Who is my economic neighbor? | Econ Matters

June ushered in hotter temperatures and the announcement that VA Mortgage is expanding in Columbia. Both make me a little uncomfortable.

Do not get me wrong; I am happy there are new opportunities for employment in my city. Some of my neighbors will realize better job matches because the number of vacant positions will increase. No, my discomfort owes to the $6 million in incentives that are received by VA Mortgage in the form of tax credits, training costs reimbursements and employee recruitment funds.
Let’s walk through this policy operation. Missouri’s Department of Revenue has claims on future VA Mortgage profits worth about $5.6 million. From VA Mortgage’s perspective, this is wonderful: the total cost — labor expenses, rents and taxes — for operating in Columbia has fallen. Thus, past investments by VA Mortgage will offer a greater after-tax return. VA Mortgage did not raise its return by innovating and lowering its cost. In the absence of any technological progress, the resources came from somewhere so that VA Mortgage’s after-tax rate of return would increase. Because Missouri’s Department of Revenue is receiving fewer taxes, those resources are either in the form of higher taxes collected from other Missourians so that state spending levels do not fall or state services must be reduced: that is, less road construction and repair, spending on free public schools, etc. I certainly do not hold any animosity toward VA Mortgage owners because this is the law. But my point stands: This is a redistribution of resources from Missouri taxpayers to VA Mortgage. There is no free lunch.
We all cheer when politicians arrive to announce that our town will have a new employer or an employer is expanding. The politicians come to town because they had a hand in this outcome and wisely applied state monies to entice the company to expand here. We can see the building. We know some of the good people who work there. They are our neighbors. Besides, in rough economic times, we project that no economic expansion would occur without this type of government incentive.
There is another trade-off we are missing when we accept the government-is-needed belief. That trade-off is tied to our view of who is our neighbor. What else could be done with the resources that have been redistributed to companies that receive these tax credits?
For the sake of illustration, suppose the resources were left in the hands of the Missouri taxpayers. There are two alternatives: Some of those monies will be spent on consumer items, and some will be saved. I can already hear the moans about spending too much. I reject that premise. For given prices, each person knows how to best use his or her resources. As long as there is no moral hazard issue, it is impossible for me to judge spending patterns.
Let me get back to the part that people saved. The pricing system also allows us or our designated agents to identify those companies that offer the highest expected returns. There are entrepreneurs across the globe competing for those scarce resources.
Of course, there is uncertainty because we are talking about the future profits of these companies. By diversifying among the companies, we can reduce this risk. These companies, especially the startups, are competing by being innovative and offering new products that never existed or by finding lower-cost ways of producing existing goods and services.
If we draw a circle of so many miles around our home, we lose the chance to invest in our neighbor in Utah, Canada or South Korea. The byproduct of this arbitrary definition of neighbor is that the saver loses because future returns are lower.
There are significant concepts at play when allocating scarce resources. I am simply asking a question: Are we convinced that the state government is getting us the highest return when they invest locally? If we accept the argument that state government officials know something we do not, then a case can be made. If I start from the premise that government officials specialize in knowing how to govern, I am skeptical that their governing skills transfer easily to investing skills.
We all want VA Mortgage to succeed. And they might have been the best option. There is also a part of me that wishes the resources they are getting would have gone through competitive channels rather than directed channels. Respecting the process of such competition, in my view, would have been the neighborly thing to do.