Facebook’s parent company, Meta, just announced they are planning on setting up a new headquarters in Kansas City, Missouri.
Lawmakers announced the move on Wednesday expressing excitement for the 1,200 temporary jobs and 100 permanent jobs which will be created by Meta in the area.
The move comes after the local government approved a technology campus which received $8.2 billion in tax incentives that Meta, through their shell company Velvet Tech Services LLC, pushed for.
Kansas City is the closest major metropolitan area to me, so I found this announcement to be particularly interesting. Although I’m on the Kansas side, Kansas City itself is less than an hour drive for me.
But the more I thought about it, the more I realized I wasn’t really excited about Meta and Zuckerberg moving in next door.
Picking Winners and Losers
Around three years ago I wrote a paper with Rosolino Candela on corporate tax incentives and some of the associated problems. With that experience, my first thought when I saw headlines for this deal was, “that must have been a huge incentive package”.
And I was right.
The package included the right to not to pay certain types of real and personal property taxes for 25 years. The total value of this tax abatement is estimated to be $8.2 billion.
At first blush this may seem fine to some readers. Can we blame Meta for trying to pay as little in taxes as possible any more than we blame individuals for writing off expenses?
My point is not that we should throw blame at Meta for accepting tax incentives. However, the problem is deeper than simple tax breaks.
Understanding the channel through which the tax break is given will help us understand where the problem lies.
Kansas City is giving Meta a break by issuing Industrial Revenue Bonds (IRBs) of various kinds. And while the details can get complicated, the main feature of bonds like this is that the city will retain legal ownership of the land and property for the 25-year abatement period so that it remains exempt from local and federal taxes.
In other words, this is less of a simple tax break and more of a public-private joint venture.
Now the problem is glaring. What the governments of Missouri and Kansas City are doing when they select companies to receive IRBs is effectively picking winners and losers.
Rather than a market where businesses compete for a piece of land or the resources to build a particular building, the government is privileging Meta by offering them lower costs than competitors can possibly obtain. Meta’s move to Kansas City isn’t the free market at work– it’s the result of granting exclusive privileges.
Knowledge in Markets
But so what? Why would it bother me that the government has given special privileges to Meta? They’ll bring jobs, after all.
To understand why I’m bothered, consider the example of a privately-owned mall. Mall owners have limited space in their buildings to lease to different stores. Imagine Hollister, American Eagle, and Bed Bath & Beyond are all competing for space in the mall. How will owners decide who should be in the mall?
First, owners will use prices. The competing companies can submit bids for the space, and the company who is most willing to pay for space will win the competition. So, the company which most desires the space gets it. This sounds like a good result, but it gets even better.
Why would, for example, Bed, Bath, and Beyond be more willing to pay for a space in the mall than Hollister? It must be because Bed Bath & Beyond owners believe they can make more of a profit than Hollister owners in that space.
And how could this be so? The only way Bed Bath & Beyond would make more profit is if consumers value the products they sell relative to the company’s costs more than Hollister.
In other words, the company who gets the space in the mall ultimately will be the one whose owners believe they will provide the most value to mall customers net of costs.
In short, customers’ values ultimately decide who gets the space.
And what if Bed Bath & Beyond overestimates their success in the space? Well, if that happens, the company will begin to make losses; eventually it will move out and make the space available for other, better-suited companies if it’s unable to turn things around. Even if the company doesn’t do so badly that losses are made, in future bidding wars the company will adjust down its bid to match lower expectations, potentially freeing the space for others.
Market signals of prices, profit, and loss ensure that scarce resources, like mall space, are utilized by the producer consumers most desire.
Distorted Knowledge in Markets
Now, let’s imagine a different scenario. Imagine Bed Bath & Beyond would be the company that would make the most profit in the open space, but now the government tells Hollister that if they move in they don’t have to pay property tax or sales tax.
Since this lowers Hollister’s cost and thereby increases profitability, Hollister now can have a higher bid than before. It’s possible that this policy will increase Hollister’s profitability so much that they outbid companies which would otherwise be more profitable absent government intervention.
Ultimately, this means consumers’ values are trampled by the government picking winners and losers. No longer are the consumers sovereign over how mall space is allocated. The political process and cronyism reign supreme.
This is why I’m not excited to have Zuck as a neighbor. The building of the Meta headquarters will utilize scarce resources which, had the government not been involved, would likely have been used in a different way, one that better aligned with consumers’ wants and needs. While this may increase the wealth of certain interest groups like Meta, it will happen at the expense of the values of society more generally.
Knowledge in Politics
The problems don’t stop there, unfortunately. Just because politicians can’t learn the knowledge generated by prices, profit, and loss doesn’t mean they don’t learn at all. Instead of learning about consumer valuations, successful politicians learn about how to succeed in the political process.
One example of this “political” knowledge is that politicians recognize how to win votes. And, as they’ve figured out, one of the best ways to win votes is by backing deals that create jobs.
Jobs are a common talking point among politicians, but it’s important to remember that jobs are a means not an end.
Of course the impact Meta has will likely be more than just the 100 jobs they promise, but that isn’t the point. New jobs, buildings, or investments are only valuable insofar as they create value for consumers. Jobs can be productive or destructive, and therefore can’t necessarily be touted as an accomplishment by lawmakers.
The government could create any number of jobs by hiring people to dig holes and fill them back in. These jobs would obviously be destructive as they use scarce labor and resources for a worthless task.
If jobs are the goal, providing tax breaks to every employer in Missouri would generate a better return on forgone tax revenue than the 100 permanent jobs created to the tune of $8.2 billion dollars ($82 million per job).
Another type of knowledge that politicians learn is how to please special interest groups that have fat wallets. This is the thing I’m most concerned about with Meta moving next door.
Politicians win when they receive large donations from individuals and companies. In order to generate these donations, there is an incentive to give special privileges to these companies and individuals.
This cronyism distorts the free market and increasingly makes company success based on political relationships rather than value creation. Meta is no stranger to this.
It seems unlikely to me that Facebook and Mark Zuckerberg were truly concerned with election integrity when they flooded this last election with “Zuckbucks.” It seems more likely that this decision, and Zuckerberg’s decision to voluntarily testify before Congress a few years ago, was more about creating political relationships than altruism.
I have no doubt Zuckerberg’s headquarters in Missouri will give him an incentive to interfere in Missouri politics. And, although I luckily live on the Kansas side of Kansas City, I have no doubt there’s an increased incentive to interfere in Kansas City politics more generally.
Personally, I see Meta’s entrance via IRBs into Kansas City as nothing short of cronyism and a dangerous disruption to the market process which channels scarce resources away from consumer values and into the political process. That’s not something to get excited about in my books.