AGAINST State Investment in Private Tech Companies

Posted on March 17th, 2009

I realize that there are times when governments invest in or provide investment subsidies to private enterprises for reasons of national security or in times of national emergency. Although I personally think there is far too little debate or evaluation about the merits of when this can or should be done, few people doubt that there are times when it is necessary.

A case, albeit weaker, can also be made for government ownership of a commercial “monopoly” in the beginning stages of a area’s economic development to ensure the creation of a basic economic infrastructure. This governmental investment is made available to ALL citizens and businesses. Past examples of this are local telephone service, natural gas pipelines, and rural electrical distribution grids. A future example might be high-speed internet. Even when there is a good case to be made for such, a legislature should very seriously consider a sunset and eventual end to government ownership once the original purpose has been achieved.

A very weak case can also be made for the government to provide investment incentives such as grants or tax exemptions to particular companies due to competition with other states and regions that are providing those benefits to companies that locate there. I have come to have more and more doubt about the wisdom of doing this, but still recognize there is a weak case to be made for the practice.

However, there is a very big and serious difference between private companies / investors “shopping” states for incentives for investment that would happen even without government assistance as opposed to those that would not happen without governmental investment. The former investments would happen “somewhere” regardless of government assistance because they have favorable expected returns relative to the risk involved. The latter are just bad investments for anyone involved.

Even so, it appears that we are now faced with the desire of some in our state government to establish ongoing programs to invest in private enterprises and/or create/participate in venture capital pools with private sector investors. While the intention to create jobs, diversify the economy, and increase regional income are all good, the method should horrify even the most ambitious “economic developer”.

For the moment, let’s set aside the arguments that government should not be involved in private enterprise as a matter of principle, or even that government should not be involved in “picking winners and losers”, and we might even forget the argument that the results of such have traditionally been abysmal. Let’s discuss whether individuals should willingly pay taxes and/or give up services to finance government investment in private enterprise. Don’t you think that if government could consistently find good investment opportunities better than the private sector, wouldn’t investors be lined up around the block to seek my and other legislator’s advice on how they should invest. I don’t see that happening. That is a wise decision on their part, I think.

The problem is not a market failure due to the lack of willing private capital for investments with favorable risk-return ratios, but instead, a lack of willing private capital for investments with unfavorable risk-return ratios. This means that if the government is to make these investments, then the taxpayers were being forced into bad or poor investments that they would not ordinarily make.

This ultimately boils down to the fact that the funds given to government sponsored venture capital pools or by direct investment in specific businesses are paid for through some combination of higher taxes or lower spending on other programs such as highways, education, or other government programs. The most direct beneficiaries of government investment in private companies are the special class of private investors who have the power to lobby for the special favors and perhaps the employees of these “favored” companies. It is clearly not going to benefit the general public directly, and any indirect benefits are marginal at best and oppressive at worst.

Taxpayers deserve for the government to treat them fairly, act in their best interest, and not to behave irresponsibly with their hard-earned dollars. In this case, government investment in private companies mostly benefits only a few but the costs and risk is distributed among all taxpayers.

If given the choice, would citizens, particularly lower income ones, willingly pay higher taxes and/or forgo services for the government to finance these activities? If not, then how is this the right thing to do?

How can it be fair to force citizens as taxpayers into investments that they have rejected as individuals? How can it be in their best interests?

Furthermore, if the state is invested in a particular company, would other competitive companies avoid Arkansas because the state has a vested interest in helping one succeed and the other fail? Would those companies believe that they would be treated fairly and equally before the law when stake, salience, certainty, immediacy, and self-efficacy can ALL be reasonably established?

It would be more fair for our state government to create a good investment potential in Arkansas by removing undesirable obstructions to private investment. We can best, more fairly, and more responsibly do this by funding a good public infrastructure, provide responsibly and competitively low levels of general taxation, an unobtrusive and fair regulatory environment, and a highly educated and skilled labor force.

The healthy investment climate described above is one where government supports, rather than substitutes for private investors. Not only is that a fairer public policy, it is a better one.

The heros of old, Democrats all, knew this when they crafted our State Constitution to say in Section 7, Article 12: “Except as herein provided, the state shall never become a stockholder in, or subscribe to, or be interested in the stock of any corporation or association.” That is a fine piece of wisdom, one that we should not meddle with without fear of extreme peril and regret.

An angry constituent asks, “Are you going to put a cap on the exective salaries of those companies we invest in? How many corporate jets will our tax dollars be buying? How much in campaign contributions do I need to make to get any action in this sweetheart deal? How many swanky parties at exclusive country clubs will I be paying for but not invited to? Are you going to prevent bonuses from being paid out to executives of these companies that we invested in, but are not paying dividends? If you support this, why don’t you follow the Japanese model . . . resign, or go commit suicide?”

No siree, Rob. There ain’t no way I’m gonna’ touch this, even with a ten foot pole. The American people are rightfully mad as hornets about this very thing. I learnt as a kid, the hard way mind you, that it didn’t make no sense to be poking at a hornet’s nest, no matter how long of a stick you foundt.

Tags: economic policy
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Arkansas Definition of Poor is Schizophrenic

Posted on March 7th, 2009

 
When it comes to collecting taxes, the Arkansas government thinks that “rich” (the top state income tax rate) is $31,700. Conversely, when it comes to handing out tax dollars, they think that you are “poor” if you are a family of five with a household income of $62,000. The median household income in Arkansas is $38,134. This means that half of the households in Arkansas have a greater income and half have less.

Why does a person making $3,799 per year have to pay tax so that money can be transferred by social welfare programs to another person making $26,000 per year?

Arkansas collects income taxes from its residents at the following rates: [Source]

• – 1 percent on the first $3,799 of taxable income
• – 2.5 percent on taxable income between $3,800 and $7,599
• – 3.5 percent on taxable income between $7,600 and $11,399
• – 4.5 percent on taxable income between $11,400 and $18,999
• – 6 percent on taxable income between $19,000 and $31,699
• – 7 percent on all taxable income more than $31,700.

Keep in mind that when reading the chart below, these values are TAXABLE income, NOT GROSS income. Once standard and other deductions are included, these numbers are quite a bit higher.

2008 HHS Poverty Guidelines [Source]

Tags: economic policy, taxes
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Laffer and Rahn Curve Discussion

Posted on February 25th, 2009

eLwood, The Stateman, and I are continuing the topic of the Laffer and Rahn Curves in the “Questions, Questions…” post Check it out and leave your two cents worth. Click here!

I hope to have a post up about the Tyranny of the Majority sometime tomorrow evening.

I have to apologize for the horrible formatting in the comments section. I can’t seem to get the CSS for the multiplex5 theme to recognize line spaces or breaks. That is what I get for being too cheap to just buy a quality theme. I am sure I can fix it with a completely irrational amount of time invested.

Oh yeah, the Lottery Issue is the hot topic in the legislature right now. Can you tell I have very little influence over how that all gets worked out? Luckily for me, it seems that I care less about any of it than any other legislator here. As someone who was opposed to the whole idea and voted against it, I really don’t see where I have much right to anyway. Not that I don’t have an opinion, I just figure I will wait until tomorrow night when I once again unsuccessfully attempt “to take over the world” before I do anything about it.

Tags: economic policy
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Milton Friedman – Economic Self Interest

Posted on February 23rd, 2009

Sometimes when the debate gets heated we can lose track of basic principles and start cutting deals just to resolve a dispute. As necessary as that may be from time to time, it is important not to lose sight of the essentials.

At the end of the video Milton Friedman asks, “Just tell me where in the world do you find these angels who are going to organize society for us?”

My answer is that I don’t even trust myself to do that. But I do trust what Adam Smith metaphorically called the invisible hand, that is, the self-regulating nature of the marketplace.

While many economists have turned their attention to long-run growth, politicians unfortunately have shorter time horizons. We (politicians) often combine little knowledge of economics with a large appetite for providing quick fixes to a perceived crisis. We (politicians) should be more skeptical of quick fixes and grand governmental schemes.

While these quick fixes can indeed delay economic downturns beyond an election, it does not provide long-term success and in fact makes the problem worse, often much much worse. Just ask former President Bush. It amazes me that President Obama would dare continue those same failed policies (big government & deficit spending) but on a grander scale this early in his Presidency. The tactic might save a few Democratic seats in 2010, but history suggests that the piper will come to claim his due around 2011 when even a seriously massive expansion of the failed Bush economic policies won’t be able to delay the inevitable.

By reforming entitlements and reducing government spending President Obama might cost the Democratic Party a few seats in the U.S. Legislature in 2010 but would virtually insure his re-election in 2012. Just ask former President Clinton, who worked with the Republicans in Congress to do just that in the early part of his first term. (More about the Clinton-Republican welfare reform successes in a later post.) Clinton failed to maintain this policy and Republicans forgot their basic principles. They delayed the inevitable with government deficit spending which resulted in the recession and “bubble bursts” that probably helped George W. Bush be elected in 2000. Over the following eight years, Bush and the Republicans, (with the assistance of Democrats mind you) continued the spending spree that “patched” up the economy enough to allow Bush to be re-elected in 2004. Nonetheless, “the chickens eventually came home roost.”

Even though that wellspring is almost – if not completely – dry, I doubt President Obama will turn away from the same failed policies of the last eight years. Republicans had better turn away, or there will be a lot of conservatives/libertarians who turn away from the Republican party in the futile hope of forming a more principled minority opposition. Both political parties need to stop thinking in terms of short-term economic “patches” that may or may not temporarily benefit our party for the next election and start thinking more in terms of the long-term solutions that benefit all of us.

We now know much more about the factors that generate long-run economic growth and the ONLY thing we can trust is the invisible hand of the marketplace. Those are the basic principles / essentials that we must not forget.

Reference: The Troubling Return of Keynesianism

Tags: economic policy
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Questions, Questions …

Posted on February 20th, 2009

I have been pondering the current structure of the state government in Arkansas. This has led me to start asking questions. Alot of questions. I will share them and perhaps you will have a few to add in similar fashion. Hopefully, as this blog develops, I will be able to provide answers.

Questions that could help us determine where we are now:

• In 1996 the estimated number of state employees was 65,000. How many state employees does Arkansas now have?
• Is Arkansas’ state government still the largest single employer in the state?
• Besides the state government, how many people are employed in city, county, public school/college, and other local government entities?
• How many people in Arkansas are employed by the Federal government?
• What is the ratio of the remaining employees to the total of all government employees?
• What percentage of the remaining employees are involved in value-added goods and services contributing to the Gross State Product?
• Does a graph of the Arkansas inflation adjusted GSP compared to the growth in all goverment employees reflect an inverse correlation?
• How does the growth in state employees compare to the growth in overall population?
• How does the number of state employees per capita compare to other states?
• How many executive branch agencies now comprise the state government?
• How many boards and commissions are now part of the state government?
• How many distinct operational units are structured into state government’s various divisions and agencies?
• Does the state keep organizational charts of it’s agencies, divisions, operational divisions, boards, and commissions?
• What is the total state payroll for all state employees?
• What is total cost of payroll and benefits for all state employees
• Are public school and college employees included in the calculations of the payroll? If not, what are those values?
• How much does the total compensation of state employees (inclusive of public educational organizations) cost the taxpayers of Arkansas?
• How has the state government’s holding of acreage, buildings, vehicles, and airplanes changed over the last 50 or so years?
• What does a graph of state spending (inclusive of federal funds) over the last half century look like?

Questions that could help us reach a consensus of where we need to go:

• Is there sufficient data to marginally construct a Laffer Curve and a Rahn Curve for the Arkansas economy?
• Democrats typically favor a Laffer optimum, while Republicans prefer a Rahm optimum. Could a consensus be established at a point in between?
• Could Arkansas be on the left side of the Rahm optimum where additional state expenditures would produce additional economic growth?
• What if Arkansas is on the top side of the Laffer optimum where lower state expenditures would produce additional tax revenues for social services?
• Are we spending an insufficient amount in the proper segment of the Arkansas economy to reach the Rahm maximum thereby causing the Laffer curve to be flatter. (Smaller Laffer optimum = less tax revenues.)
• Does anybody really care that Republicans and Democrats could somewhat objectively work toward a consensus that would maximize economic growth AND maximize social spending with only a small window between the Laffer optimum and Rahm optimum for genuine debate? Will we work together to put that fence up around our playground?

Rahn Curve

Laffer Curve

Tags: economic policy
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