Local Interventions to Support an Industry or Region

(This is an archived page, from the Patterns of Power Edition 3 book.  Current versions are at book contents).

In a democracy, politicians may offer economic dispensations for chosen regions or industries, in an attempt to win votes at the next election – as described, for example, in an article entitled What are some examples of "pork barrel politics" in the United States?.  It included the example of the famous Alaskan ‘bridge to nowhere'.

If an industry or region is experiencing job losses, for whatever reason, a government may wish to reduce suffering by providing support.  It can offer incentives, in the form of grants or tax concessions, for companies to set up activities in the affected area.  This doesn’t increase overall employment, it redistributes it.

Existing companies can be offered subsidies or tax breaks, to protect jobs.  Other companies, though, might suffer and the wider population may end up paying a high price without achieving a net gain in employment.  For example, Donald Boudreaux explained how sugar subsidies hugely benefited producers at the expense of the rest of society, in his essay Why Government Fails and Why Ideas Matter:

“Consider the U.S. sugar program. For 80 years now, since the passage of the 1934 Jones‐​Costigan Act, Uncle Sam has used production quotas, import quotas, high tariffs, and loan guarantees to ensure that American consumers pay higher prices for sugar and sugar substitutes, such as corn syrup.”

An industry can be protected by imposing tariffs on imports of comparable products or services, though that puts up the prices for everybody and may put other jobs at risk.  For example in Charles L. Hooper’s article in 2011, Mercantilism Lives, he wrote that America had 57 workers in industries which use steel for every one worker employed in steel-making; the steel-using industries would be rendered less competitive by tariffs on imported steel and might therefore be forced to shed more jobs than had been temporarily saved in the steel-making industry. 

National governments can pay for regional infrastructure projects that might not benefit people in other areas.

They may introduce regulations which purport to be for the benefit of the public but are drafted in such a way that a specific group of people benefits at the expense of the wider public.  Russell Roberts quoted the example of a regulation to reduce acid rain, in his article Pigs Don't Fly: The Economic Way of Thinking about Politics:

“If a tax had been used to reduce sulfur dioxide emission, there would have been an incentive to clean up the air. One way to clean up the air is to use technology like a scrubber. A second way is to burn cleaner coal. Cleaner coal (low in sulfur) comes from out West. Dirty coal (high in sulfur) comes from West Virginia. Senator Byrd is from West Virginia. He made sure that scrubbers were mandated.

…We got cleaner air, but we achieved it at a much higher price than was necessary.”

National governments can choose to locate some of their activities in areas of high unemployment, as was the case when the United Kingdom Passport Office and its Vehicle Licensing Agency were moved to southern Wales where jobs had been lost in coal-mining. 

A government may decide that a particular sector of the economy is strategically important, for example long-term economic benefit or national security; it can support a fledgling industry, or protect an existing one, by placing contracts for products or research. 

All these measures offer politicians a way of conferring a localised advantage.  Some interventions move economic activity around, without affecting overall GDP.  Others are at the expense of everyone else within the economy of that country, either by increasing consumer prices or by increasing taxes.  Only the last example might increase total economic activity – if it is successful in generating employment that would not otherwise be created.