The Perversion of Economic Development; L. W. Reed

Ideas and Consequences by Lawrence W. Reed The Perversion of Economic Development I n a country known for having forged the world's highest living standard from what was wilderness scarcely 200 years ago, one would think that "economic development" is a well-understoodconcept. Unfortunately, it isn't. In recent decades, economic develop ment has come to mean something other than the spontaneous, entrepreneurial phe nomenon that built America. It is often thought of as a kind of activist, publicpolicy responsibility of state and local govern ments. It rarely is defined as a "fair field and no favor" approach in which govern ments keep themselves unobtrusive and inexpensive so as to give wide berth to free markets. Instead, economic development conjures up notions of bureaucracies and commissions directing resources, subsidiz ing specific firms, granting special tax breaks to some and not to others, and erecting a vast network of regulatory incen tives and disincentives to affect behavior in the economy.

In short, economic development has come to mean what many statists and cen tral-planning types are fond of calling "in~ dustrial policy." They think the market place lacks direction and needs the assistance of officialdom. With tax dollars in hand to bestow upon the favored few, Lawrence W. Reed, economist and author, is President of The Mackinac Center for Public Policy, a free market research and educational organization headquartered in Midland, Michi gan. 75 bureaucrats claim new prophetical powers of distinguishing the winners from the losers in the marketplace. Many politicians find this approach at tractive because it brings with it the pag eantry of ribbon-cuttings and photo oppor tunities. They love to say, "Look at the jobs I created." Ever since 1976, when Pennsylvania suc cessfully lured Volkswagen with an $86 million package of loans, subsidies, and abatements, states have been adopting sim ilar schemes with great gusto and fanfare.

Often referred to as "incentive packages," they have become increasingly generous in spite of dubious results. Indeed, a 1989 report from the Council of State Govern ments stated emphatically, "[A] compre hensive review of past studies reveals no statistical evidence that business incentives actually create jobs. . . . They are not the primary or sole influence on business loca tion decision-making and . . . they do not have a primary effect on state employment growth." They do, however, shift tax burdens onto those who lack political connections, in crease the size of state bureaucracy, hinder the prospects of broad-based tax reduction and bestow alarming discretionary powers upon the boards and commissions that hand out the benefits. Ever conscious of image and the "big splash," development officials usually de vise plans that favor big businesses and discriminate against small firms. They chase 76 THE FREEMAN • FEBRUARY 1996 smokestacks and auto plants and frown on retail or service firms that might actually have more staying power. Firms that do not qualify for credits or subsidies must com pete against those who do, raising a question of fundamental fairness.

In the rush to fashion the next industrial policy contrivance, the bigger picture is shoved aside. Sam Staley, Vice President for Research at the Buckeye Institute for Public Policy Solutions in Dayton, Ohio, explains: "The fact is that the value to a firm of a typical, limited-term incentive package from government pales when compared to such factors as overall tax burdens, a rea sonably priced skilled labor force, the rela tive cost of compliance with regulations, efficient transportation facilities, crime rates, education quality, and the general quality of life. If a state or locality is not competitive in these areas, a business willgo elsewhere despite the subsidies and credits dangled before it." - Indeed, it is widely understood among economists that companies usually make their location decisions first in private, then hold out for the best incentive deals they can get from gullible government officials, play ing one off against another.

The claims of government development czars are almost always overblown, in part because they consider only the more visible side of the ledger. The downside factors of state incentive packages-from the anti competitive effects on non-favored firms to the opportunity cost of forgoing a more general tax reduction-are rarely factored into,the equation. Even when it doesn't degenerate into a thinly disguised system of political patron age, government placing its judgment ahead of the verdicts of the marketplace is more thanjust a role of dubious value. It is, indeed, utterly preposterous. No one-political ap pointees especially-spends someone else's money as carefullyas he spendshis own. Any firm or entrepreneur who cannot meet the financial petformance standards of private banks or venture capitalists does not sud denly become more likely to succeed by virtue of a government grant or favor.

In reality, government's involvement in economic development is more likely to simply reward mediocrity, obstruct the ev olution of genuine economic growth, and tum a risky private venture into a long-term public charge. Taxpayers foot the bill whether the development czars succeed or not, unlike truly private endeavors where the greatest risk is confined to those most directly involved with the venture. The folks picked to lead state development bureau cracies end up fattening not the economy, but rather, their resumes for their next government job. Writing in the November 1995 issue of The Freeman (" A Solution to the Incentives War?"), Andrew Cline of the John Locke Foundation in Raleigh, North Carolina, bluntly affirmed what will come as no sur prise to the serious economist: "To date, not one incentives proponent has been able to demonstrate that government incen tives create a net benefit for the general public."

Fortunately, a national movement is afoot to get state governments out of this busi ness. Organized by several free-market think tanks in the Midwest, more than 100 distinguished economists recently signed a Joint Resolution on State Economic Devel opment Policy. It urges states to abandon their activist industrial policies and pursue across-the-board policies of tax and spend ing reduction, deregulation, and freer mar kets. The resolution is now gathering mo mentum not only in the Midwest but in other corners of the country as well. The answer, in any event, is not in Wash ington and it's not in picking different people to run state programs. The answer is in educating the public in general and legisla tors in particular' as to the proper role of government and the real meaning of eco nomic development. When that task is ac complished, policies will change. The bottom line is what every American with a good sense of history really ought to know: economic development is what happens when government protects life and property and otherwise leaves us alone. 0 THEFREEMAN IDEASON LIBERTY Does Big Mean Bad?