Do Not Assume Economic Development Spending is Effective

Michigan Capitol Confidential ^ | 11/22/2015 | James Hohman

[MichCapCon]

In The Detroit News, business columnist Dan Howes cites a real estate developer in arguing for more spending on state economic development:

“It’s not competitive,” says Albert Berriz, CEO of McKinley Inc., an Ann Arbor-based real estate investor with a $4.6 billion portfolio spanning 33 states. “It’s a nuclear arms race, and everyone wants to put you out of business. We need to talk less and win more.”

The problem is that economic development spending is an ineffective way to grow the economy. Taking money from taxpayers to spend on the programs has an economic effect as well. Numerous studies looked at different ways to tease out the impact of these programs and their results. One review of the literature concluded:

The upshot of all of this is that on this most basic question of all — whether incentives induce significant new investment or jobs — we simply do not know the answer. Since these programs probably cost state and local governments about $40-50 billion a year, one would expect some clear and undisputed evidence of their success. This is not the case. In fact, there are very good reasons — theoretical, empirical, and practical — to believe that economic development incentives have little or no impact on firm location and investment decisions.

Residents should be skeptical of spending millions of taxpayer dollars on special deals to a handful of favored companies. Every year hundreds of thousands of jobs are both created and destroyed in Michigan’s dynamic state economy. (For example, in 2014, 832,000 jobs were created here while 764,000 jobs disappeared.)

Thus, if economic development were an arms race, it is one where the stockpiles get you nothing.

[Gen.Blather]

Government spending is effective. It’s just that it’s more effective at sending money to allies who kick back than it is at improving the overall economy.