We’ve already discussed the basic infrastructure services that local governments facilitate (roads, water, power, sewer). However, many local governments go far beyond that in the services they offer. Some local governments own and run golf courses, water parks, gyms, and other non-essential services. This goes a step beyond the proper role of government.
Put simply, the government should not offer non-essential services the private market could otherwise fulfill. A government’s purpose with respect to the market should be to simply enforce a level playing field. You should not be competing with businesses or unfairly restricting a particular business or industry in any way.
This is not an easy ideal to strive for. Oftentimes, people want the government to provide things that are not essential. It makes sense that they would. If the government provides something, it is heavily subsidized and, therefore, more affordable to consumers.
These facilities and the services they provide are not essential, and if they weren’t so traditionally provided by the government, they could certainly be provided privately. (Of course, most or all of these services are indeed provided by private businesses.)
When the government provides non-essential services, it often benefits a disproportionate or lopsided group of citizens. If, for example, taxpayers are required to fund a water park, it only benefits those who are interested in swimming. The rest of the population is subsidizing this activity with their tax dollars. On top of that, you are competing with all other businesses that do not have the benefit of subsidizing their ventures with taxpayer dollars.
Public enterprises can also benefit by enjoying legal immunity, avoiding business taxes, and not necessarily having to respond to market signals when it comes to prices, services, or even their continued existence. This provides a tremendous advantage over similar private businesses and creates the illusion of effectively outperforming a private enterprise.
Government’s involvement in business enterprises stifles growth and deters investment by private parties who do not wish to compete against a taxpayer-funded enterprise.
When it comes to your entity’s relationship with the private market, there are difficult questions to answer. As you work to answer them in a fair and meaningful way, consider these important questions.
How many people in your community stand to benefit from a proposed enterprise? Several obvious and outspoken members likely benefit from it, but when it comes to the population at large, what does the benefit look like? Is there a monopoly created? Who are we competing with by investing in this enterprise?
The answers to these questions should guide your decision on whether or not it is appropriate for you to be offering a particular service.
Below, you will find discussion on some specific issues and circumstances when it comes to the government and the private market.
“Beware the greedy hand of government thrusting itself into every corner and crevice of industry.” —Thomas Paine
If a service is so important to a community that they would have the government provide it, that same service should be important enough to be sponsored and supported by private entities or lucrative enough to attract or instigate a local business. If demand truly does exist, then this market opportunity can be filled by a private party should the economics truly work out to support the business endeavor.
Before investing in any non-essential services you should, at a minimum, do the necessary research to ensure that that service is not already being provided by a private organization.
If the service is not already provided, consider whether or not it is wise for the government to be investing in a service that no one else has determined worthwhile to provide. If the service is already provided, focus your efforts on supporting the private entity offering that service. You should avoid duplicating any services already offered by the private sector.
Instead of competing with private businesses, you should work to create a business friendly environment. You can do this by creating clear processes, limiting burdensome restrictions or requirements, and being aware of what non-essential services are already provided by the private market.
For example, Highland was considering creating a city sponsored dance class. However, when they discovered that there was already a dance studio within Highland offering the same service, they decided against funding a competing service.
In Eagle Mountain, the community was considering creating a government funded arts council, but instead created a public-private partnership backed by local businesses and other entities invested in the arts.
As your constituency grows, you’ll likely feel more pressure to attract businesses which will, in turn, bring jobs, expand the tax base, and strengthen the economy. This goal can present an important question: what are appropriate ways to attract business and development?
One Common Approach: Losing Propositions
Many local officials approach this issue by offering economic incentives to businesses willing to come to their locality. These economic incentives are usually (though not always) post-performance tax breaks or rebates. The problem is, these programs are poor policy and often do more harm than good. Businesses can play governments off each other to get the best package possible, and it is usually to the detriment of the local governments. While these incentives are often well intentioned, they do not yield an impressive return on your investment.
Further, offering incentives to some businesses naturally creates an unfair playing field between the favored recipients and their competitors. For example, if a company obtains a tax rebate to locate in your city, they can pass along that reduction in expenses to their employees by way of higher salaries, which means that their competitors will likely lose employees to this company because it can pay more. This hurts your constituents and local business owners who have invested in the community.
A Better Way: Attractive Business Environment
When it comes to taxes and finances, all businesses and individuals should be treated equally. In order to accomplish this, you should minimize or eliminate the economic incentives that you grant businesses in an attempt to win them over. Instead, attract people and businesses by creating systems and institutions that are fair and reliable, with low taxes and regulations.
In 2016, Facebook was considering building a $2.5 billion data center in West Jordan. The problem was, they were considering building that data center in several locations, which allowed them to ask for exorbitant amounts of money in economic incentives — the deal that was being negotiated included nearly $200 million in tax incentives. Ultimately, Facebook decided to build in New Mexico; Utah was not selected. This was, in part, due to opposition from the Salt Lake County Mayor at the time, Ben McAdams. He recognized that this was not a good deal for taxpayers in Utah, and he opposed it.
Instead of attracting businesses with economic incentives that create unfairness, attract people and businesses by creating systems and institutions that are fair and reliable. Local government should be focused on doing the basics as best they can. If you have clear permitting processes, friendly zoning, an open and clear political process, and low taxes and regulations, businesses will naturally be attracted to your community. That’s something that will benefit the government, your constituents, and businesses in the long term.
In order to oversee business activity and protect public health and safety, governments impose a number of regulations. The unseen problem inherent in this process is that burdensome regulations can stifle innovation, driving out business and development that would otherwise benefit the community. The question is, how do you balance these competing concerns, and how do you know what level of regulation is appropriate?
One Common Approach: Burdensome Regulations
There are a plethora of ways in which local governments can regulate business practices and make the process more difficult. They can institute burdensome licensing requirements that make it difficult for people to start businesses or find employees and create barriers to entry by requiring competing businesses to sign off on new competition. They can regulate when and where business can happen by prohibiting business activity on certain days of the week or in certain geographic areas. The list goes on.
Regulations should always be built to protect the public health and safety of your community. Any regulation that does not contribute to this goal is unnecessary. Regulations not directly addressing a specific harm should be done away with.
A Better Way: Minimize Your Involvement in the Free Market
Regulations should be simple and not burdensome for business owners. When regulating, think of businesses as your friend and maintain that perspective until they give you reason not to by way of harmful activity that deserves narrow attention and regulation.
In response to that idea, one might suggest that if you do not work to preempt harm, the damage will be extreme or maybe irreversible. It is true that if you take a more conservative approach to regulation, you might have to retroactively respond to some harm. However, the more concerning risk rests on the side of over-eager regulation.
If you choose to extensively regulate businesses, you risk not only regulating harm but also regulating ideas and innovation — peaceful activity that will find a home in a more favorable environment with fewer regulations.
If you feel that, for some reason, the government must interfere with the private market, make that interference as brief and narrowly focused as possible. Permit requirements and licensing processes should be clear and straightforward. Government should be friendly to businesses and innovation, and only put burdens on those who are bad actors.
Government entities should not be competing with the private market. This practice is unfair to both businesses and taxpayers. It creates inequitable competition that is subsidized by taxpayers but does not evenly benefit the population. Not to mention, government entities, in general, are not able to offer the high-quality services that a competitive market produces.
You should interfere with the private sector as little as possible. When your involvement is necessary, it should be minimal and simple. Your processes need to be business-friendly. That is how you will attract and cultivate the most successful businesses for your constituents and for your economy.
As you work to limit your interference in the free market, keep these takeaways in mind:
Local governments should focus on facilitating basic infrastructure well.
- Let the market facilitate extraneous amenities.
- If a private entity could do a better job, consider privatizing that service.
- Economic incentives unfairly distribute the tax burden.
- Regulations should address specific, identifiable harms, not what-ifs and personal preferences.