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Tuesday, May 19, 2009

CAPCO and Jobs

The fallacy that government can create jobs is alive and well in Texas and other states. Through the state's Certified Capital Company program (CAPCO) the state provides venture capital to small businesses. According to an OpEd article in Sunday's Chronicle:

The easiest way to understand what is wrong with the CAPCO program is to compare it to real venture capital. Real venture capital fund managers make their money from the profits they earn for their investors. If the fund managers make smart investments, they keep 20 percent of the profits. But they must return all of the original investment capital and most of the profits to their investors.

In contrast, CAPCO fund managers get to keep the state’s millions of dollars and any profits generated. Unlike investors in real venture capital, Texas taxpayers receive back nothing: Not the profits from their investment or the original capital that they provided.

In other words, tax dollars are given to a private business and the state gets nothing in return. Proponents of the program argue that CAPCO creates jobs, and the resulting tax revenue benefits the state. However, a study of Lousiana's CAPCO program found that:

CAPCOs are “expensive and inefficient to the state” and that “the greatest and most immediate beneficiaries of the CAPCO program are the CAPCO companies and their owners.”

As Henry Hazlitt points out in Economics in One Lesson, these schemes have visible beneficiaries and hidden victims. The money used for CAPCO was taken from taxpayers, who can no longer use their money in the pursuit of their values. They cannot use that money to save, invest, or consume. In other words, the economic activity that would have occurred is simply wiped out. Taxpayers, and those who would benefit from their economic activity, are the hidden victims.

Texas has already spent $400 million on CAPCO since its inception, and legislators are considering spending another $200 million on this wealth redistribution--money is taken from taxpayers and given to those who have the right political connections or are in favored industries.

These interventions in the market will have predictable results: a net job loss. But government officials will point to the new jobs created and pat themselves on the back, while ignoring the jobs that they have destroyed. They will continue to pretend that their acts of theft and coercion are productive endeavors, and when problem invariably arise, they will respond with calls for more intervention.

It has been widely reported that Texas has one of the strongest economies in the nation. Our legislators seem determined to change that fact, and if they continue to emulate the statist policies of the two coasts, we will experience the very same economic consequences as those regions.

Posted by Brian Phillips
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