In state legislatures nationwide, including Alabama’s, lawmakers perpetually peddle economic incentive packages with grandiose promises of job creation, economic growth and prosperity. Yet these well-intended efforts consistently backfire, producing consequences far removed from their lofty promises and often inflicting damage upon the very communities they aim to uplift.
The economic concept of “rent-seeking” describes the leading flaw of these legislative ventures. When governments wield the authority to distribute economic privileges through targeted incentives, businesses redirect resources from productive enterprises to the art of political persuasion. A perverse cycle ensues: as the rewards of government largesse increase, the focus of both politicians and businesses shifts from genuine economic growth to the dispensation and acquisition of political favors.
Public choice economics offers a sobering explanation. Small, well-organized interest groups are adept at lobbying, whereas the diffuse mass of taxpayers, each shouldering only a tiny portion of the cost, lacks the incentive to mount opposition. Thus, policies tend to concentrate benefits on the few while diffusing costs across the many.
Lawmakers, fixated on attracting businesses at any price, fail to grasp how these incentive schemes diminish the economic vitality they purport to cultivate.
Incentive packages fuel a race to the bottom among states, each outbidding the other with increasingly extravagant enticements. This competition doesn’t spark new economic activity but merely reshuffles it, depleting public coffers that could be put to other uses – investments in education, infrastructure, or across-the-board tax relief that benefits all businesses equally.
The better approach is not crafting ever-more-targeted incentives but establishing a level playing field where businesses rise or fall based on merit, not their prowess at courting political patronage. States should enact consistent, transparent rules that apply equally to all, avoiding the temptation to pick winners and losers through selective subsidies.
Economic development is not born of political favoritism but free and fair competition. Until lawmakers grasp this reality, resources will continue to flow not to their most productive uses but to those businesses or industries most adept at navigating the political labyrinth. The price of this misallocation is borne by those least able to afford it: small businesses, consumers and the politically marginalized.
State legislators must recognize a fundamental principle: less government interference fosters more economic growth. True prosperity emerges not from special incentives but from an environment where businesses can compete on even terms unimpeded by the distortions of political favoritism.
James Madison wrote in Federalist No. 10 that the “latent causes of faction are … sown in the nature of man; and we see them everywhere brought into different degrees of activity, according to the different circumstances of civil society.”
Madison diagnosed economic inequality as the chief cause of political faction. Modern economists, equipped with empirical data, have detailed the precise mechanics of his insight: Legislative bodies are arenas where the drive for re-election pushes lawmakers into actions that run counter to the interests of the people they serve, while well-organized minority groups skillfully transform public institutions into their own private strongholds.
We cling to the illusion that elected leaders will rise above humanity’s enduring tendency toward self-interest. They won’t—which is why the government must account for, rather than ignore, the natural pull toward self-serving behavior. Otherwise, we risk turning our institutions into tools for the powerful few.
Note: This piece is adapted from Allen Mendenhall’s regular segment “Word to the Wise” on Troy Public Radio.
Allen Mendenhall is Associate Dean and Grady Rosier Professor in the Sorrell College of Business at Troy University and Executive Director of the Manuel H. Johnson Center for Political Economy. Visit his website at AllenMendenhall.com.
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