The Misunderstanding Of Economic Development

Posted by on Apr 19th, 2012 and filed under Government, Nevada. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.

(Geoffrey Lawrence/NPRI) – After listening to Gov. Brian Sandoval’s speech today about his team’s strategy for economic development, I was struck by several components and extremely disappointed that he declined to take questions.

Now, let me get this straight—I like and respect Brian Sandoval very much. During my many conversations with him, I’ve always found him to be intelligent, engaging and sincere. I’ve also, on many occasions, praised most of the major policy initiatives he’s pursued as governor. This includes everything from performance-basedbudgeting to education reform.

However, as a free-market (and, especially, Austrian) economist, I have remained critical of his state-centric plan for economic development. This dissent has not been based on blind ideological adherence or unfounded assertions. Instead, the field of economic science has produced an overwhelming body of literature which concludes that similar efforts at state economic planning will produce an outcome that is sub-optimal to what the market would produce on its own. Ludwig von Mises became famous by pointing out that when government takes money out of the pockets of consumers and then relies on supposedly sage bureaucrats to distribute that money directly to private businesses in order to “create jobs,” there is no way for these bureaucrats to know what types of investment consumers would have preferred on their own. So, instead, they substitute their own, personal viewpoints for those of private consumers and force society to collectively subsidize industries from which consumers do not derive as much value as those that would be chosen through strictly market forces. The result is a net loss of consumer welfare and society suffers.

Sure, there is the visible sign of money moving from bureaucrats into the hands of those businessmen whom they favor. These businessmen then hire on workers, creating the visible manifestation of “jobs.” But these are jobs that produce less value than those that would be created if capital had not been diverted to the government in the first place.

Still, Sandoval, who may or may not understand these economic fundamentals, today defended his plan by alluding to other popular governors around the country who have implemented similar plans, including New Jersey Gov. Chris Christie and Texas Gov. Rick Perry. I found this defense troubling because economic illiteracy from one policymaker should not be used as a naked excuse for other policymakers to promote the same economic illiteracy.

Sandoval claimed that the State of Nevada must subsidize private business if it is to “compete” on a national playing field where other states are also offering subsidies to lure notable large businesses. What he appeared to miss was that there is no zero-sum game in a free market. To create jobs and wealth in Nevada, he need not steal them from somewhere else.

In fact, Sandoval’s focus of recruiting large, out-of-state businesses to Nevada is a flawed approach for realizing his mission of “creating jobs,” given that large businesses tend to shed jobs over time, as research shows. In a dynamic, market economy, where entrepreneurs are continually innovating and displacing older producers, it is the growth of new businesses that contributes overwhelmingly to job creation. According to Kauffman Foundation research, job growth in the United States is “driven entirely by start-ups.”

Given this recognition, wouldn’t a more savvy approach to economic development focus on identifying and removing specific barriers to native entreprenuership? Does the governor really have so little faith in Nevada’s entrepreneurial class that he believes they cannot create wealth and jobs on their own?

It’s easy to be frustrated by Nevada’s persistently high unemployment rate. But, if one loses sight of the fact that Nevada finds itself in this situation precisely because of policy failures from government (albeit, primarily at the federal level), then one becomes suscepitble to the erroneous belief that Nevada’s economic malaise is due to the failure of its entrepreneurial class. Yet, this has not been the case and the governor should remain cognizant of that fact.

Nevada’s housing and economic crises can be laid primarily at the feet of an over-reaching Federal Reserve, the impact of the Community Reinvestment Act, relaxed banking reserve requirements for mortgage-backed assets relative to other financial instruments, etc. To be fair, however, Silver State policymakers have done the state’s citizens no favors in their response to these crises, as they’ve maintained one of the highest minimum wage rates in the nation, high RPS standards that render electricity artificially expensive, they’ve raised taxes, and they’ve passed legislation that only further handcuffs the housing market, such as AB 284.

Finally, a question that the governor should have addressed, but didn’t, was whether he truly believes that his economic development plan follows the spirit, if not the letter, of the state’s constitution. At the center of his plan is a Catalyst Fund through which he plans to distribute $10 million in direct state support to select private businessmen. This appears to be in direct conflict with Article 8, Section 9 of the Nevada Constitution, which says: “The State shall not donate or loan money, or its credit, subscribe to or be, interested in the Stock of any company, association, or corporation, except corporations formed for educational or charitable purposes.”

Indeed, it doesn’t matter what Governors Christie or Perry do in New Jersey or Texas, if such action would be unconstitutional in Nevada.

Nevada Attorney General Catherine Cortez Masto has offered Sandoval cover by proclaiming that state authorities can get around the constitutional restriction if they just set up “local governments” to act as shell corporations through which the state can pass money onto private businessmen. It’s a pretty weak argument—and one with which the Nevada Supreme Court would likely disagree. If the governor truly wants to make the case for his economic development plan, this is a very serious point that he should address directly.

2 Responses for “The Misunderstanding Of Economic Development”

  1. Durk Pearson says:

    Unfortunately, it is all too clear that Gov. Sandoval knows nothing of economics – and cares even less about our State’s Constitutional limitations on our government’s power. People like that used to be called Democrats.

  2. Blayne Osborn says:

    To the point in the last paragraph, State Treausurer Kate Marshall’s S.B. 75 does the same thing, by establishing a non-profit organization (NCIC board) to invest those monies. Are the provisions of this bill also included in the economic development plan?

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