Mapping the Spatial Effects of Business Incentives

The Keystone Research Institute in Pennsylvania has been mapping the spatial development effects of state and local economic development incentives in Pennsylvania. The impetus for this mapping effort is to encourage "smart growth" in Pennsylvania communities, counties and regions. While I see merits with the effort, I also see some fatal flaws.

I spent some time at the mapping site and tested the system. No great surprises in what I saw. The group's report summarizing its findings is due shortly. I would offer a couple initial observations that are worth bearing in mind as we look at the issue of whether and how public incentives shape the spatial pattern of business and job growth in geographic areas:

1. The issue of the spatial development effects of these programs should be considered at the onset when these programs are first designed. Usually they are not given sufficient attention in the policy and program design phase. This was a recommendation that I made to the Ohio Legislature in 1999 in my cost-benefit analysis of Ohio's ED programs. Question one should be: "what goals and objectives are we striving to achieve with these programs or economic development in general?"

2. Smart growth is easier said than done. The truth is that most American citizens and businesses do not want government on any level telling them where they can live or locate businesses. Can you blame them, given government's shoddy past track record in making economic policy decisions? In all honesty, government is more of a culprit in sparking urban sprawl and causing other inefficiencies in how communities and regions develop than the actions of individual citizens and businesses. The structure of our governance system, especially at the local level, encourages inter-jurisdictional rivalry for tax base and other economic development resources. Most local governments within regions are unwilling to reinvent themselves to serve the larger regional whole that sustains them. It's really quite simple...the incentive programs we have reflect the shortcomings of the governance system that creates them.

3. In a perfect economic development world, no political jurisdiction any where would use incentives to influence the location of economic activity. The truth is that incentives are found just about everywhere worldwide. Moreover, those found in many other countries are more powerful and influential than those found here in the US. Low-cost labor, vis a vis inhumane child labor practices, are at work in many countries, including China, and these very practices are viewed by government officials as inducements to attract foreign capital investment. Most political jurisdictions have decided that "unilateral disarmament" of their ED incentive programs is not a wise move in this cut-throat world of business location and economic development.

4. I believe there is room for future productivity improvement in how we approach development in the future. I have said for sometime that probably more people would adopt the concept of "productive growth" than "smart growth." Productivity clearly aims at conserving resources, which is a good thing for businesses, governments and citizens.

5. Regions, and the communities that comprise them, should be looking for better ways to increase economic growth through more leveraged public and private sector investment strategies. First, we should invest in people and their continuous skill and knowledge enhancement. Second, we should invest in building high-quality, innovative and creative communities that businesses find competitive and people find exciting and interesting. Third, we should re-haul our overall tax system to encourage greater capital formation by businesses and wealth creation for all segments of the population. Fourth, we should increase our awareness of the cumulative effects of our various community and economic development policies. We have not been paying attention to the long-term effects of these programs. Finally, we need to learn to live within our means and make government on all levels more productive and cost-effective. For starters, local governments within regions need to increase public service collaboration.

If we did these things, we may find that many of our economic development incentives would become less important.