Yesterday Kansas Governor Sam Brownback released his plan for economic growth and development in Kansas. Drawing on free market principles and relying less on government intervention, the plan calls for a departure from present practices, especially the heavy-handed methods cities like Wichita use.
Brownback’s plan would transform Kansas’ approach to economic development. Currently the approach of the state and most of its cities and counties is to go after the “big deal.” This typically lures a large employer to Kansas through the use of various incentives. Or, as we have seen recently with the Hawker Beechcraft deal, incentives may be used to keep a company from leaving Kansas, even if that company is downsizing.
This last deal is especially troubling for the state’s future. Wichita State University professor H. Edward Flentje recently sounded a note of caution on deals like Hawker Beechcraft: “The result diverts millions in limited taxpayer funds, primarily state income-tax revenues, from state coffers to a company’s benefit, simply to have an existing business stay put.” Flentje wrote that there are more than 500 Kansas businesses now eligible for state assistance just like Hawker.
It is breaking this cycle of dependency on the “deal” that the governor’s plan calls for. Instead of the state targeting industries or specific companies, Kansas should seek to establish a strategy that is simple, fair, and of high capacity. I believe that for this strategy to work, Kansas cities and counties will need to follow the plan, too.
Productivity and growth, not just jobs
Right away the governor’s plan calls for prosperity through productivity: “A sound economic development process enhances prosperity through enhanced business-sector productivity.” This is in contrast to the economic development efforts of most governments, including that of the City of Wichita. There, the focus is on jobs, with capital investment a lesser factor.
The plan identifies two fundamental roles for government to play. First, the state should create an environment that “motivates as much risk-taking and competition as possible in the context of a ‘level playing field.'” Second, it must do this effectively and efficiently, leaving as many resources in the private sector as possible.
Key concepts in the plan are risk taking, economic competition, business experimentation, and trial and error. These activities are important, the plan says, because they will lead to increased economic productivity, which is what produces prosperity for Kansans. This is what the economic development policies of Kansas need to promote, says the plan: “The more that Kansas’ economic development environment motivates each entrepreneur and business to engage in the trial and error process, the more the Kansas economy will generate economic opportunity for Kansas families.”
But the state’s policies don’t promote this environment: “Yet Kansas economic development policy tends to work as if only a small sub-set of entrepreneurs or businesses matter.” Current policies attempt to find the right technologies and companies for the state to invest economic development resources in. The criteria for determining winners are often job count and wage levels. Winners are rewarded at the expense of non-winners.
Instead of this approach — which is common in most states and cities — the plan recommends a different policy: “Dedicate human and financial resources to promoting maximum experimentation through volume and diversity.” Also: “Establish stable policies that treat all investments and businesses equally, thereby liberating resources from the costly and economically dubious task of targeting.”
The plan is critical of selective efforts and in favor of broad-based strategy, especially in taxation: “A more uniform business tax policy that treats all businesses equally rather than the current set of rules and laws that give great benefit to a few (through heavily bureaucratic programs) and zero benefit to many.”
The plan emphasizes promoting as much diversity as possible. The current strategy of attracting large employers is not wise: “In fact, research indicates that economic development strategies based on the recruitment of large employers tends to have negative effects over the long run. One of the best predictors of future economic growth for metropolitan areas is the average employment size of business establishments: larger average sizes are typically associated with slower future growth.”
Measures of success of economic development efforts include jobs, although the plan cautions that “job creation is a result that derives from profitable business births and expansions.” Other factors are income growth, population density and migration, productivity growth, capital investment, and gross business starts and expansions.
The plan creates a council of economic advisers and coordinate the actions of seven different agencies that work in the field of economic development. It also calls for funding of certain university research programs.
The plan is not totally free-market in its approach. It retains PEAK, which lets companies that meet criteria retain their employees’ withholding taxes. But are we certain we can identify which companies are worthy of this subsidy? There will also be a fund that can be used to “close a deal on a prime economic growth opportunity.” Brownback’s “rural opportunity zones” are also included, which offer income tax breaks and student loan paydowns for people moving into counties that have experienced large population decline.
Cities like Wichita will need to change, adapt
The governor’s plan calls for economic development strategies very different from what most cities and counties pursue. As an example, at the most recent meeting of the Wichita City Council, the council approved forgivable loan agreements for two companies that are adding jobs. These loans amount to grants of money, providing that the companies meet specified employment goals. The loans were not the only form of subsidy. One company is slated to receive forgiveness from paying property tax for up to ten years, and both received grants and tax credits from the state under existing economic development programs.
At the meeting, Mayor Carl Brewer offered a defense of the city’s economic development policy (click here for video), saying that if Wichita doesn’t offer targeted incentives, other cities will. “If we don’t stay in the game and do whatever is necessary to be able to protect our jobs, protect our citizens, then we’re going to lose out on this entire thing. Times are changing. 20 years ago individuals weren’t even thinking about providing incentives to various different corporations. And now it appears that every place that we go, we seeing that everyone’s doing it. … That’s a reality of things. The dynamics and the field that we all have to play on is continuing to change.” He urged his critics to look at the larger picture, rather than just the action the council is taking today.
Council member Janet Miller also defended the city’s policy, saying that companies either qualify for incentives or they don’t, based on established criteria. She cited Wichita State University figures that support the incentives as providing an economic return to the city.
If cities continue to offer targeted incentives that are at odds with the governor’s plan, what will be the outcome? It doesn’t seem as though the two approaches are compatible. Many of the programs that cities use to offer targeted incentives — industrial revenue bonds (IRB), tax increment financing (TIF), community improvement districts (CID), and others — are creations of the legislature. It and the governor have the power to control their use — if there is political will to do so.