Wichita’s economic development strategy: rent seeking

As Wichita embarks on our planning for the revitalization of downtown Wichita — or as we look back at actions the Wichita city council takes almost every week — we ought to take a look to see if these actions produce an increase in wealth for our community.

It is wealth, after all, that defines prosperity. Our goal ought to be to create an environment where everyone lives in an environment conducive to creating prosperity and wealth. But in a misguided effort, our city leaders, week after week, take actions that produce just the opposite.

The revitalization of downtown Wichita is likely to further harm the economic environment in Wichita. That’s because counterproductive measures such as tax increment financing districts and a sales tax are likely to be necessary to implement the plan.

What’s wrong with these actions? Simple: They’re rent seeking activities. They don’t produce wealth.

The term rent, or more precisely, economic rent is somewhat unfortunate, as the common usage of the term — paying someone money for the use of an asset for a period of time — contains no sinister connotation. But economic rent does carry baggage.

So what is rent seeking? Wikipedia defines it like this: “In economics, rent seeking occurs when an individual, organization or firm seeks to earn income by capturing economic rent through manipulation or exploitation of the economic environment, rather than by earning profits through economic transactions and the production of added wealth.”

This explanation doesn’t do full justice to the term, because it doesn’t mention the role that government and politics usually play. The Concise Encyclopedia of Economics adds this: “The idea is simple but powerful. People are said to seek rents when they try to obtain benefits for themselves through the political arena. They typically do so by getting a subsidy for a good they produce or for being in a particular class of people, by getting a tariff on a good they produce, or by getting a special regulation that hampers their competitors.”

It’s thought that Wichita needs to dish out economic development subsidies so that we can attract new companies to our town, or, as is often the case, retain existing companies. So we grant special tax treatment — usually through industrial revenue bonds, but also in other ways — to these companies. Or sometimes we may dispense with the cumbersome IRB process and simply give companies money, or make loans that don’t need to be repaid.

These benefits — representing economic rent and rent seeking behavior — are great for the lucky companies that received them. But what about considering the city or region as a whole? In that case, something different emerges. Here’s an excerpt from “Rent Seeking and Economic Growth: Evidence From the States,” Harold J. Brumm, Cato Journal, Vol. 19, No. 1 (Spring/Summer 1999):

The present study finds the growth rate of real gross state product (GSP) per capita to be negatively correlated with the initial level of real GSP per capita, the burden of state tax structure, and — most notably — the level of rent-seeking activity in the state. On the basis of the estimates obtained for the standardized coefficients of the explanatory variables in the growth rate equation, the conclusion reached here is that rent-seeking activity has a relatively large negative effect on the rate of state economic growth. An implication of this finding is that a state government which promulgates policies that foster sustained artificial rent seeking does so at considerable expense to its economic growth.

In simple terms, rent seeking activity harms economic growth.

This study also states: “The private returns of rent seekers come from the redistribution of wealth, not from wealth creation. The tax that rent seeking imposes on the productive sector reduces the output growth rate by reducing the incentives of entrepreneurs to produce and innovate.”

This study looked at state governments and their activities, but there’s reason to suspect that the findings apply to cities and counties, too.

So should we simply give up and not grant preferential tax treatment and other subsidies to companies to induce them to locate in Wichita? No. Instead, as I’ve outlined in Wichita universal tax exemption could propel growth, we should offer preferential tax treatment to all new investment in Wichita.

A broad policy like this, where everyone benefits, eliminates the harmful effects of rent seeking. All companies can benefit, not only those that fit into certain categories or make special pleadings to politicians or bureaucrats. All companies can plan with certainty on receiving the benefit — there won’t be the risk whether the city council and bureaucrats will approve the benefit.

This is the type of policy we should follow to increase economic growth in Wichita.


14 thoughts on “Wichita’s economic development strategy: rent seeking”

  1. The jargon from the study really causes a lot of unused neurons to fire. Let me give you a local example. Wichita’s
    down town was getting in pretty bad shape a few years ago.
    But it was also getting to the point where a lot of us investors were starting to look at it as an opportunity. For an example I personally looked at purchasing the Sutton Place building for $380,000. If not for all the City regulations (Central Inspection) an average guy could have bought it renovated it a little at a time and broke even at $3.00 per square foot. Then the City of Wichita enters the arena, with their TIF Districts, Facade Grants, Special assessment financing. and market distortions, now the building is instantly sells for $800,000 to one of the City’s
    preferred developers. Then the City buys it from the developers, for a 50% profit and gives it back to them (in a separate LLC of course) Now the value is $1.2 million plus renovations partially paid for by Special assessment financing. Now the taxable value, and repayment are so high it has to rent for $8 to $10 per square foot. Why in Gods name would anybody pay $10 per square foot for space in the middle of downtown when they can pay the same for ground floor, drive up parking, on a busy corner
    in a prosperous suburban neighborhood? At $3 per square foot I would have filled this building with budding new businesses.

  2. Bob I don’t even agree with your Universal exemption. I can see your point, and your reasoning. (I can’t stop them from doing it, maybe I can get them to stop playing favorites).
    The simple fact of the matter is there are just to many people (maybe myself included) that can figure an angle for any opportunity. Say we implemented your plan. The next time XYZ corp wanted to expand they would just crank up a new LLC and apply for the Universal New Business tax incentives, instead of simply expanding. Another problem might be people that started new businesses (possibly non viable) to get the tax breaks on land and buildings, then sell the business to some sap retaining the property with an advantaged tax base. I do greatly prefer your program to the current system for down town development, which is
    6 Council persons, and a Mayor bestowing massive financial incentives on a 3 or 4 BLESSED developers.

  3. Question to Craig; What was it that Central Inspection required from you that kept you from purchasing the building? My understanding is that unless you change the use of the building you are grandfathered on code and fall under the same rules as the previous owner. You can email me directly at larry@garveycenter.com if you like.

  4. Will Mr. Weeks go after Park City for thinking about creating a TIF district? Or is Wichita the only target?

  5. Why don’t we make the whole city a TIF district if this is such a great idea? What a second, scratch that, make it the whole county! No, no, no……let’s make the whole state a TIF district if this is how to produce prosperity.

    Sadly, the Wichita city budget that reports on the TIF districts does not indicate that these actually succeed in their laudable goals. At least not here. Perhaps they work better in places like Chicago where they have been used for decades and we all know what good govt. they have up in Cook County.

    All sarcasm aside, TIF districts do seem to be helpful to local elected officials who can bestow benefits to their donor buddies. That’s my definition of rent seeking in our world of 2010.

  6. The Mayor and many on the City Council are poorly educated so how do you think that they are going to understand finances, TIF districts, or economics. Most of the Council read very little of the City Agenda packets and depend mostly on the City staff “spoon feeding” them what the staff want them to know. These are elected officials so perhaps instead of blaming them we should blame those who elected them.

  7. Once again the “analysis” is faulty and overly simplistic. Theoretically, developer’s pay the taxes that underwrite the TIF bonds. No taxes, no TIF. No TIF, no tax revenue. The public hasn’t lost anything because the public didn’t have anything to begin with. TIF is simply a way to earmark property taxes for a specific purpose without it going into a general fund.

    Now I said “theoretically”. TIF districts when used properly work; granted however, some of the TIF districts didn’t make sense.

    Craig, I too am interested in your OCI comment for different reasons. My experience has been that upon building remodels that a number of the older buildings have to be brought current with ADA and fire codes. This is a prohibitive cost to remodeling. Quite frankly some buildings aren’t worth the cost to remodel even if the building were obtained for free.

  8. 1. The idea is to create jobs and income to the city budget that doesn’t come from taxes. It’s not to create wealth for the prosperous.
    2. Ralph the Council have all attended college.
    And they go through the staff reports in detail. The reports are available to citizens a week in advance and we do ask questions. Most issues have already been discussed in the DAB’s. Go to a meeting. Like to see you there.
    3. I similarly understand the grandfathering. And they are adopting an Existing Building Code. But safety is usually not grandfathered (fire), some ADA requirements must be made or a plan established. If you open a wall you need to bring it up to electrical code.

  9. Lonnie, Paul Gray took some courses at WSU; Mr. Skelton finished high school: Sue Schlapp only attended high school, and Mayor Brewer attended Friends University for one semester and had a 1.6 GPA. None of these Council members have graduated from college.
    Most of the TIF districts are losing money year after year. The problem with this Council is not the economy, but their excessive spending and lack of leadership.

  10. Professor, unless mistaken, I believe that Janet Miller graduated from K-State and that as a school teacher, Lavonta Williams would have had to have been degreed.

  11. So y’all, instead of being “nice” like Ralph and giving the city’s rulers the benefit of the doubt by saying that they’re not educated enough about finances, you’re out and out stating that they’re out to screw the city’s taxpayers to give money to the local builders.

    The whole special tax break thing has to go, not just TIF districts, but the whole concept. If the taxes are so high that no one will move a business here, then MAYBE they’re too high for the businesses that are already here.

    The alternative is for every business to sell out at the end of the Special tax period and just start a new one. The people stupid enough to own a home in Wichita should have to pay businesses to make money here, yeah, that’s the ticket.

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