Imagine for a moment that you are a resident of a small town called River City. River City is a sleepy little village whose glory days were long in the past and not in the present or near future. But the new mayor has plans to change all of that. He rounds up the locals who would be willing to listen him – five or six of you, and gives this impassioned speech:
My fellow resident of River City: I had the most remarkable dream last night. I dreamt that the Lord came to me and said “Mochaccinos, Caramel Machiatos, Pumpkin Spiced Lattes… they could all be right here in River City."
You know what River City needs? Moonbuck’s coffee! Imagine what a difference it will make if Moonbuck’s brings their wonderful brew to our charming - if underappreciated - little town. Moonbuck’s is everywhere today, even on Moon, why shouldn’t they come here? And when they come, they will bring customers to business district. These customers will come for coffee but leave buying a book from Sam’s Bookstore, a hat from Hilda’s Hats, and maybe even some vinyl flooring from Ned’s Floors.
Oh, I know what you’re thinking, “Why would Moonbuck’s come here when they could go to Garden City down the road? Yes, Garden City with their fancy new homes, their Jaguars, and their BMWs will surely beat out Garden City.” “Not so,” I say. Why? Because, look around you - this is God’s Country! And we can convince the good people of Moonbuck’s that this is God’s Country by chipping in to buy them a nice new place for their coffee house. That would only be neighborly for such a nice new neighbor. And those people in Garden City might as well put a few miles on their fancy new cars driving right here to River City.
You might find the good mayor persuasive. After all, it’s hard to argue with a man who talks to God about Mochaccinos. And a nice hot Moonbuck’s coffee sure seems tempting.
But your libertarian side objects to the notion of subsidizing Moonbuck’s. Why shouldn’t they buy their own shop? And then you answer your own question: because they will buy it in Garden City. Maybe it’s bad to subsidize Moonbuck’s, but it’s bad mostly for Garden City, and you don’t really care.
Beggar thy neighbor
All across the nation, in small towns and in big cities, scenes much like the one in fictitious River City are playing out for real with real businesses and billions of dollars. Mayors and city council try to promote business by cutting generous deals with prized corporations. Instead of expecting these companies to pay into
the public pot, they are being paid subsidies out of
the public pot.
In the above example, Moonbuck’s was a passive player. But with so much money available for the asking, many companies are demanding deals. It isn’t just sports franchises, but also automakers and chip makers and other big business that are shopping their deals around forcing communities to play a negative-sum game for their business.Here is an old Inc. article
(from 1996) that does an excellent job of explaining the problems with subsidies. The problem hasn’t changed since 1996; if anything it’s worse now. The article mentions a paper by Federal Reserve Bank of Minnesota senior officials Melvin Burstein and Arthur Rolnick that strongly urged that the Federal Government should ban state and local government subsidies to private firms. I actually took a class with Art Rolnick years ago.
If these actions were obviously bad for the cities involved, one could say, “The people get the government they deserve.” But often this public sector entrepreneurial activity benefits their city at the expense of whatever city would have been the first choice city. Cities are locked in a prisoner’s dilemma: if everyone says no to subsidies then every community would benefit, but each community would benefit more if it cheats and the others don’t.
A classic example of the River City scene played out a few month ago in Washington D.C. Washington D.C. got a new baseball team, but they had to promise nearly a half a billion dollars in subsidies to Major League Baseball. Here is an old article
from last November that explains the deal Washington D.C. made with Major League Baseball. Washington D.C. is not wealthy, and could ill afford to pay money for such a luxury. But the big loser was Northern Virginia. In a free market, the baseball team would have probably come to Fairfax County, the wealthiest county per capita in America with more than one million residents. Fairfax County has twice the annual income as the District, and the District is only 35 miles away from Baltimore, the nearest baseball city. These two reasons would have been big factors in deciding where to put the franchise. But Fairfax County refused to play ball with Major League Baseball.
When mayors dip into the public pot to subsidize private, for-profit, corporations, they are violating free trade within the nation. I agree with Burstein and Rolnick that it should be against the law: public money should be used for public goods. However, who would pass a law against a mayor? His own city would never do it. His state might not either since they might not mind if their biggest city’s mayor beggars the cities of other states. The Federal government has little jurisdiction over mayors. However, Article I section 8 of the U.S. Constitution gives Congress the right to regulate commerce between states, and that might be the legal foundation for allowing Congress to declare such beggar thy neighbor actions illegal. I think this is an action that is long overdue.
Sure, I’ll take my little boy to see the Nationals in the District. We can travel the 15 miles to the District; we can just ride the Metro train. And we will get to see a part of the District we’ve never seen before, (I’m not that thrilled). And I doubt my son will care too much if he cheers the “Washington Nationals” instead of the “Fairfax County Slugs.” But sometimes I think, “Maybe baseball might have been just two miles from my home.” That would have been wonderful.