This is a guest opinion column

With the proposed Alabama Jobs Act, which will attempt to expand state tax incentives to drive local economic growth, being a top priority of the Governor Kay Ivey and the Alabama legislature, perhaps it is time to give supporting politicians a much needed lesson in the superiority of markets over central planning.

Many states, including Alabama, Michigan, and Tennessee, are caught up in an arms race of luring businesses with special tax breaks to promote local economic activity. But they seem to have forgotten why capitalism outperforms central planning in delivering economic growth. The penchant for politicians to stifle the market process by ineptly attempting to choose economic winners and losers undermines economic growth and fosters cronyism.

Under capitalism, businesses compete to cooperate with consumers by combining scarce resources to deliver value to consumers. The innovation spurred by markets has remarkably increased our standard of living compared to our not-so-distant ancestors and countries worldwide lacking market institutions. Even at the state level, states with more economic freedom, such as Tennessee and Florida, tend to outperform states with less economic freedom.

But here is the thing. Competition to serve customers is hard. Businesses would prefer to get an unfair advantage. This is why major corporations, rather than investing in ways to serve their customers better, direct substantial resources into getting tax privileges. State and local politicians justify this cronyism to spark local economic growth, but the evidence against the effectiveness of economic incentives in achieving this is overwhelming.

Economic incentive programs consistently fail to deliver employment or economic growth efficiently. The vast majority of businesses decide where to locate independent of economic incentives. Economic incentive programs continue to exist mainly because the politicians don’t know that the privileged companies will gladly accept huge windfalls to do what they want to do anyway. The co-conspiring politicians do know, though, that the recipients of tax incentives often grease their palms with campaign contributions and electoral support.

When politicians put their fingers on the scales by granting tax privileges to specific companies, they are substituting their judgment for those of consumers, producers, and investors as conveyed through the complex price system. This is central planning. And it doesn’t work. We know from decades of research that politicians investing taxpayer money tends to waste massive amounts of taxpayer dollars and fail to obtain long-term economic growth.

This is because market-interfering politicians face knowledge and incentive problems. Study after study after study (and book after book) shows that targeted economic incentives fail again and again to deliver economic growth in a wide range of contexts. And Alabama, even with its Mercedes-Benz economic incentive deal, is no exception. The low-quality studies supporting economic incentive programs are often commissioned by those who benefit from economic incentive programs and tend to cross the line into professional malpractice in manipulating their results.

But no politician, or group of politicians, or even a good economist, can reliably predict economic activity effectively. Nor do they have the incentives, especially when spending taxpayer money, to do so when they face pressure from a wide variety of special interest groups, which can include state academic institutions.

I’ve been following the research on economic incentives since I was a research intern as a teenager – nearly 20 years ago – on the Mackinac Center’s systematic review of Michigan’s Economic Growth Authority, so I speak from a deep understanding of the literature. While Dr. Judson Edwards, Dean of the Sorrell College of Business at Troy University, is a friend and former colleague, his recent defense of economic incentives does not hold up to this systematic evidence.

In addition to their ineffectiveness and immense cost, another major problem with economic incentives is that they tend to promote cronyism. Putting politicians in charge of doling out special favors will foster a deeper culture of cronyism in Alabama that drives away businesses, especially homegrown and smaller businesses that don’t qualify for these programs. This culture of cronyism tends to detrimentally infiltrate other sectors as well. I, for instance, have first-hand experience as an academic scholar at Troy University of the administrative, legislative, and special interests that can come together to suppress academic freedom. If I had to guess, I would speculate that similar pressure may be behind Dr. Edwards’ defense of economic incentives.

We have decades of evidence, and the results are in. Economic incentives fail for the same reasons that central planning of an economy fails. States like Alabama seeking economic growth are better off fostering economic and personal freedom through low taxes, sensible regulatory reform, and sound fiscal discipline that will attract productive businesses of all shapes and sizes.

Daniel J. Smith is a Professor of Economics in the Political Economy Research Institute in the Jones College of Business at Middle Tennessee State University.