‘Music Man’ Economics
by Craig Ladwig
There hasn’t been anything like this since the New Deal — a policy position so popular, so appealing in every way, and so utterly untenable. It is targeted economic development or eco-devo, a collection of schemes that would make FDR blush.
Local and state governments are spending $70 billion a year nationally on such targeted incentives. Given that level of investment it is surprising there is a city anywhere in the U.S. not rolling in dough.
Add it up yourself. You can recognize it in the minutes of your council meeting as tax incentives, job-development, retraining tax credits, tax abatements, infrastructure financing, tax increment financing, outright grants and loans or bonds backed by public funds.
We all know what these policies promise but has anybody followed up, actually measured cost effectiveness, how a city is changed politically and economically — or, to pick up a “Music Man” theme, determined whether the musical instruments ever arrived?
Indeed they have, and no they haven’t, not right here in River City or anywhere else.
Our staff has been unable to find a published, independent, cited study in Indiana or elsewhere that supports using public funds for targeted economic incentives. Not one.
Now, there may be a supporting study out there somewhere, for we have not completed a full survey of the scholarly literature. From what we have seen, though, it would be dwarfed by the stack of research to the contrary. At the end of this article there is a partial listing of pertinent papers assembled by Matthew Mitchell of George Mason University.
To be clear, we are looking for evidence of general economic benefit beyond the political lives of the ribbon-cutters on a city council.
What is often passed off as science during the early stages of an eco-devo campaign are consulting studies. These are commissioned by the city or the prospective developers. The authors, although often qualified, have an incentive (fees) to error on the optimistic side. Some include disclaimers that their conclusions rest on unconfirmed market data, estimated costs, etc., provided by the client — a suborned guess, in other words.
Fortunately, Mitchell and others at George Mason have conducted a survey of the economic literature that seriously compares the performance of targeted economic development incentives with the alternative, free-market incentives. Here is what they found, published in the current issue of “The Review of Regional Studies”:
- While both theoretical and empirical evidence suggest that there is a positive association between economic freedom and prosperity at the state level, the academic literature finds that targeted incentives are less effective in promoting broad-based prosperity.
- Targeted incentives entail an opportunity cost. These incentives direct taxpayer dollars to particular firms and industries which might have been used to provide public goods or to lower tax rates for all.
- While targeted tax cuts and subsidies might spur economic activity among privileged firms, they discourage economic activity elsewhere in the economy by necessitating higher tax rates born by firms and customers in non-privileged sectors.
- When targeted incentives entail outright subsidies, they encourage investments in which marginal costs exceed marginal benefits.
- Subsidies insulate privileged firms from competition, making them less efficient and less accountable to consumer demands. The very possibility of selective privileges encourages firms to inefficiently spend resources seeking privilege from policymakers.
- Targeted policies reward small, highly-organized interest groups with concentrated benefits paid for by taxpayers, consumers and other competitors. Relative to the beneficiaries, the groups that pay for these targeted benefits are unorganized and diffuse, and so tend to find it costlier to resist these policies, even if the total costs exceed the total benefits.
- Because the benefits of targeted incentives are immediate while the costs are often shifted into the future, incentives encourage cost-shifting. The result can be more crony capitalism in the economy.
To summarize, the logical and mechanical flaws of eco-devo are understood to a degree that ignoring them amounts to malfeasance if not fraud. And yet, pick up a newspaper anywhere in Indiana. It is clear that the policy continues unabated, if you will, with the full support of every governing body in the state.
This, surely, is how society collapses — in a unanimous vote by the local redevelopment commission to the cheers if an unquestioning citizenry.
Craig Ladwig is editor of the quarterly Indiana Policy Review.
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