Why Economic Development Efforts Often Fail
What is meant by that ubiquitous term economic development (ED)? The answer depends on who is asked. To any government, ED means more tax revenue and more government jobs. To ordinary citizens, ED means more jobs regardless of with whom. To developers, ED means buildings. To most other businesses, ED means the opportunity for more profit.
Most present day ED in the U.S., had its origins in the race riots of the mid-1960s. Under pressure to “do something,” in 1965 the Federal Government created both the Economic Development Administration (EDA) within the U.S. Department of Commerce and the Department of Housing and Urban Development (HUD).
If one asks whether after 40 years, the intended beneficiaries of ED are anywhere near as much better off as has been spent in taxpayer monies on ED, the answer is clearly no. Before exploring why continue with a third generation of a losing strategy, one point needs clarification. Economic development as it is used here refers to economic redevelopment. Many areas claiming to need economic development had been nice neighborhoods or business districts. Some have never even undeveloped but receive funding anyway.
Economic development is a by-product of profitable businesses. In short, however, politicians respond to pressure and what they perceive will get them re-elected. This usually means supporting an active minority. One consequence of this short-term “thinking” is that politicians approach ED like most cold remedies approach a cold. That is, they offer symptomatic relief rather than solving the problem. Thus, supporting ED appears to politicians be a no-brainer. Since markets almost always trump politics, “no-brainer” pretty well describes their strategies.
The “thinking” goes something like this: If you incent businesses (practice corporate welfare through subsidies and tax breaks), businesses will appear profitable. But these incentives are tied to hiring requirements. In doing all that, politicos hope to create the symptoms of good economic conditions. Another approach is incenting the construction of nice new buildings. It is then sort of assumed businesses will appear to occupy those buildings. This is exactly what building contractors want, and contractors tend to be big contributors to the political decision-makers. Even if that optimistic scenario materializes, there is still the question of what to do with the now perfectly good, older and but now vacant buildings. Creating vacancies to placate developers may be good politics. It is not good economics especially when there are public subsidies involved. A more sensible approach is to create an environment where businesses want to be and let the demand drive the construction of new buildings. One irony of all this is that the now vacant buildings have the effect of increasing the supply of building space with no corresponding increase in demand. So rents are reduced all around. This makes it harder for all building owners to be profitable.
Given the political paradigm, the true source of economic development is ignored. If instead, government took the less expensive and less public relations oriented approach of creating an environment conducive to profitable businesses, the demand for and funding of buildings would take care of itself. Further, businesses actually would be profitable and hire people. Public coffers would then start to fill. That is part of how a market economy works but is also difficult for politicians to take credit.
What does it mean to create an environment that is conducive to business? The answer, just like with ED, is many things including--but are not limited to: minimal regulations, minimal taxes, good infrastructure, fair access to private capital, good workforce, good basic government such as emergency services.
One further point is the typical reaction to some situation deemed economically depressing. That reaction is “Why doesn’t the government do something about it?!” This is quite the opposite attitude of the pioneers and others who solved the problems themselves. Back then there was no government to “do something” and those problems were arguably a lot more critical to their survival than our problems are to our survival.
(Mr. Stotter is an Academic Advisor to the Buckeye Institute for Public Policy Solutions, a research and educational institute located in Columbus, Ohio. More information on tax-related issues is available at www.buckeyeinstitute.org. Permission to reprint in whole or in part is hereby granted, provided the author and his affiliation are cited.)
