I have been working on a bunch of projects on the use of financial incentives to attract companies. One part of this project examined the “border war” between Kansas and Missouri. Google it. Companies jumping back and forth between Kansas City, KS and Kansas City, MO purely to maximize incentives.
I presented a short policy paper on how the main Kansas incentive program affects job creation. The short answer is that I find that the incentive program doesn’t create any jobs (when we compare job creation with a control group of firms). Details on my paper and the conference can be found here.
I have been invited to Wichita to present my work to local officials as they debate an increase in sales taxes to fund a number of projects, including a job creation package. The details of this package have just come out. Here is the full information that I have on the program.
There are some obvious issues that anyone could point out on this program. A regressive tax (sale tax) is used to fund a jobs program that will be targeted to select companies. This should at least be cause for some concern.
But the bigger issues on these job programs are: 1) how will this program help create jobs, 2) how will firms be targeted, 3) how will the program be evaluated, 4) what market failure is this program going to address (why doesn’t the private sector already do this).
1) How will this program create jobs? By doing everything. Infrastructure, workplace training, harness the power of clusters while diversifying the economy. Basically they will create jobs by doing everything. Which generally means they are doing nothing. Hard to take this proposal seriously.
2) How will firms be targeted? I’m not sure. This is the only clear language on this:
The City of Wichita would allocate 20% of a 1-cent sales tax to an independent commission. This new commission would be appointed by the City Council and led by private sector business people. Decisions about who receives funding, the number of jobs, and the impact on community would be made in public meetings and tracked through a website.
3) How will the program be evaluated? From the proposal:
“Several metrics will be used to track the impact of Jobs Fund expenditures. These would include:
Total Wichita employment increase over five years (target is 7% – 20,000 more jobs).
Average wages increase over five years (target is 5% over cumulative CPI).
Property tax growth over five years (target is 15% or $469 million).
What? The plan for the evaluation of a $80 million program is to eyeball regional economic growth?
4) What is the motivation for this project? From the final paragraph:
“Why can’t the free market determine job and economic growth?
The answer is this is a market-driven approach. Businesses have their markets and so do communities. Wichita is competing against 14,000 other entities trying to steal companies and jobs. Oklahoma City is just one of the cities that has a person that spends majority of time in Wichita talking to our companies about moving or locating new work there. If a company needs a rail spur and Wichita can’t provide it, other communities in the market will and Wichita loses those jobs.”
This competition rhetoric is something that drives me crazy. Paul Krugman’s somewhat dated book, Pop Internationalism, has a nice chapter on this. I always thought that government officials were being opportunistic in painting their preferred policies as being driven by “competition” and not some other motivation.
And then I started meeting local government officials in Kansas and Missouri. I think they truly believe that they must make these policy changes and that many of the local economic woes are caused by others. Not China. Their neighboring states.
I think they are wrong, but I can see that there is nothing I can say to convince them otherwise. My goal in Wichita is to present my research on how ineffective targeted incentives are for job creation, and talk more broadly about the failures of many local economic development programs.
But if they insist on moving forward on this program, I hope to at least provide some advice on how to limit the corruption, waste, and sometime unintended consequences of these programs. I think this is where my IPE perspective could help. Many of these US local development programs look like some of the failed programs in the 1970s and 1980s around the world.
Any advice or suggestions are very much appreciated.