Government Projects and Subsidies: What are the Alternatives?

By Art Carden of EconLog.

"Repeat after the economics profession: resources are scarce, and they have alternative uses. Thomas Sowell has said that this is the first rule of economics. He has also said that the first rule of politics is to ignore the first rule of economics, and this is perhaps nowhere more obvious than in discussions of state and local development policy. 

The state of Alabama has given hundreds of millions of dollars in subsidies and tax breaks to auto manufacturers, and the city of Birmingham has been talking for a long time about building a domed stadium and expanding the convention center. I've seen $500 million listed as a price tag for this venture, but I don't know that the city's prospective commitment is that high.

"What else could we do with the money?" is the question too few people are asking. Questions about economic calculation are important, but given that governments are doing these things in the context of a market economy we can at least use a few benchmarks.

So how should governments evaluate their undertakings? Ignore public choice considerations for just a second and indulge a flight of fancy. There is a collective action problem that, in theory, could mean too few stadiums and the like get produced and that could, in theory, mean that government provision of stadiums and the like would make us all better off. If Alabama, for example, is a better place to live because a government spent $250 million to lure CarCo or to build a stadium, the indirect benefits should be reflected in higher real estate prices and, therefore, higher property tax revenues. The "intangible benefits" of "putting Alabama on the map" or "becoming a big-league town" are more tangible than they might at first appear because they will be capitalized into real estate prices. Hence, we could estimate the project's contribution to tax revenue in order to determine whether it's actually creating value.

Of course, there are a lot of ways to use $250 million. A government could fund a stadium, give it to a car company, cut taxes, pay for better schools, or simply invest it in stocks and bonds. What is the baseline to which we should compare government spending on economic development, and how should we evaluate the outcomes?

I'm tempted to say we should evaluate taxes and spending by comparing it to a program of investing in stocks, bonds, or a combination of the two, distributing the proceeds, and relying on entrepreneurs to provide the things governments currently provide. Essentially, we turn states into big mutual funds. Stocks, though, are too risky while risk-free bonds are too conservative. What benchmarks and metrics would you propose?"