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Counterpoint: The lesson to be learned from the failed Excelsior-Henderson

The recent bankruptcy of Minnesota's Excelsior-Henderson Co., a motorcycle manufacturer whose start-up was subsidized by state and local governments, has again raised the issue of the wisdom of those financial supports. The editorials in this issue look at two sides of the subsidy coin.

Arthur J. Rolnick - Senior Vice President and Director of Research, 1985-2010

Published January 1, 2000  |  January 2000 issue

In a Dec. 23 editorial, the StarTribune rightly suggested a review of the process that led to the failed $7.1 million state loan to the Excelsior-Henderson motorcycle company. However, with no further explanation, the editorial went on to assert that whatever the review uncovers, "there's no reason to conclude that the state shouldn't make business loans."

I beg to differ. Indeed, the failed loan to Excelsior-Henderson is another example of why the public should question such loans. More generally, the public should question why Minnesota, or any other state or local government, should be lending taxpayers' money to private businesses.

The StarTribune would have you believe that the issue here is how to improve the process so that the state avoids making bad loans in the future. But when it comes to the government making loans to private businesses (or giving any other type of government subsidy to private companies), the issue must go deeper. Since the market will efficiently handle investments that serve private purposes, projects that receive public subsidies must serve a public purpose. But here's the rub. The public purpose cannot simply be job creation. If that were the sole public purpose, all sound companies would be worthy of government largess. That is, there would be no need to provide subsidies to one company and not another.

Indeed, there is a more fundamental reason to reject job creation as a guiding principle: These types of government programs do not create jobs. At most they move jobs from one community to another. (For example, when St. Paul successfully lured the Lawson Software Co. from Minneapolis, no new jobs were created; they were simply relocated across the river.) And I say at most, because research shows that most companies would have made the same location or expansion decision with or without the subsidy.

If job creation is the wrong principle to guide the use of subsidies, what is the right one? I recommend one that emerges from sound economic theory, and which also emerges from sound legal and political theory—the principle of equal treatment for all. To apply this principle, however, state and local governments are going to need an act of Congress. Let me explain.

If subsidies to individual private companies do not create jobs, why are they offered by every state in the union? Why are taxpayer funds, which should be used to finance public services to the benefit of all citizens (or to lower taxes to the benefit of all businesses), being used to enrich the chosen few?

The answer is that in many cases state and local governments have little choice. An economic bidding war among state and local governments has been waged for years. As businesses become more mobile and the threat to move becomes more credible, state and local governments have little choice but to compete.

Consider that Excelsior-Henderson had 14 communities bidding for its plant and accompanying jobs. So even if your community realizes that the economic bidding war is counterproductive, it would be economic folly to unilaterally withdraw. Other communities would eventually succeed in luring away your hometown businesses, and ultimately your community would lose the taxes it needs to finance its schools, roads and other essential public services.

What lesson should we learn from the failed loan to Excelsior-Henderson? We should recognize that there is something fundamentally wrong with the policy of allowing one state to bid for specific companies in an attempt to lure them away from another state. This behavior is an interference with interstate commerce; under our constitution only Congress has the power to regulate interstate commerce and end this bidding war. And it should; just as, over 200 years ago, it ended the economic trade war among the states.

The StarTribune has made it clear in this and in numerous other editorials that it believes the state should make loans and provide other types of subsidies to individual private businesses. If it believes that this is a good policy for Minnesota, it must believe it is a good policy for all state and local governments; that is, it must believe there are public benefits to the economic bidding war. Until the StarTribune provides a guiding principle that convincingly preempts the principle of equal treatment, the public should be wary of such beliefs.

This article originally appeared in the Minneapolis StarTribune, Jan. 11, 2000.

For more on the issue of business subsidies: see The Economic War Among the States.

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