January 11, 2010

Sweeney's Plan to Perpetuate Government's Centrality

Justin Katz

In a commentary piece in Providence Business News, Bryant Economics Professor William Sweeney insists that it's crucial that the Rhode Island government borrow a quarter-billion dollars for targeted investments in small businesses (there's that slippery "targeted" word again):

To recover from the Great Recession and to expand in the future, [the small-business] sector, while resilient, will require state help.

My proposal for an economic-development plan is designed to place its greatest effort on encouraging local small businesses to expand here. But it should also attempt to lure fledgling, out-of-state companies to locate in Rhode Island. To be effective, such a dual-edged, aggressive, economic-renewal program is likely to cost at least $250 million, based on the number of potential beneficiaries. ...

Rhode Island can make an economic metamorphosis, if it puts together an aggressive economic-development program, one that would establish a strong connection with young, fledgling firms captained by entrepreneurs.

In addition, this plan must nurture old-line growth companies as well. These two economic driving forces are always searching for a lower-cost location in which to operate. Rhode Island can exploit this golden opportunity with generous tax breaks and financial assistance to small businesses that have plans to expand in the Ocean State. The net result should be an updraft in the creation of new jobs.

Must we continue banging our head against this wall? Like many others, Sweeney ignores the essential problem that Rhode Island faces (a practice that's beginning to look deliberate in certain instances). Our local aristocracy lacks the intelligence and objectivity to pick winners. Where they're not ideologically blinded, they're bound by personal loyalties and a cliquish mentality. We cannot, therefore, trust them to direct the state's economy with further money for ideas that they, personally, like and people with whom they, personally, can do business.

Furthermore, government-initiated investments will always bear the risk that politics will wash them aside, perhaps just when businesses most need them. All of the gimmicky solutions to the state's problems have the taint of the temporary, and our leadership has neither long-term vision or patience.

In short: slash taxes, erase mandates, and lighten regulations. Let the productive make the decisions with their own investments of time and money. Send the signal that Rhode Island is open for business, not for reciprocity. That is the only way forward, and the governing class must be almost completely overturned and the advisory class ignored en route.

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Unbelievable that these supposed intellectuals still see our state government as the solution rather than the problem. All you have to do is ASK business owners why they steer clear of Rhode Island. The answer they give is always the same: Rhode Island government itself (corruption) and its burdensome taxes and regulations. But of course nobody cares what the business owners themselves think.

Your point that government is totally incompetent to pick winners and losers among small businesses is a good one. The reality of the marketplace is that 9 out of 10 new businesses fail on their own. Do we really trust government to pick that 1 winner as well as not sink any money on any of the 9 losers? How are they going to do that, with another "panel"? A crystal ball perhaps? One of many reasons why central economic planning is fatally flawed from the get-go.

Government simply needs to GET OUT OF THE WAY. Of course that will never happen, since that would involve asking a lot of people to lay down an incredible amount of power.

Posted by: Dan at January 11, 2010 2:25 PM

It took less than two years of working at an international bank to realize that nearly everything my Keynesian econ professors at Brown taught me was wrong (back in the 70s). There was barely any correspondence between their models and what businesspeople actually did in the real world.

Ever since, I have made it a point to skim at best articles by college professors. Of course, one "skim" was an article by Arthur Laffer in 1979 that proved not all professors lived in fantasy land. That led me to Hayek and von Mises, and finally I got the education in economics that I was cheated out of in school.

Posted by: BobN at January 11, 2010 3:49 PM

The mention of Keynes brought to mind having dinner with several Russian economists, this was during the "Cold War". I was amazed they had never heard of Meynard Keynes. I thought they would have "jiggered" him a bit, but still have thought well of him.

His most provably true maxim "In the long run, we are all dead".

When Brown was pushing Keynes in the 70's, I think all of the good work was going on at the University of Chicago.

More to the point, I think we should encourage the medium to large companies, they "spin off" small companies. They also produce a lot of local business. I have a friend with an overhead door business, he just got a contract for 345 doors. He didn't get that from a "small buiness". I suppose it is definitions. IRRC, the government regards a business as "small" if it has less than 500 employees.

Posted by: Warrington Faust at January 11, 2010 4:14 PM

This type of mindset is absolutely wrong. For us to borrow a quarter of a billion dollars to invest in early-stage companies, with our business climate not changing, would be a disaster. The businesses would simply take the money, launch or grow their operations, and then move to another state where it is cheaper to operate. Therefore, we would be guaranteeing that we have the companies for the most unproductive stage of their life cycle: the beginning, when they bleed cash, lose money, and are getting their operations off of the ground. Then, when they become viable, productive enterprises, and generate profits, growth, and taxes (not necessarily income taxes), another state, with lower taxes and fewer regulations, can reap the benefits. The only states that have benefited from such direct economic development efforts are places in which it is beneficial to start and own a business. It also helps that these states have balance sheets that can support debt for non-essential government services. Similarly, it is why states that are more business-friendly are more willing to underwrite the entire infrastructure investment a company may need to move into a location or build a facility because they know in the long run they will stay, pay taxes, and the government's investment will be paid off.

Posted by: Dan Reilly at January 11, 2010 6:10 PM

BobN and Warrington, I had a very similar experience. Keynes is the fad right now in US government, and progressives treat it as gospel because it is a convenient excuse to vastly expand the role of government. But it is important to realize that it is simply a theory of public policy (a very unscientific one at that, "animal spirits"?) and that theories come and go. Even those who support Keynesian public spending and centralization during recessions have to admit that there are some serious problems with his theories.

I listened to a very good podcast the other day on Keynsian economics and the Great Depression. I have been a strong supporter of the "Austrian School" for a few years now, but this discussion gives a detailed breakdown of the individual events and important dates leading up to the Great Depression, and it becomes very obvious when you examine it that way that government policies were what largely if not entirely caused the stock market crash and bank runs (people tend to gloss over what caused the crash and bank runs in the first place as if it was irrelevant, or never even ask the question).


If anyone is interested, it is free for download at the above site. The real meat of the analysis is in the middle and is not limited to Smoot-Hawley.

Even for "the other side," it would be a good listen just to realize that there is nothing resembling a consensus on these public issues, there are free market economists out there, and Keynesian economics are not the infallible truth.

Posted by: Dan at January 11, 2010 6:44 PM

This reminds me of the "Greenhouse compact" that did not go forward decades ago. And for good reason.
Just think about it, in the General Assembly, we have thrice bankrupt individuals sitting on the House Finance Committee. Now, it's bad enough that these clowns aren't shamed into staying off of those committees, but what could they possibly add to the conversation on picking winning companies/industries, when they have proven to be incapable of managing a household budget.
Scrap this ridiculous idea; Save the $250 million. You know damn well it will be frittered away with nothing to show for it.

Posted by: Mike Cappelli at January 11, 2010 9:51 PM
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