Rhode Island Doubling Down in Risky Economic Development

Governor Lincoln Chafee just announced that Curt Schilling’s 38 Studios will be seeking movie tax credits in addition to the $75 million in loans guaranteed by the state. Writing live from the press conference, WPRI’s Ted Nesi reported that the company has applied for $2.5 million attributable to tax year 2011 and $12 million for 2012.

Such an arrangement would be a bit more in keeping with other economic development practice, around the country. In Michigan, for example, the taxpayers subsidized $912,000 in tax credits for development of two video games by BH Golfing Game Productions.

That tax credits may be more usual does not make them necessarily more wise. At the time, the director of the Mackinac Center for Public Policy’ Morey Fiscal Policy Intiative, Michael LaFaive, offered a straightforward free-market critique of that sort of economic development that might resonate with Rhode Islanders in the midst of the 38 Studios controversy:

“It is not the state’s job to judge whether or not we have the right mentality to engage in entrepreneurial work,” LaFaive wrote in an e-mail. “Suggesting that is the case is like saying Michigan’s entrepreneurial and capital markets are broken. Investment dollars will go and stay where they are welcome. Redirecting subsidies to game makers doesn’t create new wealth, it just shifts it around. From whom was this money taken? Was it the next Bill Gates? The next Henry Ford? … The evidence is very clear: governments make terrible investors.”

In 2005, LaFaive studied the Michigan Economic Growth Authority (MEGA), which operates the state’s tax-credit program. Only ten of the 56 instances of claimed tax credits created the promised number of jobs. Rather than an initial projection of 35,821 direct jobs from 127 deals, the state realized 13,541 from 56.

In assessing the reasons for such inefficiency, the study makes an observation that ought to ring resoundingly for Rhode Islanders as they watch with bated breath the fortunes of a legendary baseball player’s business: “In economic development programs, [the political economy] dynamic can favor projects with a higher public profile, such as those that benefit well-known or exciting new businesses or industries, even if these efforts are not necessarily the wisest use of resources.”

Put differently, government officials invest taxpayer resources in businesses or industries that don’t efficiently capitalize on the state’s resources or population. Rather, other considerations, whether the flashiness of the project or the desire to guide the economy in a preferred direction, impose premiums on the investment.  The principle echoes in the frequent references to transforming the people of Rhode Island to better suit the “jobs of the future,” or whatever catch-phrase is making the rounds.

It also echoes, if indirectly, in Governor Chafee’s comments toward the end of the conference:  He juxtaposed tax revenue, which is projected to exceed expectations, as the “good side,” with continued slippage in the state’s unemployment rate, as the “bad side.”

The State of Rhode Island consists of real people with their own talents and passions.  The more their elected representatives and appointed bureaucracy take the reins of economic development, the more it will drift from their interests, whether or not it slides into a ditch.

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