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Monday, March 30, 2009

1A--From a Wagnerian Perspective

Local ballot issue 1A has generated a lot of heat in recent weeks. And when I say "heat", I mean as much heat as a couple developers, a few local politicians and one inconspicuous university chancellor can muster on the side of their very busy lives. Given its relevance to public sector economics, I figure it would be interesting to look at it from a Wagnerian Perspective.

Richard Wagner suggested that the typical view of the relationship between government and local enterprises is a top-down relationship: In other words, government is at the top, and it sets the rules for private enterprises, on the bottom, to follow. In this view, government comprises an organization, meaning everything is organized nicely; private enterprise comprises more of an order, with rules set in place by government, but in which businesses are otherwise free to act as they choose.

Wagner thought this view was wrong, and when I look at the interaction of different businesses and individuals in government regarding 1A, I can't help but agree. In Wagner's view, private individuals--maybe, say, a developer named Steve Schuck, or a university chancellor named Slammin' Pam--work alongside different government entities--let's say, in this case, "business development agency of colorado springs", or some such nonsense--to pass "rules" governing the order in which these businesses or individuals must live. Generally, they will work together for rules favorable to said individuals or businesses.

This policy is no exception. What 1A does is secure funding for a section of the Colorado Springs government which, among other things, offers tax incentives to attract business and, therefore, jobs--or so they say. This means business for rich-dude developers like Steve Schuck. It also means business down on Nevada--which happens to be the exact spot towards which UCCS plans to expand in the future.

If we put this in Wagner's framework, the Chancellor and Steve Schuck are some of the private entities working nearly hand in hand with a local government agency to secure a policy which favors his/her interests--future career prospects, more lucrative salaries, or, more optimistically, expansion for the University.

Should the Chancellor or Schuck support such a policy, as she (and I think he, more tacitly though) obviously has? I'm not passing judgment--when government offers a handout, most people take it and I don't blame them. But government should consider its role in passing such a policy. I understand that other towns do the same thing, and that it seems we need to keep up. I'm just concerned these taxes don't do what they're supposed to do.

In order to finance these tax cuts, they must tax us, the people, reducing our income and hampering what would otherwise likely be more economic development. And it's not clear that the policy actually creates jobs for residents anyway--most of the new hires come from out of town in situations like this. Remember when they attempted a CO Silicon Valley? Maybe you don't, because those businesses are gone. So are the employees they brought here from out of state.

Clearly, such a policy distorts the local signals of Colorado Springs markets, diverting capital towards businesses that otherwise would not exist in this particular climate. The result, I fear, is failure--markets inevitably work themselves out even in the presence of the most extreme government interference. The cost is distorted signals, resulting in different and more costly paths toward what would have been the same goals in a pure market.

These miniscule tax cuts will attract businesses for now, if big enough--but the future consequences might not be so bright. Just think about CO Silicon. Empty buildings. Wasted space. Taxpayer money that could have gone somewhere else, perhaps even stayed in your pocket.

Not a pretty legacy.

ADDITION: WATCH. Has nothing to do with above post..

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