Why I’m Not Enthusiastic About Having Mark Zuckerberg As A Neighbor

The parent company of Facebook, Targethas just announced that it is planning to establish a new headquarters in Kansas City, Missouri.

Lawmakers announced the move Wednesday expressing enthusiasm for the 1,200 temporary and 100 permanent jobs it will create. Goal in the zone.

The move comes after the local government approved a tech campus that received $8.2 billion in tax incentives what Goalthrough his shell company Velvet Tech Services LLCprompted.

Kansas City is the closest metro area to me, so I found this ad especially interesting. Even though I’m on the Kansas side, Kansas City itself is less than an hour’s drive away for me.

But the more I thought about it, the more I realized that I wasn’t thrilled with the idea that Goal and Zuckerberg will move next door.

Choice of winners and losers

About three years ago I wrote a Article with Rosolino Candela on tax incentives for companies and some of the associated problems. With that experience, my first thought when I saw the headlines for this deal was, “This must be a huge incentive package.”

And he was right.

The package included the right not to pay certain types of property and personal income taxes for 25 years. The total value of this tax cut is estimated at $8.2 billion.

At first glance, some readers may find it fine. can we blame Goal for trying to pay as little as possible in taxes in the same way that we blame individuals for writing off their spending?

What I mean is not that we should blame Goal for accepting tax incentives. However, the problem runs deeper than simple tax breaks.

Understanding the channel through which the tax exemption is given will help us understand where the problem is.

Kansas City concedes to Goal an exemption by issuing Industrial Revenue Bonds (IRB) of various types. And although the details can be complicated, the main feature of this type of bond is that the city will retain legal ownership of the land and all the property during the 25-year reduction period, so that it remains exempt from local and federal taxes. .

In other words, this is not a simple tax relief, but a public-private joint venture.

The problem is obvious. What the governments of Missouri and Kansas City do when they select the companies to receive IRBs is they pick the winners and the losers.

Instead of a market in which companies compete for land or for the resources to build a certain building, the government is privileging Goal offering you lower costs than your competitors can get. The transfer of Goal to Kansas City is not the result of the free market, but of the granting of exclusive privileges.

knowledge in the markets

But so what? Why should I be bothered that the government has granted special privileges to Goal? After all, they bring jobs.

To understand why it bothers me, let’s consider the example of a privately owned shopping center. Mall owners have limited space in their buildings to rent to different stores. Let’s imagine that Hollister, American Eagle and Bed Bath & Beyond compete for space in the mall. How will the owners decide who should be in the mall?

First of all, the owners will use the prices. Competing companies can bid for the space and the company that is most willing to pay for the space will win the competition. Thus, the company that most wants the space keeps it. This seems like a good result, but it gets even better.

Why, for example, Bed, Bath and Beyond andWould you be more willing to pay for space in the mall than Hollister? It must be because the owners of Bed Bath & Beyond believe that they can obtain more benefits than those of Hollister in that space.

And how can this be? the only way that Bed Bath & Beyond get more profit is that consumers value the products they sell more than Hollister relative to the company’s costs.

In other words, the company that gets the mall space will ultimately be the one whose owners believe they will provide the most value to mall patrons regardless of cost.

In short, the values ​​of the clients ultimately decide who gets the space.

And what if Bed Bath & Beyond overestimate your success in space? Well, if that happens, the company will start to make a loss; it will eventually leave and make the space available to other, more suitable companies if it is unable to turn things around. Even if the company doesn’t do so poorly as to make a loss, in future bidding wars the company will adjust its offer to meet lower expectations, potentially freeing up space for others.

Market price, profit, and loss indicators ensure that scarce resources, such as mall space, are used by the producer that consumers want most.

Distorted knowledge in the markets

Now let’s imagine a different scenario. Let’s imagine that Bed Bath & Beyond would be the most profitable company in the open space, but now the government tells Hollister that if installed you do not have to pay property tax or sales tax.

Since this reduces the cost of Hollister and therefore increases profitability, now Hollister you may have a higher offer than before. It is possible that this policy will increase Hollister’s profitability so much that it will outbid companies that would otherwise be more profitable without government intervention.

Ultimately, this means that consumer values ​​are trampled on by the government that picks winners and losers. Consumers are no longer sovereign over the allocation of space in shopping malls. The political process and cronyism reign.

That’s why I’m not excited about having Zuck as a neighbor. The construction of the headquarters Goal it will use scarce resources that, had the government not intervened, would probably have been used in another way, one that is better suited to the wants and needs of consumers. While this may increase the wealth of certain interest groups such as Goalit will occur at the expense of the values ​​of society at large.

knowledge in politics

The problems do not end there, unfortunately. The fact that politicians cannot learn the knowledge generated by prices, profits and losses does not mean that they do not learn at all. Instead of learning about consumer ratings, successful politicians learn about how to be successful in the political process.

An example of this “political” knowledge is that politicians recognize how to win votes. And, as you’ve found out, one of the best ways to win votes is by supporting deals that create jobs.

Employment is a common topic of conversation among politicians, but it is important to remember that employment is a means, not an end.

Of course, the impact of Goal it will probably be more than the 100 jobs they promise, but that is not the point. New jobs, buildings or investments are only valuable to the extent that they create value for consumers. Jobs can be productive or destructive and therefore cannot necessarily be heralded as an achievement by legislators.

The government could create any number of jobs by hiring people to dig holes and fill them. These jobs would be obviously destructive as they use scarce manpower and resources for a pointless task.

If the goal is jobs, offering tax breaks to all Missouri entrepreneurs would generate a higher return on foregone tax revenue than the 100 permanent jobs created for $8.2 billion ($82 million per job).

Another type of knowledge that politicians learn is how to please special interest groups with fat wallets. This is what worries me the most Goal move next door.

Politicians win when they receive large donations from individuals and companies. To generate these donations, they are incentivized to give special privileges to these companies and individuals.

This cronyism distorts the free market and makes the success of companies increasingly based on political relations and not on the creation of value. Goal is no stranger to this.

I find it unlikely that Facebook and Mark Zuckerberg were genuinely concerned about the integrity of the election when they flooded it with Zuckbucks. It seems more likely that this decision, and Zuckerberg’s decision to voluntarily testify before Congress a few years ago, had more to do with political rapport than altruism.

I have no doubt that Zuckerberg’s headquarters in Missouri will give him an incentive to interfere in Missouri politics. And, although I happily live on the Kansas City side, I have no doubt that there is a greater incentive to interfere in Kansas City politics in general.

Personally, I consider that the entry of Goal through the IRBs in Kansas City is nothing more than cronyism and a dangerous disruption of the market process that funnels scarce resources away from consumer values ​​and into the political process. In my opinion, that’s not something to get excited about.

This article was originally published in FEE.org

peter jacobsen is Assistant Professor of Economics at the University of Ottawa and Gwartney Professor of Economic Education and Research at the Gwartney Institute. He received his doctorate in economics from George Mason University and earned his bachelor’s degree from Southeast Missouri State University.