Mimsy Were the Borogoves

Editorials: Where I rant to the wall about politics. And sometimes the wall rants back.

Business prospect incentives discourage innovation

Jerry Stratton, January 30, 2019

Round Rock Water Tower

Round Rock Texas: One of the top ten places to live the American Dream.

In a closed session last Thursday, the Round Rock city council had listed “deliberate the offer of a financial or other incentive to business prospects considering Round Rock as a location for new businesses that would bring economic development to the City.”

Because it was in a closed session I don’t know the specifics of the incentives offered or even the business it was offered to. That said, it is always important for progress that governments not try to pick winners and losers but rather let people in general do so by buying what products and services appeal to them.

So I decided to speak a short piece before the council. I’m reproducing it here as a blog post because I’m lazy.

January 24, 2019 City Council Meeting

Consider, rather than offering incentives to individual business prospects, changing the law so that all businesses, large and small, are incentivized equally to move here and, importantly, to start here. Offering incentives on a request basis means picking winners and losers. It favors those businesses that hire extra lawyers and bureaucratic navigators—that is, those larger businesses that account for a smaller number of jobs.

It is far better to provide such incentives through simpler laws and lower taxes, so that individuals not experienced with navigating bureaucracies are better able to start small businesses and move their small businesses here. According to the Bureau of Labor Statistics small businesses create two thirds of new jobs, with a third of those created by startups. Other statistics find a smaller advantage to small businesses, but still an advantage. Decreasing the bureaucracy event horizon1, making it easier for individuals to start new businesses without having to hire lawyers and navigators, makes more sense than incentivizing individual business prospects.

Reduce taxes for everyone, not a select few, and simplify what remains. That’s the way to attract the kind of ground-up businesses that don’t just create jobs in one facility but create entirely new industries of jobs.

We could all use a reduction on property taxes. For that matter, all the other taxes that might be waived for one business are taxes we all have to pay when we “Shop the Rock”2 at businesses which are not given those incentives. Or in wages if we work for disfavored businesses.

It’s worse than that, though, because these incentives have a poor record on average anyway.

The companies that get these deals rarely live up to expectations. In one of the old state programs, only 2.3 percent of companies created the number of jobs that were announced. And even when the jobs numbers pan out, the taxpayer expense associated with the projects — some of which would have occurred without taxpayer support — puts in doubt the economic gains. Consequently, the state usually comes out behind.—Mackinac Center, James M. Hohman, Director of Fiscal Policy

But the truly dangerous aspect of this sort of corporate welfare is that excess bureaucracy, whether federal, state, or local, discourages the innovation that creates more wealth beyond the zero-sum that politicians see. An entrepreneur with a great idea isn’t likely to also be an expert in navigating complicated tax law or inveigling local governments to give them breaks on various tax laws, employment laws, or zoning laws. And so they simply don’t put their idea into practice for fear of arousing the power of the state against them.

I don’t think it’s a coincidence that the innovators who started California’s Silicon Valley boom grew up under the very conservative Reagan. He cut taxes, he cut regulations, and regardless of how much the counterculture members of the movement disliked him they could and did start up businesses—businesses involving soldering, programming, even mass production—literally in their garages, something that would likely tie then up in lawsuits long before they got a product out if they were to try it today.

That is the kind of innovative public policy that spurs innovation in other industries.

In response to Texas and Round Rock: News from Texas, and especially Round Rock/Austin.

  1. Bureaucracy Event Horizon: That portion of the economy where navigators make such a significant portion of the lobbying bloc, that it is very difficult to get the law changed.

  2. ”Shop the Rock” is the Council’s slogan for shopping locally in Round Rock.

  1. <- Harvey socialism