The Revolt Against Crony Capitalism
Rick Perry’s approach to economic development is being challenged by candidates from both parties. But history shows that Perry is only conducting business as usual.
During a Twitter town hall last July, Attorney General Greg Abbott allowed that he disagrees with outgoing governor Rick Perry on several things, one of which is that he would prefer a different approach to economic development. A few minutes later, asked more directly about the topic, @GregAbbott_TX elaborated: “I’m against cronyism & favor a level playing field & believe gov’t shouldn’t pick b/t winners & losers.” The implication was that Abbott, the odds-on favorite to replace Perry, would not make use of subsidy programs like the Texas Enterprise Fund and the Texas Emerging Technology Fund—both of which were created under Perry’s watch and have featured prominently in his economic development efforts. It was a preview of something that has proved to be a major theme of the 2014 campaigns: crony capitalism. As campaign issues go, this is an odd one, for two reasons.
First of all, it’s not controversial. Everyone is, in theory, against it—Republicans and Democrats alike. Tea party–type Republicans, in particular, have been sounding the alarm for several years now; corporate welfare—the American Recovery and Reinvestment Act, the Wall Street bailout, the auto bailout—was one of the issues that galvanized the movement in the first place, at the end of George W. Bush’s presidency. This year’s conservative candidates, like comptroller hopeful Debra Medina, have been ferociously critical of comparable practices in Texas.
The candidates on the other side of the aisle have professed similar concerns. “Texas has waited too long for a governor who knows that quid pro quo shouldn’t be the status quo,” said Wendy Davis, the presumptive Democratic candidate for governor. One of the strange moments of the campaign came in September, when Tom Pauken, who was running against Abbott for the Republican gubernatorial nomination, warned that Davis had a 40 percent chance of beating Abbott in a general election, in part because, as he put it, “she has a populist appeal and because of a lot of this cronyism in Austin, that could help her.”
The second reason it’s odd is that—well, this is Texas. Despite the disapproval sounded by Abbott, Medina, Davis, Pauken, and others, crony capitalism and corruption, or practices that would be described as such in many states, have long been accepted, even embraced, by both parties. Both parties have historically espoused a cozy relationship between the public and private sector, and the state has provided direct government support to businesses for several decades. A new report from the Texas Public Policy Foundation argues that “modern economic development policy” in the state began with the Development Corporation Act of 1979, which allowed local governments to create private funds to support economic development growth; that law was soon followed by a constitutional amendment allowing the state government, for the first time, to directly support private companies.
As the report suggests, one reason that Texans have failed to fight back against cronyism, corporate welfare, and so on, is that all of these terms are somewhat amorphous, and the boundary between a defensible economic development strategy and a statewide slush fund is somewhat subjective. In modern Texas, in fact, when people talk about cronyism, they often mean the type of corporate welfare described in the aforementioned TPPF report: tax abatements at the state or local level, or outright incentives. During Perry’s administration, watchdogs have focused specifically on the latter, particularly the Texas Enterprise Fund and the Texas Emerging Technology Fund, both of which give the governor access to a pool of money he can use to woo businesses to Texas. According to Perry, they’re “deal-closing funds.” They were created by the Legislature, in 2003 and 2005, respectively, and both have received additional appropriations in subsequent sessions. Neither is entirely anomalous; many states have similar funds or programs that provide subsidies in support of economic development, although the TEF and TETF are among the largest such funds in the country. And Perry isn’t really coy about his use of these funds. When touting the Texas Miracle to national audiences, he doesn’t include “subsidies” as one of the ingredients in his four-part recipe for whipping up the “Texas Model.” Still, the governor’s office rarely goes a week without sending out a press release about some company or other that is moving to or growing in Texas, and the TEF or TETF often plays a role in such announcements.
Critics, however, have a number of problems with these funds. Some oppose such interventions as a matter of pride. “We don’t need to pay people to come to the state of Texas,” said JoAnn Fleming, the executive director of Grassroots America at a panel at the Texas Tribune Festival last year. There are also questions of principle. Perry has tremendous latitude for deciding who the recipients will be, and the governor’s critics have accused him of doling them out to friends, allies, and donors.
Others oppose this type of welfare on pragmatic grounds. The watchdog group Texans for Public Justice has pointed out in several reports that recipients of TEF and TETF have, as a whole, consistently failed to create as many jobs as they expected to. Good Jobs First, a nationwide advocacy group, took a similar line in a 2011 evaluation of analogous state subsidy programs; the report was called “Money for Something,” and in the group’s assessment, Texas simply hasn’t been getting its money’s worth. Staying in the pragmatic vein but approaching the question from the other side of the equation, there are skeptics who argue that such subsidies aren’t even good for business, because they amount to the government “picking winners and losers,” thereby distorting potentially efficient markets: companies with a bad product may be artificially buoyed by the grants, and those that might otherwise succeed struggle to outlast their well-funded competitors.
In addition to all these arguments, Texas’s approach to economic development has been scorned by national observers, who see it as a sign of a hypocrisy, for a state that touts its commitment to limited government, and a practice that gives the lie to some of the state’s swagger. As pundits in other states have noted while Perry has been traveling to states like New York and California and Missouri, inviting businesses to relocate to Texas, poaching jobs isn’t quite the same as creating them.
It’s a long list of charges, and if there’s a reason the statewide leadership hasn’t turned against cronyism sooner, it might be that as unseemly as the system is, some of the state and local incentives have encouraged investment in specific regions or young industries. The biggest economic development coup in Texas this month, for example, was probably the news that Occidental Petroleum will relocate its headquarters from Los Angeles to Houston. Perry touted that as proof of Texas’s pro-business environment, although the oil giant didn’t receive any special favors from the state; in that sense, the news corroborates the argument that bribing businesses to move here is a waste of money, among other things. But Oxy wasn’t the only company growing in Texas this month. Perry’s office also announced that Websense and Dropbox would expand their operations after receiving TEF investments, and that the TETF would put $1.5 million to support robotics research at UT and A&M. The tech sector isn’t as big in Texas as oil and gas—but if it continues to grow as a piece of our economic pie, this will no doubt be in part because the state has aggressively bid for such industries. And if the next generation of Texas leaders abandons the approach, it would be a break with tradition with potentially profound implications.