The False Seduction of “Economic Development”

The False Seduction of “Economic Development”

by: former State Representative Don Beezley

Mikhail Gorbachev’s press secretary was asked his vision for the world: “World socialism, except New Zealand.” Why not New Zealand? “Well,” he said, “we will need to get the prices from someone!”

Obviously, the Soviet method of mimicking market prices didn’t work very well. However, the Russians did understand that markets somehow achieve an efficient allocation of resources—the right things end up in the right place at the right time.

Contrast that with planned economies where political priorities, rather than prices and profits, determine resource allocation. No rational basis exists for how to figure out what the right things even are, let alone how much of them people want, or what they are willing to give up (pay) for them.

“This legislative session is going to be about creating jobs!” It’s a common refrain, but do the various plans and schemes politicians call, “economic development,” really develop the economy? Or are they just a different version of government central planning?

Richard Florida, writing on the Atlantic CityLab stated,

“A detailed 2002 study, published in the Journal of Regional Science of more than 350 companies that received incentives, found incentives had a negative effect on these companies’s [sic] ability to create jobs. Using detailed statistical models to control for a wide variety of factors, the study found that companies that received incentives expanded more slowly than others, and worse yet that overall effect of incentives was a reduction of 10.5 jobs per establishment.”

Growth comes when entrepreneurs identify opportunities and organize resources in productive combinations to meet new needs, or better meet old ones. If they identify the right opportunity, they prosper, jobs are created and incomes rise. If they are wrong, the resources they tied up are liquidated and flow to more productive users. In response to prices and profits, resources are constantly working their way towards their highest and best uses. The right stuff in the right place at the right time.

Economic development schemes short-circuit this process. When governments pick preferred industries or businesses based on political criteria, they disrespect the consumer and harm the economy by locking resources into unproductive uses. It’s impossible for government to figure out what kind of car, health care, manufacturing, services or energy will best meet people’s needs. While some politicians may be well intended, they are far from all knowing.

The 2014 session of the Colorado Legislature has included any number of bills falling under the guise of “economic development,” including “Advanced Industry Economic Development Funding,” “Renewable Energy EZ Investment Tax Credit Refund,” and “Job Creation & Main Street Revitalization Act.” Programs like these make Coloradans worse off—twice. First, they takes their money. Second, as Richard Florida notes, above, it destroys their jobs.

The counter to all this would be, “who cares?” What the people want, expressed by their own choices, doesn’t matter. “We” will decide for them, because we know better. That perspective is arrogant, disrespectful, and simply doesn’t work. Tax credits, preferential loans, special regulations or cash given by government to subsidize a favored industry short circuits the most essential market mechanisms and results in having “the wrong stuff in the wrong place at the wrong time.” Better uses are starved of the capital used for the scheme, and job and income growth is slower than it otherwise would have been.

An irony in this is that things policy makers want to bring about are the things most harmed. Think of this in Colorado when it comes to “alternative” energy. Solar power is a great idea—the sun is pouring energy down upon us, and nobody has to pay the sun’s light bill. How great would it be to capture that “free” energy?

However, as soon as government plays favorites, as we saw with Solyndra and Abound Solar, we lose the opportunity to see what concepts will actually have the most value. The most promising ideas get crowded out by those grabbing subsidies and are delayed or destroyed before they even see the light of day.

If a state or city wants to attract business, make it a great place to do business. Not a great place to get a government payoff. Policies like low taxes, reasonable employment regulations, strong property rights, and a good tort environment are a great start. Colorado should make this commitment: it will be the best place in the country to do business based on these policies.

Let the waste end, and the growth begin!

Photo used under creative commons license. Photographer: Kevin Dooley. No modifications were made.