A Solution to the Incentives War; A. Cline

In all likelihood, the biggest problem gold proponents face is that people simply aren't .ready to go back to gold. Most people aren't aware of the extent of our monetary disarray and many of those who are don't understand its source. Two generations of Americans have known nothing but unbacked paper as money; few realize that there is an alternative. In contrast, when the United States restored gold convertibility in 1879 and when Britain did so in 1821 and· 1926, gold money was still seen as the norm. That is no longer the case. It might take a hyperinflationary disaster to shake people's faith in fiat money. Let's hope not. In addition to the horrendous costs of such a "learning experience," it's not even a sure thing that it would lead us back to gold. Recent hyperinflations in places as disparate as Russia and Bolivia have not done so. The desire to get something for nothing dies hard. Governments use central banks with the unlimited power to issue fiat money as their way to get something for nothing. By "sharing" some of that loot with us, those governments have convinced us that we too are getting something for nothing. Until we either wise up to the fact that governments can't give us something for nothing or, better yet, when we realize the moral folly of taking government handouts when of fered, we will continue to get money as base as our desires. D 1. Arsen J. Damay, editor, Economic Indic(J(ors Hand book (Detroit, London: Gale Research Inc., 1992), p. 232 and Survey of Current Business, vol. 75, February 1995, p. C-5.

2. The Wall Street Journal, April 7, 1995, and The Eco nomic Report of the President, 1995. 3. As measured by the National Bureau of Economic Research. 4. Robert J. Shapiro, "Politics and the Federal Reserve, " The Public Interest, Winter 1982, p. 123. 5. Shapiro, pp. 126-127. 6. Federal Reserve Bulletin, February 1995, p. A30. 7. Murray N. Rothbard, "The Federal Reserve as a Cartellization Device: The Early Years, 1913-1930," in Barry N. Siegel, editor, Money in Crisis (Cambridge: Ballinger Publishing Company, 1984), p. 107. 8. Rothbard, pp. 105-106. 9. Richard M. Salsman, Gold and Liberty (Great Bar rington, Mass.: American Institute for Economic Research, 1995), p. 26. 10. Michael David Bordo, "The Classical Gold Standard: Some Lessons for Today," Federal Reserve Bank of St. Louis Review, May 1981, pp. 8-9. 11. Steve H. Hanke, "Critics Err-Mexico Still Needs a Currency Board," The Wall Street Journal, February 22, 1995.

12. For a fuller treatment of this issue, see Roger Garrison, "The Cost of a Gold Standard," in Llewellyn H. Rockwell, Jr., editor, The Gold Standard: An Austrian Perspective (Lexing ton Books, 1985), pp. 61-79. 13. Alan Reynolds, "Gold and Economic Boom," in Sie gel, p. 256. 14. Hans Sennholz, Money and Freedom (Spring Mills, Pa.: Libertarian Press, 1985), pp. 81-83. A Solutionto the IncentivesWar? by Andrew Cline I n 1936, the Mississippi state legislature attempted to minimize the effects of the Great Depression by enacting the "Balance Agriculture With Industry" act, the nation's Mr. Cline is research fellow at the John Locke Foundation in Raleigh, N.C., and managing editor of Carolina Journal Weekly Report, a newsletter ofpolitics and policy delivered by fax and e-mail. first state-sponsored economic develop ment plan. Fifty-nine years later, each of the 50 states runs its own economic development pro gram, a government-controlled effort to ac tively recruit business. As was the case with the federal government, the role of the state governments was redefined in the 1930s.No longer were they relegated to providing infrastructure and education. Legislators of The Foundation for Economic Education Irvington-on-Hudson, New York 10533 Tel. (914) 591-7230 Fax (914) 591-8910 E-mail: freeman@westnet.com November 1995 Counting OUf Blessings C riticism is said to be a basic amuse ment in which we like to indulge.

We are quick to point out the faults of others, denounce their views, and decry their blunders. We enjoy lamenting the state of affairs, bewailing public policies, raising our voices against legislators and regulators, and deploring their motives and misunderstandings. We rarely are mindful that it is easier to destroy than to build up. There is much to pull down when we view our society in the light of our ideals. We are guided by a set of ideals which are innate or acquired, and measure all things by them. We judge our society and its institutions by our ideal concepts of wis dom/ righteousness, justice, and liberty. When seen in the bright light of the ideal, we are saddened by the wide gulf that sep arates the ideal from the real, particularly, by how the ways and injunctions of the Founding Fathers differ from the machina tions of the Hoover and Roosevelt Deals and all others since. We lament the rise of the omnipresent, omnipotent polity and the politicization of many aspects of our lives. As political command and coercion encompass our lives, individual freedom is diminished.

If we compare our conditions with those of all other nations around the globe, we are tempted to sing about America, the beautiful. A brief look at our next-door neighbors and NAFTA partners as well as our trade partners in Europe and Asia makes us appreciate our lot. In Canada, the Liberal Party of Jean Chretien, with a comfortable majority in the House of Commons, is pursuing its stale tax-and-spend objectives. It is forg ing ahead with social assistance, unem ployment insurance, and other transfer programs. As it labors under a heavy bur den of federal, provincial, and local taxa tion and regulation, economic life stag nates and real wages fall. Unemployment is hovering about the 10 percent mark, fed eral deficits are running at 5.5 percent of GDP, and the Canadian dollar is changing hands at 74 U.S. cents. Nationalized healthcare is deteriorating, with thousands of doctors leaving for the U.S. Only two economic sectors continue to prosper: gov ernment and the underground economy.

In Quebec, Ontario, and the three Maritime Provinces, merchandise worth many billions of dollars moves from the United States to Canada through the Akwesasne Indian reserve straddling the border. The smuggling is bringing new life to the St. Lawrence River valley. The migration of Canadian business to U.S. border states is bringing jobs and activity to the U.S. In Mexico, the political difficulties usu ally permeate all aspects of life. Foreign observers raise concerns about Mexico' s one-party dominance, corruption, and human rights abuses. The vast majority of its population of 93 million make ends meet on labor income of less than one-fifth of U.S. incomes. The rate of inflation often exceeds 10 percent per year. In 1994 the peso fell.by some 45 percent against the U.S. dollar, causing the financial markets to plunge precipitously, interest rates to soar, and economic activity to sink into deep depression. Millions of workers man aged to escape their wretched conditions in Mexico by seeking survival as illegal aliens in the U.S.

If we compare our plight with that of our British friends, we cannot help count ing our blessings. Although the U.K.'s eco nomic statistics tell a story of some progress, they reveal an unemployment rate of 9 percent. The chronic economic problems that plague the country are reces sion, high inflation, a rising tax burden, and record levels of government borrow ing, exceeding 5 percent of GDP. Wage rates are some 25 percent lower than in the United States, with interest rates generally higher by one or two percentage points. The pound sterling which used to be the world's most trusted currency is one of the weakest now, losing exchange value even against the shrinking U.S. dollar. Social and economic conditions in Germany are said to be among the best in Europe, even better than in the U.S. Productivity and income per capita are about the same. The crime rate is substan tially lower, but the unemployment rate much higher since the reunification of East and West Germany in 1989. Yet, the ideo logical and political forces of socialism are very much alive, clouding the future of Germany.

The reunification created a double-bar relled welfare state which is paving the way for a new command system. One bar rel was crafted by the advocates of the "social market economy" or "middle of the road" after the pure market economy ala Erhard had transformed the country dev astated by war into a wonderland of miraculous recovery. The other barrel was added after the reunification when the leg islators and labor leaders turned East Germany into a huge social asylum. They decreed a currency union on an exchange rate of 1:1, which made prodigious gifts to all East Germans, and ordered a rapid wage parity in East and West, which condemned many Easterners to chronic unem ployment. A massive transfer of West German wealth sustains the asylum but does not invigorate and elate its inhabi tants. Many are yearning for an early return of the command system. Japan reports a per capita production of $31,450,which compares with only $24,700 in the U.S.A. But if we bear in mind that these statistics are based on the yen/ dollar exchange rate, which undervalues the dol lar in Japan by more than one third in terms of purchasing power, we realize that Japanese real wages and standards of liv ing are still lower than those in the U.S.

Yet, Japanese society is one of the most harmonious and peaceful in the world. The crime rate per 100,000 population is a small fraction of the U.S. rate: homicide 1 rather than 9.3, rape 1.3 rather than 42.8, robbery 1.5 rather than 263.6. The Japanese are a naturally orderly people who obey the rules, which may contribute to the popUlarity of the Socialist Party, the sec ond largest party in the House of Representatives. The Socialist Tomiichi Murayama is the prime minister who heads the government formed by thr"ee allied parties. Looking abroad to the political, social, and economic conditions of neighbors and friends, Americans are counting their blessings. Away from home, there is no happiness for them. At home the warm winds of change are blowing. There are real indications that we are reversing the anti-business climate which has depressed economic life throughout the Democratic and Republican Deals. The sixty-year-old death grip of government is loosening. We are witnessing the reduction of govern ment on all levels; even labor unions which build on the Marxian exploitation doctrine are in retreat. There is new hope that tomorrow will be better yet.

Hans F. Sennholz College Course in January January 2-20, 1996 The Foundation for Economic Education is conducting a special three-credit course taught by FEE professors and staff in MicroEconomics at Mercy College Dobbs Ferry, NY 10522 (one mile south of FEE headquarters) Tuition, fees, housing, and meals $1,150.00 I f you are interested, make application for admission to The Foundation for Economic Education and submit a letter of good standing from the institution in which you are currently enrolled. Special, non-credit students of all ages are welcome. Application deadline: December IS, 1995 Decetnber Round-Table at FEE D on't miss the last chance to join us for our final Round Table of the Fall season. Our evenings begin with a reception at 5:00 P.M., followed by dinner at 6:00. Weare then entertained by a presentation given by our featured speaker. After that, the floor is opened for an exciting exchange of ideas. Charge is $40 per person per event; certain discounts are available. Attendance is limited; call or write Dr. Barbara Dodsworth at FEE for reservations (phone 914-591-7230; address, 30 South Broadway, Irvington, NY 10533).

December 2 Round Table Doug Bandow of the Cato Institute in Washington, D.C., will entertain us with his discussion of foreign aid in "Foreign Aid: New Bottles, Old Wines.

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A SOLUTION TO THE INCENTIVES WAR? 713 the time reinterpreted. government's role from a passive one to an active one. One of the results has been the creation of 50 different activist state governments, each trying to lure businesses into its boundaries with packages of tax cuts, outright bribes, or both. Even local governments have gotten into the act. Most medium-sized or large American cities have some sort of economic develop ment program with the intention of attract ing businesses. The cities throw out public incentives packages, and the perception is that the city with the most attractive pack age gets the most attractive company. But incentives don't always work that way on the state or local level. In 1993, Illinois gave Sears a $178 million package in exchange for locating an office complex in the state, New York City gave $362 million in incentives packages to nu merous companies injust eight months, and Alabama gave Mercedes-Benz more than $300 million to locate its first U.S. manu facturing plant within the state boundaries.

Now, just two years later, government lead ers are beginning to realize that those cozy deals were not a wise investment of public money. In Alabama, the entire practice of luring companies with incentives is being rethought. But in North Carolina, the threat to such programs has come from two sur prising sources: the state constitution and an aware lawyer. How the Game Works North Carolina Governor Jim Hunt has spent $12 million in public money to lure 12,000jobs into the state since his Industrial Recruitment Competitive Fund was created in 1992.That's about $l,OOOperjob.And the legislature has given him $2 million more for the next fiscal year. While the governor is trying to draw businesses away from other states, North Carolina's cities are trying to draw busi nesses away from one another and from neighboring states. For the past few years, tiny towns such as Sparta have been joining forces with counties to draw companies from Virginia, South Carolina, and Tennes see. Large cities such as Charlotte and Winston-Salem have been trying to draw the larger corporations that the smaller towns cannot get.

The theory set forth by government offi cials to justify their spending is this: public incentives attract large companies which hire large numbers of workers, thus creating jobs for large numbers of state residents. Because jobs are created, such incentives are in the public interest, and hence the use of public money is justified. But in practice, these incentives don't live up to their prom ise of serving the.public. For example, North Carolina gave Quaker Oats Co. $98,000 to build a new 98-worker plant in Asheville, fulfilling the state's $1,OOO-per-jobrule. Apparently un noticed in the transaction was that closing the old plant, also located in North Carolina, would eliminate 70 jobs. So the state paid $98,000to create only 28 new jobs-a total of $3,500per job. In other cases, companies have promised the state certain numbers of jobs, but after taking the state money have failed to deliver.

For some companies, subsidized incen tives have literally no bearing on location decisions, but they grab for some of the free cash anyway. Hoping for a payoff, a mill told North Carolina officials that the company's expansion project would be val ued at $100,000. But when the company finally moved to Virginia-because North Carolina utility rates were too high-it re vealed the value of the expansion was only $80,000. Officials of a furniture company made state economic developers aware of the generous offers they received from other states and hinted that the company would not locate in North Carolina unless the state topped the other offers. The state did not, but the company's new distribution center sits in North Carolina anyway, in Rocky Mount. There is also academic evi dence to support these anecdotes. A 1994 study by two professors at University of North Carolina at Charlotte found that, among North Carolina manufacturers, the first three factors in making location deci714 THE FREEMAN • NOVEMBER 1995 sions were local public schools, local work attitudes, and labor availability. Govern ment-subsidized incentives ranked 22nd.

Not only are incentive packages some what ineffective and open to rife abuses, but they are terribly unjust. A city taxes busi nesses. It then uses some of that tax money to lure outside companies. Every business in the city thus contributes to its own potential harm by subsidizing its competi tion. Incentives-crazed politicians don't seem to realize that businesses compete for more than customers. They compete for a limited pool of qualified employees, land, shopping mall space, and so on. Government incentives also discriminate against small businesses and recent start ups by offering money only to companies that can create large numbers ofjobs. Small and newly created companies are automat ically left out of the running for the funds. How can a mom-and-pop hardware store be said to benefit when part of its tax money subsidizes the relocation next door of an aircraft carrier-sized home improvement megastore that was given $50,000 in state money for bringing 50 jobs into mom and pop's neighborhood?

Another important issue no one seems to have noticed is this: North Carolina has a serious labor shortage. There simply are not enough qualified workers in the state to fill all of the good jobs. How then is it in the public interest to bring in more unfilledjobs? Unfortunately, the government rhetoric has been effective; it has convinced many citizens that "more jobs are good, fewer jobs are bad." Furthermore, most citizens don't even consider the problems inherent in taxing the eastern Carolina residents of Wilmington to pay for new jobs in Asheville eight hours west by Interstate. The most effective and just way for gov ernment to promote economic development is to maintain a pro-growth business climate by keeping taxes low and treating entrepreneurs as valued rather than despised citizens. Giv ingtax money to individualcompanies creates a tilted playingfield that benefits large corpo rations at the expense of smaller entrepre neurs, who create most of America's jobs.

Stopping the Game One North Carolinian has seen through the ruse. The issue of locally subsidized competition caught the eye of Winston Salem lawyer William Maready. He met several times with the leaders of Winston Salem and Forsyth County in an attempt to understand how taxing local businesses to pay for the relocation of other businesses could be construed as in the public interest. The officials failed to convince him. Maready filed suit as a Winston-Salem taxpayer. He charged that the city's and county's use of economic incentives vio lated both the equal protection and public purpose clauses of the North Carolina con stitution. He argued that "the use of tax money collected from the citizens of this county to subsidize corporations for moving here or expanding here is unconstitutional, illegal, unfair, unwise-and plain bad gov ernment." Superior Court Judge Julius Rousseau agreed and ruled in Maready's favor. Government "incentives" given to big business to entice them to locate within a political entity's borders, he said, do not constitute a legitimate public use of tax payer money. "It's an arbitrary way of spending public money." Lawyers for the city and county decried the judge's decision and indicated the state Supreme Court would vindicate their clients on appeal.

According to North Carolina's Governor, the decision was "a mistake" and "bad public policy. " But Maready stands on firm ground. To date, not one incentives propo nent has been able to demonstrate that government incentives create a net benefit for the general public. D A Matter of Principle Conspiracy or Consensus? I n my more pessimistic moments, I can begin to understand the appeal of the so-called "conspiracy theory of history. " Sometimes there seems to be a kind of powerful force dragging modern society down. Surveying the bleak headlines, one wonders if the endless evils chronicled could be mere chance-or if they might have some conscious, common source and deliberate direction? After all, ifit were only a series of "accidents," it seems that good things would happen at least half the time. Over the years, I have met many decent, concerned Americans who deduce that the world is in the grip of a powerful, malevo lently directed conspiracy. Logic seems to suggest that such plotters must be few (or else there would be defectors), at the pin nacles of power (or else they couldn't con trol things), malevolent (how else to explain the horrors in the headlines?), and super competent (for all the preceding reasons).