September 3, 2004
Best Practices for Economic Development
Historians tell us that the framers of the Constitution viewed the states as laboratories, free to apply different laws and systems of government to the people they govern. The best ideas and the best practices, hopefully, would emerge from this competition, to the betterment of us all. But in the high stakes realm of economic development, sometimes you have to wonder.
There are thousands of economic development organizations around the country, and tens of thousands of governmental entities, who covet the new jobs, new tax revenue, and new spending that new private investment can bring. Even in a booming economy, the number of significant projects that any given community has a shot at landing is depressingly small. Can you blame a state, or a community, for going all out to try to land a company that will bring those new jobs to their home town?
According to the preliminary results of a new project underway by a pair of economists in Louisiana, the answer is yes. What communities do to attract specific companies to locate within their borders can do more harm than the good things spawned by the new investment.
The “independent economist” project commissioned by the state of Louisiana recognizes that economic development is not exactly a new thing. Incentives helped convince the Ball brothers to move their operations to Muncie more than a hundred years ago, after all. So we have a rich data base of experience to draw on to try to understand what kind of strategies and incentives work better to promote economic growth than others.
The number of public programs and activities whose aim is to promote investment is truly staggering. There are enterprise zones to help depressed urban areas, and rural programs for small towns. We have programs aimed specifically at small businesses, offering training, grant support and loan guarantees. Job subsidies help pay wages for new jobs created, and job training grants help companies attract and keep skilled workers.
And then you get to the tax code. The credits, deductions and other special treatment of investment could fill this column for the next several months. Likewise the variety of special infrastructure projects, from industrial parks, transportation spurs, and zoning provisions, is almost infinitely varied. All of which sets up the question – what’s working, and what isn’t?
The Louisiana economists sifted through 40 studies – some of which were themselves summaries of multiple studies – examining the effect of development activities and reached some interesting conclusions, not all of which agree with mainstream thinking.
They are fairly harsh, for example, on the use of Enterprise Zones to subsidize business development in depressed areas of cities. Such programs, they argue, have little effect on where businesses decide to locate, and thus pad the bottom lines of existing businesses with little other beneficial effect.
Likewise they deplore the packages given by states and larger regions for new plants and facilities built by large companies. Not only do states rarely have enough information to accurately project the benefits such projects bring, but they also unfairly reward large companies, who have substantial bargaining power, over the more numerous smaller companies who do not.
Business taxes are important, the study concludes, but the differences in tax rates between states are rarely large enough to matter. And tax cuts which result in cuts in spending on education and transportation infrastructure can hurt development.
What’s out there that’s working? That will have to wait until next week.
About the Author
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