Economic development, incentives via the government, and economic growth, based on free market principles, should not be confused.
Well-meaning public officials, government employees, community business owners and executives, and chamber of commerce cheerleaders have the best of intentions when they propose ideas for economic development. I believe they are genuinely trying to help. I just wish they would stop. When we confuse economic development with economic growth, we make big mistakes in public finance. These two concepts may sound similar but they are, in fact, opposites. An emphasis on one or the other leads to different results.
Those of us interested in seeing economic growth advocate for broad public policies like lower taxes, a reduction of the regulatory burden on businesses, the elimination of double taxation on investments and savings, and a reliable and predictable legal and regulatory environment. In stark contrast, proponents of economic development argue for subsidies, tax abatements, and regulatory relief for specific businesses or industry types in particular regions. The latter believe the economy can be directed by government involvement; the former believe the economy will produce a better outcome when we leave it to the entrepreneurs and consumers to determine the direction.
For those of us with a belief in the durable power of free-markets, the choice is easy. We know, thanks to Adam Smith and 242 years of data, wealth is created by the free exchange between producers and consumers. If we leave markets free and allow the natural incentive of profit-seeking to work, without government trying to influence, direct, guide, orchestrate, manage or nudge, the states maximize their economic growth. Such growth is what drives long-term employment and increased prosperity. When we replace the decisions of entrepreneurs, investors, and consumers in the private market with decisions of politicians, government officials and development boards, we significantly lower the odds of achieving economic growth.
Economic development policy really means the state picking the winners and losers by employing direct subsidies and tax breaks to attract or promote specific businesses or industries. An authentic effort to grow our economy would not focus on giving targeted companies the assistance and resources without providing those to all companies and industries. It is not fair to the current companies in Mississippi, who built their businesses without government help, to find themselves competing with companies subsidized by taxpayers. For too long, Mississippi has followed a policy that supposes “economic development” can be a meaningful driver of economic well-being in the state. It cannot. That policy is a losing one.
The evidence produced from analysis points convincingly to the conclusion that these targeted incentives do not produce long-term benefits in excess of their costs. In many cases, the cost-per-job is extraordinarily high. While some high-profile companies and their political allies may be better off, non-beneficiary companies may lose workers or experience wage increases, or both, and the state’s economic activity as a whole slows.
When political favor seeking is emphasized like this, it thwarts the private sector and tips the scales in favor of those companies and individuals with access to political relationships. It sends a message to the private sector that it should not focus on consumer-oriented actions, like product/service innovation or marketing, and focus resources instead on lobbying, legal representation, and elections. That’s not a recipe for sustained economic growth.
While economic development incentives, like those practiced by the Mississippi Development Authority, may lead to the creation of new jobs; that does not mean such jobs lead to the creation of economic growth. Measuring jobs alone is an insufficient way to measure economic growth. For example, roughly 90% of the Canton-based Nissan plant employees were already employed when that Madison County facility opened. Those new employees were already paying state income taxes. Yet, every job created by the state and local government incentive package was subsidized. In total, roughly $1.3 billion was promised to Nissan. According to data analyzed by Mississippi State University’s Institute for Market Studies, Nissan pays its 6,400 workers at the plant an average of $62,500, which costs taxpayers $203,125 per worker. Had that taxpayer subsidy not occurred and the dollars remained in the private sector, would individuals and businesses have found a better “investment” use? Decades of economic research and free market evidence informs us that private citizens and firms are more effective at allocating resources to their highest uses than is government.
The chief argument around government incentives is that “everyone else is doing it, so we must join the process in order to remain competitive.” That’s the wrong approach. The desire to provide incentives is an acknowledgment that our tax, regulatory, and legal system is not competitive. It says our state has not adopted freedom-based policies. Instead of offering incentives to just a few, our goal should be to create the most business-friendly climate in the country. A public policy based on freedom is how we’ll grow our economy.
Rather than increase the hand of government in our economy, we should trust the “invisible hand” of the market place and the proven incentive of profit and loss for the allocation of resources. It is either folly or hubris to think government can have the knowledge to do that more efficiently than the market. Nobel Prize-winning economist F.A. Hayek once wrote, “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”
This column appeared in the Clarion Ledger on November 2, 2018.