June 21, 2015
Watch Economic Development Spending
Local governments in Indiana spend tax dollars on many goods and services that make our lives better. Police and fire protection, roadways and other infrastructure, parks and amenities comprise the bulk of this spending. As in most states, the single largest piece of spending is our local public schools. We may argue about the right size and scope of this spending, but the need for these things is not at issue.
Quietly hidden from the watchful gaze of most taxpayers is the second largest expenditure—traditional economic development. In 2015 Hoosier cities and counties will spend about 1.5 billion dollars on tax abatements, TIF and direct economic development expenditures. That is more than they will spend on fire, police, and parks combined. While most of us would agree that we should be doing some traditional economic development, it is certainly time to ask serious questions about the effectiveness of these policies.
There is abundant technical research on traditional economic development policies, some of which I have authored. The results of this work are very mixed. Some policies work, while others do not. Instead of detailing that research here it might be better to simply look at the availability of ‘footloose’ businesses that we spend so much money trying to attract.
For a long time, Americans have been radically changing their buying habits. Today most household income is spent on locally-produced services. Businesses that provide these services must locate where their customer are, not where economic developers lure them. At the same time, we have become very good at manufacturing goods. This is due to huge capital investments. So, even when we adjust for inflation, a million dollars in capital purchases in 1950 would have brought in 20 new jobs, while today it is four or fewer. The net result is that since 1970 the U.S. has created 90 million new jobs, but there are actually fewer ‘footloose’ jobs.
The simple fact is that today, maybe one out of 50 jobs could be lured from one place to another with abatements, tax credits or other economic development tools. Over the past decade, fewer than 150 factories with more than 500 workers opened or relocated in the U.S. Given the more than 3,100 counties in the country, that means that you might expect one of these factories every 22 years or so.
These are grim facts for those who feel that attracting new businesses offer a path to prosperity for Hoosier communities. Fortunately there is another way, and the most thoughtful Indiana communities, along with hundreds more across the country, have already adopted them. What works for those communities is attracting people, for it is people that businesses increasingly seek out, either as workers or customers.
That is good news for Indiana, for it turns out that as businesses have become less mobile, households have become highly mobile. To attract households all you need is good schools, safe, livable communities, and a nice mix of recreation. If communities really want to prosper, that is where they need to focus their spending.
About the Author
Educational Attainment, the 21st Century Fund and the Future of SchoolingIndiana ranks 42nd in educational attainment.
Big Savings for Ending Prevailing WageMy statistical models show that repealing state prevailing wage laws save taxpayers money.
Re-Thinking Economic Development A large share of the most mobile families—perhaps half—no longer need to live near where they work.
Money Illusion and InflationPrice fluctuation could cause inflation to last longer, but it didn’t cause the inflation, it simply extends the pain.View archives