Facebook’s parent company, Meta, has just announced its intention to set up a new headquarters in Kansas City, Missouri.
Lawmakers announced the move on Wednesday, expressing their excitement at the 1,200 temporary jobs and 100 permanent jobs that will be created by Meta in the area.
The move comes after the local government approved a technology campus that received $8.2 billion in tax breaks that Meta, through their shell company Velvet Tech Services LLC, was pushing for.
Kansas City is the closest major metropolitan area to me, so I found this announcement particularly interesting. Although I am on the Kansas side, Kansas City itself is less than an hour away for me.
But the more I thought about it, the more I realized I wasn’t exactly thrilled with Meta and Zuckerberg moving in next door.
Choosing winners and losers
About three years ago, I wrote a paper with Rosolino Candela on corporate tax incentives and some of the problems associated with them. With that experience, my first thought when I saw the headlines for this deal was “that must have been a huge stimulus package”.
And I was right.
The package included the right not to pay certain types of property and property taxes for 25 years. The total value of this tax relief is estimated at $8.2 billion.
At first glance, this seems fine to some readers. Can we blame Meta for trying to pay as little taxes as possible, any more than we blame individuals for writing off expenses?
My point is not that we should blame Meta for accepting tax incentives. However, the problem goes deeper than simple tax breaks.
Understanding the channel through which the tax benefit is given will help us understand where the problem lies.
Kansas City is giving Meta a break by issuing various types of Industrial Revenue Bonds (IRBs). And while the details can get complicated, the main feature of bonds like this is that the city retains legal title to the land and property during the 25-year reduction period, so it remains exempt from local and federal taxes.
In other words, this is less of a simple tax benefit, but more of a public-private partnership.
Now the problem is dire. What the Missouri and Kansas City governments do when they select companies to receive IRBs is basically pick winners and losers.
Rather than a market where companies compete for a plot of land or the resources to construct a particular building, the government privileges Meta by offering them a lower cost than competitors can possibly get. Meta’s move to Kansas City isn’t the free market at work — it’s the result of being granted exclusive privileges.
Knowledge in markets
But then what? Why should it bother me that the government has given Meta special privileges? After all, they will create jobs.
To understand why it bothers me, take the example of a private shopping mall. Mall owners have limited space in their buildings to rent out to different stores. Imagine Hollister, American Eagle and Bed Bath & Beyond all vying 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 that is most willing to pay for space will win the competition. So the company that most desires the space gets it. This sounds like a great result, but it gets even better.
For example, why would Bed, Bath and Beyond be willing to pay more for a space in the mall than Hollister? It must be because Bed Bath & Beyond owners think they can make more profit than Hollister owners in that space.
And how can this be? The only way Bed Bath & Beyond would make more profit is if consumers value the products they sell more relative to the company’s costs than Hollister.
In other words, the company that gets the space in the mall will ultimately be the one that the owners believe will provide the most value to the mall’s customers, after deducting costs.
In short, the customer’s values ultimately determine who gets the space.
And what if Bed Bath & Beyond overestimate their success in space? Well, when that happens, the company starts making losses; eventually it will relocate and make the space available to other more suitable businesses if it is unable to turn the tide. Even if the company doesn’t do so badly that it suffers losses, in future bidding wars the company will lower its bid to meet lower expectations, potentially freeing up space for others.
Market signals of prices, profits and losses ensure that scarce resources, such as retail space, are used by the producers that consumers desire most.
Distorted knowledge in markets
Now let’s imagine a different scenario. Imagine Bed Bath & Beyond would being the company that would make the most profit in the open space, but now the government tells Hollister that if they move in, they won’t have to pay property taxes or sales taxes.
Since this lowers Hollister’s costs and thus increases profitability, Hollister can now make a higher bid than before. It is possible that these policies will increase Hollister’s profitability so much that they will outbid companies that would otherwise be more profitable without government intervention.
Ultimately, this means that consumer values are trampled underfoot by the government choosing winners and losers. No longer do consumers have sovereignty over how retail space is allocated. The political process and favoritism reign supreme.
This is why I’m not excited to have Zuck as a neighbor. The construction of Meta’s headquarters will use scarce resources that, had the government not been involved, probably would have been used in a different way, one that is more aligned with consumer wants and needs. While this may increase the wealth of certain interest groups such as Meta, it will be at the expense of the values of society in general.
Knowledge in politics
Unfortunately, the problems don’t stop there. Just because politicians can’t learn the knowledge generated by prices, gains and losses, doesn’t mean they don’t learn anything at all. Instead of learning about consumer valuations, successful politicians learn how to succeed in the political process.
An example of this ‘political’ knowledge is that politicians recognize how to win votes. And, as they’ve found, one of the best ways to win votes is to support deals that create jobs.
Jobs are a common topic of conversation among politicians, but it’s important to remember that jobs are a resources no end.
Of course, the impact Meta has will likely be more than just the 100 jobs they promise, but that’s not the point. New jobs, buildings or investments are only valuable to the extent that they create value for the consumer. Jobs can be productive or destructive, and therefore cannot necessarily be touted as an achievement by lawmakers.
The government could create any number of jobs by hiring people to dig holes and fill them back up. These jobs would, of course, be destructive because they use scarce labor and resources for a worthless task.
If jobs are the goal, offer tax breaks each employer in Missouri would generate a better return on lost tax revenue than the 100 permanent jobs created at a cost of $8.2 billion ($82 million per job).
Another kind of knowledge that politicians learn is how to please special interest groups with fat wallets. This is what worries me most when Meta moves 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 favoritism distorts the free market and makes the success of companies increasingly based on political relationships rather than on value creation. Meta is no stranger to this.
It seems unlikely to me that Facebook and Mark Zuckerberg really cared about 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 that Zuckerberg’s Missouri headquarters will give him an incentive to meddle in Missouri politics. And while I live happily on the Kansas side of Kansas City, I have no doubt that there is a greater incentive to get involved in Kansas City politics more broadly.
Personally, I see Meta’s entry through Kansas City IRBs as nothing less than cronyism and a dangerous disruption to the market process, draining scarce resources away from consumer values and into the political process. That’s not something to get excited about in my books.