“Slush Fund,” or “War Chest?”

I’m glad to see that Slate’s Matt Yglesias agrees with most of the ideas I put forth in a piece in the latest Washington Monthly about what Washington needs to do to bring manufacturing back to the United States. But he does take issue with one idea, which is to create a federal “war chest” aimed at matching the incentives offered by China and other countries to attract companies to their shores. He condemns the notion of a “large federal slush fund” to “randomly subsidize politically powerful firms” and argues the result would be “an exciting new level of waste and bribery.”

This is a completely understandable reaction; few things are, or should be, more distasteful to progressives than the kind of explicit corporate subsidization that this proposal seems to be calling for.

But the real intent of this idea is not to encourage subsidization and bribery, but to end it.

The sad fact is that practically every country in the world–except the United States–is tripping over itself to woo companies and industries for the jobs they create and the potential for spillover innovation. China is among the most aggressive in this game, but even countries like Israel and Vietnam offer subsidies, tax breaks and free land to make themselves attractive investment destinations. As a result, these countries are grabbing jobs and industries that, absent those subsidies, might have come to us.

These subsidies are not in fact technically kosher under current trade laws, but these violations are also so rampant, and bringing suit is so time-consuming and expensive, that the current rules are essentially unenforceable.

This leaves America with two choices. We can continue to be the “good guy,” sitting out the game and potentially losing an increasing number of opportunities as the subsidies arms race among our foreign competitors escalates. Or we can unleash a war chest big enough to deter this escalation and force a new dialogue on acceptable global trade policy. The logic is of course classic deterrence theory. If you want to prevent aggression, you need a credible threat of force. And if you want to stop a war, and diplomacy isn’t working, military action, or at least the threat of it, may be the only option.

Trade expert Clyde Prestowitz, whom I quote in the piece and whose idea this is, argues that trade deterrence has worked in the past. When he was Undersecretary of Commerce, he helped create a “war chest” to combat another kind of trade practice–”direct export subsidies”–that led directly to new and tougher trade laws adopted by the WTO. Countries chose to come to the table rather than go head-to-head against America–something that’s as likely today as it was then.

The other critique Yglesias makes of the “war chest” is the lack of evidence for my assertion that it could minimize the current “beggar thy neighbor” dynamic among states that are now competing with each other to land business.

Governors and mayors now spend millions of dollars and log thousands of air miles competing against each other for jobs that would have come to America in the first place (or were unlikely to leave). The New York Times, for example, documented an internecine battle between Kansas and Missouri, where Kansas spent $36 million to lure AMC Entertainment from Missouri, only to lose the headquarters of Applebees to Missouri a few months later.

A federal war chest could end these kinds of pointless contests in a couple ways. First, by focusing attention on a national strategy to compete on a global scale, it could help states reorient their strategies around beating foreign countries, rather than their next-door neighbors. Second, the fund could be structured in a way to force an end to these interstate battles.

With states forever looking for federal funds to supplement their budgets, one option might be to make federal funds available only for legitimate state “bids” against international competitors. For example, if Texas is up against Singapore, the federal fund can backstop what Texas brings to the table if Singapore ups its bid. Another option might be to offer the availability of federal funds to supplement an international bid, but only on the condition of an explicit limit on the amount of state financial incentives that can be offered.

Again, this is an imperfect solution for an imperfect world. But with our foreign competitors growing increasingly aggressive in their efforts to land jobs and strategic industries, doing nothing is the worst option of all.

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