Targeted benefits from state “job-creation” agencies like JobsOhio misallocate resources and lead to cronyism, according to a Mercatus Center working paper released in May.
“We argue that these costs, which are often longer-term and not readily observable at the time the targeted benefits are granted, may very well outweigh any possible short-term economic benefits,” authors Christopher J. Coyne and Lotta Moberg wrote.
Coyne is associate director of the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at Mercatus, and Moberg is a George Mason University PhD candidate in economics.
“Surprisingly many states do not evaluate their benefits programs consistently, and most empirical studies on tax incentives find that they have little or no effect on employment or the economy as a whole,” Coyne and Moberg found.
JobsOhio – created with broad legislative support by Republican Governor John Kasich in 2011 — has even less transparency than the Ohio Department of Development, which it replaced. Gov. Kasich has attacked critics of this lack of transparency as “nihilists” who “are gonna have to answer to a much higher power than me” over their opposition.
“One thing missing from most studies on the effects of targeted benefits is a consideration of the unintended and unseen economic and institutional effects of these policies,” Coyne and Moberg wrote.
“The focus is typically on measuring the effects that show up in aggregate measures, such as changes in employment and economic growth. Such studies thus tend to ignore the longer-run—and often unseen—negative effects on both resource allocation and political institutions.”
After investigating the outcomes of targeted benefit programs across the country, Coyne and Moberg detailed evidence that programs like JobsOhio result in cronyism and misallocation of resources.
“Policies that favor some people or companies over others are also vulnerable to distorted incentives. Those who can benefit from the government’s incentive schemes will engage in rent-seeking in order to shape policies to benefit their own narrow interests,” they explained.
“When such rent-seeking becomes prevalent, and firms can succeed by winning favorable status from the public sector, a system of cronyism develops whereby firms habitually serve political interests instead of satisfying private consumers, and whereby political competition replaces market competition.”
“This incentivizes people to redirect their efforts from productive, positive-sum activities to unproductive and even negative-sum activities,” they concluded.
Responding to a Media Trackers inquiry, Coyne listed several questions raised by JobsOhio and state targeted benefit programs in general.
“How does government know how to ‘create’ jobs and business relative to the market? What special knowledge do government officials have regarding what types of businesses and jobs should exist?”
He added, “And if they do have access to some oracle that reveals this information why not extend this same logic to having them centrally plan and operate the entire state’s economy?”
“At what cost are jobs ‘created’? No one can deny that government can ‘create’ jobs if by create we mean spend other people’s money to employ people,” Coyne said. “But that isn’t the relevant issue from an economic standpoint.”
“The relevant issue is: at what cost? If it costs $200,000 to ‘create’ a job that generates $100,000 in value is that worth it? Further, how would the $200,000 in resources have been used if the government hadn’t decided to use them to ‘create’ a certain job?”
We noted that many Ohio politicians tout themselves as “pro-business” and convince grassroots conservatives that this is equivalent to supporting free markets.
“One interesting thing about this research project is that in the process of writing the piece I realized that this is a topic where both the right and left can, and do, find common ground,” Coyne replied.
“The reason is that targeted benefit policies undermine free markets (an issue near and dear to many on the right) but also tend to favor businesses that have political connections and resources to lobby at the expense of taxpayers and businesses that don’t have those connections and resources (an issues near and dear to many on the left).”
“This is precisely why I think it is important to continually highlight the distinction you made between being pro business and pro market,” Coyne said. “Targeted benefits are consistent with the former, but not the latter.”