Barack Obama calls them Promise Zones while Rand Paul calls them Freedom Zones. But when they were first proposed they were called Enterprise Zones.
In the 1980s, then-congressman and self-described “bleeding-heart conservative” Jack Kemp became the first lawmaker to popularize enterprise zones, which he supported to foster entrepreneurship and job creation. Enterprise Zone policies attempt to incentivize businesses to locate within their borders—usually in blighted urban areas—by offering targeted benefits to particular industries and companies. These benefits come in many forms, including business tax credits for investments, property tax abatements, and reductions in the sales tax.
There’s a couple of problems with enterprise zones, though. There’s no evidence they work. And worse, they encourage and perpetuate cronyism.
As a new paper by Christopher J. Coyne and Lotta Moberg of the Mercatus Center explains, “Despite good intentions, policymakers often overlook the unseen and unintended negative consequences of targeted-benefit policies.” One of these unintended negative consequences is increased cronyism, the practice of exchanging favors between powerful people in politics and business:
Policies that favor some people or companies over others are also vulnerable to distorted incentives. Those who can benefit from the government’s incentive schemes will engage in rentseeking in order to shape policies to benefit their own narrow interests. When such rent-seeking becomes prevalent, and firms can succeed by winning favorable status from the public sector, a system of cronyism develops whereby firms habitually serve political interests instead of satisfying private consumers, and whereby political competition replaces market competition. This incentivizes people to redirect their efforts from productive, positive-sum activities to unproductive and even negative-sum activities.
At The Foundry, Kenric Ward highlights some of the “dubious deals” from the study:
• As of 2013, Walmart had received at least 260 special state benefits worth more than $1.2 billion. For every 100 new Walmart jobs, an average of 50 existing jobs disappear as other retailers are crowded out.
• Apple got $370 million in state tax breaks for setting up in North Carolina. With just 50 jobs created, that’s $7.4 million per job.
• New York granted aluminum giant Alcoa free electricity for more than 30 years (estimated value: $5.6 billion). In return, Alcoa pledged to make a $600 million investment and promised not to fire more than 165 workers. Subsequently, New York raised taxes multiple times on its citizens.
“People respond slowly to labor-market demand, and it may take many years for rent-seeking to become professionalized,” say Coyne and Moberg. “Once it is in place, however, cronyism is hard to root out precisely because those involved in it have an incentive to perpetuate it.”
The example of enterprise zones provides an important public policy lesson: Even poverty-fighting conservatives aren’t immune from the law of unintended consequences when we try to circumvent the functions of the free market.