[Vision2020] economic development
Bill London
london@moscow.com
Mon, 23 Jun 2003 16:21:53 -0700
My thanks to Steve Cooke for suggesting to V2020 that we should read the
article (text below) at Governing.com.
This article summarizes research done in Ohio on the efficacy of that
state's economic development effort (giving various tax breaks and
incentives to businesses to expand).
The researchers discovered that the incentives did not work--"on
average, businesses accepting financial assistance created fewer jobs
than they would have created if they had not accepted financial
assistance."
The researchers also found that the economic development establishment
inflated the number of jobs they created--"businesses taking state money
announced much more ambitious plans to add workers but came in at about
the same level as the businesses that didn’t take state money."
The article summarizes: "their conclusions certainly fit into a long
line of research suggesting that money — whether financial incentives
or tax breaks — is not the most important factor in determining where
businesses locate and whether they expand. Availability of labor,
quality of life, proximity to certain pieces of big-ticket
infrastructure such as airports — all these things matter far more than
money."
This article is available at
http://www.governing.com/articles/6econ.htm
I hope that the new economic development strategic planning group
considers this kind of research. For too long, economic development has
been a sacred cow here, and too many are looking for ways to create tax
breaks, weaken zoning laws and throw away money on illusive job creation
dreams.
BL
--------------
>From Governing’s
June 2003 issue
ECONOMIC DEVELOPMENT COLUMN
WILLIAM
FULTON
Making Work
A new study suggests that state and local tax
incentives for
existing businesses don’t create new jobs.
he torrent of announcements, press releases and
gubernatorial
statements on economic development keeps coming:
companies expanding,
companies arriving, jobs being created, tax revenue
being increased — all,
we’re told, because of carefully crafted economic
development programs and
the wise use of tax dollars to encourage business
investment.
Skeptics have always questioned the
job-creation statistics in this gush of press
releases and reports, and now there is at least
one piece of evidence suggesting that the
skeptics are right. A new article in the Journal
of Regional Science — written by Todd Gabe
of the University of Maine and David Kraybill
of Ohio State University — takes a critical look
at the effect of one state-level economic
development program.
Gabe and Kraybill did a statistical analysis of
366 Ohio companies — existing companies,
not new companies — that expanded between
1993 and 1995. Some of them received
financial assistance from the state economic
development program; some did
not. And the results are both remarkable and
remarkably clear: Providing
financial incentives to existing businesses makes
little difference in creating
jobs. In fact, based on a regression analysis, the two
professors found that, on
average, businesses accepting financial assistance
created fewer jobs than they
would have created if they had not accepted financial
assistance.
This is not news that economic development
professionals want to hear, of
course, and the study has been roundly criticized by
state officials. But Kraybill
says he also has heard from a number of economic
development people who
don’t like the incentive game and are reassured by
evidence that subsidies
don’t matter much. And that’s not surprising, either,
because the study
highlighted another unfortunate reality in the
economic development business:
the tremendous pressure to justify one’s existence by
pumping up job-creation
numbers.
Gabe and Kraybill not only looked at the number of
jobs actually created but
also compared that with the number of jobs estimated
at the time the business
expansion was announced. What they found was telling.
The businesses that did
not accept economic development incentives announced
expansions averaging
45 workers — and hit the target exactly. But the
businesses accepting
incentives announced expansions averaging 91 workers —
and expanded by
only 51 workers. In other words, the businesses taking
state money announced
much more ambitious plans to add workers but came in
at about the same level
as the businesses that didn’t take state money.
This is a finding that ought to send a chill down the
back of every state
economic development director, because it calls into
question all those
job-creation numbers contained in all those press
releases and gubernatorial
announcements and thick state reports on economic
growth. Whenever State X
or Governor Y announces that the state has created
10,000 or 40,000 or
100,000 jobs, those numbers are usually based on the
announced estimates —
not actual results.
At a time when state budget directors are looking for
every dollar they can,
we’re beginning to see big fights over whether
economic development
programs are vital to restoring economic health or
expendable because they
don’t do anything. In California, for example, the
Trade, Technology and
Commerce Agency has taken a 70 percent budget cut, and
most economic
development functions have been transferred to a tiny
research section of the
governor’s office. There’s also talk of demoting it
from a Cabinet-level
department. This kind of battle will go on in
statehouses across the nation this
year and next. Placing job creation numbers in serious
question is likely to
empower the budget directors in their search for more
items to redline.
Gabe and Kraybill are careful to clarify that their
study dealt only with Ohio,
and only with expansions of existing businesses — not
new businesses that
have been lured to a state through economic
development incentives. The
results might be different in other states and might
have been different for new
businesses. But their conclusions certainly fit into a
long line of research
suggesting that money — whether financial incentives
or tax breaks — is not
the most important factor in determining where
businesses locate and whether
they expand.
Availability of labor, quality of life, proximity to
certain pieces of big-ticket
infrastructure such as airports — all these things
matter far more than money.
But they are much more difficult to quantify and much
less fun for politicians to
deal with. In politics, pork is a currency that
everybody understands, and a
well-respected measurement of whether or not you are
“delivering” for your
constituents. Based on Gabe and Kraybill’s study,
however, it would behoove
our governors to focus less on delivering pork
directly to the factory owners,
and more on putting the pork into labor training,
infrastructure and the other
things that businesses really need to thrive.