3/9/10

Poor Incentives

3/9/10
Warren Meyer at Coyoteblog commented on Arizona's recently failed bid to subsidize the relocation of a solar panel company. Basically, it was an expensive attempt to bring 80 jobs to a city of 4 million. Meyer rightly explains that this is very stupid, and that even if you had to subsidize relocation, you could do it far more efficiently bringing in more jobs for less money.

What I think he missed though, was that while it is completely irrational in a business-(or individual) sense given the fact there are much more effective and less costly alternatives, it is perfectly rational given the incentive structure.

The government is like a child with a credit card. The incentives of state governments lead them to chase fads like green jobs, high speed rail, state-of-the-art stadiums, and a host of other ridiculously expensive wastes with little or no return on investment. Why buy a rubber stamp factory when you can boast about being the only state in the nation to have the most green jobs, or having one of the greenest cities?

Meyer is looking at this correctly to explain the irrational economics, but not to understand it. I think what these subsidies are trying to buy is image, and in the context of 49 other competitors selling the same thing--acting largely the same way, image is king. And when politicians get to add the word "green" to the phrase "job creation," they usually win no matter the real numbers.

Of course, buying image can be self-defeating. The investment, immigration, and tourism image brings is mitigated, if not canceled out by the higher taxes and busted budgets their fad-chasing brings them.

If you want to explore further down the incentive structure, i.e. why they keep doing it when it's obvious they shouldn't, read Bryan Caplan's book.

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