Sunday, August 26, 2007

Response to A.P. Article

The Associated Press reported that the New Jersey Economic Development Authority would now accept stock in lieu of cash payments due on loans made to private companies, ostensibly to set up or expand operations in the state. Archive Systems Inc. became the first company to participate in this program, with a payment of $250,000 worth of stock.

Many states and cities follow this contradictory approach. Having spent six years under Governors McGreevy and Corzine slamming business with higher taxes and increased regulations creating a hostile business environment, the state turns around and dishes out taxpayer-subsidized loans to attract the business it drove away or discouraged to begin with.

But that's not the worst of it. The loans must inevitably go primarily to the worst types of businessman; i.e., those with political connections, or those who don't qualify for private bank loans or can't attract private investors. "Rick Kushel, CEO and chairman of Archive Systems", the A.P. reports, "said the program allowed the company to gain access to money it otherwise wouldn't have had." (emphasis added) Is it any wonder that the state is having a hard time getting repaid?

So our state has managed to create a lose-lose-lose situation. We first drove away or discouraged independant, self supporting enterprises, then attracted favor-seekers who can't pay their bills, and now, in apparent desperation, we make them in effect wards of the state by accepting worthless stock in hopes they can somehow turn themselves around.

There is a danger in this. Stated Kushel, "We think it's a great opportunity to have the state as a supporter". To "have the state as a supporter" means that Archive will now be backed by the taxing (i.e., coercive) power of the state. To understand fully the nature of this danger, the principle one must grasp is that, in any society, the government is the only entity that can legally use force against that nation's citizens.

So consider what it will now mean for Archive's competitors. Rather than compete on a level playing field, the competitor will face a company whose "supporter" has the power of taxation, regulation, audits, prosecution, inspection, etc. This opens up the potential for all kinds of mischief (tax audits, "investigations", etc.) initiated by Archive's "supporter" (the state) against the competitor. In an economic downturn, the competitor may face tight credit conditions in the private market, possibly leading to a capital shortage, while Archive can enjoy a stream of liquidity courtesy of a state agency (the New Jersey Economic Development Authority) because, says EDA's Technologies Director Kathleen Coviello, "We want to make sure that the funding is there to support these entities".(emphasis added)

At this point I want to state strongly and unequivocally that my intention here is NOT to accuse anyone of any wrong-doing. I have no reason to believe that Ms. Coviello and the E.D.A., or Mr. Kushel and Archive are anything but honorable and well-intentioned. Rather, I am using the Archive-EDA stock arrangement to demonstrate what I believe to be the unfairness and potentially dangerous course the state has taken in enabling private companies to in effect tap into the taxing and regulatory powers of the state.

Government has a long history, at both the state and federal levels, of engaging in credit activities with private business, in the form of direct loans, loan guarantees, subsidized loans, etc. (whether a government should engage in these activities is another issue). As a creditor, the state has no direct control over the business to whom it loans money. By accepting stock rather than cash as repaymant, the state is acquiring an ownership stake in a private company. This is an ominous turn of events.

To understand why, one must grasp the crucial distinction between government and private activity. As stated earlier, the government has a legal monopoly on the use of force. The private market is governed solely by the principle of voluntary association free from force or the threat of force. That is why it is called a free market. By taking an ownership position in a private company, the state is introducing force into the private market which, by it’s very nature,it must be free of. Since “[m]oney earned from investments…will go toward…expanding EDA programs”, there are apparently going to be more of these kinds of deals. This must necessarily lead to a crowding out of independent businesses in favor of state owned or controlled enterprises.

This smacks of “state capitalism”; i.e., fascism, or government control of the means of production. The EDA program is a direct threat to the free market and thus to individual liberty, because to be free, in essence, means to be free from force or the threat of force. In the 1930s, the FDR administration and Congress, in setting up the Social Security program, mandated that tax revenues coming into the program could only be invested in government bonds and not private company stocks or bonds, precisely because they recognized the threat that state ownership of private enterprise posed to liberty. The same logic should apply here.

The government already has too much control over the economy. The EDA program represents another step toward statism. The New Jersey Economic Development Authority should be banned from accepting anything but cash in repayment for it’s loans. Instead, New Jersey should make the state’s business climate more conducive to private investment, risk-taking, and production by lowering taxes, regulations, and other impediments.


No comments: