Voice For Liberty

Tag: Greater Wichita Economic Development Coalition

  • Open records again an issue in Kansas

    Responses to records requests made by Kansas Policy Institute are bringing attention to shortcomings in the Kansas Open Records Act.

    Those who have made records requests in Kansas are probably not surprised that KPI has had difficulty in having its records requests respected and filled. In 2007 Better Government Association and National Freedom of Information Coalition gave Kansas a letter grade of “F” for its open records law. Last year State Integrity Investigation looked at the states, and Kansas did not rank well there, either. See Kansas rates low in access to records.

    This week KPI president Dave Trabert appeared before the Sedgwick County Commission to express his concerns regarding the failure of Greater Wichita Economic Development Coalition to fulfill a records request made under the provisions of the Kansas Open Records Act. Video is at Open government in Sedgwick County Kansas.

    While commissioners Karl Peterjohn and Richard Ranzau spoke in favor of government transparency and compliance with records requests, not all their colleagues agreed.

    Dave Unruh asked Trabert if GWEDC had responded to his records request. Trabert said yes, and the response from GWEDC is that the agency believes it has complied with the open records law. This, he explained, is a common response from agencies.

    Commission Chair Tim Norton expressed concern that any non-profit the commission gives money to would have to hire legal help, which he termed an unintended consequence. He made a motion to receive and file Trabert’s remarks, which is routine. His motion also included taking this matter under advisement, which is what politicians do in order to bury something. Unruh seconded the motion.

    Peterjohn made a substitute motion that a representative from GWEDC would appear before the commission and discuss the open records act. This motion passed four to one, with Unruh in the minority. Even though Norton voted in favor of Peterjohn’s motion, it’s evident that he isn’t in favor of more government transparency. Unruh’s vote against government transparency was explicit.

    Wichita school district records request

    USD 259, the Wichita public school district, also declined to fulfill a records request submitted by KPI. In a press release, KPI details the overly-legalistic interpretation of the KORA statute that the Wichita school district uses to claim that the records are exempt from disclosure.

    In a news report on KSN Television, school board president Lynn Rogers explained the district’s reason for denying the records request: “But some school board members with USD 259 in Wichita say, the numbers brought up in court are preliminary numbers. That’s the reason they are not handing them over to KPI. ‘We have worked very hard over the years to be very forthright and we’ve tried to disclose the information when we have it,’ says Lynn Rogers.’”

    This claim by Rogers — if sincere — is a break from the past. In 2008 Rogers told me that it is a burden when citizens make requests for records.

    Until recently the Wichita school district had placed its monthly checkbook register on its website each month, and then removed it after a month had passed. Rogers explained that the district didn’t have space on its servers to hold these documents. That explanation is total nonsense, as the pdf check register documents are a very small fraction of the size of video files that the district hosted on its servers. Video files, by the way, not related to instruction, but holding coverage of groundbreaking ceremonies.

    City of Wichita

    KPI has made records requests to other local governmental agencies. Some have refused to comply on the basis that they are not public agencies as defined in Kansas statutes. This was the case when I made records requests to Wichita Downtown Development Corporation, Greater Wichita Economic Development Coalition, and Go Wichita Convention and Visitors Bureau.

    In 2009 I addressed the Wichita City Council and asked that the city direct that WDDC follow the law and fulfill my records requests. (Video is at Video: City of Wichita and the Kansas Open Records Act.)

    In my remarks, I told Mayor Carl Brewer and the council this:

    The Kansas Open Records Act (KORA), in KSA 45-216 (a) states: “It is declared to be the public policy of the state that public records shall be open for inspection by any person unless otherwise provided by this act, and this act shall be liberally construed and applied to promote such policy.”

    But in my recent experience, our city’s legal staff has decided to act contrary to this policy. It’s not only the spirit of this law that the city is violating, but also the letter of the law as well.

    Recently I requested some records from the Wichita Downtown Development Corporation. Although the WDDC cooperated and gave me the records I requested, the city denies that the WDDC is a public agency as defined in the Kansas Open Records Act.

    This is an important issue to resolve.

    In the future, requests may be made for records for which the WDDC may not be willing to cooperate. In this case, citizens will have to rely on compliance with the law, not voluntary cooperation. Or, other people may make records requests and may not be as willing as I have been to pursue the matter. Additionally, citizens may want to attend WDDC’s meetings under the provisions of the Kansas Open Meetings Act.

    Furthermore, there are other organizations similarly situated. These include the Greater Wichita Economic Development Coalition and the Go Wichita Convention and Visitors Bureau. These organizations should properly be ruled public agencies as defined in the Kansas Open Records Act so that citizens and journalists may freely request their records and attend their meetings.

    Here’s why the WDDC is a public agency subject to the Open Records Act. KSA 45-217 (f)(1) states: “‘Public agency’ means the state or any political or taxing subdivision of the state or any office, officer, agency or instrumentality thereof, or any other entity receiving or expending and supported in whole or in part by the public funds appropriated by the state or by public funds of any political or taxing subdivision of the state.”

    The Kansas Attorney General’s office offers additional guidance: “A public agency is the state or any political or taxing subdivision, or any office, officer, or agency thereof, or any other entity, receiving or expending and supported in whole or part by public funds. It is some office or agency that is connected with state or local government.”

    The WDDC is wholly supported by a special property tax district. Plain and simple. That is the entire source of their funding, except for some private fundraising done this year.

    The city cites an exception under which organizations are not subject to the Kansas Open Records Act: “Any entity solely by reason of payment from public funds for property, goods or services of such entity.”

    The purpose of this exception is so that every vendor that sells goods and services to government agencies is not subject to the Kansas Open Records Act. For example, if a city buys an automobile, the dealer is not subject simply because it sold a car to the city.

    But this statute contains an important qualifier: the word “solely.” In this case, the relationship between the City of Wichita and the WDDC is not that of solely customer and vendor. Instead, the city created a special tax district that is the source of substantially all WDDC’s revenue, and the existence of the district must be renewed by the city soon. The WDDC performs a governmental function that some cities decide to keep in-house. The WDDC has only one “customer,” to my knowledge, that being the City of Wichita.

    Furthermore, the revenue that the WDDC receives each year is dependent on the property tax collected in the special taxing district.

    The only reasonable conclusion to draw is that in terms of both funding and function, the WDDC is effectively a branch of Wichita city government.

    The refusal of the city’s legal department to acknowledge these facts and concede that the WDDC is a public agency stands reason on its head. It’s also contrary to the expressly stated public policy of the state of Kansas. It’s an intolerable situation that cannot be allowed to exist.

    Mr. Mayor and members of the council, it doesn’t take a liberal application of the Kansas Open Records Act to correct this situation. All that is required is to read the law and follow it. That’s what I’m asking this body to do: ask the city legal department to comply with the clear language and intent of the Kansas Open Records Act.

    The following year when WDDC’s contract was before the council for renewal, I asked that the city, as part of the contract, agree that WDDC is a public agency as defined in Kansas law. (Video is at Kansas Open Records Act at Wichita City Council.) Then-council member Paul Gray, after noting that he had heard all council members speak in favor of government transparency, said that even if WDDC is not a public agency under the law, why can’t it still proceed and fulfill records requests? This is an important point. The Kansas Open Records Act contains many exclusions that agencies use to avoid releasing records. But agencies may release the records if they want.

    Any council member could have made the motion that I asked for. But no one, including Gray, former council member Sue Schlapp, former member Jim Skelton (now on the Sedgwick County Commission), Mayor Carl Brewer, and council members Jeff Longwell (district 5, west and northwest Wichita), Janet Miller (district 6, north central Wichita), and Lavonta Williams (district 1, northeast Wichita) would make a motion to increase government transparency and citizens’ right to know. Wichita city manager Robert Layton offered no recommendation to the council.

    Last year I appeared again before the council to ask that Go Wichita agree that it is a public agency as defined in the open records act. Randy Brown, who is chair of the Kansas Sunshine Coalition for Open Government and former opinion page editor of the Wichita Eagle was at the meeting and spoke on this matter. In his remarks, Brown said “It may not be the obligation of the City of Wichita to enforce the Kansas Open Records Act legally, but certainly morally you guys have that obligation. To keep something cloudy when it should be transparent I think is foolishness on the part of any public body, and a slap in the face of the citizens of Kansas. By every definition that we’ve discovered, organizations such as Go Wichita are subject to the Kansas Open Records Act.”

    Brown said that he’s amazed when public officials don’t realize that transparency helps build trust in government, thereby helping public officials themselves. He added “Open government is essential to a democracy. It’s the only way citizens know what’s going on. … But the Kansas Open Records Act is clear: Public records are to be made public, and that law is to be construed liberally, not by some facile legal arguments that keep these records secret.”

    He recommended to the council, as I did, that the contract be contingent on Go Wichita following the Kansas Open Records Act.

    Discussion on this matter revealed a serious lack of knowledge by some council members regarding the Kansas Open Records Act. In remarks from the bench James Clendenin (district 3, southeast and south Wichita) asked the city manager a series of questions aimed at determining whether the city was satisfied with the level of service that Go Wichita has provided. He then extended that argument, wondering if any company the city contracts with that is providing satisfactory products or service would be subject to “government intrusion” through records requests. Would this discourage companies from wanting to be contractors?

    First, the Kansas Open Records Act does not say anything about whether a company is providing satisfactory service to government. That simply isn’t a factor, and is not a basis for my records request to Go Wichita. Additionally, the Kansas Open Records Act contains a large exception, which excepts: “Any entity solely by reason of payment from public funds for property, goods or services of such entity.” So companies that sell to government in the ordinary course of business are not subject to the open records law. Go Wichita is distinguished, since it is almost entirely funded by taxes and has, I believe, just a single client: the City of Wichita.

    Finally, we should note that the open records law does not represent government intrusion, as Clendenin claimed. Open records laws offer citizens the ability to get an inside look at the working of government. That’s oversight, not intrusion.

    Pete Meitzner (district 2, east Wichita) asked that there might be a workshop to develop a policy on records requests. He expressed concern that departments might be overwhelmed with requests from me that they have to respond to in a timely fashion, accusing me of “attempt to bury any of our departments in freedom of information acts [sic].” Such a workshop would probably be presented by Wichita City Attorney Gary Rebenstorf. His attitude towards the open records law is that of hostility, and is not on the side of citizens.

    In making this argument, Mr. Meitzner might have taken the time to learn how many records requests I’ve made to the city. The answer, to the best of my recollection, is that I made no requests that year to the city citing the open records act. I have made perhaps a half-dozen informal requests, most of which I believe were fulfilled consuming just a few moments of someone’s time.

    As to Meitzner’s concern over the costs of fulfilling records requests: The law allows for government and agencies to charge fees to fulfill requests. They often do this, and I have paid these fees. But more important than this, the attitude of council member Meitzner is troubling. Government should be responsive to citizens. As Randy Brown told the council, government should welcome opportunities to share information and be open and transparent.

    Michael O’Donnell (district 4, south and southwest Wichita) made a motion that the contract be approved, but amended that Go Wichita will comply with the Kansas Open Records Act. That motion didn’t receive a second.

    Brown and I appeared on the KAKE Television public affairs program This Week in Kansas to discuss this matter. Video is at In Wichita, disdain for open records and government transparency.

    Enforcement of Kansas Open Records Act

    In Kansas, when citizens believe that agencies are not complying with the Kansas Open Records Act, they have three options. One is to ask the Kansas Attorney General for help. But the policy of the Attorney General is to refer all cases to the local District Attorney, which is what I did. The other way to proceed is for a citizen to pursue legal action at their own expense.

    After 14 months, Sedgwick County DA Nola Foulston’s office decided in favor of the governmental agencies. See Sedgwick County DA Response to KORA Request to Wichita Downtown Development Corporation.

    When newspapers have their records requests refused, they usually give publicity to this. The Wichita Eagle is aware of my difficulties with records requests in Wichita, as their reporters have attended a number of meetings where my records requests were discussed, sometimes at length. But so far no coverage of an issue that, were the newspaper in my shoes, would undoubtedly covered on the front page. Something tells me that KPI won’t get any coverage, either.

    Additional information on this topic is at:

  • Wichita Mayor Carl Brewer on role of government

    When President Barack Obama told business owners “You didn’t build that,” it set off a bit of a revolt. Those who worked hard to build businesses didn’t like to hear the president dismiss their efforts.

    Underlying this episode is a serious question: What should be the role of government in the economy? Should government’s role be strictly limited, according to the Constitution? Or should government take an activist role in managing, regulating, subsidizing, and penalizing in order to get the results politicians and bureaucrats desire?

    Historian Burton W. Folsom has concluded that it is the private sector — free people, not government — that drives innovation: “Time and again, experience has shown that while private enterprise, carried on in an environment of open competition, delivers the best products and services at the best price, government intervention stifles initiative, subsidizes inefficiency, and raises costs.”

    But some don’t agree. They promote government management and intervention into the economy. Whatever their motivation might be, however it was they formed their belief, they believe that without government oversight of the economy, things won’t happen.

    But in Wichita, it’s even worse. Without government, it is claimed that not only would we stop growing, economic progress would revert to a previous century.

    Mayor Carl Brewer made these claims in a 2008 meeting of the Wichita City Council.

    In his remarks (transcript and video below), Brewer said “if government had not played some kind of role in guiding and identifying how the city was going to grow, how any city was going to grow, I’d be afraid of what that would be. Because we would still be in covered wagons and horses. There would be no change.”

    When I heard him say that, I thought he’s just using rhetorical flair to emphasize a point. But later on he said this about those who advocate for economic freedom instead of government planning and control: “… then tomorrow we’ll be saying we don’t want more technology, and then the following day we’ll be saying we don’t want public safety, and it won’t take us very long to get back to where we were at back when the city first settled.”

    Brewer’s remarks are worse than “You didn’t build that.” The mayor of Wichita is telling us you can’t build that — not without government guidance and intervention, anyway.

    Many people in Wichita, including the mayor and most on the city council and county commission, believe that the public-private partnership is the way to drive innovation and get things done. It’s really a shame that this attitude is taking hold in Wichita, a city which has such a proud tradition of entrepreneurship. The names that Wichitans are rightly proud of — Lloyd Stearman, Walter Beech, Clyde Cessna, W.C. Coleman, Albert Alexander Hyde, Dan and Frank Carney, and Fred C. Koch — these people worked and built businesses without the benefit of public-private partnerships and government subsidy.

    This tradition of entrepreneurship is disappearing, replaced by the public-private partnership and programs like Visioneering Wichita, sustainable communities, Greater Wichita Economic Development Coalition, Regional Economic Area Partnership (REAP), and rampant cronyism. Although when given a chance, voters are rejecting cronyism.

    We don’t have long before the entrepreneurial spirit in Wichita is totally subservient to government. What can we do to return power to the people instead of surrendering it to government?

    Wichita Mayor Carl Brewer, August 12, 2008: You know, I think that a lot of individuals have a lot of views and opinions about philosophy as to, whether or not, what role the city government should play inside of a community or city. But it’s always interesting to hear various different individuals’ philosophy or their view as to what that role is, and whether or not government or policy makers should have any type of input whatsoever.

    I would be afraid, because I’ve had an opportunity to hear some of the views, and under the models of what individuals’ logic and thinking is, if government had not played some kind of role in guiding and identifying how the city was going to grow, how any city was going to grow, I’d be afraid of what that would be. Because we would still be in covered wagons and horses. There would be no change.

    Because the stance is let’s not do anything. Just don’t do anything. Hands off. Just let it happen. So if society, if technology, and everything just goes off and leaves you behind, that’s okay. Just don’t do anything. I just thank God we have individuals that have enough gumption to step forward and say I’m willing to make a change, I’m willing to make a difference, I’m willing to improve the community. Because they don’t want to acknowledge the fact that improving the quality of life, improving the various different things, improving bringing in businesses, cleaning up street, cleaning up neighborhoods, doing those things, helping individuals feel good about themselves: they don’t want to acknowledge that those types of things are important, and those types of things, there’s no way you can assess or put a a dollar amount to it.

    Not everyone has the luxury to live around a lake, or be able to walk out in their backyard or have someone come over and manicure their yard for them, not everyone has that opportunity. Most have to do that themselves.

    But they want an environment, sometimes you have to have individuals to come in and to help you, and I think that this is one of those things that going to provide that.

    This community was a healthy thriving community when I was a kid in high school. I used to go in and eat pizza after football games, and all the high school students would go and celebrate.

    But, just like anything else, things become old, individuals move on, they’re forgotten in time, maybe the city didn’t make the investments that they should have back then, and they walk off and leave it.

    But new we have someone whose interested in trying to revive it. In trying to do something a little different. In trying to instill pride in the neighborhood, trying to create an environment where it’s enticing for individuals to want to come back there, or enticing for individuals to want to live there.

    So I must commend those individuals for doing that. But if we say we start today and say that we don’t want to start taking care of communities, then tomorrow we’ll be saying we don’t want more technology, and then the following day we’ll be saying we don’t want public safety, and it won’t take us very long to get back to where we were at back when the city first settled.

    So I think this is something that’s a good venture, it’s a good thing for the community, we’ve heard from the community, we’ve seen the actions of the community, we saw it on the news what these communities are doing because they know there’s that light at the end of the tunnel. We’ve seen it on the news. They’ve been reporting it in the media, what this particular community has been doing, and what others around it.

    And you know what? The city partnered with them, to help them generate this kind of energy and this type of excitement and this type of pride.

    So I think this is something that’s good. And I know that there’s always going to be people who are naysayers, that they’re just not going to be happy. And I don’t want you to let let this to discourage you, and I don’t want the comments that have been heard today to discourage the citizens of those neighborhoods. And to continue to doing the great work that they’re doing, and to continue to have faith, and to continue that there is light at the end of the tunnel, and that there is a value that just can’t be measured of having pride in your community and pride in your neighborhood, and yes we do have a role to be able to help those individuals trying to help themselves.

  • Wichita revises economic development policy

    The City of Wichita has passed a revision to its economic development policies. Instead of promoting economic freedom and a free-market approach, the new policy gives greater power to city bureaucrats and politicians, and is unlikely to produce the economic development that Wichita needs. Sedgwick County will also consider adopting this policy.

    The city wants to have policies that everyone can understand, but it also wants flexibility to waive policies and guidelines in light of mitigating factors.

    Here’s an illustration of how difficult it is to adhere to policies. The draft proposal of the new economic development policy states: “The ratio of public benefits to public costs, each on a present value basis, should not be less than 1.3 to one for both the general and debt service funds for the City of Wichita; for Sedgwick County should not be less than 1.3 overall.”

    The policy also states that if the 1.3 to one threshold is not met, the incentive could nonetheless be granted if two of three mitigating factors are found to apply. But there is a limit, according to the policy: “Regardless of mitigating factors, the ratio cannot be less than 1.0:1.”

    Last August the city council passed a multi-layer incentive package for Douglas Place, which is better known as the Ambassador Hotel and environs. Here’s what the material accompanying the letter of intent that the council passed on August 9, 2011 held: “As part of the evaluation team process, the WSU Center for Economic Development and Business Research studied the fiscal impact of the Douglas Place project on the City’s General Fund, taking into account the requested incentives and the direct, indirect and induced generation of new tax revenue. The study shows a ratio of benefits to costs for the City’s General Fund of 2.62 to one.”

    So far, so good. 2.62 is greater than 1.3. But the policy applies to both the general fund and the debt service fund. So what about the impact to the debt service fund? Here’s the complete story from the WSU CEDBR report:

                                       Cost-benefit ratio
City Fiscal Impacts General Fund         2.63
City Fiscal Impacts Debt Service         0.83
City Fiscal Impacts                      0.90

    The impact on the debt service fund is negative, and the impact in total is negative. (A cost-benefit ratio of less than one is “negative.”)

    Furthermore, the cost of the Ambassador Hotel subsidy program to the general fund is $290,895, while the cost to the debt service fund is $7,077,831 — a cost factor 23 times as large.

    So does the city have the wherewithal to stick to the policies it formulates? In my experience, not always. In this case, the city didn’t make this negative information available to the public. It was made public only after I requested the report from WSU CEDBR. It is not known whether council members were aware of this information when they voted.

    There are, however, other factors that may allow the city to grant an incentive: “In addition to the above provisions, the City Council and/or County Commission may consider the following information when deciding whether to approve an incentive.” A list of 12 factors follows, some so open-ended that the city can find a way to approve almost any incentive it wants.

    At yesterday’s city council meeting, when explaining the policy to the council, Wichita economic development chief Allen Bell said there should be “rational criteria” for when exceptions can be considered. We should also ask for truthfulness and complete disclosure, including negative factors.

    When considering cost-benefit ratios, we 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. Furthermore, these benefits are not like profits that business firms earn. Instead, they are in the form of taxes that government takes.

    Speculative industrial buildings

    A new feature of the policy implements property tax forgiveness for speculative industrial buildings. The proposed plan had a formula that grants a higher percentage of tax forgiveness as building size increases, but the council eliminated that and voted a 100 percent tax abatement for all buildings larger than 50,000 square feet.

    Given tax costs and industrial building rents, this policy gives these incentivized buildings a cost advantage of about 20 percent over competitors. That’s very high, and makes it difficult for existing buildings to compete. Probably no one will build these buildings unless they qualify for and receive this incentive.

    While the city hopes that these incentivized buildings will generate new jobs in Wichita, there appears to be nothing in the policy that prevents existing companies in Wichita from moving to these buildings. This simply moves jobs from one location to another, and would harm existing landlords.

    While the policy was designed to encourage large buildings instead of small, there appears to be no limitation on the size of space someone can rent. A building 100,000 square feet in size gets 100 percent tax abatement. But the space could be rented out in smaller parcels to multiple tenants, making it easy to steal local tenants from another landlord.

    Finally, are pre-built facilities really necessary? Wind energy firms in Newton and Hutchinson built their plants from ground up.

    Tax costs

    Since many of the economic development incentives involve relief from paying taxes, we have to ask whether our tax levels and tax policies are discouraging business investment. Now we have an answer.

    This year the Tax Foundation released a report that examines the tax costs on business in the states and in selected cities in each state. The news for Kansas is worse than merely bad, as our state couldn’t have performed much worse: Kansas ranks 47th among the states for tax costs for mature business firms, and 48th for new firms. Wichita was cited in the report, and the city did not do well. See Kansas and Wichita lag the nation in tax costs.

    Wichita’s 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, Wichita Mayor Carl Brewer took credit for creating a similar percentage of jobs in Wichita.

    Rarely mentioned are the costs of creating these jobs — the costs of the incentives and the cost of the economic development bureaucracy. These costs have a negative economic impact on those who pay them, meaning 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.

    The targeted economic development efforts of governments like Wichita and Sedgwick County 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 that subsidies can be used to pay? Is 1.3 to one really the benchmark we should seek, or we be better off and have more jobs if we insisted on 1.4 to one or relaxed the requirement to 1.2 to one?

    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.

  • Wichita-area economic development policy changes proposed

    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.

    Embracing Dynamism: The Next Phase in Kansas Economic Development Policy

    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.

  • Tax costs block progress in Kansas

    If we in Kansas and Wichita wonder why our economic growth is slow and our economic development programs don’t seem to be producing results, there is now data to answer the question why: Our tax costs are high — way too high.

    Recently the Tax Foundation released a report that examines the tax costs on business in the states and in selected cities in each state. The news for Kansas is worse than merely bad, as our state couldn’t have performed much worse: Kansas ranks 47th among the states for tax costs for mature business firms, and 48th for new firms.

    The report is Location Matters: A Comparative Analysis of State Tax Costs on Business.

    The study is unusual in that it looks at the impact of states’ tax burden on mature and new firms. This, according to report authors, “allows us to understand the effects of state tax incentives compared to a state’s core tax system.” In further explanation, the authors write: “The second measure is for the tax burden faced by newly established operations, those that have been in operation less than three years. This represents a state’s competitiveness after we have taken into account the various tax incentive programs it makes available to new investments.”

    The report also looks at the tax costs for specific types of business firms. For Kansas, some individual results are better than overall, but still not good. For a mature corporate headquarters, Kansas ranks 30th. For locating a new corporate headquarters — one that would benefit from tax incentive programs — Kansas ranked 42nd. For a mature research and development facility, 46th; while new is ranked 49th. For a mature retail store, 38th, while new is ranked 45th.

    There are more categories. Kansas ranks well in none.

    The report also looked at two cities in each state, a major city and a mid-size city. For Kansas, the two cities are Wichita and Topeka.

    Among the 50 cities chosen, Wichita ranks 30th for a mature corporate headquarters, but 42nd for a new corporate headquarters.

    For a mature research and development facility, Wichita ranks 46th, and 49th for a new facility.

    For a mature and new retail store, Wichita ranks 38th and 45th, respectively.

    For a mature and new call center, Wichita ranks 43rd and 47th, respectively.

    In its summary for Kansas, the authors note the fecklessness of Kansas economic development incentives: “Kansas offers among the most generous property tax abatements and investment tax credits across most firm types, yet these incentives seem to have little impact on the state’s rankings for new operations.”

    Kansas tax cost compared to neighbors. Click here for a larger version.

    It’s also useful to compare Kansas to our neighbors. The comparison is not favorable for Kansas.

    More evidence of failure

    Recently the Greater Wichita Economic Development Coalition issued its annual report on its economic development activities for the year. This report 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, Wichita Mayor Carl Brewer took credit for creating a similar percentage of jobs in Wichita.

    The report by the Tax Foundation helps us understand why the economic development efforts of GWEDC, Sedgwick County, and Wichita are not working well: Our tax costs are too high.

    While economic development incentives can help reduce the cost of taxes for selected firms, incentives don’t help the many firms that don’t receive them. In fact, the cost of these incentives is harmful to other firms. The Tax Foundation report points to this harm: “While many state officials view tax incentives as a necessary tool in their state’s ability to be competitive, others are beginning to question the cost-benefit of incentives and whether they are fair to mature firms that are paying full freight. Indeed, there is growing animosity among many business owners and executives to the generous tax incentives enjoyed by some of their direct competitors.”

    But there is one incentive that can be offered to all firms: Reduce tax costs for everyone. The policy of reducing tax costs for the selected few is not working. This “active investor” approach to economic development is what has led companies in Wichita and Kansas 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 Kansas has been pursuing and which Wichita’s Brewer wants to step up: “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 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, except to reduce the cost of government for everyone.

  • Cabela’s opening a reminder of failure in Wichita

    Yesterday’s opening of a Cabela’s store in Wichita was celebrated as a great success, but the circumstances of the store’s birth should remind us of the failure of Wichita’s economic development strategies and efforts.

    We have to ask why Wichita is not able to attract retailers like Cabela’s without offering some sort of subsidy. In the current example, we are allowing Cabela’s to add 1.2 cents per dollar extra sales tax. Cabela’s keeps one cent, and 0.2 cents will be used to build a new highway exit ramp — one not seriously contemplated until Cabela’s wanted it.

    This turnover of public taxation to private interests through the community improvement district (CID) program is contrary to good public policy. The power to tax is one of the most important — and harmful — functions of government. It ought to be used to pay for public goods, instead of being turned over to private benefit, as it has for Cabela’s.

    At the opening ceremony, I spoke with Kansas Governor Sam Brownback and reminded him that just two weeks ago Wichita voters spoke out against special tax deals similar to the deal Cabela’s received. What is the future of these special tax deals? “I think the better approach is broad tax reduction,” he said.

    While the governor was referring primarily to income taxes, there is strong evidence that Kansas needs to reduce all forms of business tax costs. The release of a report from the Tax Foundation ranking the states in business tax costs brought that into sharp focus two weeks ago. The news for Kansas is worse than merely bad, as our state couldn’t have performed much worse: Kansas ranks 47th among the states for tax costs for mature business firms, and 48th for new firms.

    This raises the question: Was the CID tax giveaway truly necessary for Cabela’s to open, or is Cabela’s business model so flimsy that it requires corporate welfare to survive, or is Cabela’s simply an opportunistic company, willing to feed off taxpayers as another source of profit?

    Community Improvement Districts

    CIDs allow merchants to apply a higher sales tax rate to sales. The money from shoppers is collected under the pretense of government authority, but it is earmarked for the exclusive benefit of the owners of property in the CID. This is perhaps the worst aspect of CIDs. Landlord and merchants already have a way to generate revenue from their customers under free exchange: through the prices posted or advertised for their products, plus consumers’ awareness of the sales tax rates that prevail in a state, county, and city.

    But most consumers may never be aware that they paid an extra tax for the exclusive benefit of the CID. If they happen to calculate the sales tax they paid, they may conclude that the high CID rate is charged all across Wichita — thereby staining our reputation.

    The Wichita city council had a chance to provide transparency to shoppers by requiring merchants in CIDs to post signs informing shoppers of the amount of extra tax to be changed in the store. But CID advocates got the city council to back down from that requirement. CID advocates know how powerful information is, and they along with their allies on the city council realized that signage with disclosure would harm CID merchants. Council Member Sue Schlapp succinctly summarized the subterfuge that must accompany the CID tax when she said: “This is very simple: If you vote to have the tool, and then you vote to put something in it that makes the tool useless, it’s not even any point in having the vote, in my opinion.” She voted against the signage requirement.

    Jeff Longwell (district 5, west and northwest Wichita), in explaining his vote against the signage requirement with the tax rate displayed, said he thought this information would be confusing to shoppers.

    Are incentives necessary?

    The age-old question is whether economic activity will occur without economic development incentives. Governor Brownback said it is a “legitimate question” as to whether Cabela’s would be here anyway.

    In the case of Cabela’s, the store might not be in Wichita without incentives, as the company has shown itself to be especially eager and adept at gathering corporate welfare paid for by taxpayers. One writer concluded “For its part, Cabela’s is unabashed about its dependence on corporate socialism, even declaring in its annual report that grabbing public money is key to its business plan.”

    We see elected officials and economic development bureaucracies eager to create jobs, so much so that they offer incentives that are not necessary. This leads to a cycle of dependency on city hall for economic development. That’s good for politicians and bureaucrats, but bad for everyone else.

    It would be one thing if our economic development activities were working. But there’s evidence that they’re not. Recently we learned that the job-creating activities of Greater Wichita Economic Development Coalition last year resulted in a number of jobs barely more than one-half of one percent of the labor force.

    That’s not a very good job. But keeping a website up to date ought to be easy. The GWEDC site, however, is terribly out of date. On a page titled Recent Relocations Highlights, the most recent item is from 2009. Have we not had any relocations since then, or does GWEDC simply not care to update and maintain its website?

    A recent Wichita Eagle article, (Why isn’t Wichita winning projects?, January 22, 2012 Wichita Eagle), after listing four items economic development professionals say Wichita needs but lacks, reported “The missing pieces have been obvious for years, but haven’t materialized for one reason or another.”

    If these pieces are truly needed and have been obviously missing for years: Isn’t that a startling assessment of failure of Wichita’s economic development regime?

  • In Wichita, Epic Sports highlights need for reform

    Last week the Tax Foundation and KMPG issued a report that gives us some insight as to why this city council may feel it is necessary to award economic development incentives like the one being considered for Epic Sports today. According to the report, our tax costs on business are high — way too high.

    The news for Kansas is worse than merely bad, as our state couldn’t have performed much worse: Kansas ranks 47th among the states for tax costs for mature business firms, and 48th for new firms. The report also had some separate figures for Wichita, and the results were similar.

    While many of the problems with high tax costs on business are state issues, the city’s legislative agenda calls for continued authority to use existing economic development incentives. In particular, the city this year has testified for the continued use of historic preservation tax credits. Spending on these incentive programs reward the lucky few, but increases the cost of government, and therefore taxes, for everyone else.

    We need to realize that the city’s “active investor” method of targeted economic development isn’t working.

    As evidence, recently the Greater Wichita Economic Development Coalition issued its annual report on its economic development activities for the year. It claimed to have to have created 1,509 jobs in Sedgwick County during 2011. But that’s only 0.59 percent of the county’s labor force. This is a very small fraction, and other economic events are likely to overwhelm these efforts, which were at great cost.

    There is one incentive that can be offered to all firms: Reduce tax costs for all. The Tax Foundation report should be a shrill wake up call to the city and state that we must change our ways.

    But the action the council is considering today moves us in the opposite direction. These incentives have a cost. Other businesses have to pay. That motivates many to seek incentives from the city and state, which in turn raises the cost of government and taxes. It’s a spiral that leads to ever-increasing control of economic activity by city hall.

    We in Wichita need to build a dynamic economy in Wichita that is based on free enterprise and entrepreneurship rather than a government handout. This is the way we can have organic and sustainable economic development. We can start on this path today by saying no to this incentive package.

  • Kansas and Wichita lag the nation in tax costs

    If we in Kansas and Wichita wonder why our economic growth is slow and our economic development programs don’t seem to be producing results, there is now data to answer the question why: Our tax rates are high — way too high.

    This week the Tax Foundation released a report that examines the tax costs on business in the states and in selected cities in each state. The news for Kansas is worse than merely bad, as our state couldn’t have performed much worse: Kansas ranks 47th among the states for tax costs for mature business firms, and 48th for new firms.

    The report is Location Matters: A Comparative Analysis of State Tax Costs on Business.

    The study is unusual in that it looks at the impact of states’ tax burden on mature and new firms. This, according to report authors, “allows us to understand the effects of state tax incentives compared to a state’s core tax system.” In further explanation, the authors write: “The second measure is for the tax burden faced by newly established operations, those that have been in operation less than three years. This represents a state’s competitiveness after we have taken into account the various tax incentive programs it makes available to new investments.”

    The report also looks at the tax costs for specific types of business firms. For Kansas, some individual results are better than overall, but still not good. For a mature corporate headquarters, Kansas ranks 30th. For locating a new corporate headquarters — one that would benefit from tax incentive programs — Kansas ranked 42nd. For a mature research and development facility, 46th; while new is ranked 49th. For a mature retail store, 38th, while new is ranked 45th.

    There are more categories. Kansas ranks well in none.

    The report also looked at two cities in each state, a major city and a mid-size city. For Kansas, the two cities are Wichita and Topeka.

    Among the 50 cities chosen, Wichita ranks 30th for a mature corporate headquarters, but 42nd for a new corporate headquarters.

    For a mature research and development facility, Wichita ranks 46th, and 49th for a new facility.

    For a mature and new retail store, Wichita ranks 38th and 45th, respectively.

    For a mature and new call center, Wichita ranks 43rd and 47th, respectively.

    In its summary for Kansas, the authors note the fecklessness of Kansas economic development incentives: “Kansas offers among the most generous property tax abatements and investment tax credits across most firm types, yet these incentives seem to have little impact on the state’s rankings for new operations.”

    Kansas tax cost compared to neighbors. Click here for a larger version.

    It’s also useful to compare Kansas to our neighbors. The comparison is not favorable for Kansas.

    More evidence of failure

    Recently the Greater Wichita Economic Development Coalition issued its annual report on its economic development activities for the year. This report 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, Wichita Mayor Carl Brewer took credit for creating a similar percentage of jobs in Wichita.

    The report by the Tax Foundation helps us understand why the economic development efforts of GWEDC, Sedgwick County, and Wichita are not working well: Our tax costs are too high.

    While economic development incentives can help reduce the cost of taxes for selected firms, incentives don’t help the many firms that don’t receive them. In fact, the cost of these incentives is harmful to other firms. The Tax Foundation report points to this harm: “While many state officials view tax incentives as a necessary tool in their state’s ability to be competitive, others are beginning to question the cost-benefit of incentives and whether they are fair to mature firms that are paying full freight. Indeed, there is growing animosity among many business owners and executives to the generous tax incentives enjoyed by some of their direct competitors.”

    But there is one incentive that can be offered to all firms: Reduce tax costs for everyone. The policy of reducing tax costs for the selected few is not working. This “active investor” approach to economic development is what has led companies in Wichita and Kansas 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 Kansas has been pursuing and which Wichita’s Brewer wants to step up: “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 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, except to reduce the cost of government for everyone.

  • Wichita economic development isn’t working

    Recently the Greater Wichita Economic Development Coalition issued its annual report on its economic development activities for the year. That report, along with a Wichita Eagle article from January, tells us that the traditional methods of economic development used in the Wichita area isn’t working very well.

    In the Eagle article, (Why isn’t Wichita winning projects?, January 22, 2012 Wichita Eagle), after listing four items economic development professionals say Wichita needs but lacks, the reporter wrote “The missing pieces have been obvious for years, but haven’t materialized for one reason or another.”

    If these pieces are truly needed and have been obviously missing for years: Isn’t that a startling assessment of failure of Wichita’s economic development regime?

    While Wichita Mayor Carl Brewer was quoted in the article as saying “You hear a lot from the loud minority,” the fact is that the minority rarely wins. Six of seven members of the Wichita City Council will vote for almost any giveaway to any company, no matter how unnecessary or unwise the subsidy program is.

    With two of its five members having a realistic view of government’s power to influence economic development, it’s a little tougher to push programs through the Sedgwick County Commission. But most programs make it through or don’t need the county’s participation.

    The GWEDC report also 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.

    Not 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.

    GWEDC website stale and out-of-date

    If GWEDC is looking for ways to improve its efforts in marketing Wichita, it might start with its own website. While the site features a high level of design sophistication, examining its contents reveals a lack of attention being paid to the site.

    For example, on a GWEDC page titled Recent Relocations Highlights, the most recent item is from 2009.

    The “News” page holds as its most current story one encouraging attendance at a conference that took place in 2010. The second and final story on this page notifies us that someday in the future there will be an Intrust Bank Arena in downtown Wichita. That arena has now been open for two years.

    The site also promotes an RFP (request for proposal) with a deadline in 2009 — three years ago.

    Anyone who comes across the GWEDC site would conclude from this negligence that this is an organization — and by extension, a city — that simply doesn’t care about its online presence.

    Going forward

    The danger we in Kansas, and specifically 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 such as Brewer, however, is to take action, usually in the form of targeted incentives as a way to spur economic development. GWEDC is the agency responsible for this.

    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. This, however, does not stop governments from creating policies for the awarding of incentives. It also doesn’t stop the awarding of incentives willy-nilly without a policy, as the Wichita City Council has done for a hotel.

    This “active investor” approach to economic development is what has led to Boeing and other 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 is sure to undertake in response to the loss of Boeing: “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 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.