Ed. note: the two measures discussed below passed.
Today the Sedgwick County Commission will consider two measures that, if adopted, will further establish corporate welfare and rent-seeking as Wichita’s and Sedgwick County’s economic development strategy.
When people are living on welfare, we usually see that as a sad state of affairs. We view it as a failure, both for the individual and for the country. We seek ways to help people get off welfare so that they become self-sufficient. We want to help them contribute to society rather than being a drain on its resources.
But local economic development officials don’t see corporate welfare as a bad thing. Instead, as these two measures — both which will likely pass — illustrate, welfare is good when you’re a business in Sedgwick County. Especially if you can raise speculation that your company might move out of the area.
The term rent, or more precisely, economic rent is somewhat unfortunate, as the common usage of the term — paying someone money for the use of an asset for a period of time — contains no sinister connotation. But economic rent does carry baggage.
What is rent seeking? Wikipedia defines it like this: “In economics, rent seeking occurs when an individual, organization or firm seeks to earn income by capturing economic rent through manipulation or exploitation of the economic environment, rather than by earning profits through economic transactions and the production of added wealth.”
This explanation doesn’t do full justice to the term, because it doesn’t mention the role that government and politics usually play. The Concise Encyclopedia of Economics adds this: “The idea is simple but powerful. People are said to seek rents when they try to obtain benefits for themselves through the political arena. They typically do so by getting a subsidy for a good they produce or for being in a particular class of people, by getting a tariff on a good they produce, or by getting a special regulation that hampers their competitors.”
The deals the Sedgwick County Commission will consider are both corporate welfare and rent-seeking. Both are harmful to our community.
The first item concerns Apex Engineering International LLC, which is proposed to receive forgivable loans of $220,000 each from Wichita and Sedgwick County. (The City of Wichita has already approved its loan.) The company will also receive grants and tax credits totaling $1,272,000 from the state. Surprisingly, no property tax exemption is mentioned for this company. The city’s material on this matter may be read at Approval of Forgivable Loan Agreement (Apex Engineering International).
Apex will also receive $1,272,000 in tax credits and grants under programs offered by the State of Kansas.
The second item concerns MoJack Distributors, LLC, a company that makes an accessory for riding lawn mowers. It is proposed that the City of Wichita and Sedgwick County each make a forgivable loans of $35,000 to this company. (Again, Wichita has already approved its loan to this company.) If the company maintains a certain level of employment, the loans do not need to be repaid.
But this is not the only welfare being given to Mojack. The city also proposes a 100% Economic Development Exemption (EDX) property tax exemption. This exemption obliges the county to abate its share of property tax, too. The term would be five years, with renewal for another five years if conditions are met. The city’s material on this matter may be read at Approval of Forgivable Loan Agreement, MoJack.
For both companies, there was the treat of moving operations elsewhere, and the incentives offered made the difference, say the companies.
Targeted investment, or welfare
Government bureaucrats and politicians promote programs like these as targeted investment in our region’s economic future. They believe that they have the ability to select which companies are worthy of public investment, and which are not. It’s a form of centralized planning by city hall that shapes the future direction of Wichita’s economy.
As Hayek pointed out, knowledge that is important in the economy is dispersed. Consumers understand their own wants and business managers understand their technological opportunities and constraints to a greater degree than they can articulate and to a far greater degree than experts can understand and absorb.
When knowledge is dispersed but power is concentrated, I call this the knowledge-power discrepancy. Such discrepancies can arise in large firms, where CEOs can fail to appreciate the significance of what is known by some of their subordinates. … With government experts, the knowledge-power discrepancy is particularly acute.
I emphasized the last sentence to highlight the problem of the dispersed nature of knowledge.
Yet this week, our Wichita and Sedgwick County bureaucrats feel they have the necessary knowledge to recommend to the commissions that the citizens of Sedgwick County make investments of public funds in these two instances. All Wichita city council members were gullible enough to believe it.
One thing is for sure: the city and the county have the power to make these investments. They just don’t have — they can’t have — the knowledge as to whether these are wise.
We need a dynamic job creation engine
Furthermore, we have to question the wisdom of investing in these established companies, especially a company involved in aviation, as Wichita and Sedgwick County are always seeking to diversify their economies away from dependence on aviation.
Through research conducted by Dr. Art Hall and others, we now know that it is dynamic young companies that are the main drivers of job creation in Kansas. Hall wrote: “Embracing dynamism starts with a change in vision. Simply stated, the state government of Kansas should abandon its prevailing policy vision of the State as an active investor in businesses or industries and instead adopt the policy vision of the State as a caretaker of a competitive “platform” — a platform that seeks to induce as much commercial experimentation as possible.” (While Hall wrote about the State of Kansas, Sedgwick County is playing the same role at a local level.)
The “active investor” role that Sedgwick County is about to take with regard to these two companies is precisely the wrong role to take. These actions increase the cost of government for the dynamic small companies we need to nurture. Instead these efforts concentrate and focus our economic development efforts in an unproductive way.