By Aaron Newell

Where should state governments’ target economic incentives? Should they attempt to boost already thriving counties, or should they focus on developing poorer counties? Dango Kumwenda, an ACRE Fellow and BT����MBA student, recently wrote an op-ed for the Arkansas Democrat-Gazette titled “” arguing that Arkansas is misallocating its economic development incentives by focusing most of them in the richest counties in the state.

Kumwenda cites economist : in a county with 10% unemployment, with a new incentive package that creates 1000 jobs, half of these jobs will simply be filled by people switching jobs within the county. In a county with 4% unemployment, the same package will result in only 200 new jobs.

Kumwenda also specifically addresses the situation in Arkansas:

“[T]he Arkansas Economic Development Commission reported signing 133 new incentive agreements in 2017 alone. Of those 133, the state gave out a total of 67 incentive packages that were aimed specifically at creating and retaining jobs. Of those 67 packages, a staggering 47 of them were given to companies in the 15 richest counties, and 30 went to firms in three of the four wealthiest counties in the state. By comparison, companies in the 22 poorest counties received only 5 incentive packages in 2017.”

Kumwenda encourages Arkansas to focus on the poorer counties in Arkansas to create more prosperity. To read the full op-ed, .

For more of ACRE researchers’ work on targeted economics development incentives, go here.

Jacob Bundrick, ACRE’s policy analyst on this issue, has many related works on his author page. Bundrick’s latest publication, “” is a policy review highlighting five ways Arkansas officials could improve the Quick Action Closing Fund.

ACRE also brought in one of the top researchers in the field of targeted economic development incentives as part of our Distinguished Speaker Series. , Professor in the Department of Government at the University of Texas-Austin and author of , spoke about his own research on economic development incentives. You can watch a video summarizing Jensen’s research . You can view the entire lecture on ACRE’s YouTube page .

Dango Kumwenda is a part of ACRE’s Research Fellowship Program. In this program, students work with a professor to write a publishable research paper that is presented at the annual Society of Business, Industry, and Economics conference. Kumwenda has been working with BT����Assistant Professor of Economics Dr. Weici Yuan on a paper that investigates the relationship between economic development incentives, migration patterns, and employment.

What is the Quick Action Closing Fund (QACF) and what reforms should be considered to protect taxpayers?

Jacob Bundrick, a policy analyst at the Arkansas Center for Research in Economics, was on the Conduit News radio program Wednesday morning to answer these questions and more.

The QACF allows the state to provide cash grants to select entities in the hopes of attracting and retaining businesses within Arkansas. The state legislature has appropriated approximately $176 million to the QACF since it was created in 2007. The Arkansas Economic Development Commission has said the program is responsible for creating or retaining nearly 20,000 jobs in Arkansas.

In the interview, Bundrick discussed the findings of, “an academic journal article he co-authored with BT����Associate Professor of Economics and ACRE Scholar Thomas Snyder that was published in The Review of Regional Studies on March 6, 2018.

Bundrick said:

What we found was that these subsidies don’t actually stimulate increased economic activity here in Arkansas. There’s no increases in employment or establishments in Arkansas counties.

Bundrick also said the best policy would be to end the program and use the savings for tax relief or other governmental needs. However, there are incremental reforms to the program that can better protect taxpayers such as increasing transparency requirements and introducing subsidy limits on a per-job basis.

Bundrick said:

The lower the cap, the less risk there is that you overpay and end up losing money for taxpayers.

You can listen to the full interview here:

Bundrick is also the author of the ACRE policy review, “Tax Breaks and Subsidies: Challenging the Arkansas Status Quo”.

Is there a “more proven path” Arkansas should take for economic development?

ACRE Policy Analyst Jacob Bundrick says yes in an op-ed published in the on March 19th. Arkansas officials should focus on “broad, comprehensive reforms to increase economic growth” rather than targeted economic development incentives.

One example of an ineffective incentive is the Quick Action Closing Fund (QACF). The QACF allows the state to provide cash grants to select entities in the hopes of attracting and retaining businesses within Arkansas.

Bundrick and ACRE Scholar and BT����Associate Professor of Economics Dr. Thomas Snyder examine the effectiveness of these incentives in an academic journal article titled “ published in The Review of Regional Studies on March 6th. They found that QACF subsidies provided to businesses within a given county have no statistically meaningful relationship with private employment ��or private establishments over a four-year period after the subsidies are disbursed.

Bundrick says in his op-ed:

“Statistical and anecdotal evidence strongly suggests economic development incentives are not working. And these programs are not free. When the state provides incentives to businesses that would have invested in Arkansas regardless of the aid, the state is forgoing revenue that would have been collected and giving away tax dollars that could be better spent.”

Bundrick is also the author of the ACRE policy review, “Tax Breaks and Subsidies: Challenging the Arkansas Status Quo” and recently participated in a organized by UCA’s Center for Community and Economic Development.

ACRE Policy Analyst Jacob Bundrick and ACRE Scholar Dr. Tom Snyder discussed the unintended consequences and opportunity costs of Quick Action Closing Fund (QACF) spending at the State Agencies & Governmental Affairs – Senate Constitutional Issues Subcommittee on February 5th.

Bundrick and Snyder explained the conclusions of their working paper titled �� which takes an empirical dive into the relationship between QACF subsidies and private employment and private establishments in Arkansas’s counties.

The study was released by the Mercatus Center at George Mason University and accepted for publication in the academic journal The Review of Regional Studies.

The Quick Action Closing Fund

The Quick Action Closing Fund (QACF) allows the state to provide cash grants to select entities in the hopes of attracting and retaining businesses within Arkansas. The state legislature has appropriated approximately $176 million to the QACF since it was created in 2007. The Arkansas Economic Development Commission has said the program is responsible for creating or retaining nearly 20,000 jobs in Arkansas.

Bundrick and Snyder in their research find that QACF subsidies provided to businesses within a given county have no statistically meaningful relationship with private employment per 1,000 population and private establishments per 1,000 population over a four-year period after the subsidies are disbursed. They also find no evidence to suggest that a given county experiences any meaningful employment or establishment spillover effects related to QACF subsidies awarded to businesses in neighboring counties. Bundrick and Snyder conclude that the evidence provides reason to be skeptical of the QACF as a job creator.

Unintended Consequences — Including Fiscal Cost

At the meeting, Bundrick said regarding the possible unintended consequences of QACF subsidies:

“There are lots of different things that you might not intend to happen with these subsidies that do happen that have these negative effects. The first one we’ll call crowding out. Basically what that means is we’re giving an artificial cost advantage to select companies through this subsidy. With that artificial cost advantage, they have the ability to perhaps pay higher wages to their employees than existing firms. Naturally, employees would like to make more so they shift from one employer to another. It could be that they use that artificial cost advantage to offer their products and services at a lower cost so they can sell their goods at something lower than what their competitors can.����In some markets where it is relatively saturated you actually get an effect where you create jobs at the subsidized firm and the existing business has to close down. We don’t really see that effect reported that often in things like [AEDC’s] annual report for the Quick Action Closing Fund but there’s lots of academic research that shows that happening.��A second unintended consequence there is fiscal cost. This program isn’t free. It costs money and revenue to use it. One way you can raise that revenue is by increasing taxes. We haven’t seen that a whole lot at the state level. Where you can see that pretty clearly is at the county level. Some of these counties will raise sales taxes to fund these types of programs. Just a couple of examples there, Jefferson County and Clark County, have increased their sales taxes to fund these types of program.”

Bundrick also mentioned the possible opportunity costs of the program:

“The other side of that coin is that you could shift public resources from other types of expenditures into the Quick Action Closing Fund. Instead of spending money on highways or paying for comprehensive tax reform or education or something along those lines, you use that money for the Quick Action Closing Fund. Maybe those other expenditures are the ways you could’ve used this money in a way that would’ve been more productive for the broader economy.”

“These Funds Aren’t Actually Effective”

Snyder said he found there to be “no overall effect on employment or business establishments” from the QACF.

Snyder said:

“What we see is that most of the literature says the same thing that these funds aren’t actually effective. This money could’ve been spent elsewhere. What we’re doing is taking taxpayer money and then directing [it] to some businesses. What would happen if we didn’t take that money and spent it in other ways such as infrastructure? Some studies have actually shown that with infrastructure spending there is a good return on that.”

A summary infographic of Bundrick and Snyder’s work can be found here. For more on the pros and cons of targeted economic development incentives, be sure to check out Bundrick’s Policy Review Tax Breaks & Subsidies: Challenging the Arkansas Status Quo.

Jacob Bundrick and Dr. Tom Snyder will speak before the State Agencies & Governmental Affairs – Senate Constitutional Issues Subcommittee at 1 p.m. Monday in the Old Supreme Courtroom at the State Capitol regarding their research examining the effects of targeted business subsidies on economic growth.

Bundrick and Snyder’s working paper titled �� takes an empirical dive into the relationship between Quick Action Closing Fund (QACF) subsidies and private employment and private establishments in Arkansas’s counties.

The study was released by the Mercatus Center at George Mason University and accepted for publication in the academic journal The Review of Regional Studies.

You can read the agenda for the meeting . A summary infographic of Bundrick and Snyder’s work can be found here.��

ACRE Scholar and BT����Assistant Professor of Economics Dr. Jeremy Horpedahl participated in a panel discussion entitled “The Arkansas Business Status and Future under the Trump Era” at the annual meeting of the (ACTEB) on September 29th, 2017.

Other panelists included Arkansas Economic Development Commission’s Tom Chilton, Economic Development Alliance for Jefferson County’s Caleb McMahon, Arkansas Economic Development Institute’s Michael Pakko, and Simmons Bank’s Kelton Harrison. The discussion was moderated by ACRE Scholar and BT����Associate Professor of Economics Dr. Tom Snyder.

Topics of conversation from the panelist included ways Arkansas might improve its economic competitiveness compared to other states, ways to improve workforce education, and the current status of Arkansas’s economy.

Horpedahl said Arkansas policymakers should consider a “more broad strategy” of economic development where “entrepreneurs can thrive and businesses will come here not because they were targeted but because it looks attractive in general.”

Horpedahl said:

“I see there’s kind of two strategies of economic development that aren’t necessarily mutually exclusive, but two different kinds of policies you can follow. One is a kind of targeted economic development where you are trying to directly attract firms to come here. The other strategy is to provide a system where entrepreneurs are free to make investments where they see opportunities, but there’s no central direction to it. You can pursue both of these at the same time. I think we’ve done a lot of the first of trying to attract firms whether they’re international firms or from other states. I think we’ve been kind of lagging on the second one which is to have a general climate of low taxes, tolerable regulations and that sort. I know there’s a lot of work at the Legislature trying to move in that direction. If we look at things such as our corporate tax rate, it’s the second highest in the South. If we look at something like occupational licensing, we have the second-highest occupational licensing burden in the country by some measures. These are some things along with other economic development policies we really need to look at pursuing.”

A full transcript of the meeting can be found here.

Horpedahl is the co-author with Tax Foundation experts of ��.” The rest of ACRE’s work on tax policy can be found here. For more of ACRE’s work on economic development, check out “Tax Breaks and Subsidies: Challenging the Arkansas Status Quo” by ACRE Policy Analyst Jacob Bundrick and “The Effects of Arkansas’ Occupational Licensure Regulations” by Snyder.

You can watch the full ACTEB panel presentation , and stay up to date on our videos by following our YouTube page.

Created in 2007, the QACF allows the state to provide cash grants to select entities in the hopes of attracting and retaining businesses within Arkansas. These subsidies are awarded to businesses primarily at the discretion of the governor. The $176 million QACF has been used to , including $10 million to Hewlett-Packard in Conway, nearly $7 million to LM Wind Power in Little Rock, almost $3 million to Caterpillar in North Little Rock, and more than $2 million to Neckbone Productions for the filming of the movie “Mud”.

In June of this year, the AEDC reported that the QACF is directly responsible for . Proponents of the QACF argue that there is even more job creation than that as a result of the multiplier effects the subsidized businesses and their employees send through the local economy. But does the empirical evidence agree with this take?

The short answer is “no”. Bundrick and Snyder find that QACF subsidies provided to businesses within a given county have no statistically meaningful relationship with private employment per 1,000 population and private establishments per 1,000 population over a four-year period after the subsidies are disbursed. The researchers also find no evidence to suggest that a given county experiences any meaningful employment or establishment spillover effects related to QACF subsidies awarded to businesses in neighboring counties. Bundrick and Snyder conclude that the evidence provides reason to be skeptical of the QACF as a job creator.

This work carries significant policy implications. If Arkansas’s politicians are aiming to develop policy that will positively affect job creation in Arkansas, they should look to more proven policy reforms. For instance, is a more effective strategy than trying to pick winners and losers with targeted subsidies. Moreover, the state could make significant headway by reducing the barriers to employment imposed by Arkansas’s onerous occupational licensing laws. These broad-based, comprehensive reforms are likely to lead to better economic outcomes for the state than continuing to provide select businesses with subsidies from the Quick Action Closing Fund.

For more on the pros and cons of targeted economic development incentives, be sure to check out ACRE’s Tax Breaks & Subsidies: Challenging the Arkansas Status Quo.

Will Issue 3 bring jobs or bankruptcy taxes? Issue 3 proposes to allow local governments to appropriate tax dollars directly to private companies for economic development projects and to pay private organizations for economic development consulting work. Issue 3 would also expand the type of projects for which local debt can be issued as well as increase the number of taxes that can be authorized to retire economic development bonds.

The proposal to loosen the restraints on municipalities stems from a that payments made by the cities of Little Rock and North Little Rock to local chambers of commerce were unconstitutional. Proponents argue that passing Issue 3 will resolve the legal question and enable local governments to offer enough incentives to attract businesses.

, executive director of the Arkansas Economic Development Commission, claims that “when a local community has no defined ability to spend funds for economic development purposes, it is at an immediate disadvantage versus communities that have this ability.” Issue 3 would allow all communities to develop defined spending plans that might help cities and counties develop both direct and indirect employment.

Randy Zook, president and CEO of the Arkansas State Chamber of Commerce/Associated Industries of Arkansas, that “ambiguities in our state Constitution have left our communities with their hands tied when it comes to using local resources to recruit employers.” However, voters should remember that constitutions are put in place to limit government power. Expanding government officials’ ability to use local tax dollars and public debt to finance private economic development projects comes with costs.

For example, Fayetteville city attorney that allowing cities and counties to finance private economic development projects means that “Arkansas cities will likely be invited into bidding wars with each other for new ‘economic development’.” Businesses could threaten to leave for the neighboring town if their current host city did not provide more incentives. This would put Arkansas cities into contests with each other to see who can write the biggest check, which ultimately drives up local tax burdens. Little Rock would compete not just with Oklahoma City and Nashville, but also with Conway and Rogers. Rather than spurring job creation, existing jobs would simply be moved from one Arkansas city to the next.

Furthermore, local governments take on significant financial risk when tax dollars and local debt are used to finance private businesses. , provides a cautionary tale. In March 2015, more than one-third of Port St. Lucie’s debt ($335.5 million) was from “failed or faltering economic-development deals for which the city fronted money with a promise of repayment.” This means that taxpayers in Port St. Lucie are being forced to pay $335.5 million (plus interest) for projects they will see little to no economic benefit from. The city’s struggle with economic development debt led to a If Issue 3 passes, how many Arkansas cities would follow the path of Port St. Lucie?

While many government officials are cautious about such projects, others might not be as diligent – or they might be mistaken. There is always the chance that city and county officials would take risks hoping that they will pay off and, perhaps, also gambling that if their bet fails, the state might step in and pick up the bill. After all, Arkansas taxpayers have seen this before.

In the 1920s, Arkansas’s municipalities to finance road construction projects. Yet, the debt burden quickly became insurmountable for municipalities. In an effort to rescue the failing road districts, the State of Arkansas assumed local road debts. However, Arkansas was hit hard by the 1927 flooding of the Mississippi River system and the Great Depression that followed a few years later. By 1933, Arkansas was drowning in its debts and became the first and only state to declare bankruptcy during the Depression.

Using local tax dollars and public debt to finance economic development projects brings both risks and rewards. Relaxing the constitutional restraints on local governments may enable Arkansas’s communities to attract new economic development, but at what expense? Arkansas voters must ultimately weigh the cost of higher tax burdens and the risk of bankruptcy against the possibility of new employers.

Earlier this month, software engineering firm Elyxor pledged to create 45 new tech jobs in North Little Rock over the next five years. Arkansas Online quoted Governor Asa Hutchinson as saying, “While we have a diversified economy in Arkansas … we will not be complete as a state and complete as an economy until we have a dynamic, sustained technology sector in this state.” As I explained in my first post in this series, Elyxor will receive an income tax credit for 1 percent of its total payroll in exchange for hiring these employees. This situation is a prime example of the government trying to steer the economy to help with economic development.

One reason why many politicians and taxpayers support such financial incentives for businesses is that they think governments can influence specific economic activities by designing and issuing incentives that address perceived needs such as job creation, project investment, or research and development. Governments are also supposedly able to influence industry composition, or the types of businesses in the state, by offering targeted business incentives.

Steering the economy doesn’t work, though, and can actually be harmful for two reasons: regional unrealism and resource allocation. Let me explain what I mean by those terms.

Specializing in Comparative Advantages Helps Regions Prosper

Regions prosper when they specialize in the industries where they have a , meaning they produce a good or service more efficiently than other regions do. For example, Arkansas has a comparative advantage in rice farming. The state’s water resources and topography allow Arkansas farmers to grow rice more efficiently than farmers in other states. This comparative advantage has led Arkansas to .

Specialization in comparative advantages often leads to industry clusters. When these clusters occur naturally, they can further boost economic productivity. The economic benefits of natural clusters, such as those for computer and software development firms in Silicon Valley, have led economic developers to attempt to create artificial clusters. Arkansas’s targeted business incentives, which are designed to attract companies that specialize in transportation logistics, information technology, life sciences, bio-based products, agriculture, and advanced materials and manufacturing systems, are one example.

Incentives, however, are not necessary to attract firms that align with a region’s natural comparative advantages. The��comparative advantage alone, whether it is the workforce, technology, or location, is reason enough for firms in��that industry to locate in the region. If Arkansas had a comparative advantage in “knowledge-based” industries, such as software development, knowledge-based firms would locate in Arkansas regardless of the incentives the state provided. We see this natural clustering without government incentives in California, where Brook Taylor, spokesman for the Governor’s Office of Business and Economic Development, said that “are being built in spite of the fact that we don’t have specific tax credits or incentives for them. Companies are just building them here because it makes sense.”

Regional Unrealism Hurts Arkansas’s Economy

Steering the Arkansas economy into industries where it does not have a comparative advantage, however, makes Arkansas worse off. points out that Arkansas would actually��“make itself poorer if it tried to specialize in ways that were inconsistent with its comparative advantage.”��Market distortions lead to regional unrealism, which is the accumulation and use of resources in areas and activities��in which they are not best used. When a state does not do what it is good at, but rather what it dreams it could��be good at, its economy does not reach its production potential and the state is poorer as a result.��To see how regional unrealism harms states, consider Arkansas’s comparative advantage in rice production. ��Imagine that Arkansas’s leaders thought that ski resorts were the key to a successful economy. By issuing enough subsidies and tax breaks, Arkansas could turn its rice fields into ski lodges. Rather than Arkansas farmers raising roughly half the nation’s rice, vacationers would be skiing down fake slopes. Would this arrangement make Arkansas wealthier?

Clearly, it would not. The state would waste massive resources and opportunities trying to support a ski industry. The land, labor, and climate of eastern Arkansas is much better suited for growing rice than it is for downhill skiing. Another region that is less efficient at producing rice might make up for the lost production in Arkansas, but since it��is less efficient, rice prices for consumers would rise. Arkansas and its residents are much better off when the state uses its resources to farm rice instead of pretending to be Colorado.

While this is a very clear example of how regional unrealism makes states worse off, it’s not always this obvious. Most times it occurs at levels that are very hard to see. Issuing tax breaks and subsidies to may not seem as absurd as trying to cultivate skiing in Arkansas, but if firms such as Nordex and Hewlett Packard Enterprises are not here because of natural economic conditions, we are making ourselves poorer.

Markets Allocate Resources Better Than Government Intervention Does

Why do people think the government should steer the economy? They may assume that the government is better than the market at allocating resources. However, Nobel Prize-winning economist pointed out that no single person or entity knows all the relevant information about the entire economy that is required to make optimal decisions. There is no omniscient wizard who knows exactly which widgets need to be made, how many need to be made, where they need to be sold, and at what price. Rather, people have specific, tacit knowledge about a business or industry, and the potential to earn a profit motivates them to react to market signals, such as prices. Governments, on the other hand, do not have the same profit incentive and are too far removed from market signals to behave in the same way. Individuals reacting to market signals lead the economy to focus on its comparative advantages better than government manipulation does.

Conclusion

The idea that governments can steer economies into sustained economic growth is a myth. History has repeatedly shown this. Government manipulation, although often well intentioned, ends up hurting more than it helps. By limiting government intervention, politicians not only allow entrepreneurs and businesses to make the best economic decisions for their firms, but they also clear the path for states to specialize in their comparative advantages. The outcome is more prosperity for individuals and states alike.

In my last post, I went over the basics of why tax incentives and subsidies are considered staples of economic development. In this post, I’ll explain why they don’t work as politicians might hope.

A common argument in favor of financial incentives is that tax breaks and subsidies motivate firms to create new jobs and invest in new projects, which sparks demand for more products and services within the local economy.

For example, if Hewlett-Packard builds a plant, then construction workers get hired, computers get bought, employees eat at local restaurants, and so on. As demand rises, more firms are attracted to the area and either establish new operations or expand existing operations, leading to further job creation, project investment, and an overall uptick in economic activity.

This uptick increases public revenue as new businesses and employees pay taxes on their earnings and purchases. With increased public revenue, governments may be able to afford to decrease marginal tax rates on businesses or individuals or increase the number or quality of public goods and services. And who doesn’t want lower taxes or better schools, roads, and parks?

While these arguments seem sound, the reality is that financial incentives often fail to spur economic activity for several reasons.

Positive and Negative Spillover Effects from Tax Breaks and Subsidies

Traditionally, incentive programs are evaluated only by the jobs, local investment, and tax revenue directly created by the firm that receives the incentive package. For example, the only reports the direct number of jobs created or retained and the direct investments made by the companies receiving subsidies.

But new and expanding firms create spillover effects that both help and hurt surrounding businesses. Some of these effects support economic growth.

-Labor pooling encourages economic growth by increasing the concentration of workers in the area with specialized skills and knowledge.

-Technology spillovers, or the exchange of technology among people and firms, increase efficiency and innovation. -Knowledge sharing, or the exchange of thoughts, concepts, and ideas among people and firms, also leads to increased innovation.

But there are also several negative spillovers. Increasing the number of firms in a location

-increases the demand for a variety of inputs, such as labor and real estate, which increases the cost of labor and rents and raises the cost of doing business.

-means that, unless infrastructure is expanded, more firms are competing to use the same level of roads, railways, utilities, and communication systems.. The resulting congestion can slow the movement of people and products, which hurts a company’s profits.

-makes tax hikes more likely. An influx of businesses and people means that demand for public goods such as roads, schools, and police will increase. Public money (taxpayer dollars) pays for these goods, which means that the government must collect more revenue. While more businesses and people mean that the tax base will expand and the government will collect more revenue even if it doesn’t raise tax rates, increasing the demand for public goods also increases the likelihood that taxes will rise to keep up with demand for public goods. (Related: Taxes Take Their Toll on Arkansas Manufacturing)

-leads to the cannibalization of existing firms. Tax breaks and subsidies provide a cost advantage to firms that receive them over firms that don’t. When a particular market is saturated (isn’t big enough for more firms), providing a cost advantage to select new firms through incentives allows them to “steal” employees and customers away from existing firms, often to the point that some existing firms must close.

Because of these spillover effects, both positive and negative, tax incentive projects should be evaluated based on their total impact on an economy—not just based on the direct effects from the incentivized firm.

When Looking at the Whole Economy, Tax Incentives for Businesses Don’t Help As Much As Politicians Think They Do

Much research on the net effects of tax incentives for businesses has found that large, new firm locations have a much smaller benefit on the local economy than advertised. In other words, the negative spillover effects outweigh the positive ones. Research by economist Kelly Edmiston examining the found that “after five years, each 100 new employees hired by a new or expanding firm results in a net gain of only 29 workers to the resident county.”

In addition, found that using tax incentives to attract large firms to an area doesn’t have any positive overall effect on the private sector, and likely doesn’t increase tax revenue, either. These findings contradict the common argument that financial incentives increase economic activity. If new firms take employees and customers from existing firms, there are no positive spillovers.

Rent-Seeking

Because incentives reduce the cost of doing business, firms that receive incentives have an artificial competitive advantage over similar firms that do not receive them. The government-granted competitive advantage gives incentivized firms a better chance of survival than those that do not receive aid. By providing advantages to select firms, the government is picking winners and losers rather than letting the market decide. Who do you think should decide whether, say, Target or Walmart is more successful in your hometown: the government or the customers who shop there?

Another problem is that when governments pick and choose who receives financial incentives, they create an environment of rent-seeking: the use of resources to gain financial advantages without creating value in the overall economy. Firms use their resources to lobby for political favors that provide competitive advantages rather than creating a better product or service. Are you, as a consumer, better off when for (that your tax dollars pay for) or spends money on better quality clothes and a more unique shopping experience? Is the economy better off when Dillard’s spends money courting governments for handouts instead of courting customers, whose purchases lead to jobs and economic growth? By issuing financial incentives, governments are encouraging firms to waste resources courting politicians instead of focusing on value-adding activities.

When politicians increase the rewards, or financial incentives, for unproductive behavior, more entrepreneurs engage in , which leads to a misallocation of talent and hurts the economy in the long run.

Seen and Unseen Effects

Policy makers need to consider both the because policies do not have a single outcome, but a series of outcomes. Only the initial outcome is immediately apparent; subsequent effects take time to develop. However, failing to consider the unanticipated outcomes of policy is dangerous. Policies that have short-run benefits often have negative long-run outcomes, and vice versa. Sound economic policy requires foresight to anticipate the future consequences of today’s decisions.

In the case of policies that provide financial incentives to select firms, the immediate, seen effect is that the firm receiving corporate welfare creates new jobs. This effect is often well documented in photo opportunities with politicians. What we don’t see are the other Arkansas jobs destroyed or the jobs that would have come to Arkansas but don’t because of the unintended consequences of financial incentives. While a handful of firms and the workers they hire may initially benefit from subsidies and tax breaks, the economy at large suffers in the long run.