Wanted: A Line Between Public and Private

We Must Place Limits on the Expenditure of Public Funds for Private Purposes


Filed Under : Government Spending, Subsidies, Special Interests

Most people think that government should have limits, that government should do some things but not every thing. Accordingly, most people would argue that even if government could produce better hamburgers than anyone else, it shouldn’t get into the restaurant business because that would compete against—and draw valuable resources and attention away from—its more important missions of protecting life and property. Government, most people believe, should spend public money for public purposes and should rarely spend public money for private purposes.

Those assumptions, as reasonable and universal as they seem when stated so generally, sometimes break down when the discussion turns to specific projects near and dear to the hearts of special interests. And if the implications of a recent court ruling in a North Carolina case should spread across the country, just about any special, private interest could become a public purpose at everyone else’s expense.

The origin of the case rests in subsidies by state and local governments to private businesses. Public officials are increasingly granting them as part of their economic development strategies to keep companies from leaving or to lure companies away from other locations. Angered by this dubious use of tax money, North Carolina lawyer William Maready decided to do something about it. In 1995, he filed suit against the city of Winston-Salem and the county of Forsyth.

Maready argued that subsidies violated the provision of the state’s constitution which provides that “[t]he power of taxation shall be exercised in a just and equitable manner, for public purposes only.” Subsidies, he reasoned, amount to the taxing of existing, local firms to pay for the relocation or expansion of other, often competing businesses. That, Maready claimed, was use of public resources for an overwhelmingly private, not public, purpose. A lower court validated Maready’s argument, but the defendants appealed.

On March 8, 1996, the Supreme Court of North Carolina overturned the lower court and handed down a 5-2 decision of sweeping significance. It said, in effect, that government can hand out money to anyone so long as the intent of the recipient is to create new jobs with it. By the Court’s reasoning, it doesn’t matter if no evidence is presented that the subsidy is really needed or even that it would result in a net benefit to the community. Just the intent of doing good with it is justification enough.

Just how sweeping the majority opinion in the Maready case was becomes clear from this analysis by Andrew Cline of the John Locke Foundation in Raleigh, North Carolina: The Court “ruled that if a policy is aimed at helping the community, that policy will be considered constitutional whether it actually benefits or harms the community!”

In a stinging dissent, Justice Robert Orr lamented the fact that “little remains of the public purpose constitutional restraint on governmental power to spend tax revenues collected from the public. . . . If a potential corporate entity is considering a move to Winston-Salem but will only come if country club memberships are provided for its executives, do we sanction the use of tax revenue to facilitate the move?” According to the Court, that would be perfectly acceptable. In Justice Orr’s more thoughtful view, “An activity cannot be for a public purpose unless it is properly the `business of government,’ and it is not a function of government either to engage in private business itself or to aid particular business ventures.”

From the history of my state of Michigan comes a lesson that puts a useful perspective on the North Carolina story. Upon achieving statehood in 1837, Michigan jumped into the subsidy business in a big way—offering enticements to private firms to stay or locate here and even “assisting” economic development by starting up state-owned railroads and canals. The legislature approved public handouts for sugar beet producers, silk manufacturers, and sheep raisers, among others, “to increase the home market.”

In barely a decade, the state’s interventions were widely regarded as colossal, expensive failures—so much so that the state’s constitution was rewritten in 1850 to excise state government from virtually all economic development. The relevant passage from the Michigan Constitution of 1850 read, “The State shall not subscribe to or be interested in (emphasis mine) the stock of any company, association, or corporation . . . [t]he State shall not be a party to or interested in any work of internal improvement, nor engaged in carrying on such work. . . .” In the absence of subsidies, Michigan—surrounded by lakes and once thought of geographically as “the state on the road to nowhere”—went on to develop world-class industries in lumber, furniture, carriages and, ultimately, automobiles.

The clear line between “public” and “private” that Michigan established in 1850 is not so clear any more. Subsequent changes in the Constitution, the passage of new laws, and the creation of programs for “economic development” have blurred it considerably. While today’s Michigan Constitution expressly forbids the State from directly subsidizing private schools, the State seems increasingly interested in distributing millions of public dollars to private businesses. Those dollars—whether for privately owned sports stadiums or for private firms to move here from other states—are always wrapped in the alluring guise of an ostensibly public purpose. Strangely, and with few exceptions, the people who cry the loudest against any subsidies to private schools are silent on the matter of subsidies to private businesses.

The Maready decision tells us where the country as a whole might end up if limits aren’t placed on the expenditure of public funds for things like “job creation.” We should be asking ourselves and our elected officials this question: Do we really want to obliterate the line between public and private, so that any seemingly worthwhile purpose can become a rightful claim on the public treasury?


August 1996



Lawrence W. (“Larry”) Reed became president of FEE in 2008 after serving as chairman of its board of trustees in the 1990s and both writing and speaking for FEE since the late 1970s. Prior to becoming FEE’s president, he served for 20 years as president of the Mackinac Center for Public Policy in Midland, Michigan. He also taught economics full-time from 1977 to 1984 at Northwood University in Michigan and chaired its department of economics from 1982 to 1984.

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