Keating: Economic Development? Try Common Sense

April 22, 2013


Charlie Rose of the Public Broadcasting Network gathered a group of majors around his oak table to discuss the state of U.S. municipalities. A dominant theme emerged — the need for a mayor to be able to implement his or her own personal vision.

Yes, with respect for administrative discretion, we should attract competent, honest officials and expect them to use their bully pulpits to express themselves, but only about 20 percent of the time. Otherwise, in a republic, we are right to expect that 80 percent of their efforts (and an even higher percent of tax revenue) be allocated to the basic functions of local government.

The rhetoric of “creating jobs,” “envisioning the future” and “economic development” is boiler-plate political speak, but one wonders if such talk distracts us from what we know local government can actually do.

Good cities and towns are safe, attractive, create a good environment for rearing children, and provide an educated and industrious labor force. In such communities, the rule of law prevails, and there is a loose consensus on how people behave informally toward each other in government, in business and in the neighborhood.

Given these conditions, prosperity is not guaranteed but has a good chance. Two simple mechanisms should be in the tool kit of all local officials — the first is a realistic assessment of local conditions, and the second is a consistent rubric for decision-making.

On the website are found statistics for every state, county and city in the U.S. It takes less than five minutes to look up information for a particular community. Link here for a table of available data showing the uniqueness of each locality.

The reality is that each state, county and town is constrained by its present circumstances. With back-of-the-envelope calculations, it is possible to identify and project the economic framework for population, potential tax revenue and the level of sustainable public debt that any particular community can service. So why can’t we admit that it is beyond the most enlightened local leaders to nudge economic or population growth beyond 2 to 3 percent a year?

They can, however, create an environment conducive to growth and use moral suasion to inform the community of possible trade-offs. Here’s how:

Realistic local decisions are made in the context of readily available information concerning population and economic growth. It is within this framework that choices are made concerning how tax revenue should be allocated. In addition to demographic data, cost-benefit analysis can be used as another valuable information-gathering tool. Cost-benefit analysis — calculating the present value of benefits minus costs — points decision-makers toward those activities and projects yielding positive net benefits.

Initial costs and operating costs are generally available; they are fairly straight-forward in evaluating local projects. Assessing benefits presents more of a challenge because we are dealing with public goods. However, careful observation of market behavior and well-designed surveys can be used to determine those government services valued by residents and for which they are willing to pay. Comparisons of property values or a willingness to accept congestion can be used to evaluate the value that households place on shorter commutes. Differential fees paid by households, similar to those in the local community, can be used to determine how residents value city sewage as compared to septic tanks.

Consider how residents demonstrate their willingness to pay for leisure activities. By attending county fairs, picnicking, shooting hoops at community centers, purchasing tickets to concerts for seniors and organizing adult athletic leagues, residents reveal their preferences for activities that provide benefits. Admittedly, these preferences change over time. However, contrast these activities with the mushrooming growth and duplication of tax-financed economic-development efforts. They often are designed to attract out-of-towners on expense accounts whose tastes reflect those of the planning bureaucracy and not necessarily the community. Cost-benefit methods, by contrast, would require decision-makers to identify benefits in terms of current local residents having standing in all public decisions.

There is a danger that analysts will double count or pile on dubious benefits. However, the light shone by impartial rudimentary cost-benefit analysis assists in ruling out the most egregious and unrealistic projects. To put it as a common-sense prescription: Cost-benefit analysis guides; public officials decide.

To summarize, those entrusted with making decisions for the general public should continually be asking themselves two questions: Are we listening? Are we responding?

Maryann O. Keating, Ph.D., an adjunct scholar of the Indiana Policy Review Foundation, is co-author of “Microeconomics for Public Managers,” Wiley/Blackwell, 2009.



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