'Juice' is not the route to economic development

Sandoval-legislature scheme would anoint bureaucrats to direct Nevada economy

By Geoffrey Lawrence
  • Tuesday, March 6, 2012

Last session, Gov. Brian Sandoval and lawmakers of both parties came up with a plan for economic development for the Silver State. But is it a plan that actually deserves to be implemented?

Your answer may depend on your perspective. Are you a small-business owner? An individual entrepreneur? Do you believe the same rules should apply to everyone equally? Do you believe that producing something of value for your fellow man is the best path to profits?

If you answered yes to any of these questions, you likely will not be thrilled with the scheme that state politicians produced.

On the other hand, maybe you're a political or corporate insider who's ready and able to get — or give out — special government privileges. Maybe, to you, it seems like smart business to work the system so that you're guaranteed taxpayer dollars in your pockets, even if you don't provide adequate value in return.

In that case, the scheme that legislative pols and Sandoval came up with may be just your ticket.

Despite any good intentions — the governor says his top priority is to put Nevadans back to work — the plan offered by his administration would clearly move the Silver State toward an economy based on political "juice," rather than market-demonstrated merit.

The scheme targets seven major industrial sectors for expansion fueled by direct public subsidies and tax credits. Within each of the seven sectors, highly paid state bureaucrats called "Industry Specialists" would determine the direction of growth and decide which companies should receive public subsidies.

Additionally, the seven state-anointed sectors will have a state-run marketing operation — "Team Nevada" — cranking out tax-funded publicity.  And, apparently on the assumption that sector entrepreneurs will be unable to determine which new technologies might be profitable, the governor proposes to appoint a state technology czar — called the "Technology Commercialization Director" — to administer a collective research and development operation on their behalf within the state's higher-education system. This individual would decide which technologies should be developed and instruct businessmen in the targeted sectors to use those technologies.

Fundamentally, the Sandoval-Carson-City plan for top-down direction of the state economy ignores everything mankind has learned about the superiority of competitive markets to soviet, corporatist and mercantilist schemes.

In a free society, the optimal, most effective and most efficient answers to questions of production actually get made by consumers. Through the prices they willingly choose to pay, they, in effect, signal to entrepreneurs what services and which products they most highly value. From consumers' behavior, entrepreneurs get the data they need to plan the elaborate production processes of a 21st-century market economy.

Facing a given level of demand, individual entrepreneurs are able to calculate exactly how much they can afford to pay to hire workers or to purchase machinery. They can calculate how much a new production process might lower their per-unit costs and, hence, which new technologies they should invest in and at what level.

The entrepreneur's demand for machinery and raw materials, in turn, sends price signals up the supply chain and allows others to make similar calculations.

Free, competitive markets — absent political fixers' government interventions — ensure that all resources get expended to create maximal new value. If consumers don't value a firm's output more than the sum of its inputs, the firm will not stay in business — and the productive resources it employed will become available for more-productive ventures.

Instead of allowing consumers to direct production decisions, however, this Carson City "juice" plan would empower bureaucrats to impose those decisions from above. Firms with political clout that produce negative value — whose outputs are valued less than the sum of inputs — will be allowed to stay in business because of state government subsidies. Those subsidies will mean the politically connected will not only exploit taxpayers, but also, damage consumer welfare.

Yes, these rent-seeking firms will need to employ workers. Those workers, however, will be employed for tasks that consumers have effectively signaled would be wasteful.

People work to create value for themselves and others — not for toil's sake alone. This basic economic fundamental, which ultimately determines the capital structure of an efficient economy, is ignored in the seven-sector czar-led scheme.

This is particularly bizarre, given that the administration acknowledges that private entrepreneurs are, right now, successfully restructuring Nevada's economy. As entrepreneurs re-form profitable ventures out of liquidated assets, they once again create value in accord with consumers' demonstrated desires. The administration specifically notes that Nevada currently leads the nation in export growth, export adaptability and new-business launches. Nevada is a popular destination for foreign direct investment.

If Sandoval and the Carson City crowd want to expedite the recovery process, they should focus on identifying and removing obstacles to entrepreneurship — not placing more barriers in its way.

Top-down control and corporatist rent-seeking only destroy wealth over the long term.

Geoffrey Lawrence is deputy policy director at the Nevada Policy Research Institute. For more visit http://npri.org.

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