Job creation is a priority among Arkansas' civil servants.
Recently, state officials joined FMH Conveyors and Bekaert Corp. in announcing their plans to create more than 200 new jobs in Jonesboro and Rogers. Government officials credit Arkansas' competitive business environment for the expansions within the state. But Arkansas is providing both firms with financial incentives, including cash rebates, sales-tax breaks, and an additional $1 million subsidy for FMH Conveyors.
If the state's business environment gives Arkansas a comparative advantage over other states, why does the government need to provide corporate welfare?
A state has a comparative advantage when firms are able to produce goods and services more efficiently than they could in other states. For example, Arkansas farmers are able to grow rice more efficiently than North Dakota farmers because of Arkansas' water resources and topography.
When states have a comparative advantage in an industry, it is not necessary to use financial incentives to attract and retain firms in that industry. The comparative advantage alone, whether it is the work force, infrastructure, or resources, is reason enough for firms in that industry to locate within the state. In other words, the profit and loss motive drives firms to find the best place for them to do business.
This phenomenon is evident in California, where Silicon Valley has a comparative advantage in the technology industry. Brook Taylor, spokesman for the Governor's Office of Business and Economic Development, said that data centers in Silicon Valley "are being built in spite of the fact that we don't have specific tax credits or incentives for them. Companies are just building them here because it makes sense."
If Arkansas has a comparative advantage in conveyor systems manufacturing and steel cord production, then FMH Conveyors and Bekaert Corp. would be expanding in Arkansas regardless of the incentives the state provides.
To provide incentives anyway is simply wasting taxpayer money.
But what if these firms do not fit within Arkansas' comparative advantages? Should Arkansas provide corporate welfare to entice them to expand within the state?
No. Mercatus Center economist Matthew Mitchell explains that a state would actually "make itself poorer if it tried to specialize in ways that were inconsistent with its comparative advantage." This is because financial incentives distort price and profit signals, leading states to accumulate and use resources in areas and activities in which they are not best used.
When states do not do what they are good at, but rather what they dream they could be good at, the result is an economy that does not reach its output potential.
Consider an extreme example. Imagine that the leaders of Arkansas thought that ski resorts were the key to a successful economy. By issuing enough corporate welfare, Arkansas could turn its rice fields into ski lodges. Instead of Arkansas farmers raising roughly half the nation's rice, tourists would be skiing down fake slopes.
Would that be the best use of Arkansas' resources? Would this make us wealthier or poorer as a state?
Clearly this would make Arkansas worse off. We would be wasting opportunities and resources. But what about the corporate welfare Arkansas gave FMH Conveyors or Bekaert Corp.? Are we stealing resources away from potentially more productive uses?
The only way to know this is to avoid corporate welfare and allow FMH Conveyors and Bekaert Corp. to respond to unaltered price and profit signals. It is unfair and unproductive to tax firms that use Arkansas' comparative advantage to give subsidies to firms that do not.
Arkansas may indeed be the best place for FMH Conveyors and Bekaert Corp. Then again, Arkansas might not be. But by distorting the economy with corporate welfare, the only thing we know for sure is that we are making Arkansas taxpayers worse off.
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Jacob Bundrick is a research associate with the Arkansas Center for Research in Economics (ACRE) at the University of Central Arkansas.
Editorial on 04/09/2016