‘Music Man’ Economics

January 22, 2020

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”:

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.

Reading List

Bartik, Timothy. (2017) “A New Panel Database on Business Incentives for Economic Development Offered by State and Local Governments in the United States,” W.E. Upjohn Institute for Employment Research, 1–131.

Buchanan, James and Richard Wagner. (1977) Democracy in Deficit. Liberty Fund: Indianapolis, Indiana.

Bundrick, Jacob and Thomas Snyder. (2018) “Do Business Subsidies Lead to Increased Economic Activity? Evidence from Arkansas’s Quick Action Closing Fund,” Mercatus Working Paper, Mercatus Center at George Mason University, Arlington, VA.

Byrne, Paul. (2018) “Economic Development Incentives, Reported Job Creation, and Local Employment,” Mercatus Working Paper, Mercatus Center at George Mason University, Arlington, VA.

Calcagno, Peter and Frank Hefner. (2018) “Targeted Economic Incentives: An Analysis of State Fiscal Policy and Regulatory Conditions,” Mercatus Working Paper, Mercatus Center at George Mason University, Arlington, VA.

Campbell, Noel, Alex Fayman, and Kirk Heriot. (2011) “Growth in the Number of Firms and the Economic Freedom Index in a Dynamic Model in the United States,” Journal of Economics and Education Research, 12, 51–64.

Campbell, Noel and Tammy Rogers. (2007) “Economic Freedom and Net Business Formation,” Cato Journal, 27, 23–36.

Campbell, Noel, Kirk Heriot, Andres Jauregui, and David Mitchell. (2012) “Which State Policies Lead to U.S. Firm Exits? Analysis with the Economic Freedom Index,” Journal of Small Business Management, 50, 87–104.

Chapman, Keith. (2005) “From ‘Growth Centre’ to ‘Cluster’: Restructuring, Regional Development, and the Teesside Chemical Industry,” Environment and Planning A, 37, 597–615.

Compton, Ryan, Daniel Giedeman, and Gary Hoover. (2011) “Panel Evidence on Economic Freedom and Growth in the United States,” European Journal of Political Economy, 27, 423–435.

Dove, John and Daniel Sutter. (2018) “Is There a Tradeoff between Economic Development Incentives and Economic Freedom? Evidence from the U.S. States?,” Mercatus Working Paper, Mercatus Center at George Mason University, Arlington, VA.

Doucouliagos, Chris and Mehmet Ulubasoglu. (2006) “Economic Freedom and Economic Growth: Does Specification Make a Difference?,” European Journal of Political Economy, 22, 60–81.

Guo, David and Shaomin Cheng. (2018) “Untargeted Incentives and Entrepreneurship: An Analysis of Local Fiscal Policies and Small Businesses in Florida,” Review of Regional Studies, 48, 119-135.

Local Voters? The Politics of Business Location Incentives,” Public Choice, 164, 331–356

Kreft, Steven and Russell Sobel. (2005) “Public Policy, Entrepreneurship and Economic Freedom,” Cato Journal, 25, 595–616.

Krueger, Anne. (1974) “The Political Economy of the Rent-Seeking Society,” American Economic Review, 64, 291–303.

Lindsey, Brink and Steven Teles. (2017) The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth and Increase Inequality. Oxford University Press: New York, New York.

Mitchell, Matthew. (2012) The Pathology of Privilege: The Economic Consequences of Government Favoritism. Mercatus Center: Arlington, Virginia.

Mitchell, Matthew, Jeremy Horpedahl, and Olivia Gonzalez. (forthcoming). “Do Targeted Economic Development Incentives Work as Advertised?,” Mercatus Working Paper.

Mattera, Philip, Kasia Tarczynska, and Greg LeRoy. (2017) “Megadeals: The Largest Economic Development Subsidy Packages Ever Awarded by State and Local Governments in the United States,” Good Jobs First.

North, Douglass. (1990) Institutions, Institutional Change and Economic Performance. Cambridge University Press: Cambridge, UK.

Thomas, K. (forthcoming) “A New Estimate of State and Local Subsidies to Business in the United States,” Mercatus Working Paper.

Thomas, Garrett and Russell Rhine. (2011) “Economic Freedom and Employment Growth in U.S. States,” Federal Reserve Bank of St. Louis Working Paper 2010-006A, 93, 1–18.

Wang, Jia. (2016) “Do Economic Development Incentives Crowd Out Public Expenditures in U.S. States?,” B.E. Journal of Economic Analysis & Policy, 16, 513–538.

Wang, Jia, Stephen Ellis, and Cynthia Rogers. (2018). “Income Inequality and Economic Development Incentives in U.S. States: Robin Hood in Reverse?,” Review of Regional Studies, 48. 93-117.


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