Bribes As Economic Development

According to the Indianapolis Business Journal, Indiana lawmakers are considering paying people to move here.

Members of what I still call “The World’s Worst Legislature” (despite a significant amount of competition from places like Florida and Texas) are evidently considering what the IBJ calls “an extensive piece of legislation to restructure the incentive toolkit of the Indiana Economic Development Corp.” One “key” component would create a statewide remote-worker grant program.

Senate Bill 361 has a provision that would require the department to design and implement a program giving remote workers cash incentives for moving to Indiana.

A remote worker would be eligible for a grant of up to $5,000 a year with a maximum of $15,000 over the life of the program. The total grants, which would come from the IEDC, would be capped at $1 million this year and $1.5 million in 2023….

The bill also would allow businesses outside Indiana to apply for IEDC tax credits, if they bring at least 50 remote jobs to Indiana, paying at least 150% of the state’s average hourly wage. That would be about $25.

This interesting use of taxpayer funds is essentially an admission that Indiana isn’t a very attractive place to live–that (at least, outside Indianapolis, the city our legislators love to hate) people need to be bribed to move to the Hoosier State.

A few days ago, in another blog, I noted that Indiana’s Statehouse is filled with legislators who have exactly one policy proposal to offer for any problem you can name: tax cuts. When it comes to economic development, they assure us that the only thing businesses look at when looking  to relocate or expand is a “favorable tax environment.” Believing this, of course, requires a certain imperviousness to that pesky thing called “evidence,” but if there is one thing our GOP super-majority is really, really good at, it’s ignoring evidence.

Which brings me to yet another bit of unwelcome research, sure to be dismissed and ignored.

The Brookings Institution has been examining ways to “rejuvenate” states in the Midwest that have, as we say, “missed the boat.” The report begins by noting that there are currently two Midwests

One Midwest features communities that have diversified and turned an economic corner in today’s urbanized, global knowledge economy. In this Midwest, many of the region’s major metro areas and university towns have found new economic dynamism and relative prosperity.  

In the other Midwest, however, factory towns that have lost anchor employers continue to languish. Most of these small and midsized industrial heartland communities rely on traditional economic development strategies to reinvigorate their economies, including doling out incentives to attract or retain employers or attempting to create a more “business-friendly” environment with lower taxes and labor costs. 

Most of Indiana clearly falls into that second category. But as Brookings reports, there is “compelling new data” telling us that these traditional economic development tools are–if not entirely ineffective–far less effective than investments in quality of life and place.

Research on smaller communities has found that community amenities– recreation opportunities, cultural activities, and especially “excellent services (e.g., good schools, transportation options, including connectivity to urban areas)” significantly exceed so-called “business-friendly” policies in their ability to  contribute to healthy local economies.

Smaller places with a higher quality of life experience both higher employment and population growth than similarly situated communities, including those that rank high by traditional economic competitiveness measures.

Research has confirmed that people are willing to pay higher housing prices and even accept lower wages to live in places that offer a higher quality of life.  

Indiana’s lawmakers will have great difficulty getting their heads around another finding (assuming they would even bother to consult the research); studies, including this one, have shown that businesses are willing to pay higher real estate prices and offer higher wages in order to locate in places with more productive workers. 

More productive workers, of course, are produced by better schools. Not religious indoctrination academies supported by Indiana’s voucher program with monies drained from our struggling public schools, and not schools in which teachers are forbidden to teach accurate history…

The bottom line:

After estimating quality of life (what makes a place attractive to households) and quality of business environment (what makes a place especially productive and attractive to businesses) in communities across the Midwest, we found quality of life matters more for population growth, employment growth, and lower poverty rates than quality of business environment. 

Or, of course, you can just take some of the tax money generated by those low rates and try to bribe people to move to the “hanging on by a thread” areas of Indiana.

Given the pathetic history of Indiana’s General Assembly, I expect they’ll opt for bribery.


Politics and Policy: A Cautionary Tale

I’m sharing my next column for the IBJ, which expands upon my earlier post, and considers the policy issues that the Litebox blunder illuminate.

How did we get from “Enterprise Zones” to Litebox?

Back in my Hudnut Administration days, I remember enthusiastic discussions about Enterprise Zones–a new tool promoted by then-Congressman Jack Kemp to encourage investment in depressed areas of the city. The idea was to offer tax incentives to businesses who were willing to locate in such areas and hire the unemployed who lived there.

It was a great—if reality-challenged—idea.

It didn’t take long for Carmel and other affluent bedroom communities to begin competing for those employers by offering incentives of their own. I don’t know whether those original Enterprise Zones still exist, but I do know that state and local governments are all falling over themselves to lure companies with ever-more-lavish inducements, courtesy of their taxpayers.

Which brings us to Litebox.

Amid great hoopla, Mayor Ballard and Governor Daniels announced the award of major incentives to Litebox, a company promising to create 1200 new jobs. Its sole proprietor was man who not only turned out to have no history of entrepreneurial or business success, but who also has multiple unpaid tax liens and judgments against him in several states.

The story makes vividly clear how slapdash the City’s vetting process has been, and how politically motivated the decision to announce this “job creation” success was. (Really, in the age of Google, this level of incompetence is incomprehensible.) But the story makes a bigger point, albeit implicitly, about the entire policy of cities “buying” jobs by offering financial incentives to companies that promise to move and/or expand.

The obvious arguments against such efforts are familiar: it puts government in the position of helping some businesses but not others, which troubles those of us who believe in real markets; and it is a zero-sum game overall, since the company that moves from Ohio to Indiana is not creating more jobs–it is simply moving them from one place to another.

But the Litebox fiasco points up another problem with these programs. Even if competent people are running them, they are unlikely to know enough about the technologies and economic realities of very different industries to make truly informed decisions. The same technological and cultural changes that increasingly challenge tech businesses and that make investment decisions risky even for savvy and highly knowledgeable experts, make it virtually impossible for government officials to accurately gauge the viability of tech business deals. (In this case, reporters quoted industry sources who pointed to “ridiculous” assumptions in the Litebox business plan, but in most cases, the miscalculations are more difficult to spot.)

As a recent Indianapolis Star article reported, citing several examples, even companies with sound performance histories and none of the obvious red flags that were ignored in the Litebox example routinely fail to deliver the jobs that are promised.

When you add in the inevitable politics involved–the temptations of cronyism, the huge pressures to score political points, to look like you are delivering on your campaign promises–it’s no wonder that the jobs frequently don’t materialize.

It’s long past time to re-examine these programs and the policy assumptions they’re built on. It was probably inevitable that the use of tax and other incentives would not be limited to truly depressed areas; I was among those who failed to appreciate that inevitability.

Here’s a truly radical suggestion: what if we took the tax dollars that are currently being siphoned off to these favored businesses and used them to create a city that people want to live in? What if we decided to compete not with handouts, but with a superior quality of life?