Tomorrow the Wichita Metro Chamber of Commerce will announce, according to the Wichita Eagle, new economic development initiatives. Said to be the product of months of discussion, past history suggests that the efforts will not be fruitful for the Wichita area. The inclinations of the parties involved in this effort are for more government intervention and less reliance on economic freedom and free markets.
Do economic development incentives work?
Judging the effectiveness of economic development incentives requires looking for the unseen effects as well as what is easily seen. It’s easy to see groundbreaking and ribbon cutting ceremonies. It’s more difficult to see that the harm that government intervention causes.
That’s assuming that the incentives even work as advertised in the first place. Alan Peters and Peter Fisher, in their paper titled The Failures of Economic Development Incentives published in Journal of the American Planning Association, wrote on the effects of incentives. A few quotes from the study, with emphasis added:
Given the weak effects of incentives on the location choices of businesses at the interstate level, state governments and their local governments in the aggregate probably lose far more revenue, by cutting taxes to firms that would have located in that state anyway than they gain from the few firms induced to change location.
On the three major questions — Do economic development incentives create new jobs? Are those jobs taken by targeted populations in targeted places? Are incentives, at worst, only moderately revenue negative? — traditional economic development incentives do not fare well. It is possible that incentives do induce significant new growth, that the beneficiaries of that growth are mainly those who have greatest difficulty in the labor market, and that both states and local governments benefit fiscally from that growth. But after decades of policy experimentation and literally hundreds of scholarly studies, none of these claims is clearly substantiated. Indeed, as we have argued in this article, there is a good chance that all of these claims are false.
The most fundamental problem is that many public officials appear to believe that they can influence the course of their state or 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 their expectations about their ability to micromanage economic growth and making the case for a more sensible view of the role of government — providing the foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.
Other economists have studied tax increment financing (TIF) and have concluded that it is an overall negative factor for the entire region where it is used. Another study found that TIF districts created for retail use had a negative effect on municipal employment.
Last week Dave Trabert wrote in the Kansas Policy Institute blog: “There’s a very simple reason that these well-intended initiatives haven’t worked: local government and their public-private partners are offering employers what they want them to have instead of what they need to create jobs. The Wichita Chamber’s own survey of business owners said taxes were too high. WIBA’s member survey identified tax and regulatory issues as their top concerns, as did the US Chamber of Commerce. Yet government and their public-private partners ignore what the customer wants because they don’t want the same things.”
Wichita’s record on economic development
Earlier this year Wichita Mayor Carl Brewer said that the city’s efforts in economic development had created “almost 1000 jobs.” While that sounds like a lot of jobs, that number deserves context.
According to estimates from the Kansas Department of Labor, the civilian labor force in the City of Wichita for December 2011 was 192,876, with 178,156 people at work. This means that the 1,000 jobs created accounted for from 0.52 percent to 0.56 percent of our city’s workforce, depending on the denominator used. This miniscule number is dwarfed by the normal ebb and flow of other economic activity.
It’s also likely that the city’s economic development efforts were not responsible for a large proportion of these jobs. But government still takes credit. Also, the mayor did not mention the costs of creating these jobs. These costs have a negative economic impact on those who pay them. This means that economic activity — and jobs — are lost somewhere else in order to pay for the incentives.
The mayor’s plan going forward, in his words, is “We will incentivize new jobs.” But under the mayor’s leadership, this “active investor” policy has produced a very small number of jobs, year after year. Doubling down on the present course is not likely to do much better.
There’s even confusion over whether our efforts are working. In 2005, a Wichita Eagle editorial commented on a GWEDC report: “Among the points in Thursday’s report worthy of pride was this: the observation by coalition president J.V. Lentell that he’s never seen the cooperation on economic development between the public and private sectors as good as it is now. ‘I’m here to tell you, I think it’s on track,’ Lentell said, emphatically.” (July 29, 2005)
But in January of this year, an Eagle article listed several things Wichita needs, such as free land and buildings, money for closing deals, and a larger promotions budget. The reporter concluded “The missing pieces have been obvious for years, but haven’t materialized for one reason or another.”
So even if we believe that an active role for government is best, we have to conclude that our efforts aren’t working. Several long-serving politicians and bureaucrats that have presided over this failure: Mayor Carl Brewer has been on the city council or served as mayor since 2001. Economic development director Allen Bell has been working for the city since 1992. City Attorney Gary Rebenstorf has served for many years. At Sedgwick County, manager William Buchanan has held that position for 21 years. On the Sedgwick County Commission, Dave Unruh has been in office since 2003, and Tim Norton since 2001. (Unruh has said he wants to be Wichita’s next mayor.)
These people all believe in government-directed economic development. We need to hold them accountable.
Finally, consider Wichita job growth. As shown in the accompanying chart, the growth in government employees has outstripped private sector job growth. The increase in local government employees is particularly striking.
What our leaders want
I don’t know what will be in the economic development plan, but it is possible — likely, even — that there will be a call for a tax revenue stream for economic development. In February a company location consultant told Wichita leaders “Successful communities need a dedicated stream of money for economic development.” The news story reported “He was preaching to the choir. GWEDC leaders have been saying for some time that now is the time to go to the business community and the public to make the case for more money and resources.” (Consultant: Wichita needs sites, closing fund to lure business, Wichita Eagle February 16, 2012.)
At one time local chambers of commerce would oppose tax increases. They would promote free market principles as the way to create a positive business environment. But this year it was the official position of the Wichita Chamber that eight government subsidy programs was not enough for a downtown hotel, and that there should be a ninth.
A few years ago Stephen Moore wrote a piece for the Wall Street Journal that that shows how very often, local chambers of commerce support principles of crony capitalism instead of pro-growth policies that support free enterprise and genuine capitalism: “The Chamber of Commerce, long a supporter of limited government and low taxes, was part of the coalition backing the Reagan revolution in the 1980s. On the national level, the organization still follows a pro-growth agenda — but thanks to an astonishing political transformation, many chambers of commerce on the state and local level have been abandoning these goals. They’re becoming, in effect, lobbyists for big government. … In as many as half the states, state taxpayer organizations, free market think tanks and small business leaders now complain bitterly that, on a wide range of issues, chambers of commerce deploy their financial resources and lobbying clout to expand the taxing, spending and regulatory authorities of government. This behavior, they note, erodes the very pro-growth climate necessary for businesses — at least those not connected at the hip with government — to prosper. Journalist Tim Carney agrees: All too often, he notes in his recent book, ‘Rip-Off,’ ‘state and local chambers have become corrupted by the lure of big dollar corporate welfare schemes.'”
Does Wichita have the will?
Dr. Art Hall, who is Director of the Center for Applied Economics at the Kansas University School of Business has made a convincing case that less government involvement, not more, is needed. He argues that a dynamic economy is what Kansas needs, not one where government directs taxpayer investment for economic growth.
Hall writes this regarding “benchmarking” — the bidding wars for large employers that are the foundation of Wichita economic development, and the battle for which Wichita is likely preparing: “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.”
Hall’s paper on this topic is Embracing Dynamism: The Next Phase in Kansas Economic Development Policy.
We need to recognize that government as active investor doesn’t work. A serious problem with a plan for increased economic interventionism by government is the very nature of knowledge. In a recent issue of Cato Policy Report, Arnold King wrote:
As Hayek pointed out, knowledge that is important in the economy is dispersed. Consumers understand their own wants and business managers understand their technological opportunities and constraints to a greater degree than they can articulate and to a far greater degree than experts can understand and absorb.
When knowledge is dispersed but power is concentrated, I call this the knowledge-power discrepancy. Such discrepancies can arise in large firms, where CEOs can fail to appreciate the significance of what is known by some of their subordinates. … With government experts, the knowledge-power discrepancy is particularly acute.
Relying on economic freedom and free market solutions for economic growth and prosperity means trusting in the concept of spontaneous order. That takes courage. It requires faith in the values of human freedom and ingenuity rather than government control. It requires that government officials let go rather than grabbing tighter the reins of power, as will probably be the key feature of Wichita’s new economic development plan.
But Wichita’s mayor is openly dismissive of economic freedom, free markets, and limited government, calling these principles “simplistic.” Instead, he and most others prefer cronyism and corporate welfare. That hasn’t worked very well so far, and is not likely to work in the future.