The Outstater

May 16, 2023

Economic Development: Return of the Music Man

Friend, either you’re closing your eyes to a situation you do not wish to acknowledge,
Or you are not aware of the caliber of disaster indicated by the presence of a pool table in your community.
Well, you got trouble, my friend, right here, I say, trouble right here in River City. — Harold Hill, “The Music Man”

IT IS HARD to get the score of “The Music Man” out of your head when reviewing the typical economic-development deal. Almost every Indiana city has one or more, and yes they are what they seem to be — shams.

These projects, designed to hoover state and federal grants while leveraging local tax revenue, are built without market tests. They are meant to go belly up in 20 years, at which time the insiders buy them at what amounts to a sheriff’s sale — that or more taxpayer money is leveraged to revive the project and start the process all over. And all the time circumventing a banking system that might ask embarrassingly hard questions.

And yet, the 76-trombone enthusiasm is understandable. We all want to see our community grow and prosper. We all like the idea of a vibrant “downtown.” We all want to dine and work in nice places.

But still, an inarguable good is the beginning of every scam.

Indeed, there is an unnatural, facelift feel to the projects pushed by the economic-development agencies. They have no actual investors or entrepreneurs behind their hotels, convention centers, athletic venues or, ahem, marching bands. There are only stagers (Potemkin-like architects, lawyers, engineers, grant-packagers and political bag men) all paid up front regardless of a project’s success or failure. They merely organize, permit and arrange the rebar and concrete. To be technically exact, they are what economists call “rent-seekers,” aptly defined here by Wikipedia:

“Rent-seeking is the act of growing one’s existing wealth by manipulating the social or political environment without creating new wealth. Rent-seeking activities have negative effects on the rest of society. They result in reduced economic efficiency through misallocation of resources, reduced wealth creation lost government revenue, heightened income inequality, risk of growing political bribery, and potential national decline.”

Clear enough? Again, these supposed public-private “partnerships” have no business plan that a commercial bank would recognize. There are no real consequences except for the public half of the deal. The only guaranteed return is for the private organizers, none of it justified by present value or any potential stream of community benefit. That is despite billions and billions of dollars in state funds put at risk (they have made the exact amount difficult to estimate).

How is this done in Indiana, a state historically  touted for its constitutional prohibition against government using your money to borrow on speculation?

The prohibition is an artifact of conditions in the state when it passed its 1851 constitution. The state was riddled with debt stemming from the collapse of the canal system and the bonds that were issued to support their construction. (Railroads basically killed the canals).

Indiana legislators and courts began nullifying the constitutional prohibition not long afterward. You can wade through the tortured rationale for yourself of why the Constitution didn’t really mean what it said and why the state therefore should borrow away. It is all in the March 1933 Indiana Law Journal.

Today, Indiana gets around the prohibition by creating government-sponsored agencies such as IEDC (Indiana Economic Development Corporation) and the IDDC (Indiana Destination Development Corporation). The state also manages local government debt issuance through the IFA (Indiana Finance Administration) and encourages the municipalities to borrow for projects they work on with the IFA. There is no prohibition on municipal borrowing in itself. The state also administers federal disbursements that it lends to the municipalities such as the State Revolving Fund that Fort Wayne uses to fund sewer projects.

“Despite the constitutional prohibition from borrowing, the state has still found ways to do so,” concludes Jason Arp, a Fort Wayne city councilman and former banker. “I’m very concerned that IEDC and IDDC will become the next source for financial woes for the state in the future.”

We are approaching the fourth year that low office vacancy has been blamed on an epidemic. But there is another explanation. Office workers and their employers don’t see a value in downtown real estate today despite the money put into economic development there. Indianapolis and Fort Wayne now claim office vacancies below 25 percent but the numbers are supplied by . . .  wait for it . . . the people who sell office space.

A better indicator is downtown cellphone usage. It is 41 percent of what it was five years ago in Indianapolis. Other Indiana cities are no doubt similar. That would indicate not only vacancies but fewer visitors to the dining and entertainment venues that boosters promise for economic-development projects.

There have been other signs in recent years that Indiana has taken a dangerous path. This foundation has checked off several of them:

Now comes new census data that says despite the fortune that has passed through Indiana’s economic-development agencies this last decade there has been little or no real growth. We asked Arp to examine the data for the upcoming issue of The Indiana Policy Review.

“The Census Bureau data dispels the narrative that the public-private-partnerships pushed by Greater Fort Wayne Inc. and others has created growth in our city. The data shows that incomes are lagging the state, that the population growth has largely come from refugees . . .”

And in an accompanying article, John C. Mozena, president of the Center for Economic Accountability explains his group’s findings that the job-creation efforts of state economic-development agencies don’t make a meaningful difference to the workforce or economy, and that is based on the agencies’ own data.

The latest Indiana Economic Development Corporation report, for example, takes credit for 24,059 “expected” new jobs. That is a pathetic 0.35 percent of the state’s 6.79 million population or 0.71 percent of its 3.39 million workforce.

As the man at the next desk notes, if it were not for rounding up there would be no numbers at all, and the ones they claim may include the dubious multipliers (jobs or visitors that supposedly attract other jobs or visitors).

“That return on investment is so bad it makes Sam Bankman-Fried look like Warren Buffett,” quips Mozena. “If private-sector investment professionals were delivering results like this to their customers they’d be fired, in jail, or both.”

And metaphorically, when the band instruments do arrive they cost three times their assessed valuation.

If the economic-development agencies are ineffective in actually creating wealth they are effective at changing a region’s political makeup and economic strategy. Policies proven to attract investment such as guarantees of property rights, lower taxes, open competition, freedom from regulation, etc., are abandoned for the magic of those public-private “partnerships.”

Economics by press release takes over. City councils fill with unquestioning boosters of what is a banking scheme managed by self-serving insiders.

The result is a deepening cynicism in a citizenry promised easy, immediate prosperity  — that and a loss of competitive position vis-a-vis other states even as they say that our indebtedness is necessary to make us more competitive.

Several years ago we asked a friend’s reaction on visiting newly remade and uber-progressive Carmel, Indiana. Her reaction sums up that of our experts: “It’s impressive,” she said, “But it doesn’t look natural.”

It is not. — tcl


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