You often hear politicians say that they’re pro-business.

What do they really mean when they say this? It’s true that more business activity is good for cities and states. It leads to more jobs, more products and services, and to a better standard of living. The problem is there are two very different ways that a politician can try to bring more business to a state.

Two Approaches to Being Pro-Business

The first approach treats the economy like a wilderness. A politician acts like a smart forest ranger whose only job is to make sure that nothing impedes the economic freedom and business growth that occurs naturally. Businesses aren’t directed, they aren’t stimulated, and they aren’t suppressed by government intervention.

However, politicians rarely do this. Instead, they treat the economy like a machine and they think of themselves as machine operators, trying to produce a pro-business environment by pushing buttons and pulling levers. Typically, these are in the form of special subsidies, tax breaks, and incentives for particular industries or firms.

For example, let’s say your governor wants to encourage auto manufacturers to build factories in your state. He can use the first approach: He can choose to eliminate senseless regulations or reduce burdensome taxes for everyone; create a more open and level playing field. Or he can choose to give special advantages to just one auto manufacturer in the state.

Five Problems with Government Subsidies and Privileges

To a lot of people, the second approach makes sense. It creates jobs, right? But there are big problems when politicians try to create jobs through special handouts.

Opportunity cost — where might that money have gone instead? When politicians provide special handouts to a business, the money must come from somewhere. Either everyone else’s taxes must go up, or the amount of money available for public goods, like law enforcement, must go down. It’s anti-competitive. When one company gets a special privilege, it’s unfair to other companies, such as local small businesses who don’t get the same benefits. This gives the favored companies some measure of monopoly power which can allow them to charge higher prices or offer lower quality services at a detriment of consumers. When businesses are playing with taxpayer money, they’re more likely to make bad decisions. For example, they might choose to set up shop in a place where it doesn’t make sense economically. With enough subsidies, you could get a business to grow oranges in Alaska. Is that really a good idea? Subsidies encourage business leaders to focus more time and energy on politics than on their businesses and on customers. This can be enormously costly for a society in the long run. Ultimately there’s a cultural cost. When politicians cut special deals with favored corporations, it makes people think that the government is only there to serve special interests. How often do you hear people say that they don’t trust the government? And it gives people the impression that success in capitalism is all about whom you know and not what you do.

Whenever a politician claims to be pro-business, stop to look at what they actually mean by it. Are they proposing to lower barriers for all businesses to make it easier for everyone to succeed, or are they just trying to favor a few firms at the expense of taxpayers, competitors, consumers and the economy at large? The approach makes all the difference.

Video: What Does a Politician Mean When They Say They’re Pro Business?

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Should the Government Subsidize… Silly Walks? (video): Art Carden explains why government subsidies are problematic for the economy.

“Is Capitalism “Pro-Business?” (video): Steve Horwitz explains why capitalism is good for everyone, not just big business.