New Democrat Update - November 2009
WHY BUSINESS SUBSIDIES DON’T WORK
Dr. Jeffrey Zax, Economics Professor at the University of Colorado at Boulder, recently spoke about Enterprise Zones and other state tax subsidies to businesses at a meeting of Democratic state legislators and Colorado DLC members. Dr. Zax was kind enough to summarize his presentation for the New Democrat Update:
Governments offer lots of subsidies to private businesses. Just this week, the State of Colorado and the City of Denver agreed to $3.6 million dollars in subsidies for SMA Solar Technology. This amounts to $12,000 per job.
That's a lot of money, especially when governments are cutting spending on their legitimate responsibilities. Is it well spent? Almost surely not. Government subsidies to businesses are the wrong way to encourage employment and economic growth.
The Colorado Enterprise Zones program, probably the most prominent subsidy of this sort in our State, is a good example. This program gives subsidies to establishments located in designated Enterprise Zones. Areas are designated as Enterprise Zones, at least in theory, because they seem to need help in order to achieve adequate levels of economic growth. Superficially, helping them achieve this through subsidies makes sense.
What do we know about how this program actually works? Establishments in Enterprise Zones don't pay their workers any more than similar establishments outside of these Zones. For the most part, they have fewer employees. Moreover, fewer firms are born in Enterprise Zones and those that are there are more likely to disappear. In other words, Colorado Enterprise Zones arguably destroy both firms and jobs.
How can the effect of the Enterprise Zone program differ so greatly from its intent? The answer is simple. Economics. Imagine yourself as a business person when an Enterprise Zone is formed. You immediately recognize that Zone subsidies can increase your profits. So you move to the Zone. At least for a little while, you really are better off.
The problem is that you are not the only one who has noticed. Other businesses are moving to the Enterprise Zone as well. Your business and their businesses all need facilities in the Zone. The price of those facilities begins to rise. Some of the subsidies which drew you to the Zone are now being spent on rising rents and property prices.
Of course, as long as rents don't absorb all of the subsidies, you're still better off. Any other firm which moved to the Zone would be too. So they keep coming.
When do firms stop moving into the Zone? When they've driven property prices up so high that these prices cancel out the subsidies completely. It looks as though that process took only a couple of years in Colorado.
Workers would have had a similar experience. The first firms in Enterprise Zones enjoyed some nice benefits, and may have used some of them to hire workers and maybe even pay them more. But if they did, lots of other workers would have lined up for these jobs. Employers would have realized that they didn't have to pay as much to get the workers that they needed. As rents began to rise, they would find that they couldn't pay that much, either. In the end, increased supplies of workers and increased rents would ensure that wages in Enterprise Zones would be no different from wages any place else.
All this suggests that Enterprise Zone businesses would, in the end, look just like businesses outside Enterprise Zones. Why, instead, do they seem to have fewer workers and to be more fragile? They probably have fewer workers because Enterprise Zone subsidies for the use of capital encourage businesses to replace workers with machines. They are probably more fragile because they receive fewer Enterprise Zone subsidies as they age.
If, in the end, neither firms nor workers are better off in Zones than outside, where do all the subsidies go? We've already seen the answer. They go into driving up property prices. Even though the intent of these subsidies was to help businesses and workers, owners of property have to get all of the benefits. In other words, all of the money spent on Enterprise Zones is going to people who don't need it.
This is typical for all government subsidies to businesses. There are two types of businesses, those which would be successful in Colorado in any case, and those which would ordinarily not be. There's no point in giving money to the first type of business, because they don't need it. Money given to businesses of the second type only supports those which are otherwise weak. This puts solid businesses at a disadvantage and retards, rather than encourages growth.
If the government can't support the economy through subsidies to individual businesses, what can it do? It can and should provide the public goods and services which all businesses need to prosper: efficient transportation, good infrastructure, public safety and a well-educated workforce. If it did this, sound businesses would thrive without individual subsidies. We wouldn't want any businesses which still needed those subsidies to survive.
ECONOMIC LIFEBLOOD
Research and development expenditures (R&D) - a significant source of innovation and jobs - are slated for their biggest falloff in 30 years, according to a new report from the national Democratic Leadership Council. Since the beginning of the current economic recession in December of 2007, American R&D spending has fallen an estimated 2.4 percent, marking only the third time since 1980 that the nation's investment in R&D has declined. However, the fall off would have been much worse - as much as 7.4 percent - had the federal government not invested heavily in R&D as part of President Obama's economy recovery package, signed into law last February.
Despite signs of new life, many middle-class American families continue to struggle amidst an economy that has yet to create the new jobs that breadwinners need. With an eye toward sparking new growth, the report includes these new policy ideas, among others:
Establish a National Institute of Science and Engineering: The United States is the world's leader in the life sciences in large part because the federal government has made such a significant investment in the National Institutes of Health. Today, Washington should begin making a similar investment in science and engineering, by establishing a NISE, whose job it would be to fund basic scientific research at educational institutions around the nation, create a network of university-based venture capital funds, and award fellowships to American students interested in pursuing doctorates in scientific and technical fields.Expand the Work Visa Program Designed to Allow Foreign Scientists and Engineers into the U.S.: Until the U.S. begins producing more homegrown scientists and engineers, domestic businesses will depend on foreign talent to fill jobs that would otherwise migrate overseas. Unfortunately, the H-1B visa program, intended to allow highly-educated foreigners to fill jobs for which there is no eligible American candidate, is over subscribed. In 2008, companies made 163,000 applications for 65,000 slots. The U.S. should expand the number of slots to 200,000."The Obama administration deserves credit for having pulled the nation's investment in research and development back from the abyss," said New DLC CEO Bruce Reed, co-author, with White House chief of staff Rahm Emanuel of The Plan: Big Ideas for America. "The president has demanded that efforts to pull the nation out of the recession put us on a glide-path to long-term economic growth, and investing in R&D will be a crucial element of that strategy."