Monday, January 5, 2009

The Costs and Benefits of the Boscov's Plan

The Costs and Benefits of the Boscov's Plan
By Matthew Rousu
Published in The Daily Item, January 4, 2008

Economists are a strange bunch. We tend to remove emotions from our decision-making. When a controversial issue arises, however, like the Boscov’s loan issue, this is an important trait. We are trained to make decisions simply by looking at the potential benefits and the potential costs of a particular action. Let’s take a close look at the potential benefits and costs to see whether or not the Snyder County Commissioners made a good decision in rejecting the loan to Boscov’s.

First, what are the potential costs of providing the loan to Boscov’s? One potential cost is that the loan could default. While some have said the loan had no risk, anyone who has followed the closings of businesses recently knows there is always at least some risk, even if a business looks completely safe. With a business that has declared bankruptcy, the risk is higher. If there really is no risk of the loan defaulting, why wouldn’t a local bank jump at the opportunity to provide this loan?

A second potential cost to providing the loan is that $5 million could have been used for other projects. Providing this loan now would limit the future opportunities to provide loans. A third potential cost is a big one: what precedent does this set and what are the side effects of this loan bailout? For precedent, should the county now provide loans to all businesses, even if they have declared bankruptcy? How about the Mom and Pop store? Also, is it right for a government to provide assistance to a major retailer when many smaller shops, owned by local middle-income families, compete with Boscov’s? This is an enormous cost – yet one that most people who supported the loan ignored.

Having listed three potential costs, let’s look at the potential benefits of providing Boscov’s a loan. The one main potential benefit for using public funding, as was made clear in almost every article and editorial, is preventing a loss of jobs. For the loan to benefit the community by saving jobs, however, two things must happen. First, the loan would have to make the difference between Boscov’s staying in business and closing down. According to the December 20th article in the Daily Item, Albert Boscov indicated that the Boscov’s store would stay open “With or without the county’s help”. If that is true, this is a big argument against providing the loan.

Let’s suppose that Mr. Boscov is wrong, however, and the store might close down and that the loan would prevent the store closing. A second thing that would have to happen is that by Boscov’s staying open, it would “save jobs”. However, contrary to the conventional wisdom, this probably isn’t true. If Boscov’s does indeed shut down, that means that people who otherwise would have purchased their TVs, clothing, furniture, etc. from Boscov’s would have a choice to make. They could either not purchase those items at all, or they could buy them elsewhere.

Given that there are many other stores that sell these items nearby, it is likely that Boscov’s customers can find what they want at other stores in the area. When these individuals buy their items at the other stores, those stores will experience an increase in sales, and will need to hire more people. Eventually, the “lost jobs” from Boscov’s would be “new jobs” at the competitor’s businesses. Overall, one would expect no lost jobs for the area.

The only way one could credibly make the argument that Boscov’s closing would result in fewer jobs for the area is if people who would buy from Boscov’s would no longer purchase products from Snyder country – instead buying from stores in other counties or from the Internet. Given the number of stores that sell the same types of items as Boscov’s in Snyder country, few people likely fall into this category.

Given a look at the benefits and costs, I think it is pretty clear that we should commend the Snyder County Commissioners for rejecting the loan.

Some background articles on the controversy can be found at these links:

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