Thursday, February 9, 2012

“Spillover into the local community": Politico Mantra and Politico Reality

Spillover effect: a secondary effect that follows from a primary effect, and may be far removed in time or place from the event that caused the primary effect”. (1)

In the Foreground

 The politico and spillover effects

Spillover effects are positive or negative externalities [neighborhood effects] of a particular action e.g. burning coal for electricity has the positive externality of power-on-demand while soot is depicted as a negative externality. Other times political proponents of proposed private sector investment or proposed public sector spending co-op the concept of “spillover” to mean some positive external economic activity that arises from a primary economic activity e.g. a computer maker builds a new assembly plant which then attracts suppliers to situate nearby or a downtown revitalization plan based on X causes businesses associated with X to be attracted to the downtown area as well. The phenomena are many times termed/framed as "spillover into the local community".

Note: "spillover into the local community", in the main, is a politico proposition-phrase that frames only the positive aspect of spill-over effects and purposely leaves out any negative externalities of such spillover effects such as traffic congestion, the taxpayer cost of additional social overhead capital, tax relief for the attracted primary event and hence taxpayer cost for attraction by low or zero tax rates for a specified period, etc.

Failure to diversify an economy’s portfolio of primary effects

A potential as well as real life reoccurring long-term problem with the depicted spillover effect is the concentration of particular spillover activities associated with the primary event. That is to say, the first stage spillover effect as described/depicted is many times a concentrated single end result. For example, a natural gas find, a valuable coal seam, the opening of a large auto assembly plant, or the attracting of an entire sub-sector such as textiles becomes associated with a concentrated first stage spillover effect that lacks diversification within the economy at hand. For example, the primary effect described above is followed by a first stage item which is generally the primary event’s direct suppliers. The primary and the first stage secondary effect create a robust economy that causes no perceived need to diversify the economy further. That is, the robust economy is concentrated around the primary first stage and secondary events.

 Over time ancillary items pop-up regarding the primary and first stage secondary events such as additional housing, auto dealer, grocery stores, retail strip centers, etc. However these items are not additional primary events. Hence we have an economy based on one prime event and the prime events suppliers. Occasionally the economy seems so well situated that the need to diversify and find additional and alternate primary effect and associated spill over effect items are put aside in favor of additional duplicates of the initial primary and first stage secondary events e.g. Buffalo as a steel center, Detroit as an auto assembly center, greater North Carolina as a textile center.

Hence the primary driver and first stage secondary events create such a robust economy that the mind-set becomes “what goes up continues to go up”. Over time exogenous events such as aggregate regulation, taxes, technology, changes in demand preferences, etc. can cause a decline in the concentrated primary event which causes the reverse process of the primary first stage secondary events. The economy begins to deteriorate, deterioration increasing at an increasing rate e.g. Detroit.

In the Background

Spillover effects and politicos through the mechanism of government

From the discussion above it becomes obvious that diversification is very important within an economy’s portfolio of primary effects. However, regardless of the amount of diversification, the politico’s mantra of “spill over into the local community" comes with a lesser known phenomena that empowers the politico and simultaneously drives away the very primary effect, secondary primary suppliers, and ancillary items that the politico trumpets with the manta "spillover into the local community".

When politicos want to attract a primary effect and sing the praises of “spill over into the local community" caused by the primary effect, the politico also sees the entire exercise as potential tax revenue the politico can use for political constituency building purposes. That is, the politico rejects the concept that all capital and all human capital is mobile, and most capital and most human capital migrates to the lowest environment of tax and regulation. The politico substitutes mobility with “fixed”. That is, the politico sees the primary effect, primary suppliers, and ancillary items as tax revenue generators that can fund political constituency building exercises.

The politico, with the mind set of primary effect, primary suppliers, and ancillary items as tax revenue generators, begins a long march of raising taxes on the very concept of “spill over into the local community" and the revenue is used for political constituency building. The politico thinks they can raise taxes and further raise taxes, and raise tax even more as the taxed entities are perceived as “fixed”. That the “fixed” entity will not/cannot move and hence is a constant target of tax. The politico then takes increased tax revenue and builds politico monuments [public structures that supposedly benefit the greater public], increases redistribution to build a dependent constituency base, and increases size and scope of government to create yet another dependent constituency base of the public sector dependent on the politico to maintain funding.

The fallacy of “fixed” entities and escalating taxes on such entities ends by the entities merely following the economic phenomena that: all capital and all human capital is mobile, and most capital and most human capital migrates to the lowest environment of tax and regulation. Over time, most capital and human capital migrate away leaving the locale with no tax base yet the associated cost of maintaining prior build politico monuments, a redistribution system with politico build constituency dependent on continue redistribution of a tax dollar stream and a bloated public sector. That is, the economy begins to deteriorate, deterioration increasing at an increasing rate. A phenomena that can be in place of or in concert with the failure to diversify primary effects as discussed above.

That is, purposely, the politico creates a situation that causes the primary source to pass like the wind through the trees.



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