Although I am not calling for the termination of state and local efforts to attract mobile private investment and jobs using subsidies, such as tax abatements and credits, grants, customized infrastructure and workforce training, I think it is important to question.
Would economic life go on after business incentives? The answer is: of course there would be. The number of jobs, additional state income, and tax revenues generated by landing an Intel, a Boeing headquarters, or whatever are dwarfed by the numbers of jobs and new income created by the other firms, governments, hospitals, foundations, and colleges in the state.
Economic life would go on. A state economy is not so fragile that efforts to shine a light on the accountability and cost-effectiveness of a state’s portfolio of incentives and increase its accountability will cause it to be shunned by out-of-state corporations who otherwise would locate there, causing it to go into a dangerous economic nose-dive.
Moreover, how does an overall local, state, or national economy, according to the latest studies of why the West became rich grow today? Knowledge, Ideas, Technological change. New product development. Workforce skills and motivation. Property rights. Government investment in public goods and essential services.
In short, economic growth is a function of entrepreneurship, innovation, competition, productivity. These are the real drivers.
This is as true now as it was at the dawning of the industrial revolution in Britain, the development of the Western offshoots (.e.g, United States, Canada, Australia, and New Zealand), and the rise of Japan and the Asian Tigers.
You can, of course, “buy jobs” with incentives. But whether these contribute more than their initial payroll depends on everything else. Even well-designed, targeted, and managed attraction and incentives constitute only the smaller, visible part of the “iceberg.”
So, the first order of economic development is get the prerequisites right – for example, a world class physical infrastructure, technological assets, human capital, financial resources, amenities and quality of life.
A good development climate for existing firms and entrepreneurs is also a good climate for a mobile facility, looking for a new base of operations. And no incentive can overcome the disadvantages in the real quality and cost conditions of a jurisdiction. Get these in solid shape and they too will come.
That’s the ticket for sustainable development, not over-reliance on landing the next trophy plant.
NOTE: This is the second in a series of articles about business incentives – Creating Jobs Versus Buying Jobs: What’s The Potential? The first was “Buying Jobs.”