Government Guarantees Equals Taxpayer Expense

Perhaps one of the most famous landmarks in the U.S. is the site of the World Trade Center in New York City.  It may also become a major expense for taxpayers.

We all know about the old World Trade Center buildings.  The twin towers, along with Building 7, all came down on September 11, 2001.  Since then, One World Trade Center, now the tallest building in the U.S., has been built.  It is also more than 40 percent vacant.

But the developer of Three World Trade Center, another skyscraper, is requesting over one billion dollars in loan guarantees from the port authority of New York and New Jersey, the official owners of the site.

In other words, taxpayers will be on the hook for this building and will pay the tab, especially if rents are less than expected.

There could be any number of reasons for vacancies and the need to lower rent in One World Trade Center.  It could be that some people are afraid of another terrorist attack.  It could be that it is too expensive.  It could be that business is not booming as much as normal in New York City.  But regardless, there is obviously a problem with One World Trade Center and it will likely be the same with Three World Trade Center.

It would not be a problem if the owner and developer and lenders were all on the hook for it, if they were all private parties that did not involve taxpayers.  It should be like any other business, where it is only those who voluntarily involved themselves who suffer the losses.

Perhaps I shouldn’t say “any other business” because some industries in the U.S. today are more like a fascist society than a capitalistic one.  The businesses are not directly owned by the government (socialism), but rather controlled and directed by government (economic fascism).  Unfortunately, in favored industries that have friends in high places, we see scenarios where the free market is allowed to work when they are profitable, but then it is no longer a free market system when losses appear.  In other words, it isn’t a free market system at all.

We saw this in 2008 when car companies, banks, and other financial institutions were bailed out.  They were allowed to reap the rewards when they were highly profitable.  But then the taxpayers had to foot the bill when things went bad.

Of course, this is a case of moral hazard, where the companies are encouraged to take on more risk than they otherwise would, knowing that a bailout is likely if things go bad.

For this reason, government guarantees of any kind are harmful for multiple reasons.  It causes excessive risk taking in the first place and then taxpayers have to pay for the consequences when those high-risk ventures don’t work out.  It is a misallocation of resources that makes us poorer.

If a project is worth pursuing, it should be up to the entrepreneur/ business and the investors of the project who should pay for any losses.  It is not as if taxpayers will get paid if the project is profitable.  The free market system works so well because of profits and losses.  The loss portion is just as important, as it tells entrepreneurs what not to do.

The World Trade Center project is obviously a misallocation of resources at this point in time.  Unfortunately, it looks as if taxpayers might have to pay once again for the mistakes of others.  Or maybe they really aren’t mistakes.