September 21, 2014
A Public Lecture on Economic Development Policy
My employer requires from time to time that some professors give a public lecture. Last week was my first at Ball State and I offered a talk titled: "Why Tax Incentives Don't Work." This was an intentionally provocative title. Economic development is big business with Indiana communities spending perhaps a billion dollars more on operations, incentives, abatements and infrastructure spending. So a little eye-popping headline can be excused because anything this big needs serious research.
The basis of my lecture was a 20-page study with nice mathematical models and graphs. Fortunately, most smart readers can understand the matter in far less space.
The Great Depression brought us modern economic development. From the 1930s to the 1970s about half of American counties and cities started an earnest effort to attract new businesses. There is some evidence that in the early days it was modestly successful. That shouldn't be too surprising since in the ‘30s maybe half of jobs were in businesses that could be lured to a new town with enough cash. But the world changed.
By 1990 nearly everyone had an economic development team, but by then fewer than one in five jobs were "footloose" in the sense that they could choose a place of business untethered to the local demand for the good or service they produced. Over the past quarter century the share of jobs in 'footloose' firms has dropped to under 5 percent, maybe much less. The average size of firms has plummeted and scarcely 150 new large manufacturing establishments (500+ workers) open each year.
The sum of all these facts is that the cost of luring a new firm to town has skyrocketed, while the benefits have plummeted. The U.S. has created more than 90 million net new jobs over the past 45 years, but there are fewer ‘footloose’ or ‘attractable’ jobs today than in 1969. Yet, communities throughout Indiana continue to pour money into attracting those jobs.
Understanding why there are so few footloose jobs in our economy is important. As we get richer we spend more on services such as entertainment, health care and the like, and less on manufactured goods. Add to that the automation in factories and the end result is far fewer businesses with fewer employees that could be lured to our state.
So what makes rich places rich and poor places poor? With almost all jobs tied to local demand for goods and services, most workers can choose to live anywhere they wish. That makes attracting people, not business, the successful strategy. Places with great schools, nice safe neighborhoods and good recreational opportunities attract more people. That is what makes places rich. Not having these attributes makes them poor. It is just about that simple.
Traditional business attraction efforts at the local level have not made Hoosiers better off. Smart mayors and county leaders know this and are shifting policies. Still, it isn’t necessary that every Indiana community modernize their economic development efforts, just the ones who want to grow.
About the Author
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