See the Pyramids Along the Nile
A couple of years ago, in my home state of Connecticut, Governor John Rowland agreed on a deal to bring the New England Patriots to Hartford. To quote Diane Scarponi of the Associated Press, "At $374 million for a Hartford waterfront stadium and amenities, it was considered to be the richest stadium deal in National Football League history." Carole Bass of The New Haven Advocate pointed out: "…under the deal struck by Rowland and Patriots owner Robert Kraft, the team will pay no rent, property tax or insurance on the stadium for 30 years." (The deal later fell through when Massachusetts made Kraft an offer that was, in his estimation, better.)
While Connecticut's deal with the Patriots would have been expensive, the proposal just barely exceeded the $360 million Denver agreed to spend on a new stadium for the Broncos. Similar projects are common across the country. Writing in The Brookings Review in 1997, economists Roger G. Noll and Andrew Zimbalist described the then-current situation:
New facilities costing at least $200 million have been completed or are under way in Baltimore, Charlotte, Chicago, Cincinnati, Cleveland, Milwaukee, Nashville, San Francisco, St. Louis, Seattle, Tampa, and Washington, D.C. and are in the planning stages in Boston, Dallas, Minneapolis, New York, and Pittsburgh. Major stadium renovations have been undertaken in Jacksonville and Oakland. Industry experts estimate that more than $7 billion will be spent on new facilities for professional sports teams before 2006. Most of this $7 billion will come from public sources.
By subsidizing sports facilities governments are taxing the "average Joe" and increasing the earnings of some very wealthy individuals: pro athletes and sports team owners. What justification exists for this practice? The usual reason is that such largesse will, in the long run, provide a boost to the local economy, and more than pay for itself. This explanation fails to take account of Bastiat's warning to consider what is not seen, as well as what is seen, when contemplating an economic policy.
What is seen is the activity around the stadium on game day. People buy tickets to the game, which are taxed, producing revenue for the state. Inside, they buy hot dogs and beer, producing revenue for both the vendors and the state. They may go out for a meal before or after the game, enriching area restaurants. Perhaps they will also stop at a local museum, or see a show afterwards. Both while the stadium is being built and after it is in use, local construction companies will have more work, first constructing and later maintaining the stadium, access roads, parking lots, and so on.
When we look at what is seen, it appears obvious that the stadium has been a boost to the local economy. It is only when we focus on what is not seen that the picture looks less rosy. The resources being expended around the stadium had to come from somewhere.
"Ah," the supporter of the stadium deal may reply, "but the state is going to borrow most of the money -- so it's really creating the resources necessary for the project by being credit-worthy."
However, Bastiat pointed out that in any loan, money is only the intermediary. What is being borrowed is ultimately always a currently existing good (or goods). When the government lends money to a farmer, he spends it on a tractor. What the farmer has really borrowed is the tractor. And since there are only so many tractors in existence at one time, someone else does not have that tractor as a result.
And so it is with these stadium deals, and all similar government efforts to "boost industry." If construction companies are building the stadium, there is something else they are not building. If steel is being used to support the structure, that steel is unavailable for other projects. If people are spending their money at restaurants around the stadium, there are other places -- perhaps restaurants in their own neighborhood -- where they are not spending that money. And the money spent by the state, whether raised through taxes or borrowing, to be repaid by later taxes, would have been spent by someone on something else. (The expected benefits of these alternate projects are the opportunity costs of the stadium project.)
Of course, all of this is true of any private investment as well: to commit resources to project X is always to withhold them from some other project Y. So the question becomes: Who is likely to be better at picking projects in which it is worth investing, the government or private investors?*
Once we examine the incentives presented to those involved, the answer should be clear. Private investors will personally suffer a loss if their project fails and personally profit if it succeeds. A profit is a sign that the entrepreneur has better assessed the desires of the consumers as they relate to the resources expended for the project than others bidding for those resources. A loss is a sign that the entrepreneur was mistaken -- the resources were more in demand for some other use than the one to which he put them. Given his intense personal interest in the project, the entrepreneur has strong motivation to ensure that resources are used in a manner conforming to the wishes of the consumers.
Furthermore, those entrepreneurs who are best at assessing the future state of the market are the ones who will increase the resources at their disposal. Those who frequently misestimate will soon cease to have resources to invest. None of this indicates that entrepreneurs will not make mistakes, only that there is a self-correcting mechanism in the market process that rewards the entrepreneurs who are most often correct.
The incentives for government "investors" are quite different. Governor Rowland will neither garner the profits nor suffer the losses from any stadium project. Of course, the voters could indirectly make him suffer a tiny fraction of the potential loss by voting him out of office. However, this is a very weak incentive. For one thing, he may have left office long before the ultimate outcome of the project becomes clear. At that point, the voters have no recourse whatsoever.
Another force weakening this incentive, indeed, in most cases, completely negating it, has been pointed out by the Public Choice School of economists. Public choice economists have shown that strong incentives exist for politicians to favor special-interest groups at the expense of the general public. Those upon whom benefits are concentrated are motivated to campaign hard for these benefits. As the costs of most political actions are spread across the public as a whole, the average person has little motivation to become involved.
Employing this insight in the context of the stadium project, we can see that, even at a total cost of $374 million, the cost to each Connecticut resident is only about $100. It is simply not worth much of any individual citizen's time to become devoted to the cause of stopping the stadium. However, for the construction companies who hope to get work on the stadium and the owners of businesses and land nearby, the potential benefits are enormous. They have a strong incentive to lobby hard for the project, to donate to the campaigns of politicians who support it, and to sponsor studies that will make the project look good.
In fact, if there were a profit to be made in some particular investment, private investors would be likely to act quickly to take advantage of the opportunity with their own funds. For instance, Chicago Bulls owner Jerry Reinsdorf and Chicago Blackhawks owner Bill Wirtz privately financed the United Center in Chicago. Between hockey games, basketball games, conventions, ice shows and other events, the arena is kept busy many nights out of the year.
Private investors will turn to the risky business of lobbying the government to support a project only when it is not clear to them that it is profitable without taxpayer subsidies. Thus, the government is likely to specialize in money-losing projects.
Numerous empirical studies back up these theoretical considerations. The Heartland Institute of Chicago, which has studied the sports stadium issue in depth, found:
Between 1954 and 1986, the 14 stadiums for which sufficient data were available had an aggregate net accumulated value of negative $139.3 million. This loss of wealth to the host city's taxpayers ranged from $836,021 for Buffalo's War Memorial Stadium to $70,356,950 for the New Orleans Superdome. The only facility to have a positive net accumulated value was privately built, owned, and operated Dodger Stadium.
And Other Caucus Races
The difficulties faced in justifying the use of public funds for stadium construction apply to all such "public" investment. For example, in a recent review of a book on the transcontinental railroad, Newt Gingrich wrote:
This book is also a useful reminder to its modern audience that much of American success has been a public-private partnership… The government played the most critical role by providing finances and incentives. Without those public contributions the [transcontinental] railroad could not have been built for at least another generation.
In a similar mode of reasoning, we could say that without slave labor, the pyramids in Egypt might not be built even yet. But no critic of such "public-private partnerships" ever doubted that sometimes some particular project would be completed sooner with government intervention than without it. Gingrich is paying attention to what is seen, and ignoring what is not seen.
The resources necessary to build the railroads had to be diverted from other uses. Were those uses more or less valuable than the railroad? If what Gingrich says is true, and the railroads would not have been built privately for a generation, we must conclude that entrepreneurs thought there were many, many projects that the consumers demanded far more urgently than a transcontinental railroad. Gingrich places special emphasis on the role of the Army in "protecting" the rail line. This seems to be a polite way of saying, "Killing lots of Indians who were in the way." We might be excused for having serious doubts as to whether those Indians thought the railroad was the best use of resources at that time.
Contemplate a situation in which Newt Gingrich came to American citizens and proposed that the government sponsor a regular shuttle to the planet Pluto. When we object, he asserts that this project would not be realized for another few millennium if not for government intervention. No doubt, he is correct. But how is this possibly a justification for undertaking this project? Isn't it, instead, a reason for rejecting the project from the start?
Another way in which government "promotes industry," in the US and many other countries, is to aid exporters. (If you, dear reader, are not American, simply substitute your own country's name for "America" in what follows. The odds are high that your government is also engaged in similar shenanigans.) The think tank Foreign Policy in Focus reports:
Examples of grants and subsidies for exporters include the Market Access Program (MAP) and the Export Enhancement Program (EEP) of the U.S. Department of Agriculture. The MAP, established in 1990, has an annual budget of $100 million and provides partial defrayment of the costs of market building and product promotion overseas. Some recipients, including Sunkist Growers, Sunsweet, Dole Foods, and Gallo Wines, have collected more than $1 million in a single year.
Certainly Dole Foods, a multi-billion dollar corporation, appreciates the dough. But why should the rest of us pay for its marketing? One reason given is that these subsidies "create American jobs." Now, it is no doubt true that Dole can employ some greater number of workers than it would have without the subsidy. This is what is seen. On the other hand, the funds for this program came from other people, who presumably would not have been burning their cash in the backyard. (And if they would have been, this would lower the price level, not cause a downturn, as Keynes held.)
We can assume that some portion of their spending would have gone to pay someone's wages. We can also venture a guess that in most cases, the jobs lost to taxes were more valuable than those gained through the subsidies. (We can't be certain of this, because entrepreneurs do make mistakes, and bureaucrats will get lucky occasionally.) After all, if Dole thought that this marketing was profitable, it would have undertaken it without the subsidy. If it didn't think so, this is because it estimated that consumers valued the resources necessary for the marketing campaign more highly in other uses.
Another, related, justification is that America needs to "level the playing field" its own exporters face, because many other countries subsidize their exporters. But no country can subsidize all domestic producers! The benefit to subsidized industries comes at the expense of higher taxes on those not subsidized. The closing of one door to American manufactures opens another door even wider. It is true that particular domestic industries may suffer as a result of another country's trade policies, but to attempt to compensate for this by introducing further distortions in the structure of production initiates a downward spiral in the satisfaction of all consumers. It is as though, because you have cut yourself and are now bleeding on my shoes, I will also cut myself, in order to bleed on yours.
Who is likely to benefit from these programs? It is not a family farmer, who lacks the resources to lobby Congress and to conduct foreign marketing efforts. Public Choice theory, common sense, and history all tell us that powerful, wealthy interests will come to control such programs. True, a populist revolt might succeed in limiting such programs to small concerns. However, there is no reason to suspect that this would be better than the current crop of programs. In many cases, it might really be the largest corporations who should be devoting resources to export marketing. Again, the issue is who can best decide how much to spend on such marketing: The owners of the exporting companies, who have their own money on the line, or government bureaucrats?
* There is, of course, an important issue relating to the morality of the government forcibly extracting money from Bill to invest in Joe's project. Mises, Rothbard, Hans-Hermann Hoppe, Walter Block, Stephan Kinsella, and other Austrians have dealt with this issue at great length. Without meaning to downplay the importance of this aspect of the problem, I will simply say that a discussion of it is beyond the scope of this article.