Government Role in Economic Development

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Should the government play a role in economic development? That’s a question that will be discussed by Byron Schlomach of the Goldwater Institute, who will argue against government intervention in the economy, and Barry Broome of the Greater Phoenix Economic Council, who will talk in favor of the concept.

Ted Simons: Should government play a role in economic development? And if so, what kind of a role and how much should public officials offer incentives, including tax credits and special taxing zones? Tonight we debate government's role in the private sector with Byron Schlomach of the Goldwater Institute, which advocates for less government in economic development. Also here is Barry Broome with the greater Phoenix economic council, which supports the use of government tools to attract businesses to Arizona. Good to have you both here. Thanks so much for joining us. All right. What is government's role in economic development?

Byron Schlomach: Providing good roads, providing essential infrastructure, providing for a safe environment, public safety. That's pretty much where it ought to end. I think there comes a point where government just needs to stay out of the way.

Ted Simons: Is that where it ends?

Barry Broome: Well, we agree with Byron, government has a role of staying out of the way, and certainly public safety and roads, but the role of a state government and a local metropolitan government is to make sure they have all the policies necessary to drive all the jobs. And to drive those jobs in an equitable way. Make sure there aren't poor neighborhoods, make sure the jobs have higher than normal wages, that they have export industry positions. And highly specialized policies by the government can contribute significantly to communities' ability to do that.

Ted Simons: Why not let government in its own way, strong way, as opposed to a way to gets in the way of business, why not let government stimulate economic development? Do things to help push the process along?

Byron Schlomach: Any time you do that, it involves a redistribution to certain favored industries. And what that means is that you're taking tax money away from regular people, people working in other industries, possibly even in companies that are in competition with the companies that you're trying to recruit, and you're redistributing it to your favorite companies. There's a fairness issue I would argue, there's a justice issue I would argue. And I would also argue that, look, government doesn't always have people in government, people in economic development don't necessarily know the right way to go. We have these examples with solar companies going bankrupt that had been supported by the federal government, and state and local governments for that matter. And it's because quite frankly, government stepped in, encouraged these industries to grow faster than they should have. They weren't mature enough.

Barry Broome: Well, there's always mistakes in every bit of policy infrastructure. But a lot of people don't realize when they start talking about incentives in the case of Arizona with the company like Suntech or First Solar. First Solar has built a 1.2 million square foot plant. They actually didn't receive any of their incentives, even though they were scheduled to so, because those incentives were performance-based. One of the things we've done in Arizona is that all of our incentives are performance-based. I think not all incentives are the same. There are scenarios in which incentives were a mistake. Solyndra would be an example of that. But if you sit down and craft and construct the policy the correct way, then these incentives can be done so that they're safeguarded and can drive higher than normal investment in the community.

Byron Schlomach: But what's the point? I mean, if you're going to meet certain performance standards, then that's usually a level at which that company is competitive anyway. And if First Solar hasn't shut its doors but it hasn't met those goals, then what's the point of promising it to them in the first place? It seems like to me that these kinds of incentives are more political than they are anything else. And I often call these incentives the funds that are set aside for this kind of purpose ribbon cutting funds. Because they're a great way to make news, and it is obvious that they're there, you don't -- What you miss is all the economic activity that's lost because you've taken money away from people.

Ted Simons: Is there not an argument that you would also miss all the economic activity in general if you don't attract a business here in the first place?

Byron Schlomach: The way you attract business is with a good culture, pro-business culture, low taxes, an efficient government that provides necessary infrastructure, necessary health and safety benefits, and we're not just talking about police forces. We're talking about making sure that you have a healthy environment. That's what attracts companies and jobs.

Ted Simons: Is that all that attracts companies and jobs?

Barry Broome: You have to have that. Let's just take an example of an unknown success story in Arizona for incentives. It's the aerospace defense sector in this market and down in Tucson, which is the largest most dynamic highway industry position in the state of Arizona. So Hughes Aircraft goes to Tucson, you know, many, many years ago in competition with other markets, and Tucson provides free land. And the federal government provides a loan guarantee to Hughes Aircraft. Today that's Raytheon. If you look at Tucson today, where would it be without Raytheon. Whether it's Boeing or Honeywell, or Lockheed Martin, all of these different aerospace defense industries got free land back in the 40's, 50's and 60's. They got federal loan guarantees, they got tax credits, but it -- There were other things Arizona did back in the days of Barry Goldwater and Paul Fannin. They gave them right infrastructure, they -- One of the reasons we were a right to work state, one of the very first, maybe the very first one in 1946, it was to lure aerospace defense companies out of California. We eliminated the inventory tax before most states did. So there was a situation where we made sure we had free market and management rights on the right to work side, we gave these companies good infrastructure, we also converted Arizona State University from a teaching school to an engineering school and a research school. Those were all good environmental decisions. But we were still in competition with 11 states for this industry, and we still had to engage in a targeted policy to take advantage of those, advantages we did broadly, and I think it's been a big payday for Arizona.

Ted Simons: Talk about that scenario in general, and in particular the idea that this is how states and regions compete.

Byron Schlomach: Well, in providing infrastructure, if you have a potential employer who wants to move in and here's a plot of land that you need a road built to it, I have no objection to providing basic infrastructure where there are opportunities. I don't have any particular objection to giving away land. We have -- We're kind of lousy with land in this state to this day. And frankly, it needs to be converted to private ownership as much of it as we can possibly convert. Those aren't the example in the inventory tax elimination. That's certainly not something I have an objection to. That's rational tax policy. We still to this day have an antibusiness tax policy in this state with taxing business at a higher rate in the property tax, for example.

Ted Simons: Can incentives be constructed in such a way well enough to where you aren't picking winners and losers? As you refer to earlier.

Byron Schlomach: I don't believe you can. And it really boils down to politics. It boils down to who are the best advocates for their companies, or for their industries. And look, lobbyists don't always tell the truth. They often go a little too far with their stories.

Ted Simons: And is there a bias, create the most jobs, get the most attention, get the better breaks?

Barry Broome: I mean, I think if you look at, you know, one of the big criticisms that I hear from people, you know, there was a story that came out a year ago that GE didn't pay any federal taxes or virtually no federal taxes. And it had a lot of people tell me how upset they were about that. My question back to them on G.E. is, what was G.E.'s tax impact to the federal government? A staggering producer of tax impacts. So if you look at Intel, for instance, where we put in an infrastructure, we just passed a bill to help them with infrastructure, we have an R&D tax credit for anyone in the state, but it's very important to Intel. Real and personal property taxes are eliminated by a significant percentage but Intel. Intel's investment activity is so dynamic in Chandler, it's still the largest tax payer in Chandler. They pay more taxes to Chandler schools than any other business, and after the incentives on their last fab plant, we projected that the state receive $370 million in that new income. And we get research and $133,000 dollar a year jobs and engineers. So -- And then Intel has a procurement relationship with 1,700 small businesses in the Arizona community. So there are -- Some of these industries are the straw that stirs the drink. Aerospace, Intel, and you know, there's certainly complexity with rolling out those strategies. Solar has not reached its potential, but if you scrub underneath the solar incentives, the state did not take a big hit on that. The federal government did, though, to your point on Solyndra. If you pay attention to the policies the correct way, you can drive higher than normal outcomes, and in order to have another generation of aerospace companies and another generation of Intels, we're going to have to engage in both what Byron is saying, public safety, great schools, and infrastructure, but we're also going to have to have the policy infrastructure necessary to compete for these export industries, because there's 50 other states that would like to have Intel too.

Byron Schlomach: But look, businesses I've said for a long time, businesses do not pay taxes. Only people pay taxes. So what that means is, you don't favor a particular business because of that principle, you favor all businesses because of that principle. The reality is, we, in this state already overtax businesses, the solution isn't to go out and do selective tax abatements for certain employers, especially the large ones who can afford the best lobbyists. The thing to do is to lower the taxes for all businesses. And watch a thousand flowers bloom.

Ted Simons: The idea of government intervention meaning economic distortions, the projects that the free market may not accept in a totally free market just means that this is something that the market rejects and that whatever flowers are blooming, you'd have even more flowers if you get rid of the incentives, let the market do its work. Valid?

Barry Broome: Well, here's the thing about incentives, first off. When we advocate for incentives, like the kind that have helped Intel expand in Chandler, we're not advocating for those for Intel. We're advocating for those for Chandler in the east valley in Arizona. When I talk about public policy and incentives it's not something we give to a business, as Byron is saying, and he's right, all these businesses are global, they've got great lobbyists, if they don't get treated well in Arizona, they get treated really well in Alabama, Tennessee, Texas, and so forth. These are policies you do to improve your community's position to grow their economy. So that's the first statement on incentives. The second statement, and this is about the market, I'm glad you brought this question up. Sometimes if you're -- If you have my job, my job isn't to work the market; my job is to work the valley and greater Phoenix. And convince the market to participate at a high level here so that we can have a prosperous community. Sometimes the market will say no to you. And depending on how they say no, you have to make a decision as a community. And your decision is going to be, am I going to do something to compete and change this scenario, or am I going to accept the fact that the market is saying no to me? Right now if you're working in places like Chicago and Detroit, I know what the market is telling those places. But those communities can't accept those outcomes, so they have to engage in a strategy to change. The market tells me that Arizona is a great place to play golf, recreate, have conventions, and build homes. I'm sending a message back to the market that we're far more dynamic than that. So the market conversation is a struggle for the community because the market outcome might not be one you can accept.

Ted Simons: Respond, please.

Byron Schlomach: I think incentives are in that negative. In fact, I read an academic paper about how where these economists looked at the economic outcomes in the congressional districts of congressmen who became chairmen of committees, which generally means you get a lot more port to take home. They found in fact, on a differential basis, those districts did not do that well economically. And they believe they -- It's hard to know exactly why that is, but they believe that it's because other corporations, corporations those chairmen don't favor, avoid those districts because they would otherwise have to compete with those corporations and those areas. I think there's a role besides providing infrastructure and education for government to play and for organizations like GPEC in promoting a state, promoting an area, and promoting our culture and promoting what we have in our advantages, but going out and providing these tax incentives and such, that's a mistake.

Ted Simons: We have to stop it there. Gentlemen, great discussion. Good to have you both here.

Barry Broome: Thank you.

Byron Schlomach: Thank you.

Byron Schlomach:Goldwater Institute;Barry Broome:Greater Phoenix Economic Council;

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