Corporate Welfare In One Lesson


February 12, 2016 10:02AM

Tennessee has its fair share of corporate welfare. One of the highest profile cases is that of Volkswagen in Chattanooga, especially in lieu of their recent environmental scandal. Volkswagen received a $554 million subsidy in 2008 to locate a plant in Chattanooga. Last year they received another $165.8 million for plant maintenance and infrastructure. Proponents of these subsidies will inevitably say something like, “look at all the jobs created by enticing Volkswagen to come to our state.” They are correct in claiming that the subsidy “created jobs”, but this is not the end of the story.

The difference between a good economist and a bad economist is that a bad economist sees only the immediate and direct effects of a policy, while the good economist traces all the consequences of a policy. The bad economist sees only what strikes the eye immediately, the good economist looks further.

Take the Volkswagen example. What has really happened here is that the government has confiscated money from its citizens and given it to Volkswagen, supposedly with the intention of creating jobs. But we must consider what would have been done with this money had it remained in the hands of the people who earned it. The citizens could have spent that money on goods and services that they desired, boosting demand and creating jobs within their communities. Otherwise, that money might have been saved and made available for firms to use in expanding operations, also creating jobs. Most likely, the subsidy to Volkswagen hasn’t created net new jobs; it has simply transferred jobs from various firms throughout the state to a Volkswagen plant in Chattanooga.

To say that certain jobs would not have been created without government subsidies is to concede that these jobs are artificial and are not creating enough value to be economically viable in the absence of government intervention. The free market ensures that all resources, including labor, are being used to create things that consumers want the most. Government intervention into the free market only acts to waste resources and restrain economic growth. Ideally, salaries would come about entirely from producing things that others buy voluntarily, not from a government who has looted from the residents of its territory.

The mistake of observing only the obvious effects of a policy and not considering the unseen and indirect consequences is known as the broken window fallacy. It is important that Tennesseans not fall for these excuses to expropriate more funds from taxpayers. If policy makers actually want to create jobs and bring more business to Tennessee, they should cut taxes and regulations rather than giving handouts to favored groups.