Subsidies almost never create jobs

May 5 JDN 2458609

The most extreme examples of harmful subsidies are fossil fuel industries and stadiums.

Fossil fuels are obviously the worst: The $1 trillion per year in direct and indirect government subsidies to fossil fuel corporations are second only to the $4 trillion in climate change externalities produced by the fossil fuel industry. Instead of subsidizing these corporations $1 trillion, the world should be taxing them $4 trillion—so we are off by $5 trillion, every single year. This is 6.5% of the world’s GDP. In the United States, our largest oil subsidy is called the Interstate Highway System, but other countries have us beat: Iran, Uzbekistan, and Libya each give more than 10% of their GDP in subsidies to the fossil fuel industry.

Most stadiums receive some kind of subsidy, and many are outright publicly funded—and yet banks still get the naming rights. The largest teams with the most wealth of their own are typically also the most subsidized. The benefits of building a new stadium are not even particularly large, which is probably why over 85% of US economists agree that these subsidies don’t make sense.

But subsidies are all over the place, and one of the most common reasons given for them, if not the most common reason, is that they will “create jobs”.

This is the reason Trump gave for trying to subsidize coal (which isn’t even working). It’s the reason people give for subsidizing huge filmmaking conglomerates in making films (which costs the government about $90,000 per job created). Why are we handing money to rich people? It will create jobs!

This is almost never actually true. We have known that this kind of subsidy doesn’t work since at least the 1980s.

The states and cities that create the most jobs aren’t the ones that offer the most generous handouts to corporations. They are the ones that have the cleanest air, the best infrastructure, and above all the most educated population. This is why there have been months when the majority of US jobs were created in California. California is the largest state, but it’s not that large—it’s only about 12% of the US population. If as many as 70% of the new jobs are being created there, it’s because California is doing something right that most other states are doing very, very wrong.

And then there is the rent-seeking competition that megacorporations like Amazon engage in, getting cities to bid higher and higher subsidies, then locating where they probably would have anyway but with billions of dollars in free money. This is a trick we need to stop falling for: The federal government should outright ban any attempt to use subsidies to get an existing corporation to locate in a specific state or city. That’s not contributing to American society; it’s just moving things around.

There are a few kinds of industries it makes sense to subsidize, because they have high up-front costs and large public benefits. Examples include research and development and renewable energy. But here the goal is not to create jobs. It’s to create wealth, typically in the form of scientific knowledge. We aren’t trying to get them to hire people; we’re trying to get them to accomplish something that’s difficult and important.

Why don’t subsidies create jobs? It’s really quite simple: You need to pay for those subsidies.

The federal government doesn’t face a hard budget constraint like businesses do; they can print money. But state and municipal governments don’t have that power, and so their subsidies need to be made up in either taxes or debt—which means either taxes now, or taxes later. Or they could cut spending elsewhere, which means losing whatever benefits they were getting from that spending. This means that any jobs you created with the subsidies are just going to be destroyed somewhere else, by higher taxes or lower government spending.

Most state and local governments have really tight budgets. Allen, Texas was running a $30 billion budget deficit and cutting salaries for public school teachers, but still somehow found $60 billion to subsidize building a stadium. The stadium might “create jobs” by moving some economic activity from one place to another, but the actual real economic benefit of a stadium is very small. Public schools are the foundation of a highly-developed economy. Without widespread education, this high a standard of living is simply impossible to sustain. Cutting public education is one of the last things you should be willing to do to balance a government budget—and yet somehow it seems to be one of the first we actually do.

It is true that we spend a great deal on education, and that spending could be made a lot more cost-effective (we can start by cutting athletic coaches and administrators); but every $1 spent on education yields between $4 and $6 in additional long-run wealth for our society. This means that at quite reasonable tax rates (17% to 25%) a public education system can directly pay for itself. Compare this to subsidizing a stadium, which gets back less than $1 of benefit per $1 spent, or subsidizing oil companies, which actively harms the world.

People don’t seem to understand that a capitalist economy basically just creates as many jobs as it needs. In a financial crisis, that mechanism falters; that’s when the federal government should step in and print money to get it running again. But when the economy is running smoothly, trying to “create jobs” is just not a useful thing to do. Jobs will be created and destroyed by the market. Policy should be trying to increase welfare. Educate your population. Improve your healthcare system. Build more public transit. Invest in fighting poverty and homelessness. And if you don’t think you can afford those things, then you definitely can’t afford handouts to megacorporations that won’t even make back what you paid.

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