Article in Economics / Microeconomics
Are officials in economic development agencies and their counterparts in local governments truly in a better position to allocate resources to improve the economy than those individuals and businesses operating in the marketplace?
 
 
 

It is time for citizens and public officials to re-evaluate their approach to economic development.

Many cities, regions, and states have economic development agencies that are funded through taxation. Their staffs then use these funds to finance new industrial parks, cover operating expenses, and fund economic development projects in local communities. In addition, these agencies then coordinate with state and local governments to offer tax abatements and other incentives to attract and retain businesses.

The question is whether such efforts are either currently successful, or in fact could ever be. At issue is the fundamental question of whether officials in these agencies and their counterparts in local governments are truly in a better position to allocate resources to improve the economy than those individuals and businesses operating in the marketplace.

The underlying premise of most economic development efforts is just that. Too often, they begin by siphoning millions of dollars out of local economies to fund their staff and program, and then in turn work with local officials to offer targeted tax incentives to certain industries.

As Michael LaFaive of the Michigan-based Mackinac Center for Public Policy observes, economic development agencies base their existence on a host of flawed assumptions. These include the idea that 1) bureaucrats are better equipped to foster wealth and job creation better than local citizens; 2) the efforts of trade associations, industry groups, chambers of commerce, law and accounting firms, universities and a host of specialty consultants are insufficient to provide businesses with the expertise they need; 3) selective tax credits and subsidies are more effective than across-the-board tax relief; and 4) public officials will be rewarded for “doing something” through intervention rather than simply removing barriers to the free exercise of the economy.[i]

All of this means that the overall tax burden for businesses and individuals is higher than it would otherwise have to be without such redistribution of wealth. This is important because a higher tax burden translates into lower economic growth.

“When taxes go up, the growth in the income of taxpayers might decline,” notes economist Richard Vedder . In fact, several decades of studies by economists confirm the proposition that the higher the level of taxation, the lower the rate of economic growth, holding non-tax factors constant” (emphasis original).[ii] Vedder also observes that this the economic impact varies depending on the tax imposed. “The evidence is striking that the most harmful major tax is the individual income tax.”[iii]

Lower economic growth means a reduced capacity for supporting cultural amenities. “We get it wrong,” says economist Joel Kotkin. “We think it is the cultural amenities that drive the prosperity when really it is the prosperity that drives the cultural amenities.”[iv]

So what advantage does this model offer that leads to its widespread adoption? To be sure, it puts the economic development and local officials in the powerful but misguided position of picking winners and losers in the economy.

The “development agency needs to be scrapped,” says Jacksonville State University economics professor Peter Calcagno. It is “a futile and frequently corrupt effort in economic planning that only ends up redistributing other people's money.”[v]

Calcagno may very well be correct. Citizens and public officials should closely scrutinize the costs and benefits arising from taxpayer-funded economic development efforts. If complete closure is not a viable option, at the very least communities should consider whether there may be other models for how economic development agencies can achieve their stated goals.

Economic development agencies have the capacity, for instance, to transform themselves from agents of corporate welfare into catalysts for change. They can begin to foster a culture of genuinely consistent and uniform support for economic vitality by taking the following steps:

- First, seriously consider scaling back the size of the agency and the taxation necessary to support it. Any successes agencies achieve must be balanced against the drain they represent on the overall economic health of the area and the damaging culture created by granting special treatment to some business ventures and not others.

- Second, economic development agencies should become advocates of all business growth and entrepreneurship rather than focusing on targeted investments. This means encouraging state and local governments to streamline services, reduce overhead, and consider contracting out or privatizing where appropriate.

- Third, economic development agencies should follow these efforts up with proposals to lower the tax burden residents and businesses across the board. Dollars taken out of the hands of private citizens are dollars that are removed from the hands of those who create economic wealth and are in the best position to determine where and how resources should be allocated to maximize growth and prosperity in the region.[vi]

Economic development agencies should view these moves as central to their mission and as part of an overall effort to create a local enterprise zone, and local citizens should drive this transition.

Many areas sit on the brink of an important decision about how they will compete not only with its regional neighbors but also in an increasingly competitive global marketplace. It is true that recent events have hurt local, state, national, and international economies. But these blows also offer an opportunity to shift gears, to change the perception of local government, and to create an environment where investment is welcomed from within and without.

We cannot afford to do otherwise.


[i] Michael D. Lafaive, “Recommendations to Strengthen Civil Society and Balance Michigan’s State Budget — 2nd Edition,” (Midland, Michigan: Mackinac Center for Public Policy, 2004). Available at: http://www.mackinac.org/6545.

[ii] See Richard K. Vedder, “Grinding to a Halt: Ohio’s Tax Policy and its Impact on Economic Growth,” (Columbus, Ohio: The Buckeye Institute for Public Policy Solutions, 2002) 7. Available at: http://www.buckeyeinstitute.org/docs/Grinding_halt_study.pdf.

[iii]Ibid., 14.

[iv]“Bring Back The People: Reason Saves Cleveland With Drew Carey,”ReasonTV, 19 March 2010. Available at: http://www.youtube.com/watch?v=-a39z0VZa5I.

[v] Peter T. Calcagno,“Can States Buy Business?,”The Free Market (Auburn, AL: The Mises Institute, April 1999) Volume 17, Number 4. Available at: http://mises.org/freemarket_detail.aspx?control=30.

[vi] For an excellent recent discussion of government intervention in the economy, see Timothy Sandefur, “Does the State Create the Market – And Should it Pursue Efficiency?,” Harvard Journal of Law and Public Policy, Volume 33, Number 2 - Spring 2010. Available at: http://www.harvard-jlpp.com/33-2/779.pdf.

 

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Matthew Hisrich received his MDiv in teaching and theology from the Earlham School of Religion, where he now serves as Director of Recruitme

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