One look at the role of economic development
June 21, 2007
This Q & A on the topic of economic development agencies is taken from an interview with Eileen Norcross, a senior research fellow at George Mason University’s market-oriented Mercatus Center.
Economic development agencies affecting Carson City include: the Economic Development Authority of Western Nevada (EDAWN), the Northern Nevada Development Authority (NNDA) and Nevadaworks.
These are groups subsidized with millions of dollars from the government. EDAWN gets more than half of its money from state and local governments, NNDA gets 40 percent of its money from state and local governments and Nevadaworks gets all of its money from the federal government.
What are economic development agencies and what do they do?
They are nonprofit groups set up (and subsidized by the government) with the aim of encouraging economic development, stimulating job growth or attracting business to a particular region. Also, they can be clearing houses for tax-incentive programs, making business aware of what might be out there that the government is offering.
How do we know if these agencies are doing a good job?
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Well, it’s very difficult to ascribe causality. There’s a few things I could say here. First, should the government be in the business of trying to create jobs? A lot of these tax-incentive programs, for instance, are offered to business with the idea that if we attract X amount of industry we will generate X amount of jobs. Is this how economic development occurs? That’s not necessarily the case.
They have it backwards, in essence. First, you should be setting up a good tax climate and a low regulatory burden. Let firms or entrepreneurs identify where they want to set themselves up, instead of trying to cherry pick who should come to your community with the aim of creating X amount of jobs.
Are you saying the premise of an economic agency needs to be questioned?
Yes. The policy premise that you should try to attract a particular entrepreneur or business, that you can somehow know in advance what business will thrive is questionable.
But what if an agency identifies a particular group, say, young professionals and says a region would be better off if it had them. What’s wrong with that? What’s wrong with saying we want to bring those kind of people to our city?
There’s nothing wrong with it. It’s just that they have the cause and effect wrong. They want to see prosperity, they want to see young people in the community. But the way you create that is by making sure the institutional environment is friendly to economic development and it’s nondiscriminatory. You don’t try to pick and choose with the tax code. I think that’s how economic development occurs. You make sure regulations aren’t driving away business. You make sure property rights are being protected. These types of things will determine whether your business climate is friendly or not.
Certainly, there’s nothing wrong with saying we want to generate economic activity or encourage young people to come here. And you can achieve that, it’s just through a different set of levers.
But economic development agencies say that neighboring states and regions are using the types of incentives you disagree with, so we are put in a situation where we have to keep up.
That’s one of the arguments you see – that we have to compete with our neighbors. But there are 20 years worth of studies on whether tax incentives actually work, whether they cause a company to relocate to a given region.
The evidence is mixed to negative that they are a deciding factor. So a state might think, “Yes, we have to do the same thing.” But in reality what they have to do is keep themselves competitive by making sure the institutional environment is right.
If we want businesses to move here, isn’t it our responsibility to help them with moving costs and start-up expenses?
The empirical literature shows it’s still a cost to the government. That even if you create a job, it’s at a great expense, so over time, it really doesn’t pay for itself … Now, tax competition is not necessarily a bad thing. Different states have the right to offer different levels of taxation, states certainly compete on that basis. The problem comes in when a state tries to set up a policy where it’s going to offer special breaks and exceptions. It’s probably not doing what it thinks it’s doing. It’s creating an opportunity for opportunism.
Do you think this kind of policy creates a climate of corruption?
I think it creates every opportunity for that … I don’t know if this happens at large, but it opens the doors for political agents to offer particular incentives to companies. Some could argue it’s a form of corporate welfare.
What type of people end up benefiting most from economic development agencies?
Those corporations who might be able to get a benefit that they might not have otherwise received for making a decision. Whether giving these corporations these benefits ends up stimulating the economy is a question mark at best, so whether the public benefits is a good question.
On the Net
George Mason University:
Economic Development Authority of Western Nevada (EDAWN):
Northern Nevada Development Authority (NNDA):