Can Wichita learn from a setback?

What can Wichita learn from the news of layoffs at Spirit and Textron?

While the Wichita metropolitan area is facing immediate stress due to layoffs at two large employers, we need to look at the long-term horizon and evaluate whether our economic development strategy needs adjustments.

Like many areas, Wichita relies on economic development incentives to lure companies, or to persuade them to stay rather than leave for elsewhere. There is much research finding incentives playing a minor part in business decisions. Nathan M. Jensen, for example, found this:

In my own study of 80 incentive offerings in Texas, published in October in the journal Public Choice, I found that numerous companies applied for incentives after they had already broken ground and, in some cases, after they had completed building. A few even noted in their applications that they weren’t looking at other states for their investments. Yet all of these companies received taxpayer dollars for doing what they would have done anyway.

This points to the open secret of economic development: Though incentives are rarely effective in changing firms’ investment decisions, they do allow politicians to attend ribbon-cutting ceremonies where they can highlight their own role in attracting a new company (or retaining an old one) and creating jobs. ¹

Timothy J. Bartik found this: “Reviewing 34 estimates from research studies of incentives’ effects, Bartik found that typical incentives only tip 2 to 25 percent of location decisions — that is, the company wouldn’t have located there ‘but for’ the incentive.” ²

So how can we know if incentives are needed in a particular instance? It’s difficult, as neither party has an incentive to be forthright. If a business executive does not ask for incentives, the firm’s owners are justified in asking why not. And it’s difficult for politicians and bureaucrats to turn down opportunities to bask in the glory of groundbreaking and ribbon-cutting ceremonies and their improved chances at re-election.

Incentives increase the cost of government for those who don’t receive them. Yes, cities like Wichita promote a benefit-cost analysis that shows that for each dollar spent or forgone for incentives, the city receives even more. But this happens with all economic activity, even that which is not incentivized. This leads to the important question: Is the incentive necessary? With so much evidence showing incentives are not necessary, Wichita spends a lot on companies that don’t need incentives, with everyone else paying their cost.

Even before the Spirit announcement, Wichita was looking at a slowly-growing economy. The Center for Economic Development and Business Research at Wichita State University provides forecasts for the Wichita economy. For 2020, CEDBR wrote in its October forecast, “For 2020, growth is expected to be more modest, as the Wichita economy is projected to add approximately 1,600 new jobs and grow 0.5 percent.” ³ For comparison, total nonfarm employment rose by 2,800 jobs (0.9 percent) from November 2018 to November 2019. For the same period, employment in the nation grew by 1.5 percent. CEDBR forecast a slowing of the growth of the Wichita economy, and that was well before the announcements of layoffs at Texron and Spirit.

What to do?

A Wichita Eagle editorial suggests diversifying the local economy. That’s been a goal for decades. But it hasn’t happened. ⁴

The Eagle also advises “swift, decisive action,” taking “economic development off the back burner, where it’s languished for years.” This is surprising, as organizations like Greater Wichita Partnership are devoted to the task of economic development. GWP tells us, “Fast-forwarding economic growth is at the heart of the Greater Wichita Partnership’s mission. ⁵ The cost of employing its two top executives topped $485,000 in 2018. It also paid $115,000 to share an executive with another agency. ⁶ If the Eagle thinks this is practicing economic development at a slow simmer, we need to make a few big changes.

The Eagle also calls for “generous funding streams.” This may be a reference to the common perception that Wichita has few economic development incentives available. But we have about the same as everyone else: Forgiveness of property and sales taxes, tax increment funding, refunds of employee state withholding taxes, sales tax districts, investment tax credits, historic tax credits, loans, parking easements, grants, and regulatory relief. The city says it no longer uses cash incentives, which is not true.

The Eagle notes some bright spots, mentioning specifically, “Cargill’s decision to stay in Wichita.” But that was a decision to stay, and it came at great cost to the city.

We need to say no to incentives for large firms.

There’s plenty of evidence that young business firms are the key to economic growth. ⁷ But Wichita’s economic development policies, as evidenced by the lavishing of subsidy on Spirit and Cargill, are definitely stacked against the entrepreneur.

These subsidies and practices are harmful to the Wichita economy, creating a strangling effect on entrepreneurship and young companies. As large subsidized companies escape paying taxes, others have to pay. This increases the burden of the cost of government on everyone else — in particular on the companies we need to nurture.

Instead, Wichita relies on targeted investment in our future. Our elected officials and bureaucrats believe they have the ability to select which companies are worthy of public investment, and which are not. It’s a form of centralized planning by government that shapes the future direction of the Wichita economy. It hasn’t been working.

—
Notes