Tag Archives: economic development

What Is Government’s Role?

Americans love to defend liberty–and oppose government actions that they believe intrude on that liberty. (Granted, all too often they are perfectly willing to have government limit other people’s liberties, especially when those other people don’t espouse the same religious beliefs they hold, but that’s a subject for another day…)

We’re just emerging from one of those periodic, heated debates, triggered by “patriots” offended by government’s effort to prevent the spread of a deadly disease. Again, I’m not spending many pixels on the anti-mask, anti-vaccination folks, because (with very few exceptions) they are so clearly wrong–not just on the science, but on the role of government–not to mention remiss in discharging their most basic obligations to other humans. People who don’t believe public health is a public good that governments are bound to protect are beyond the reach of logic and reason.

In many other areas, we get into various shades of gray. There are plenty of issues that raise legitimate questions about the proper role of the state. I’ll admit to qualms, for example, about things like seat belt laws and similar”nanny state” measures, meant to protect individuals from their own heedless or self-destructive behaviors.

I was recently prompted to think about the proper and improper use of government authority when I read a recent “Eye on the Pie” column written by my friend Morton Marcus. Marcus, for those of you unfamiliar with him, is an economist and former director of the Indiana Business Research Center at Indiana University. In this particular column, he defended governmental “intrusion” on the most hallowed of rights: property rights. He argued (I think persuasively) that your house may be private property, but it also has characteristics of a public good.

My house can be seen by anyone driving down my street. Unless I go to great trouble, I can not stop you from seeing my house. I can’t charge you for looking at my house.

But what you see of my house influences your opinion of my block and the price you’d pay to live near me.

Broken windows, leaky roofs, sagging gutters, piles of trash, and abandoned furniture are not inviting signs of habitation. Such a house may be a fire hazard and a danger to its neighbors.

At the same time, if my house has rats or unhealthy conditions, it may pose a health hazard not only to my family, but to yours as well. My children play with your children. I meet you in the grocery. We family may be carriers of disease, my house a public health menace.

Governments have limits on private behavior when public health and safety are at risk. Yet, we’ve seen great resistance to action that infringes on presumed private rights.

We don’t enforce building codes. We allow structural deterioration and abandonment. We don’t insist houses have adequate insulation from the cold of winter and the heat of summer to protect residents from chronic illness..

Our collective neglect is excused because we believe we’re protecting the poor and/or elderly who cannot afford repairs or adequate weatherization.

Yet our housing stock is one of the most vital aspects for the economic development we seek. Our state provides funding to restore abandoned, old movie theaters, but does little to resurrect declining houses.

Our reluctance to infringe on the “rights” of a property owner conflicts with the community’s need to preserve its critical assets.

Morton argues that there are many negative consequences of not treating housing stock as a public good: decay of our central cities, abandonment of our smaller towns,  encouragement of urban sprawl and environmental degradation.  He blames the  “infatuation with the myth of unlimited private property rights.”

Of course, as any lawyer will confirm, there are few if any rights that are “unlimited,” and property rights are no exception.  Laws against nuisance, and minimum upkeep regulations–neither very well enforced, unfortunately–are meant to protect the considerable investments people make in their homes.

Morton’s column raises some thorny issues: does government have an obligation to ensure that people’s homes are humanly habitable? How far does that obligation extend before it becomes an unconstitutional invasion of property rights? What about the rights of homeowners whose properties are adjacent to homes that have been allowed to deteriorate?

If we are talking about property values, it is interesting to note that, in historic areas that are subject to more stringent government regulation, values are not only stable, but tend to be higher.

I’m not entirely sure where I come down on what are often very technical/legal questions of property regulation, but I am sure that these are precisely the sorts of questions our elected officials ought to be debating–rather than worrying about my uterus, Jewish space lasers, or being “replaced.”

 

 

 

 

Education And Economic Development

As Indiana’s legislature continues its multi-year assault on public education, evidence confirming the importance of a state’s educational system continues to mount. (Not that evidence matters to the culture warriors who dominate Indiana’s Statehouse. )

Intel  has announced that it plans to build its twenty billion dollar factory in Ohio–an announcement that business publications have called “arguably the most consequential manufacturing announcement in recent decades.”

Why Ohio? As the linked article notes, Indiana can easily compete with Ohio when it comes to the Hoosier State’s economic development tools of choice:  tax breaks, tax rates and regulatory environment. However,

To attract the kind of high-paying, advanced manufacturing jobs, cities and states need an abundant share of college graduates, a steady flow of new graduates and communities in which these workers will desire to live.

 Indiana  can offer tax breaks, tax rates and  a regulatory environment similar to Ohio’s, but we come up short on such all-important measures as quality of life and the supply of an educated workforce. Ohio offered plenty of fiscal incentives to capture the projected 3,000 jobs–jobs that swill pay an average of $125,000 in salary and benefits– but it is highly likely that Indiana could have matched those financial incentives.

So what were the factors that gave Ohio the edge?

This factory is a 25-minute drive from the College of Engineering at Ohio State University and close to the fastest-growing parts of the Columbus metropolitan area. The entire metro area has absorbed some 130% of the state’s population growth since 2000 .

The salary levels also suggest that the workforce at this plant will be primarily comprised of college graduates.  Ohio workers in the semiconductor industry earned $65,490 per year in the last 12 months before the COVID downturn. To be profitable, this factory will be much more than the clean-room production facilities of a traditional semiconductor factory.  I suspect this site will involve considerable product development and testing.

This evidence points to the need for a large number of college graduates as a driving factor in Intel’s decision. Close to a dozen top engineering colleges are within a five-hour drive.  These include Purdue University, the University of Michigan, Michigan State University, Carnegie Mellon University, the University of Kentucky and of course Ohio State.

The only other Midwest location that could boast the same geographic concentration would be Indianapolis.  The fact that Indiana was not chosen in this case offers a harsh lesson for states that rely on incentives rather than an educated workforce as an economic development strategy.  It is the same lesson the Amazon HQ deal provided state policymakers around the nation.

As important as quality of life was, the presence of an educated population was even more important.

Statewide, Ohio just does much better than Indiana on educational attainment.

In 2020, 29.6% percent of adults in Ohio had a college degree; in Indiana, it was 26.9%.  That may seem like a modest difference, but it places Indiana in the bottom 10 states in both college graduates and those holding an advanced degree.  Ohio ranks in the middle third on both measures.

Most troubling, though, is that Indiana’s share of adults with a college degree has been in decline since 2018, a factor that would immediately remove it from the long list of applicants for an advanced semiconductor plant.

The author analyzed the environments/inducements of Indiana and Ohio, and concluded that the “only meaningful difference” came down to  the availability of well-educated workers.  That  one difference made Ohio the beneficiary of the “most consequential industrial expansion in the country in this century.”

It isn’t that more college graduates leave Indiana than Ohio. Neither state has significant levels of outmigration. The problem is that Indiana doesn’t attract many college graduates from outside the state. We also have low numbers of high school graduates who enroll directly in college.  (Ohio has 3,600 more students per year heading to college than Indiana.)

We all know that old political saying: follow the money. In this case, we need to follow the money that isn’t being spent–and where it isn’t being spent– because state spending reflects what that state’s legislators value. Not only does Indiana spend less on education, our legislature siphons off millions of the education dollars that would otherwise go to our public schools, and sends them via vouchers to predominately religious private schools, a significant number of which are of dubious educational quality.

Though Ohio hardly spends a lavish amount on schools, it has allocated $3 billion more to education than Indiana over the past decade. Ohio continues to spend a larger share of its GDP on schooling of all types. Ohio spends almost 20% more per child on education, or roughly $1,500 per kid aged 0 through 24 than does Indiana. That extra spending spending just paid off.

The World’s Worst Legislature never learns…..

 

 

The Cost Of Luring Jobs

Over the past decade or so, like this blog, Americans’ political discussions and debates have focused on national issues and the increasing gridlock in Washington. There are several reasons for that. The decline of local journalism  has meant that local issues that might trigger local activism are increasingly less likely to be covered, while more national media highlights the growing dysfunction of the federal government. And many of the challenges we face are national–or global–in scope.

Although it’s understandable that local policies tend to fly “under the radar,” that doesn’t make those issues unimportant. For one thing, individual citizens who are powerless to change goings-on in Washington can affect many local issues.

Governing Magazine recently focused on one such issue: economic development.

The article pointed out what even casual observers have long suspected, and what the data confirms–most state and local governments approach economic development in costly and unproductive ways. The article’s subhead really sums up the conclusion: “Governments can’t seem to stop offering huge incentives to corporations, even though it’s clear they don’t have much effect on companies’ decisions. Does paying $288,000 for one job really make sense?”

The rather obvious answer to that question is no. But economic development officials are responding to the pandemic by doubling down–ignoring overwhelming evidence and instead doing more of what they know. (This situation reminds me of America’s long, counterproductive drug war. As I said in a speech some years ago, if a doctor performed a hundred identical surgeries and every single patient died, would you insist that the proper response was to have him do more of them? The logic is the same.)

Seeking to create jobs and help their local economies climb out of the pandemic recession, state and local officials are raising the ante on subsidies to big corporations. But if history is any guide, ever-increasing tax breaks and other economic development incentives will likely lead to slower — not faster — growth. Given that state and local governments have already been wasting $95 billion every year in an economic race to the bottom, more subsidies will just dig the hole deeper.

The article highlighted North Carolina’s largest-ever subsidy: $865 million for an Apple  research and development center promising 3,000 new jobs. But Apple would probably have chosen North Carolina in any event–without those subsidies.

Smart companies like Apple understand that the real long-term attraction is not subsidies so much as the great economic foundation North Carolina has built: investments in top-notch research universities, a tech-ready workforce and a business-friendly environment. North Carolina is indeed a perfect place to locate a cutting-edge research center. Site Selection magazine has consistently ranked it as a top state for business climate.

Interestingly, when Apple located a facility in Austin, Texas gave the company about $10,000 per job. North Carolina promised some $288,000 per job.

Research tells us that only one in eight subsidies effects a change to a location or expansion decision, and that some 90 percent are a complete waste of money. Companies happily accept the money, but their decisions are based far more on the availability of a talented local workforce, region-specific advantages and access to supply chains and customers.

For example, Google and Fidelity Investments recently announced expansions to their existing operations in the Research Triangle — without asking North Carolina for subsidies. Both emphasized the area’s skilled workforce as the primary draw.

The consensus of academic research is that corporate handouts don’t create broad benefits for the community providing them. That’s because subsidies motivate wasteful corporate investments and create public funding trade-offs. Every dollar spent on subsidies is a dollar that can’t be used to improve infrastructure, education or public safety, or to cut taxes on smaller businesses and households.

This expensive and unnecessary fiscal competition between local units of government adds absolutely nothing to the national economy–after all, nationally, moving enterprise A from city B to city C is a zero-sum exercise. And as the article notes, paying companies to move to your state siphons off funds that could be used for things that actually make your state attractive to those companies–like a first-rate public education system that not only turns out a skilled workforce, but is an amenity valued by the management folks who would be locating in your state.

The evidence shows that one of the most persuasive “subsidies” a state can offer is an attractive quality of life.

When policymakers ignore evidence, when they make decisions on the basis of ideology–or worse, when policy decisions are simply the result of  “we’ve always done it this way” or “everyone else does it this way”–the costs aren’t limited to the dollar amount of the subsidies.

 

 

All Cost, No Benefit

Every city of any size, and every state, has a government agency charged with “economic development.” Economic development is almost always a euphemism for luring new employers to the city or state.

A productive discussion about what a genuine effort to improve the local economy should and should not entail is considerably overdue. Such a re-examination remains unlikely, but here and there, investigations of current practices do remind us that not everything we call an “incentive” deserves the name.

Which brings us to Wisconsin, Scott Walker and Foxcomm. A report from the Brookings Institution recently described that embarrassing boondoggle:

In 2017, the state of Wisconsin agreed to provide $4 billion in state and local tax incentives to the electronics manufacturing giant Foxconn. In return, the Taiwan-based company promised to build a new manufacturing plant in the state for flat-screen television displays and the subsequent creation of 13,000 new jobs.

It didn’t happen. Those 13,000 jobs never materialized, and plans for the manufacturing plant have been consistently scaled back. Even if the project had gone through as planned, there is no way the Foxconn subsidy would have made money for the state, or provided earnings benefits for residents that exceed its costs. It now appears that few of Foxconn’s promises will be fulfilled, even though local governments have gone into debt over the project.

The Foxcomm “deal” was widely panned at the time, but as Brookings reports, criticisms of that effort were mostly based on the enormous size of the incentives being offered, not on the underlying concept. But since 1990, even the average size of these business incentives has tripled, threatening public services and the social safety net.

Even when the incentive being offered is comparatively modest, however, research doesn’t confirm the underlying assumptions of the approach. At least 75% of the time, the incentives don’t really affect the relocation decision one way or the other.

They’re all cost and no benefit. Furthermore, even when incentives do tip a location decision, they do not pay for themselves. They may create new jobs, but frequently they also bring in new workers from outside the city or state, which raises costs to public services that offset at least 90% of any increased revenue…On average, only 10-30% of new jobs go to state residents who are not already employed.

Are there incentives that would work? Brookings says there are, and offers the following checklist:

Do the incentives target the right businesses?

Will the business provide multiplier effects? When the business buys from local suppliers, it helps increase jobs at those companies. Workers employed at the business, too, will buy from local retailers, increasing those jobs.

Is the business “traded”—i.e., selling its goods and services outside of the state or community? Incentives to non-tradeable firms will just displace jobs at other local non-tradable firms.

Is the real job multiplier accurately calculated? Multipliers can be overstated if they ignore the increased local costs that accompany business growth.

Is the business locally owned? Locally owned firms spend more of their revenue locally, benefiting the hometown economy.

Do the incentives target the right areas?

Incentives should target economically distressed local areas, with more available labor that is not employed. That way, the share of new jobs that go to local residents can be two to three times as great, compared to already-booming areas.

Do the incentives target high-tech businesses in an area with an above-average high-tech base? High-tech businesses have additional multiplier effects because they support and spawn other local firms whose workers and ideas flow from one to another. But this only works when the area has a sufficiently large “cluster” of tech firms to build from.

Are they the right type of incentives?

Are they structured so cash incentives occur upfront? Upfront incentives are more cost-effective in affecting business location decisions, because they are more relevant to business decisionmakers who focus on the short term.

Do they include enticements/requirements to hire locally? For example, customized training programs can encourage firms to hire the local unemployed.
Do they include a healthy share of customized businesses services, or is it all cash giveaways? Business services such as job training, business advice to smaller businesses, and new transportation infrastructure can have job creation effects per dollar that are five to 10 times greater than tax or cash incentives.

Do the incentives avoid robbing Peter to pay Paul? If governments pay for incentives by decreasing public spending on education, training, or infrastructure, the negative economic development effects of those budget cuts may exceed any benefits from the incentives.

Finally, is there a decent model to accurately assess the impact of the incentive?

There are practical ways to evaluate incentives. We can compare assisted with unassisted firms, or assisted areas with unassisted areas. There are good estimates of how many location decisions will be swayed by a cash incentive package of a particular size, and how many jobs per dollar will be created by a high-quality customized job training program. State and local government researchers can combine these evaluation approaches with models of local labor markets and fiscal impact to see whether a specific incentive package’s benefits are likely to exceed its costs.

Finding the right answer depends on asking the right questions–not on constantly sweetening the pot.

 

A Lesson On Know-Nothingness

Paul Krugman recently delivered a lesson on “Know Nothingness”--both as historical reference and descriptive term:

If you’re a student of history, you might be comparing that person to a member of the Know Nothing party of the 1850s, a bigoted, xenophobic, anti-immigrant group that at its peak included more than a hundred members of Congress and eight governors. More likely, however, you’re suggesting that said person is willfully ignorant, someone who rejects facts that might conflict with his or her prejudices.

The sad thing is that America is currently ruled by people who fit both definitions.

The parallels between anti-immigrant hysteria in the mid-19th century and today are too obvious to require enumeration. Krugman does, however, enumerate several, pointing out that the countries considered “shitholes” in the 19th Century –especially Germany and Ireland–differ from those in Trump’s dark-skinned category today.

It isn’t just bigotry, of course. It’s profound ignorance.

But today’s Republicans — for this isn’t just about Donald Trump, it’s about a whole party — aren’t just Know-Nothings, they’re also know-nothings. The range of issues on which conservatives insist that the facts have a well-known liberal bias just keeps widening.

One result of this embrace of ignorance is a remarkable estrangement between modern conservatives and highly educated Americans, especially but not only college faculty. The right insists that the scarcity of self-identified conservatives in the academy is evidence of discrimination against their views, of political correctness run wild.

Those of us who work in the academy know firsthand that this accusation of discrimination is utter bullshit.

Case in point: my office in the School of Public and Environmental Affairs is on the same floor as that of professors in the Kelley School of Business. When I first joined the faculty, twenty years ago, a majority of those professors self-identified as fiscally-conservative Republicans. They continue to be conservative, but very few of them are still Republicans. When the party rejected science, evidence and scholarly research, they left.  As Krugman says of the science professorate, “When the more or less official position of your party is that climate change is a hoax and evolution never happened, you won’t get much support from people who take evidence seriously.”

But conservatives don’t see the rejection of their orthodoxies by people who know what they’re talking about as a sign that they might need to rethink. Instead, they’ve soured on scholarship and education in general. Remarkably, a clear majority of Republicans now say that colleges and universities have a negative effect on America.

Krugman then points to research showing the growing importance of “clusters of highly skilled workers” who create what he calls “virtuous circles of growth and innovation.” Those clusters disproportionately emerge around universities.  In 2016, voters largely divided along educational lines, with the better-educated, rising regions carried by Hillary Clinton, and more rural, under-educated and less skilled regions going for Trump.

The anti-education, anti-evidence, anti-science voters who remain in the GOP are also disproportionately likely to express tribal, White Christian beliefs: creationism, rather than evolution, America as (their version of) a Christian Nation.

Newsweek recently reported

Evangelical Christians overwhelmingly support President Donald Trump because they believe he’ll cause the world to end.

Many have questioned why devout evangelicals support Trump, a man who has bragged about sexual assault, lies perpetually and once admitted he never asks God for forgiveness. Trump’s lack of knowledge of the Bible is also well-known.

Nevertheless, many evangelical Christians believe that Trump was chosen by God to usher in a new era, a part of history called the “end times”….  the time when Jesus returns to Earth and judges all people.

Are people who hold these beliefs representative of Christianity? No. Are they rare on most university faculties ? Yes, and for obvious reasons.

When knowledge and expertise are devalued, when empirical evidence is scorned, when the weighty and complex search for meaning that characterizes serious religiosity is replaced with superstition, rejection of reason and fear of the Other, the know-nothings have won.