Save More and Live Better, Just Not at the Expense of Others
Walmart takes a lot of heat for its alleged effects on wages, employment, labor standards, and community quality-of-life. In research we’ve worked on over the last few years, my co-authors and I have examined the merits of these claims and have found that a lot of this heat is undeserved. Rigorous empirical research shows that Walmart creates jobs and lowers prices. Research also shows that Walmart does not lead kill small businesses (though this claim has been brought into question) or generally reduce “quality of life” within a community.
One area in which Walmart should be viewed with skepticism, however, is their pursuit of subsidies from the local governments with which they do business. While these subsidies and tax breaks allegedly create jobs and tax revenue, they reward political savvy rather than productivity. This tilts the economic playing field in favor of large corporations with armies of lawyers and against small entrepreneurs.
While working on some Walmart-related research last summer, I was given an article about a multi-million dollar package of tax breaks and subsidies given to Walmart to develop a distribution center in Lewiston, Maine. According to the Walmart Subsidy Watch website (www.walmartsubsidywatch.org, maintained by the organization Good Jobs First), the package included millions of dollars in tax increment financing incentives, over three hundred thousand dollars worth of free land, and $2.7 million in infrastructure improvements. While one can debate the various merits and demerits of tax increment financing, free land and infrastructure amount to giveaways that reduce Walmart’s costs of doing business at the expense of the company’s competitors.
These policies distort economic activity and create waste, on net, but they are likely to remain popular among local governments competing to “create jobs” and attract revenue-producing benefits. For politicians, large installations like Walmart Distribution Centers, automobile factories, and pro sports franchises are attractive because they are very large, very visible, and very easy to take credit for. It might also be easier to collect taxes from a single large taxpayer than from innumerable smaller firms, but this remains an open question.
Subsidies do not create wealth. They transfer wealth from one entity to another—in the case mentioned here, these subsidies transfer wealth from the taxpayers of Maine to stockholders of the world’s largest corporation. Further, the possibility of subsidy gives companies incentives to direct resources away from their core business—providing a wide selection of goods at low prices, in Walmart’s case—and toward unproductive “rent-seeking,” which is the term economists and political scientists use to describe the hunt for special privileges from the government. Subsidies create large, easy-to-identify changes in the distribution of economic activity, but they do not create net new economic activity. We would all be better off if governments let us keep our money instead of taking it and giving it to other people.