Alabama politicians just gifted European aerospace giant Airbus a $26 million subsidy package to assemble airplanes in Mobile. That’s on top of a previous $158 million taxpayer-financed handout for another Airbus plant.
The notion that a company with a $76 billion market cap can’t assemble planes without assistance from state taxpayers simply doesn’t fly — but special treatment for privileged corporations is, of course, all too common across the United States.
{mosads}Airbus’ decision, meanwhile — which actually seems based on winning over Washington policymakers rather than Alabama’s subsidies — is worth a deeper look.
Airbus has spent decades trying to grow its share of aircraft sales in the United States, especially in the massive and massively profitable defense industry. But the company has found it difficult to win U.S. military contracts without the congressional influence that domestic manufacturing facilities command.
Its first step to solving the problem was the 2004 opening of a helicopter factory in Mississippi. Next, a partnership with Northrop Grumman helped win a $38 billion Air Force contract in 2008 to build the next generation of aerial refueling tankers — until Boeing disputed the decision.
After years of political wrangling and controversy, during which time Northrop Grumman claimed the project requirements had been rewritten in Boeing’s favor and dropped out, Boeing got the contract in 2011.
The episode convinced Airbus that it needed to double down on gaining political influence in Congress to win future contracts. In 2012, it announced that it would create a plant to build its A320 jetliner in Mobile, the site where it had intended to build its Air Force refueling tanker.
But Airbus’ A320 facility is for assembly, not manufacturing. That means that Airbus builds the wings, fuselage and vertical stabilizers of the planes in Europe and transports them via ship to the United States for assembly, like a giant and extremely complicated set of Legos.
If you think this production chain sounds unnecessary and convoluted given that the final product could fly to the U.S. instead, you’re right. Airbus admits that it doesn’t save money by assembling the planes in America. Its Mobile plant is for building political capital, not airplanes.
It has worked, too. Airbus Americas Chairman Allan McArtor told The New York Times: “It’s been night and day how we’re received on Capitol Hill. The attitude started changing immediately.”
Noted Pentagon budget hawk Franklin Spinney coined the term “political engineering” to describe spreading production across many locations to maximize political support. This appears to be exactly what Airbus has done in Europe, where it builds airplane wings in the United Kingdom, vertical stabilizers in Spain, and fuselages in France and Germany.
This requires an expensive specialized transportation system wherein jetliner components are shipped in specially designed trains, barges and cargo planes to their final destination.
To be fair, we live in an increasingly specialized and globalized economy. After all, Boeing uses the high-strength materials industry in Japan to manufacture airliner fuselages and wings, and it ships them via air transport to the United States for assembly.
But the benefits of international trade can’t quite explain why Airbus would bear such high cost to open new assembly facilities overseas. It would most likely be easier to expand their existing operations in Europe and just fly the planes to the final customers.
Airbus’ international assembly facilities are an indictment of how protectionism and political favoritism can increase the cost of production. Its Mobile plant, as well as its facility in Tianjin, China, are designed to build political bridges to profitable future projects rather than make better or cheaper products for customers.
That’s also an important reason why state and municipal subsidies for companies currying federal favor are a pure waste of taxpayer money. Local economic development subsidies are usually aimed at swaying a corporation’s location decision from one place to another (although economic research shows this almost never actually works).
But companies engaging in political engineering tend to decide where to locate far in advance of local politicians’ proffered subsidies, which they gladly accept as icing on the cake.
{mossecondads}And economic development subsidies aren’t small potatoes. The combined state and local handouts for Airbus are the equivalent of 40 percent of a year’s worth of Alabama corporate income tax revenue. These wasted tax dollars mean other businesses and households pay higher taxes for politicians’ credit-claiming ribbon-cutting ceremonies, but there’s no additional benefit for the community.
Airbus didn’t create this game, but protectionism and political favoritism force them to play it. The least local politicians can do is to stop adding fuel to the fire — especially if it’s taxpayer cash.
While all economic development subsidies are worthy of a critical re-examination, subsidies for companies getting federal contracts or that have a strong incentive to curry favor in Congress represent the most senseless of political handouts.
Michael Farren is a research fellow and Tad DeHaven is a research analyst with the Mercatus Center at George Mason University.