Auto Subsidy Hypocrisy?

Are Southern senators arguing against a federal bailout of Detroit on free market grounds hypocrites? Mike Lillis thinks so:

Yet this argument — that the government has no business interfering in free markets — ignores an increasingly frequent tradition among Southern states, which have fronted billions in local taxpayer dollars in the past two decades to attract foreign auto plants. Those incentives, arriving in the form of tax breaks, training for new employees and even land, have enticed BMW to South Carolina, Mercedes to Alabama and Nissan to Tennessee. The result of the government subsidies has been the steady emergence of the South as an auto-manufacturing powerhouse. Some are dubbing it the “New Detroit” — a region where real estate is cheap and the labor’s not unionized.

Not only that, Matt Yglesias argues, but Southerners are bringing down the economy.

This is, of course, but a small slice of the larger southern politics tradition which has always insisted since the end of the Civil War that cheap labor and a low-tax, low-service, high-inequality social and economic system are the key to prosperity. This approach left the South perennially poorer than the rest of the country, but over the past couple of decades this made-in-dixie failed approach to economic development has come to dominate national policy. Not coincidentally, during this period the United States has begun to fall behind high-wage, high-service, low-inequality northern European countries in terms of average living standards.

Now, first off, there’s a substantial difference between offering a federal taxpayer bailout of failing companies and states offering incentives to businesses who might bring in new jobs.   As with publically financed sports stadia, there’s a legitimate debate to be had as to whether it’s worthwhile to spend taxpayer money to attract business.  But Alabama was competing with several other states to attract Mercedes and the incentives were part of a winning bid.

The South is poor for a variety of reasons, mostly having to do with relying on agriculture and mining much longer than their counterparts in the West and Northeast and the legacies of slavery and Jim Crow.  But it’s been growing for decades, mostly at the expense of the Rust Belt.

Further, the United States is still, by far, the most prosperous country on the planet despite having always been a low tax, high inequality, low service society.  We’re a gigantic, continental landmass and we’ve been well behind the Western curve in transferring wealth through government coercion for social purposes.  It’s far from clear how giving $15 billion to keep failing manufacturing firms afloat another few months is going to increase our standard of living.

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James Joyner
About James Joyner
James Joyner is a Security Studies professor at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Steve Verdon says:

    This is, of course, but a small slice of the larger southern politics tradition which has always insisted since the end of the Civil War that cheap labor and a low-tax, low-service, high-inequality social and economic system are the key to prosperity.

    What?!?!? Oh I get it, a non-unionized work force. Hmmm…I wonder what has happened to the wages in the states that offered subsidies to companies like Nissan, Mercedes and BMW vs. those states that did not? Let me see…South Carolina right….hmmm…runs over the BLS website $13.26 for South Carolina. $15.80 for Michigan, for production occupations. Compared to $11.98 for Mississippi, $11.90 in Arkansas, $12.63 for North Carolina, $12.25 for Georgia.

    Yeah those idiots in South Carolina are doing it wrong. They are increasing the production occupation wages vs. lowering it…what are they thinking?

    Does Matt Yglesias know what the word empirical means? Has anyone shown him how to use his web browser to do something other than spew nonsense?

  2. Floyd says:

    Matt displays little knowledge of economics and even less about history in his comment above.
    Ever heard of reconstruction?

  3. SA says:

    Hypocrites, yes. In bemoaning the unions as anti-free market, when a union is a lot like a corporation of little one-man companies that produce labor.

    Even more ironically, down here they hate foreign cars on the NASCAR track, but have no problem giving billions to Nissan out of their paychecks in subsidies.

    BTW, there are perennially poor people everywhere, it’s just in the South that the poor are proud to be that way.

  4. Steve Verdon says:

    SA,

    Unions basically angle to be monopolists or at the very least to cartelize a given segment of the labor market. In that sense they are anti-competitive, possibly reduce overall welfare, and result in a deadweight loss to that portion of the labor market.

    Added via edit:

    Oh and the increase the wage thus creating excess supply–unemployment as more people enter the labor force to try and get a job at the artificially higher wage.

  5. PD Shaw says:

    I recall reading that the Japanese automakers were deliberately spreading out plants to multiple states to have multiple politicians to protect them. I read this in a detailed critique of a high Illinois subsidy for Mitsubishi to locate a plant in state.

  6. Dave Schuler says:

    Opposing subsidizing automobile makers who employ Americans at the expense of other automobile makers who employ Americans is hypocrisy?

  7. Bandit says:

    It’s only about raising the standard of living for a group of solid supporters. It’s not our standard of living, it’s UAW’s standard of living. That union donation money has to buy something.

  8. raoul says:

    JJ: Intriguing title but you did not answer the question. Schuler: the hypocrisy question arises when one advocates not using taxes to support a given industry and then turning around and doing the same. Specifically this refers to free market and government approach; and the answer is that government is already involved. The remaining question is whose taxpayers (political bloc) gores whose ox.

  9. Barry says:

    “Now, first off, there’s a substantial difference between offering a federal taxpayer bailout of failing companies and states offering incentives to businesses who might bring in new jobs. ”

    In terms of whether or not such actions fit with the free market, there is in fact no difference – they both do not. I’m surprised at you, James.

    “As with publically financed sports stadia, there’s a legitimate debate to be had as to whether it’s worthwhile to spend taxpayer money to attract business. But Alabama was competing with several other states to attract Mercedes and the incentives were part of a winning bid.”

    Which is saying that Alabama used Evul Guvmint Interference with the Invisible Hand to help out the Alabaman economy.

    In addition to all of this, how many such red states get more money from the federal government than they receive?

    Or would that also be the free market in action?

  10. Steve Verdon says:

    In terms of whether or not such actions fit with the free market, there is in fact no difference – they both do not. I’m surprised at you, James.

    Although neither is “free market” there actually is a difference: in one case taxpayers are propping up failed companies, in the other tax payers are giving up rents for a successful firm to locate in their state.

  11. cfpete says:

    Has history been erased?
    Do people actually believe that the Big 3 have not been legendary in their extraction of subsidies from all levels of government?
    The list is long, so just a few instances.

    Poletown:
    The facts are straightforward and not in great dispute. The world’s largest automobile maker and Detroit’s most powerful economic actor, General Motors, wanted to build a new plant and chose a 465 acre neighborhood which included hundreds of homes, 12 churches, 16 schools, 143 small businesses and a hospital as a location for the expansion. In order to obtain the real estate, GM needed the city government to invoke the legal power of eminent domain, a doctrine which allows governmental bodies to take, for a “fair” price, private property for a “public purpose,” traditionally construed to mean such uses as building schools and constructing highways.

    In this case, however, the purported public purpose was to be jobs at the GM plant for Detroit residents. Mayor Coleman Young, a former socialist and civil rights activist, fully supported condemning the neighborhood by using the state’s new “quick take” law, passed by the state legislature at the request of the city and GM. The “quick take” law permitted the state to take title to private property at once, without having to wait for the judicial resolution of legal challenges. Young organized a package of over $350 million in local, state and federal subsidies as an enticement for GM to locate the new plant within city limits. Negotiations between city hall and GM were initially concealed. When the plans were finally revealed to the public, community opposition arose, stirred in part by Ralph Nader, who sent a support team into the community to help organize resistance to the project. Mayor Young and his staff vilified opponents of the plant, including a local parish priest, Father Joseph Karasiewicz, members of Nader’s team and city councilman Ken Cockrel, who tried to promote an alternative site for the plant that would have saved most of the neighborhood from bulldozing.

    The cavalier attitude expressed by Mayor Young and by GM President Roger Smith about the destruction of such community institutions as churches was reminiscent of Stalin’s wanton razing of Russian churches and the attitude of U.S. policymakers towards Vietnamese villages. (“We had to destroy it, in order to save it.”)

    Other powerful institutions were complicit in the community’s destruction. The United Auto Workers, the hierarchy of the Catholic church and the local media supported, or refused to actively oppose, the city and GM’s actions.

    Lacking support from any powerful interest group, Poletown’s inhabitants looked to the courts for protection. A local progressive attorney, Ron Reosti, challenged the city’s proposed action, but the state Supreme Court upheld the “quick take” law.

    GM promised 6400 jobs at this plant. By Dec. 2007 approximately 1000 jobs remained.

    Fairfax Assembly, Kansas City:
    GM successfully lobbied the city council of Kansas to close a municipal airport and offer the land to GM. Then the race for additional subsidies began in earnest: GM applied for low-interest bonds; the state established an enterprise zone on the airport site, thereby exempting GM from sales, use, property, and ad valorem taxes; and the city agreed to issue $775 million in economic development revenue bonds for the project.
    In later years, Kansas City issued an additional $266 million in revenue bonds for the assembly.

    Now this was a good investment:
    The original program, begun in 1993, aimed to develop affordable cars that got 80 miles to a gallon of gasoline. Vice President Al Gore, its most vocal backer in the Clinton administration, likened the project, known as the Partnership for a New Generation of Vehicles, to the Apollo space program in its technological complexity. In addition to about $1.5 billion in government subsidies, the Big Three automakers — General Motors, Ford Motor and DaimlerChrysler — together spent about $1 billion a year on related technologies.

    The carmakers all developed prototype vehicles that got at least 70 miles a gallon, and the project nurtured advances in aerodynamics and lighter composite materials now used in auto manufacturing.

    But none of the Big Three came close to commercial production of an 80-mile-a-gallon car. The average fuel economy of cars and trucks for sale in the United States has, meanwhile, steadily dropped, so that this year’s fleet — with its growing proportion of sport utility vehicles — gets the worst gas mileage in 21 years, according to the government.

    The list goes on and on.
    You have Ypsilanti, Michigan which gave GM 1.3 billion in tax abatements only to have GM close the plant and move it to Texas where it received more tax abatements – though Texas was smart enough to include claw-back provisions for their subsidies.

    More recently, GM received a 50% tax abatement on property taxes and a 100% tax abatement on equipment through 2033 from Flint Michigan to build the Chevy Volt.
    Ford recently received $151 million in state tax incentives from Michigan for plant upgrades.

    There are many more instances if some intrepid journalist wants to take the time adding it all up.

  12. ap says:

    OH SAY IT AIN’T SO! hypocrisy from the government and politicians?!? do we really need to do a rundown of hypocritical actions by non-southern republicans?

    on topic: yglesias is fairly transparent on this…

    The United States could urgently use food policy reform. Right now, we have a lot of subsidies to food growers. That’s questionable economics. But what’s more, we subsidize people to grow food that’s bad for public healthy in ways that are environmentally unsound. That’s terrible. If we’re going to subsidize farming, we ought to be subsidizing people for growing healthy crops in a sustainable way. On the merits, this is a no-brainer — there’s obviously no public interest in taxpayer subsidies for high-fructose corn syrup — but the politics is another matter.

    in yglesias’s estimation it is “bad economics” to subsidize an industry that directly employs 3 million and millions more in related occupations and industries. yet, it is good policy to subsidize an industry that employs a much smaller number both directly and in peripheral occupations?

    of course the political predilections of the UAW have nothing to do with his piggy-backing on Josh Marhsall’s analysis.

  13. ap says:

    argh, “questionable economics”

  14. tom p says:

    Although neither is “free market” there actually is a difference: in one case taxpayers are propping up failed companies, in the other tax payers are giving up rents for a successful firm to locate in their state.

    And Steve, just exactly how long is this “successful firm” succesful? As long as “other tax payers are giving up rents“??? Shall we talk about how all the Japanese firms don’t have to worry about providing health care? Especially in Alabama? (in Osaka they don’t have to worry about it either)

    Let us talk apples and apples. Especially in light of your anti-national health care proclivities.

  15. anjin-san says:

    It’s far from clear how giving $15 billion to keep failing manufacturing firms afloat another few months is going to increase our standard of living.

    Perhaps that is because it is not intended to increase our standard of living, rather it is to keep that standard from declining.

    I mean, 14 billion measly dollars? That is chump change compare to the financial industry bailout.

    Funny how much outrage there is on the right about guys making $50 an hour, and how little there is over CEO’s who have led their companies to disaster demanding multi-million dollar bonuses.

  16. Rick DeMent says:

    Unions basically angle to be monopolists or at the very least to cartelize a given segment of the labor market.

    And now Steve Verdon will explain how large corporations are immune from the same thing. Unions were formed in the first place to counter the tendency of corporations to do exactly the same thing only with much more political clout and money at their disposal.

    Steve, in most cases I would tell people to read some history, in your case I’m pretty sure you have read it, you just discount the lessons it has to offer which is the only way anyone can give any credence to ideological fealty of “free market” orthodoxy.

    The “free market” is a myth. There is no such thing until you learn that lesson all others will remain elusive.

  17. odograph says:

    As I’ve said, I lean toward bankruptcy for the failing auto companies. That said, I don’t really see the “no bailouts!” crew on the right offering better solutions here.

    It’s more they want the right to catcall as things go to heck. The fact that we are still in a Republican presidency makes that a bit more ironic.

    We just entered the ZIRP, but shout if it makes you feel good.

  18. Anderson says:

    Although neither is “free market” there actually is a difference: in one case taxpayers are propping up failed companies, in the other tax payers are giving up rents for a successful firm to locate in their state.

    Verdon is crossing dangerously near to hack territory. If the firms are so successful, why do they need the tax breaks?

    In Mississippi, Toyota’s spent $300M on a new plant; the state has spent $200M on infrastructure for it. And now the plant is on indefinite hold while the economy stumbles.

    I favor Chapter 13 for Detroit, myself, but the notion that Southern car factories aren’t swilling at the public trough is just b—s—.

  19. Steve Verdon says:

    And Steve, just exactly how long is this “successful firm” succesful?

    Simply because a firm is extracting rents does not make it unsuccessful. Try again.

    As long as “other tax payers are giving up rents”???

    Maybe, but not necessarily.

    Shall we talk about how all the Japanese firms don’t have to worry about providing health care?

    Those costs are still bourne by their society, I really don’t see the big deal here.

    Anderson,

    Verdon is crossing dangerously near to hack territory. If the firms are so successful, why do they need the tax breaks?

    And Anderson is getting dangerously close to idiot territory. I was neither endorsing nor condemning the practice merely stating what should be obvious even to a child: there is a difference between the two practices. If you don’t like the rent extraction here is an idea…go with a more limited government that can’t hand out these goodies.

    In Mississippi, Toyota’s spent $300M on a new plant; the state has spent $200M on infrastructure for it. And now the plant is on indefinite hold while the economy stumbles.

    I don’t see how this means that Toyota is a failing company. It may have been a bad move on Toyota’s part, and was almost surely a bad move on Mississippi’s party, but that doesn’t mean Toyota is going to file for bankruptcy any time soon.

    I favor Chapter 13 for Detroit, myself, but the notion that Southern car factories aren’t swilling at the public trough is just b—s—.

    I agree, this is a different issue as to whether or not there is a difference between propping up a failing company and a company that manages to extract rents from a state when deciding where to locate. Both fall under the catagory of corporate welfare, but that doesn’t make them identical just as a Alaskan Tundra wolf and St. Bernard are both members Canis lupus are not the same thing.

  20. odograph says:

    merely stating what should be obvious even to a child

    LOL, I love these Steve-isms.

  21. tom p says:

    Shall we talk about how all the Japanese firms don’t have to worry about providing health care?

    Those costs are still bourne by their society, I really don’t see the big deal here.

    Steve, I see your point here… but you miss mine. The Japanese pay app. $1,822 per person, a cost that is shared across the entire society. GM, pays app $4,178 per employee and retiree… let’s see…. that is health care for 557,000 people paid for by 125,000 current workers (according to this)…

    Do you now see the ball and chain around the Bug 3’s ankle, that is lacking from Toyota/Honda? Especially considering the big 3 have been here 100 yrs and Toyota/Honda 10? Is it any wonder T/H are presently more successful? I know it is far more complex than just this but as I said, apples and apples.

    (disclaimer: these links are for comparative purposes only. I can not vouch for their accuracy)

  22. Steve Verdon says:

    Do you now see the ball and chain around the Bug 3’s ankle, that is lacking from Toyota/Honda? Especially considering the big 3 have been here 100 yrs and Toyota/Honda 10? Is it any wonder T/H are presently more successful? I know it is far more complex than just this but as I said, apples and apples.

    No I don’t. Firms don’t look at these things this way. What they look at is total compensation and that is where we need to make the comparison. We’d also have to adjust things along the lines of Purchasing Power Parity as well.

    I am far from convinced of the arguments that:

    1. Health care expenditures will stop growing or even shrink with government provided health care.
    2. That it is a major barrier to U.S. competitiveness and that implementing a gov’t run program will solve the problem.

    There are other issues as well. For example, if we implement a government based health care plan how will it be paid for? Deficits or taxes? How will that impact the domestic auto-industry? If I have less income either due to higher taxes or higher interest rates will I buy more or less cars over a given period of time?

    There are lots of variables to consider here, and I see little reason to think they will help and plenty that they wont.