Those who’ve followed The Minuteman for some time know that we’re not fans of government cronyism. We’ve most often discussed it in terms of Renaissance Zones, but those certainly aren’t the only examples. As a West Fargo Pioneer article from yesterday demonstrates, even the 2017 Tax Cuts and Job Act – otherwise known as The Trump Tax Cuts – contains a new “economic development” program known as “Opportunity Zones”.
A recent Bloomberg Businessweek article described the program as follows:
“Recovery in the U.S. from the Great Recession has been uneven. Superstar cities such as New York and San Francisco have sprung back, while plenty of rural areas and Rust Belt towns are still in a slump. Buried in the tax overhaul late last year was a provision to address some of these economic disparities by allowing states to designate ‘opportunity zones’ in low-income areas. Investors who develop real estate or fund businesses in these zones will be eligible for tax breaks. The concept is not new—Congress has launched similar efforts in the past—but this one is more free market in spirit than its predecessors.”
The amusing part of this is the claim that it’s “more free market in spirit”. Such a statement is nothing short of an admission that the program really isn’t free market after all. It is what it is— a government program that picks winners and losers. The reality of this is found in the details.
In carrying out his role in the process, Governor Doug Burgum announced last Friday that he had designated 25 zones in 15 counties as Opportunity Zones. A deeper look shows the City of Fargo being granted the most zones with five— a full one-fifth of the total number allotted. Intentional or not, that alone has a cronyistic feel to it coming from the Fargo-businessman-turned-governor.
With 53 counties in the state, I wonder how the other 38 feel about being overlooked as worthy of such a designation? Surely there must be counties/cities that feel they qualify just as much as the next one. At least that’s the way it was in Texas, where it was reported last month that cities across the Lone-Star State were lobbying the state’s governor to choose them as an Opportunity Zone.
Then there’s the issue of whether the program will even fulfill its purpose— mainly to boost economic potential in struggling areas. The Wall Street Journal described it this way:
“Governors are trying to balance the need for funds in poor areas with an area’s potential for development and a desire to spread benefits across the state. That makes these choices complicated and it means money won’t always go purely to the neediest places.” (Emphasis Added)
The aforementioned Bloomberg article expresses it in these words:
“The provision’s backers hope the tax breaks will create jobs and boost local economies in parts of the country that badly need it— from rural Idaho to Newark, New Jersey. Some researchers and community groups aren’t so sure. They say that the law could promote the kind of investments that are intended, such as new small businesses and affordable housing—but the legislation is so broadly written that savvy investors, corporations, and real estate developers could exploit it. ‘It could be used to take affordable housing and convert it into market-rate condos,’ says Brett Theodos, a senior researcher at the Urban Institute. ‘It could be used to support payday lenders. Amazon could engineer it into an investment vehicle for HQ2.'” (Emphasis Added)
To illustrate the potential for exploitation, we need look no further than Georgia. Their designated zones in Atlanta have already received approval from the U.S. Treasury Department. And their boundaries include areas that have been pitched to Amazon as being potential locations for their second headquarters. There’s also Michigan. Their governor selected most of downtown Detroit, where Dan Gilbert – the founder of Quicken Loans, Inc. – has bought up property.
The Brookings Institution’s Adam Looney expressed his view that most of the benefits from Opportunity Zones will go to projects that would have been completed anyhow, and as a result:
“You will have happy developers, and you’ll have happy local politicians, but we won’t really know if it it’s an improvement for the people who live in those areas.”
Of course, it’s no secret that as a businessman Donald Trump was on the receiving end of a significant amount of government “incentives”. As president, he hailed Opportunity Zones back in February. Nor is it a secret that as a businessman Doug Burgum double-dipped into TIF and Renaissance Zone programs for his Block 9 Project in Fargo. As governor, he praised the Opportunity Zones back in March.
Undoubtedly, it can be argued that people like President Trump and Governor Burgum are simply taking advantage of the breaks that are being offered to them. And perhaps that’s true. Yet, such an acknowledgement doesn’t mean these government programs should exist.
Having said that, cronyism isn’t a Democrat problem or a Republican problem— it’s simply a problem. It’s one that is shared by both parties. This is evident in the fact that the idea for Opportunity Zones was authored by Jared Bernstein (a member of the Obama administration) and Kevin Hassett (a Republican economist). It was introduced in bipartisan legislation in 2016, but never reached the floor— until a modified version was tucked into the Republican tax plan in December.
The arrogance of government is made up of those who believe they have all the answers. In this case, they somehow think that they’re so brilliant that they can pass legislation, draw boundaries, and grant special economic status to a select few in the name of “growth”, “incentives”, and “prosperity”. Yet, ever and always, such things are nothing less than cronyistic examples of picking winners and losers.
When it comes to Republicans, they should know better. In his article, “What Happened to the GOP’s Free-Market Principles?”, David Boaz at the Cato Institute wrote:
“…we understand that the process of economic change makes us all better off, even though there can be short-term pain for the owners and employees of failed firms.
“Republicans are supposed to know all this. That’s why they proclaim their devotion to free markets and oppose industrial policy, government subsidies, bailouts, and other schemes to override the market process and keep current firms in business even when they’re no longer meeting consumers’ needs.
“But when a businessman runs for president [or governor], all bets are off. Republicans let fly with the same denunciations of normal business practices that Democrats do.”
In a true free market economy government would get out of the way and allow market forces to determine which businesses were needed where and who would be the most profitable. There wouldn’t be political figures exerting influence and making decisions as to who’s most deserving of “incentives” and who isn’t. In a true free market economy, Fargo wouldn’t get five Opportunity Zones and Williston none, because there wouldn’t be any government decree of zones at all.
As one blogger said on this subject:
“Bad policy is not transformed into good policy simply because it’s advocated by good people with good intentions. This should be obvious—especially to conservatives…”
We need to reject cronyism, not embrace it.