85 Years of Economic Warfare Between States is Enough

85 Years of Economic Warfare Between States is Enough
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Eight-five years ago this fall, former Mississippi Governor Hugh White launched a bold experiment: The “Balance Agriculture with Industry” (BAWI) program. White hoped to jumpstart a stagnant, rural economy by subsidizing manufacturing firms to move to Mississippi. Instead, he fired the first shot in an economic development war between the states — a perpetual and unwinnable arms race that today consumes about $95 billion a year.

Worse, the conflict continues to distract policymakers from more equitable strategies that actually work, such as building a tax and regulatory environment conducive to growth.

Even in 1936, Gov. White’s idea was not exactly new. Adam Smith, the godfather of modern economics, warned of the dangers of subsidizing businesses in 1776. Nor did BAWI work. Mississippi remains America’s poorest state, with a per capita personal income just 70 percent of the national average.

There are many problems with artificial attempts to stimulate economic growth:

First, any economic activity ostensibly spurred by a subsidy will be offset by reductions in government services, increased debt, or higher taxes that siphon resources from private enterprise. It’s like trying to fill a pool by dipping a bucket in one end and pouring it back in the other. Advocates claim to know which high-impact industries to subsidize, but even if this were true (their track record is poor), they usually fail to account for these tradeoffs.

Subsidies also breed inefficiency. If a local project wouldn’t be built without a subsidy, maybe your community isn’t well-suited for it. With enough money, Mississippi could create an ice fishing industry in artificially frozen lakes. But some things are better left to Minnesota.

Furthermore, the consensus in the academic research is that only about 12 percent of subsidies actually change a company’s decision regarding where to locate or expand. The rest are a complete waste of taxpayer dollars.

Ironically, favoritism undermines sustainable economic development. This is because subsidized firms are shielded from competitive pressures, leading to lower-quality and inferior production techniques.

This all explains the well-documented finding that subsidies typically fail to benefit the communities that offer them. Sure, they help the privileged and connected companies that receive them — but only at the expense of locals with no voice.

It gets worse. Gov. White’s racism was no secret — he helped found the segregationist Dixiecrat Party. BAWI was also explicitly racist. Advertisements highlighted a “high percentage of friendly, native Anglo-Saxon labor.” Mississippi’s African American majority was intentionally ignored.

A later analysis of BAWI made the problem clear: “While the industrialization program has improved the employment situation for the white workers of Mississippi, the same cannot be said for the non-white … There are practically no non-white workers employed in the apparel or textile products industry which includes the bulk of the BAWI plants.”

Today’s subsidies do not explicitly discriminate on the basis of race, but they do create distinct winners and losers. Large, established, popular, and out-of-state firms usually win, while small, modest, and local entrepreneurs lose. Better economic development policy would create conditions in which any sound business can flourish.

Thankfully though, there are options that could end the subsidy war and allow policymakers to focus on what really works.

First, legislatures and governors could simply comply with the constitutional constraints they’ve sworn an oath to uphold. After multiple states defaulted on debts built up by subsidizing corporate gambles in the 1830s and 40s, nearly every state adopted a constitutional ban on public gifts to private interests. Unfortunately, courts have weakened these bans by allowing politicians to simply declare that a gift serves a “public purpose.” Today, only a few principled mayors and governors honor their constitutional responsibility.

Second, states should hold Congress accountable. Congress’s role under the Commerce Clause is to step in and stop states from interfering with interstate trade — something economic development subsidies clearly do. A Congressional ban on economic favoritism would be the fastest way to address the problem.

And since waiting on Congress is a fool’s errand, leaders in 15 states — from New York to Utah to Illinois to Florida — have introduced bipartisan legislation that would create an interstate compact to mutually end this economic war between the states.

We’ve fallen into the exact kind of economic infighting the Constitution tried to avoid. A truce would save billions of dollars every year, and — even more importantly — allow our governments to serve the general welfare of all, rather than the specific welfare of a privileged few.

Matthew D. Mitchell is a senior research fellow and director of the Equal Liberty Initiative at the Mercatus Center at George Mason University. Michael Farren is a Mercatus Center research fellow.

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