What Economic Development Gets Wrong

February 25, 2019

This past week brought news of Amazon making the decision not to locate a second headquarters in New York. As to be expected, some saw this as a victory for the people of New York and others saw this as a devastating blow to the city’s economy. There is a critically important debate to be had on this topic, but the response from pro-economic development officials and corporate advocates was, as always, to say job killing socialists wrecked the deal because they hate capitalism. This response possibly lacks a little nuance, and more importantly, keeps us from having a rational conversation about the role economic development plays in shaping cities.

The conventional wisdom that economic development is the only thing that can improve a city  is outdated, tired and needs to die. Unfortunately, in thousands of communities, economic development efforts are the only strategy being deployed to try and grow the local economy. The economic development industry has grown large and pervasive and feeds off of government budgets at every level. Economic development run amok has created a situation where considerable public money is being transferred to private interests with far too little oversight. By making every mayor and county commissioner believe they will be painted as a hippy job killers if they don’t play the game, we keep draining communities of their much needed resources while increasing share holder dividends and inflating CEO pay. New York was ready to hand over $3 billion in public resources to a company that is currently valued at more than $1 trillion. It is true that New York would have realized more than $3 billion in return, but that’s not the argument. The point is that the public should not have to foot the bill for the continued growth of a successful private corporation when it does not need assistance. This is the exact opposite of what the field of economic development claims to be about. The whole idea behind this specialized area of government is to use limited public resources, in a targeted manner, that allows the private sector to grow enough to become self-sustaining. If a private entity, be it a retailer, or developer, or manufacturer does not need assistance, then what sense does it make to provide them with more public resources?

Let’s consider a block of buildings in a blighted downtown. Often times, these buildings are in poor shape and require significant investment. Simultaneously, they are located in an area with depressed rental rates. This creates a cashflow problem. Whereby, someone wanting to renovate these buildings would have trouble paying back the debt on the renovations because monthly rents are lower than the monthly cost of the debt incurred to renovate. When this is the case, which it so often is in depressed downtowns, the project cost is greater than the payback, therefore no one is willing to take on these projects and these buildings remain vacant. This is what city leaders miss, if there is no money to be made in renovating a building in your downtown, no one is going to renovate the building. Property owners and developers are not, and should not, be in the business of losing money. This is an instance where utilizing public money as financial incentives does make sense. Local government could use low interest loans, tax rebates and other various financial tools to bring the project cost to the point where it’s feasible. By reducing the cost to renovate the buildings, a property owner could then justify the project and derive enough cash flow to finance the debt. In doing this, the owner can take out a loan, hire a contractor and subcontractors and put people to work while also purchasing materials – all which help grow the local economy. When the project is complete, the city realizes a substantial increase in property tax, income tax, and sales tax. By utilizing economic development incentives, a project that would not have happened, is able to happen. If used effectively, the amount of those incentives should be less than the amount returned to the city. Thus tax payer money is wisely being used as the result of the completed project will generate more new money than the amount of public money expended to make the project possible . When we talk about economic development in these terms though, for some reason people balk at the idea of using public money to help subsidize a local persons development or business. We seem to draw the line at using economic development incentives to assist community members in growing the local economy, but have no issue using those same funds to benefit the Walton family.

At some point, using public funds to bolster the private sector leads to a market correction and the next block may not require any public assistance. This catalytic effect is the entire reason for using economic development tools. Rental rates will increase and developers will no longer need public resources to make a deal work. This is the proper time for a city to pull back such incentives, because they are no longer needed. This is the reason we need economic development and the benefits it can have. By using strategically placed incentives, we can foster a marker correction and create a situation where the money expended is dwarfed by the long-term benefits and returns realized. Large cities all have an older neighborhood where this scenario played out. A city leader saw the value in trying to revitalize a traditional neighborhood and used targeted incentives to kick start the economy. A couple of buildings get renovated, some new businesses open up, apartments are added and before you know it, a renaissance is taking place. A little financial fertilizer led to a wholesale revitalization of a neighborhood. Which leads to thousands of new jobs, millions  in investment, a huge expansion of the tax base and an increase in tourism and civic pride. This is where economic development incentives can be a critical tool for a city.

Economic development incentives can and should be used to jumpstart local development in existing neighborhoods where the market needs help. But here is the problem, city leaders think that economic development incentives are the only tool in the toolbox and use these public funds far too liberally. It stops being economic development and starts being corporate welfare when public funds are transferred to a private entity that does not need the money to make a project work. It can and has been justified by arguing that the expended funds will be returned to the city through increased investment, but if the funds were not needed in the first place, this argument rings hollow. I could argue to my wife that I saved money by buying another bike that was on sale, but she will probably point out, and rightly so, that I did not need another bike.

Using economic development incentives to attract national corporations to town, is tantamount to showing a burglar where the good silverware is. It’s not enough that national chains comes to town, they pull more money out of the community than they put in, but some cities want to pay them to do it? That is outrageous. Some will make the argument that a national chain could decide to not do a project if not provided with enough incentives, but I call bullshit. You can be positive that if a national chain expresses interest in your community, they already ran the numbers and know there is money to be made, but they would like to maximize their profit if local government is a willing accomplice. National chains thrive because they are able to profit in a community. They arrive with the intent of taking sales away from locally owned businesses, and by offering them public subsidies, we give them a hand-up in putting locals out of business.

Building subur
ban sprawl and incentivizing national chains is the quickest route to destitution for cities. Inviting outside interests to come and compete with local property owners and business owners ensures that the little money left in the community will continue to bleed out and benefit some other town. You cant grow your economy from the outside, it can only come from within. Any strategy that shifts local money to outside parties is a losing proposition. Economic development incentives, when strategically targeted to jumpstart local investment is wise and can create incredible returns and help rebuild an economy and community. City leaders must realize that national chains and developers are all looking to maximize their profit. They are in the extraction industry, and they are mining your community resources. Don’t pay them to do it.

*Thank you very much for taking the time to read my blog, if you found the information useful, I do hope you will consider sharing it with your friends and colleagues.

– Jeff Siegler

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