Federalism sets the stage for corporatism

The New York Times has a fantastic piece about the amount of cash incentives state and local governments provide to businesses. The Times found that local governments provide over $80 billion to firms each year. I do not have anything meaningful to add to the story, but it deserves pointing out very clearly what mechanics cause this phenomenon.

In a capitalist system, economic resources — i.e. capital resources — are privately controlled. But everyone needs access to those resources in order to produce things, have jobs, and thereby make out a living. This means that those with the power to allocate (invest) capital have massive leverage over everyone else. If regions do not give capitalists what they want, the capitalists are able to effectively strike by withdrawing or refusing to allocate capital in the region.

When different regions can put together different packages of rules for capital to abide by, capital can play those regions against one another and get an increasingly sweeter deal for itself. This ultimately takes two forms: removing “burdens” and providing benefits. The small government types generally only focus on the removing burdens part. They get really excited about the prospect that competition for capital investment will force areas to dismantle environmental protections, worker protections, consumer protections, and so on.

But ultimately, competition to attract capital will not and cannot end at simply removing these “burdens.” Just as being able to dump poison in rivers instead of disposing it safely delivers greater profits to capital, so too does simply giving money to capital. And that’s what we see in this New York Times report. The end game of federalist government with fifty different state economic policy climates and hundreds of thousands of city economic policy climates is corporatism. With that many geographical areas forced to compete against one another to ensure that their residents stay alive, capital will naturally cut itself a fantastic deal with the local powers. That means demanding tens of billions of dollars in free cash in order to locate in a given area. The price for not giving in is local impoverishment.

So contrary to what conservatives would have you believe, distributing economic policy power to the states is not something that will force smaller government. It is something that will force whatever government capital most prefers. The government capital most prefers is not the right-libertarian paradise people imagine; rather, it is the government that is willing to simply fork over the public’s cash. In reality then, federalism merely sets the stage for a race to the bottom that generates corporatism.