Monday, September 24, 2001

When should government promote or assist private business?

POLS 475 Essay #1

by David Veksler

Never. That is the short answer, and it is a substantial claim considering the plethora of subsidies and financial support given to business by the federal and state governments today. There are several reasons why government assistance is actually harmful to the economy and they clearly explain the failure of each government assistance policy to achieve the desired goals. The main policies used to “help” businesses are: tariffs and other protectionist measures, tax breaks and low interest loans, and subsidies to corporations and agriculture. Unfortunately, while every one of these measures is widely used today, they all end up hurting competition, business, and consumers.

It is no secret that protectionist measures hurt consumers and competition, as any introductory economics class will quickly show, but Congress rarely heeds the free-trade argument. America’s trade deficit at the end of 2000 was a record $370 billion according to Commerce Department figures, yet it accompanied the largest economic growth cycle in America’s history. This confirms the idea that trade deficits do not cause poor economic performance; rather, they typically accompany improving economic conditions because they are a sign of increasing foreign and domestic investment. Despite ideas to the contrary, trade deficits do not cause Americans to lose their jobs, as during the last nine (as of 2000) years of rising deficits, the unemployment rate has fallen by 0.4 to record lows. As the Cato Institute reports, as the economy experienced the recent recession, the monthly deficit figures fell right along with the stock market. (The 2000 U.S. Trade Deficit: Select Cato Commentary, http://www.freetrade.org/new/DGTD2000.html. February 21, 2001) Nevertheless, the Bush administration has been invoking protectionist measures for the steel industry among others, in what is probably a sign of their political influence. America’s protectionist policy is clearly a solely political one, and a costly one at that, as protectionist measures are harmful to consumers and manufacturers as well as hypocritical, since United States often encourages the WTO and other global free-trade organizations to lower their own member nation’s tariffs.

Tax breaks, low interest loans and other such financials incentives are used mainly by states to attract business to their area. These measures are costly to the taxpayers because as research shows, the money spent attracting business rarely pays of. It is hard to measure the effect of government economic policy on a national level, but it is possible to learn a lot from looking at individual states’ policies. As all states want to attract business to their area, all fifty states have passed a variety of tax and financial incentives that can be compared to measure their relative effectiveness. According to a study by Thomas R. Dye in the Journal of Politics # 42 (Winter 1980) pp 1085-1077 titled “Public Policies and Economic Growth in the American States,” there is actually a negative relationship between the number of incentives enacted by states and the foreign and manufacturing investment as percentage of GDP (’92-’94) The r coefficient is only .108, so there is no statistically significant relationship visible. There are however, several outliers, such as Minnesota and New Hampshire that only have one and two out of the six incentives studied and fare unusually bad in investment, while Kentucky, with all six investments, fares unusually well. Perhaps, politicians are impressed by these exceptions and ignore the general failure of state incentives in attracting business. If we look at employment growth, another important measure of a state’s economic well being, we find that there is a slight positive correlation, but the r-value is only .199, so once again there is no statistically significant relationship between economic incentives and employment growth. Additionally, these incentives have little effect becuase all of the states have at least one incentive to attract business, and 48 have at least three, with the majority having five or six. Once again, there is no relationship between the number of incentives provided, the wealth of a state, or the success it has in attracting business, and financially successful states like Texas and New Hampshire have three and two incentives respectively, while poorer southern states often have all six incentives enacted. (Friedman, Miles. Directory of Incentives for Business and Development in the United States. Washington: The Urban Institute, 1991.) As the evidence shows, the end effect of these state incentives to businesses is increased taxes to individuals with little or no reward in attracting business to a state.

Subsidies, the most expensive from of government assistance to business, otherwise known as “corporate welfare” are by far the most expensive form of government assistance to private business. Subsidies to businesses cost more than $75 billion of the yearly federal budget. (“Corporate Subsidies in the Federal Budget.” Testimony of Stephen Moore before the House Budget Committee, June 30, 1999.) Instead of helping business, they have several harmful consequences. Originally meant to correct marked failures, the highly political process of distributing these subsidies creates huge market distortions, effectively throwing a wrench in the market system. As Stephen More says, “The major effect of corporate subsidies is to divert credit and capital to politically well-connected firms at the expense of their less politically influential rivals.” While more than 90 percent of American businesses manage to survive just fine without subsidies, government grants, loan guarantees, or insurance, they do have to pay higher taxes to support their politically connected competitor, which lowers their competitiveness significantly. Agricultural subsidies are yet another case of price supports harmful effects. Out of 400 farm commodities, two dozen received price supports, of which 80 percent goes to farmers with a net worth of over $500,000. The end effect agricultural supports is that the bigger, politically well-connected farms get subsidies from the government, while over a million small farmers struggle to compete with them. (“Corporate Subsidies in the Federal Budget.) No wonder small farms have trouble staying in business.

The end result of all this government “help” is quite clear — government distorts the market system by politicizing the economy, and favors larger, better-connected bossiness over smaller, less influential ones. State financial incentives cost money in higher taxes without any visible success in attracting investment. Finally, tariffs lead to higher manufacturing costs for imported and domestic raw materials, and eventually lead to higher consumer prices. Meanwhile, the group most hurt by these programs is the consumer, who has little influence or knowledge of these programs, but ends up paying for them due to higher prices for imported and domestic goods and higher state and federal taxes to pay for the various government programs.

Wednesday, September 12, 2001

Abroad in search of monsters to destroy

By David V.

When a friend called me with the news about Manhattan early Tuesday morning, I dismissed it as a sick joke until I turned on the television and realized that this was no joke. Certainly, I had many times thought of the possibility of something like this happening — after all, the towers rival only the White House as a symbol of American Capitalism and its global presence. But isn’t our government the most powerful nation in the world? Shouldn’t it protect us from terrorists blatantly terrorizing our skies? As the news got worse and worse throughout the day and the politicians pronounced threat after threat on an invisible enemy, I felt the urge to help my fellow Americans. I will give blood tomorrow when the lines here at Texas A&M University are shorter than an hour, but first, I needed to understand what happened, how this happened, why this happened, and what lessons we can learn from this horrific tragedy. What follows is my response, based on answers I found by looking beyond the front-page news and opinions I have previously held.

As most people know, the evidence so far points to a hijacking organized by an international network of terrorist cells, well-funded and well-organized, planned long ago, by men who were determined to send their message of hate to Americans. Their attack was planned to do the maximum amount of damage, as the jets were flown with a deadly accuracy, a maximum load of fuel for an intercontinental flight, and detailed knowledge of the structure of the buildings, timing of the New York traffic, and the security measures present on the planes themselves. The two towers were designed to withstand a direct hit by a small plane (which is why they did not tip over), and the tempered steel designed to withstand a fire for two to three hours while the occupants evacuated, but the dozens of tons of highly explosive jet fuel combined with many tons of paper and flammable materials in the buildings to quickly overwhelm the structural integrity of the buildings, which then collapsed downward under their own weight within an hour. The towers and the thousands of occupants inside them never had a chance.

It is hard to imagine the many thousands likely dead at the site of the bombing, as the numbers have no faces to most of us, but it is not hard to imagine what nearly 100,000 New Yorkers went through as they waited throughout the night for a loved one that had not come home, hoping desperately that he or she was still alive under the rubble or unconscious in some hospital. Having many relatives in New York myself, I received news early on that my own relatives there were ok, and this provided some relief as I heard stories of men and women buried alive and jumping in desperation from the top of the collapsing towers.

As serious as the toll to human life has been in New York and the Pentagon, perhaps an even greater toll will reciprocate throughout the United States and the world, as the economic effect reverberate and affect every one of us. The anonymous workers at the trade center towers facilitated the movement and creation of a huge amount of wealth that daily sustained our welfare. As horrible as the loss of life at the Pentagon is, the loss of whatever services were provided in the destroyed sections of that compound certainly do not compare to the unrewarded and for the most part unknown contribution that the traders, financiers, entrepreneurs, and thousands of other workers daily made to our economy. To compound the problem, the grounding of all flights by the FAA (except government flights, of course) will cause millions of tons of cargo, packages, and postal mail (they carry an estimated 10% of the total US daily economy) to be undelivered, not to mention canceled business trips, conferences, vacations, visits to see family and friends, lost school time, and untold other economic damage.

The reaction from politicians was immediate, but it did very little to comfort me. I heard President Bush say “Terrorism against our nation will not stand,” but it has stood, and all the trillions of the CIA, the FBI, the ISA, NSA, and all the other agencies that took our money to protect us from terrorism have completely failed us. Numerous airport security checks and the scanners, the safety regulations, the air traffic control network, the F16’s (Why were they 10 minutes too late?) the government snooping of telephone, cellular, internet, and all other forms of interference in our civil rights could not stop a bunch of determined and well-funded thugs from carrying out their plot. I suppose I should not be surprised. The FAA can stop guns from getting on a plane and perhaps after doubling the normal hassle associated with flying it will even be able to prevent knives from getting onboard, but a half dozen of desperate and unarmed men, with nothing to lose could still overpower a lightly loaded plane and send it down in a maelstrom of destruction, leaving the FAA powerless to stop them.

What makes men so evil as to kill thousands of innocent civilians? I hear people talk of being unable to comprehend the mindset of the terrorists who perpetrated this, and the Palestinians who cheer and fire guns up in the air in joy at the news of this tragedy. Perhaps I can provide a clue. As a disclaimer, I must admit that I am Jewish myself, and my entire extended family is divided between Israel and the New York City metropolitan area, so many people assume that I support U.S. involvement in the Middle East. However, while I strongly support Israel and the cause of Zionism, I strongly oppose U.S. involvement in the Middle East conflict, and consider it partly to blame for the current tragedy. Former president Bill Clinton made his role in the conflict between Israel and Palestinians the showcase of his presidency, trying to get his mug in as many photos of Palestinian and Israeli leaders as he could, while hiring lobbyists to get him the Nobel peace prize, but what has he achieved? Israeli forces and armed Palestinians are involved in a long and bloody conflict, with the blame being shifted to the United States, and our country becoming an enemy to a score of Middle Eastern countries, who otherwise could be our peaceful trading partners. I do not think that the United States should stop being an ally of Israel, as Israel is the only democracy in the entire region, but our continuous entanglements in the affairs of other countries and imperialistic policy have easily made us an enemy whose size makes it easily vulnerable to attack. The United States military, stretched thin in a global deployment exerting an influence unprecedented in the history of past empires is unable to defend itself or our own country, while Congress and the President send our troops to yet more battlefields in Somalia, Iraq, Macedonia, Yugoslavia, infringe the rights of China, all for some vague moral duty, or, much more likely, the political advancement of our political leaders. Meanwhile, the Palestinians and their allies fight back in the only way that is possible in a conflict with a military superpower—through acts of terrorism.

There is no doubt in my mind that we must find and decisively punish the cold criminals that organized and planned this crime, as well as their financiers, who expected to get away with their part in it only a few dollars poorer. However, the thousands of lives lost in this tragedy will be in vain if we do not learn the lesson that George Washington first taught us and instead continue our path of global policing and imperialism. As Washington said, we must keep “Peace, commerce, and honest friendship with all nations, entangling alliances with none.”