The Public-Private Partnership Trap

A trend recently in economic development circles has been to encourage public-private partnerships. In this kind of partnership, the government partners with a private business to pursue some sort of project.

Typically, the government gives taxpayer money directly to the business as a subsidy to pursue the project or they guarantee a loan to help finance the project. To the politician and business, this kind of partnership is a great idea — the politician gets to take credit for “creating” jobs, and the business has some protection from losing money.

I have four concerns we should consider before pursuing a public-private partnership. First, we have to ask ourselves on what would the taxpayer voluntarily choose to spend their money instead of this project? With public-private partnerships, we see taxpayer money being spent on a new project, but what we don’t see is data on what taxpayers in aggregate would have spent that money if they had been allowed to keep it.

This is important because politicians want to take credit for creating jobs. What we must remember is that all they are doing is creating jobs in one area at the expense of jobs being created in a different area. They are merely shifting jobs around instead of creating new jobs.

Second, we must recognize that we live in a world of scarcity in which there are not enough resources available for everyone to have everything they want. Because of this, we must decide which projects to pursue and, just as important, which projects not to pursue.

In a market economy, we have profits and losses telling businesses and banks which projects to pursue and to which projects to loan money. When a project is profitable, people voluntarily spend their money and tell the business they like what they are doing. If the business is losing money, then people are telling them to stop wasting scarce resources creating things we don’t want.

How do politicians know that a project is one that the people want? The political process, unlike the marketplace, does not provide a good way for people to give feedback. The voting booth is our primary means to hold a politician accountable when we don’t like what he or she did with our money.

But we only get to vote once every year, two years, four years or six years depending on the office. Even in the best case, when we can vote every year, the fact that you don’t vote for someone doesn’t tell them why you didn’t vote for them. It may not be obvious that they lost votes because of the public-private partnership project instead of some other issue.

Third, public-private partnerships can discourage productive behavior. Businesses begin spending a lot of resources trying to get taxpayer money instead of on productive activity. Society as a whole is worse off because many of those companies that spend scarce resources to get taxpayer money will not actually get the money.

These companies and society would have been better off with their energy focused on doing their job better and providing a better quality product at a better price.

The public-private partnership model creates an environment of competing for government money that hurts the economy.

Finally, I have a moral concern. When politicians spend money, they are always spending other people’s money. In the case of public-private partnerships, the government is using the power of taxation to take money from a relatively poor person and give it to a relatively wealthy person.

Instead of forcing people to pay for projects through taxation we should let people keep their money and voluntarily choose to spend it on what they want. Only then will we have true economic development.

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John Kessler is an adjunct scholar of the Indiana Policy Review Foundation and head of the Indiana University-Purdue University Fort Wayne Center for Economic Education and also an economics instructor.