Paul. Every RDA, loan guarantee, or special tax treatment is just another way of propping up a private company at tax payer’s expense. It’s called “picking winners,” because the government is essentially guessing that this company is going to work, pay back the money, and the government will come out on top.
Unfortunately, more often than not (if not nine times out of ten) the government–city, state, or federal–picks that winner not based on market success but on lobbyist donations. As a result, often dubious enterprises are propped up beyond their useful life by taxpayer money, money that is frequently lost from productive use.
Want an example? The most glaring is Solyndra, mentioned above. Touted as a green energy company, in 2009 the Obama Administration provided it with $535 million in loan guarantees. Additionally, the California government gave it $25.1 million in tax breaks. Then, on August 31, 2011, Solyndra declared bankruptcy, laying off 1100 workers. Ouch.
Closer to home, you might look at UTOPIA, a consortium of 11 Utah cities that have formed to compete with the private sector to provide telecom services and a dubious project that, if it worked, would provide very high-speed internet to participating customers in participating cities across Utah. While not a company, it acts as one and has been set up by government to compete with private companies. There are those, such as myself, who do not believe government should subsidize competition with the private sector. Further UTOPIA’s ongoing problem is that it requires participant cities to foot the initial cost of building the network until sufficient customers can be attracted to repay the costs. So far, the project has run over budget and has been unable to attract enough customers to meet targets. In fact, from 2010 to 2011, it started to lose customers. The cost was just too high for people to pay when sufficient internet bandwidth is available from private companies.
Inability to gain customers is one thing, and there are those that argue that UTOPIA has begun to gain customers, but regardless UTOPIA has consistently been required to rely upon taxpayers to balance its budget when it has failed to meet its stated goals. As the Utah Taxpayer’s Association argues, after so many repeated failures to meet promises, perhaps local governments would face up and end the pain:
UTOPIA, and its enablers on the city councils in UTOPIA’s member cities, have heard these concerns repeatedly. Many even agree that these arguments should have persuaded their predecessors in the city governments to not venture down this path at all. However, they feel compelled to pony up more money, to make sure taxpayers don’t lose the money already committed to back UTOPIA’s bonds. Unfortunately, that money is already gone.
Rather than cut their losses, though, and move on, cities continue to throw good money after bad. Take West Valley City, for example. In 2010, to match its obligations to UTOPIA and help cover UTOPIA’s shortfall, In the 2011 budget year,
To cover their $3.5 million UTOPIA bill, West Valley City is proposing an 18% property tax increase. While West Valley City officials insist that the property tax increase is unrelated to the UTOPIA bill, it is no coincidence that the exact amount of revenue generated from the property tax increase is $3.5 million.
The tax increase would amount to $70.44 on the average home valued at $185,000 and $128.16 for businesses of the same value. West Valley City already has the second highest property tax burden in the state.
That budget passed, and West Valley residents, whether they use UTOPIA or not, saw an 18% increase in their taxes. And guess what–UTOPIA seems to fit all the characteristics of a subsidized company that the market wouldn’t support otherwise.
Maybe it’s time to choose leaders who won’t subsidize private business and use the government to compete with the market? Even the Chinese can make a city look good by pouring enough money into it. Just look at the Olympics. That doesn’t mean the economy will do better because of it.
Helping a company, or competing with a company using taxpayer dollars, only removes from the market resources that the market would have otherwise, and more efficiently, used to create more competitive products.
In Solyndra’s case, the Obama Administration picked the company they thought would last. They were wrong.
In UTOPIA’s case, eleven cities have opted to create a product that the private sector was unwilling to support on it’s own. If the private sector won’t support it, why should the government?
Related articles
- A Non-Sexy Way to Cut Government Spending (publiusonline.com)
- At Solyndra, More Jobs Lost – and Even More Jobs Lost (heritage.org)
- Romney Campaigns at Failed Solyndra Factory (thecaucus.blogs.nytimes.com)
