The City of Wichita and Sedgwick County are considering a revision to their economic development policies. Instead of promoting economic freedom and a free-market approach, the proposed policy gives greater power to city bureaucrats and politicians, and is unlikely to produce the economic development that Wichita needs.
A new feature of the proposed policy implements property tax forgiveness for speculative industrial buildings, with a formula that grants a higher percentage of tax forgiveness as building size increases. And, in a stroke of pure bureaucratic central planning, the ceilings of these buildings must be at least 28 feet high.
The policy requires that projects have an estimated ratio of public benefits to public costs of at least 1.3 to 1, although there are factors that allow exceptions. This ratio should be met for both the city’s general fund, and its debt service fund. This — if the city actually enforces this — would be a welcome change. But within the last year, the city ignored a large negative cost-benefit ratio for the Ambassador Hotel, and instead used a positive ratio for the city’s general fund. See Fact checking the Wichita Ambassador Hotel campaign.
Wichitans also need to realize that the “benefits” in the calculation are in the form of increased tax revenue paid to the city, county, etc. There is no consideration of actually rewarding the taxpayers that pay for — and assume the risk of — economic development incentives.
There is also the curious focus on jobs that pay above-average wages. But what about workers who don’t have the skills to earn above-average wages? Shouldn’t they be able to benefit from the city’s economic development efforts?
There is also the focus on exports: “A ‘Value-Added Job’ produces goods and/or services that are sold predominately outside of the MSA. Importing wealth into the community through value added jobs grows the local economy. Whereas non-value-added jobs typically re-circulate wealth within the community.” This is reminiscent of mercantilism, an economic strategy where exports are prized and imports are discouraged. It ignores the benefit that Wichitans receive from trading with themselves.
There are also targeted industries and a list of eligible business activities.
Clawbacks — the recovery of incentives if a company fails to live up to its agreed-to goals — are important in the new proposed policy. But the city has had clawbacks in effect, in the form of personal guarantees from TIF developers, for example. But last year the city decided not to enforce that agreement, and instead refinanced the debt at credit risk to the city.
The record on economic development
Earlier this year Greater Wichita Economic Development Coalition issued its annual report on its economic development activities for the year. The shows us that power of government to influence economic development is weak. In its recent press release, the organization claimed to have created 1,509 jobs in Sedgwick County during 2011. According to the Bureau of Labor Statistics, the labor force in Sedgwick County in 2011 was 253,940 persons. So the jobs created by GWEDC’s actions amounted to 0.59 percent of the labor force. This is a very small fraction, and other economic events are likely to overwhelm these efforts.
In his 2012 State of the City address, Brewer took credit for creating a similar percentage of jobs in Wichita.
Rarely mentioned are the costs of creating these jobs. These costs have a negative economic impact on those who pay these costs. This means that economic activity and jobs are lost somewhere else in order to pay for the incentives.
Also, at least some of these jobs would have been created without the efforts of GWEDC. All GWEDC should take credit for is the marginal activity that it purportedly created. Government usually claims credit for all that is good, however.
Danger going forward
The danger we in the Wichita area face is the overwhelming urge of politicians to be seen doing something. For example, in response to the departure of Boeing, Wichita Mayor Carl Brewer called for the community to “launch an aggressive campaign of job recruitment and retention.”
It is likely that we will become susceptible to large-scale government interventions in an attempt to gain new jobs. Our best course would be to take steps to make Kansas and Wichita an inviting place for all firms to do business. The instinct of politicians and bureaucrats, however, is to take action, usually in the form of targeted incentives as a way to spur economic development.
We’ve seen the disappointing results — not only with Boeing, but also in a report showing that Wichita has declined in economic performance compared to other areas.
These targeted economic development efforts fail for several reasons. First is the knowledge problem, in that government simply does not know which companies are worthy of public investment. In the case of the Wichita and Sedgwick County policy, do we really know which industries should be targeted? Are we sure about the list of eligible business activities? Is 1.3 to 1 really the benchmark we should seek, or we be better off and have more jobs if we insisted on 1.4 to 1 or relaxed the requirement to 1.2 to 1?
This lack of knowledge, however, does not stop governments from creating policies for the awarding of incentives. This “active investor” approach to economic development is what has led to companies escaping hundreds of millions in taxes — taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form.
Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business is critical of this approach to economic development. In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Hall quotes Alan Peters and Peter Fisher: “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and local economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence. We need to begin by lowering expectations about their ability to micro-manage economic growth and making the case for a more sensible view of the role of government — providing foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.”
In the same paper, Hall writes this regarding “benchmarking” — the bidding wars for large employers that Wichita and other cities engage in: “Kansas can break out of the benchmarking race by developing a strategy built on embracing dynamism. Such a strategy, far from losing opportunity, can distinguish itself by building unique capabilities that create a different mix of value that can enhance the probability of long-term economic success through enhanced opportunity. Embracing dynamism can change how Kansas plays the game.”
In making his argument, Hall cites research on the futility of chasing large employers as an economic development strategy: “Large-employer businesses have no measurable net economic effect on local economies when properly measured. To quote from the most comprehensive study: ‘The primary finding is that the location of a large firm has no measurable net economic effect on local economies when the entire dynamic of location effects is taken into account. Thus, the siting of large firms that are the target of aggressive recruitment efforts fails to create positive private sector gains and likely does not generate significant public revenue gains either.’”
There is also substantial research that is it young firms — distinguished from small business in general — that are the engine of economic growth for the future. We can’t detect which of the young firms will blossom into major success — or even small-scale successes. The only way to nurture them is through economic policies that all companies can benefit from. Reducing tax rates is an example of such a policy. Abating taxes for specific companies through programs like IRBs and other economic development programs is an example of precisely the wrong policy.
We need to move away from economic development based on this active investor approach. We need to advocate for policies — at Wichita City Hall, at the Sedgwick County Commission, and at the Kansas Statehouse — that lead to sustainable economic development. We need political leaders who have the wisdom to realize this, and the courage to act appropriately. Which is to say, to not act in most circumstances. Wichita and Sedgwick County are moving in the wrong direction.