Dig Baton Rouge

Business As Usual

News & Analysis by Scott Burns

Bobby Jindal could’ve learned a valuable lesson in economics by watching the World Cup opener earlier this month.

Brazil, the host country and odds-on favorite to win the tournament, overcame an early deficit to defeat Croatia 3-1 in the opening match. But the headline story wasn’t Brazil’s resilient come-from-behind victory.

Instead, it was the controversial penalty called when Brazilian striker Fred took a dive inside the penalty box.

The flop worked as planned. In what critics proclaimed to be the greatest acting job by a Fred since the series finale of “The Wonders Years,” the Oscar-nominated performance led to a penalty kick that proved to be the deciding goal.

The fact that Brazil happens to be the host country didn’t help matters. For years the World Cup has been plagued with accusations of big team and home-country bias. With thousands of diehard fans encircling the field like so many wolves ready to pounce, referees quite understandably tend to err on the side of the global powerhouses and the hometown heroes. This primal instinct for survival, combined with all the other benefits home teams enjoy, has the potential to unfairly tilt the playing field.

Brazilians might’ve benefitted from that home-cooked call. But Croats suffered their most heart-wrenching defeat since the Battle of Gvozd Mountain. The overall effect on the perception of the game was assuredly negative – especially in the American market, where hatred for soccer is the nation’s second oldest pastime.

Soccer enthusiasts and rational individuals share one thing in common: They both believe rules governing the game should be fair. A key aspect of fairness is symmetry. When the referees apply different standards to different teams, the outcome is less likely to accurately reflect the play on the field.

In what might constitute the most desperate attempt to make soccer remotely relevant, this lesson has direct implications for Governor Jindal’s “pro-business” policies that provide special benefits to large firms.

If we think of the economy as a sport where fans represent consumers and businesses are like the competing teams, governments sort of act like referees. They’re largely responsible for establishing and enforcing the “rules of the game.” If these rules are fair and simple, competition usually yields the desired outcome: the better team wins. If not, then competition is hampered, and fans are cheated.

In a recent paper from George Mason University’s Mercatus Center, economists Christopher Coyne and Lotta Moberg argue this sort of corporatist deal-making is bad for small businesses and even worse for taxpayers.

The biggest problem is it encourages “rent-seeking.” When translated from the original Econ-speak, this essentially means currying special favors. Just as soccer players expend enormous effort trying to solicit unearned calls from referees, large companies expend enormous energy and resources sucking up to the teat of state officials. The mother’s milk in this case comes in the form of taxpayer-funded transfer payments.
Rampant rent-seeking produces a wide-array of unintended consequences. First, it produces a bias towards large corporations. Politicians are notorious for chasing big headlines. This gives big businesses with much larger lobbying resources an undue advantage. Smaller firms thus lose out.

Second, it invites bribery. Local companies that have no real intention to leave the state face a strong incentive to “take a dive” and pretend they’re leaving to attract attention from state officials. By doing so, they in effect bribe state agencies into offering them millions of dollars of taxpayer-funded “incentive packages” to stay put.

“Just as soccer players expend enormous effort trying to solicit unearned calls from referees, large companies expend enormous energy and resources sucking up to the teat of state officials.”

Third, it institutionalizes cronyism. Profit and loss signals that make market competition so efficient are replaced by the lure of special privileges in inefficient “political competition.” This in turn leads to a massive misallocation of resources. Econ 101 tells us that any effort exerted to attain a mere transfer of resources represents a net social cost. Instead of finding cheaper ways to produce more and better goods, lobbyists find new ways to cajole politicians into doling out favors. Votes are bought and sold, but nothing new is created.

It’s perfectly sensible for companies to try and take advantage of the state’s crony offerings, but its hardly clear Louisiana taxpayers benefit from the entire gambit.

In 2012, the state provided Cheniere Energy more than $1.7 billion in incentives with the goal of creating an additional 255 jobs and retaining another 77 jobs near Lake Charles. This costs taxpayers nearly $7.5 million for each job. The previous year, the state offered Sasol Energy more than $2 billion in incentives for its natural gas to diesel facility in the same region.

Baton Rouge is no exception. In 2008, the state lured Electronic Arts to open its Digital Media Center on the LSU campus by offering a 35 percent payroll tax credit and numerous other incentives.

In 2013, the state and the city of Baton Rouge offered IBM nearly $30 million in incentives as well as tens of millions more in facility construction grants and tax credits to construct a service center downtown.

None of this mentions the billions of dollars that have been offered over the past decade in film tax credits. Having films like “Pitch Perfect” filmed locally is a fun attraction. But luring Fat Amy to the state by dangling massive taxpayer-funded pork seems sort of desperate.

A more market-friendly approach to luring business here is to follow the advice of Adam Smith and offer low tax rates across the board. This would make Louisiana a “pro-business” environment for all. The Tax Foundation currently ranks Louisiana 33rd in its State Business Tax Index. Clearly there’s room for improvement. Jindal just needs to keep his eye on the ball.

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