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Gresham's Law of Hartford Development
March 13, 2000
Gresham's Law that bad money drives out good was formulated in the 19th century, when it was noted that people spent the cheapest form of currency that sellers will accept, saving better money for other uses. Hartford's ongoing pattern of subsidies - for a stadium, a convention center, an aquarium, hotels, parking garages and so on - demonstrates that the Law applies with at least as much force today. When you cheapen what qualifies as an investment, good investments, with all their hoped-for benefits, will go elsewhere.
The argument for subsidy of large scale projects in Hartford is by now a familiar one. In spite of the fact that the major needs for office space, restaurants, shopping and entertainment are being met by the marketplace, a sizeable number of folks keep insisting that something is "missing from Hartford." Because the City cannot attract investment competitively, they tell us, it must somehow be jump-started to become the capitol city that it "really should be."
Even though it has become obvious that previous subsidized projects, such as the Civic Center and Statehouse Square, will never repay anything like the resources they have drawn out of the area, new projects ala the variations being promoted under the heading of Adriaens Landing continue to be justified for all the spillover benefits they are alleged to create. As long as proponents do not have to risk their own money, they go on making claims for newer schemes, even as the older ones whither away abandoned by users or require subsidies to keep afloat. By now Hartford has collected a long list of such white elephants, witnesses to misguided and overblown expectations.
Gresham's Law guarantees that the supply of Hartford's white elephants will only grow for, once subsidies become common, investors who use the more expensive money - which is to say, their own - are put at a competitive disadvantage. Consider the pending application for a twenty million dollar reduction in property taxes for the proposed Renaissance Hotel in downtown Hartford. The developers say that it is necessary to make the project worthwhile, which is correct given that subsidies have become a regular local practice. But existing hotels are also correct in their complaint that this will add severe, perhaps disabling competition for them because existing facilities should be able to accommodate foreseeable demand.
In other words, subsidies cut short the life of existing facilities, spurring an artificially fast cycle of obsolescence. In the case of Hartford, they also penalize those developers who stood by the City in its darkest days. The hotels that upgraded during the recent slow years now are rewarded by new competitors funded courtesy of the taxpayers at the rate of about $200 per resident.
As the example of Hartford's hotels suggests, once subsidies are common, they become self-perpetuating. Any would-be developer has to expect that future competitors will be helped by City or State taxpayers and, therefore, his expected returns on his investment have to be discounted. Investments fall to the level where they would be worthwhile even anticipating losses from sporadic intrusions of government subsidized competition, and the net effect is lower overall returns at a higher total cost than if the subsidy game had never begun. The situation is similar to what we often see in underdeveloped economies where governments arbitrarily nationalize industries or impose prohibitive regulations.
Recent revisions in the proposal for the Adriaens Landing Project show how quickly the logic of the subsidy game can spiral into debilitation. State officials have been justly criticized for the dismal prospects for the project with all the losses that they imply. But rather than swallow their pride and do the logical thing of killing it, they are now trying to pass off a large chunk of the costs to the City. In addition to a disadvantageous swap of property Hartford would have to forgo all property taxes on the project for 20 years. The planners say some of this could be recouped by giving the City a share of the revenues but that is a shaky claim; if the returns really were that promising, private investors would have beaten the State to these projects. Considering that an alternative project yielding competitive returns would net Hartford about $24 million per year in property taxes per year, the City would lose almost a half billion dollars over this 20 year exclusion.
The City and Legislature must find the courage to cancel projects such as Adriaens Landing and begin to reverse the damage before worthwhile future investments are scared off for good.
Gerald Gunderson is the Shelby Cullom Davis Professor at Trinity College and a Board member of the Yankee Institute for Public Policy, a Connecticut research and educational institute.
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The Yankee Institute for Public Policy, Inc. is a nonpartisan educational and research organization founded more than two decades ago. Today, the Yankee Institute's mission is to "promote economic opportunity through lower taxes and new ideas for better government in Connecticut." The Yankee Institute for Public Policy, Inc. is classified by the IRS as a 501 (c) (3) public charity. Contributions are deductible to the extent allowed by law.
