16 February 2015

Free Enterprise in the 21st Century

I guess I just don't understand free enterprise or capitalism here in the 21st century. I always thought it meant that the market, buyers with money, would decide whether products and ultimately companies would sink or swim, based on the quality of their ideas and their ability to turn those ideas into something people will pay for.

So this week in Duluth, Minnesota, mayor Don Ness is hopeful that the Minnesota state government will put up US$4M, to go with the US$6M the city has committed, to build a new US$10M plant at the Duluth Airport. The plant will be leased to Cirrus Aircraft who will use it to build their new SF50 Vision personal jet aircraft in. The jets will sell for about US$2M each. Cirrus CEO Dale Klapmeier indicated that time is running out for the state to commit. Mayor Ness is very concerned that without the city and state building the plant for Cirrus that the company will move its manufacturing of the SF50 elsewhere, lured by incentives from other cities in the US.

You see in free enterprise there is lots of competition, at least between US communities willing to give tax breaks or even build facilities for companies, in an attempt to lure jobs to their communities.

The odd thing is that Cirrus was bought out for US$210M in February 2011, by China Aviation Industry General Aircraft (CAIGA), a subsidiary of Aviation Industry Corporation, which is wholly owned by the Government of the People's Republic of China. The Government of the People's Republic of China is currently arguably the richest entity of any kind on earth. So why do they need handouts from small US cities? It is also a communist government and a bit totalitarian, but let's not get into that.

Okay so let's summarize: The City of Duluth and the State of Minnesota want to provide a total of a US$10M taxpayer subsidy to the Government of the People's Republic of China as an incentive for them to establish their Cirrus SF50 production in Duluth instead of having it lured away by greater government subsidies from other cities. The new plant will build jets for rich Americans, since I doubt that poor or middle class Americans, like most of the taxpayers in Duluth, will be buying too many personal jets.

That all seems to add up to the taxpayers of Duluth and Minnesota subsidizing lower aircraft purchase prices for wealthy Americans via the intermediate step of providing facilities to a Chinese government state-owned enterprise.

Is it worth mentioning that government subsidies like this are not permitted under most trade agreements, like GATT? Of course that would be applicable if the City of Duluth was subsidizing a private company, but in this case they are really subsidizing a foreign government, so I guess that doesn't count.

I guess I just don't understand free enterprise, at least 21st century free enterprise.

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Michael Shaw said...

Interesting. While China was once communist it is now more laissey-faire than the USA, at least in terms of freedom of its enterprises.

Would this be a state and city Keynesian approach to government investment?

Is it a bad investment? What chance will Cirrus Jet have at success?

If these jets sell than will the workers making them in the USA be better off? Depends on what the alternatives are? If jobs are the goal maybe the city and the state are on the right track. Does it really matter who the purchasers of the jets are?


Adam Hunt said...

Mike Shaw asked, "does it really matter who the purchasers of the jets are?"

I think so. Essentially the final buyers of the product are the people who benefit from this government subsidy. I think you might make some sort of case for a subsidy if the product being produced would benefit poor people or at least the majority of people who live in the city. That would include subsidizing things like public transit or maybe even bicycle production, but not jets for rich people and especially not something that is going to hasten climate change.