| February 25, 2011

For economic development, try freedom, not handouts

In the first edition of Oklahoma Policy Blueprint (in a chapter entitled “Promoting Economic Development: Government Programs or Economic Freedom?”), economist Benjamin Powell made the case that “to promote real economic development, the state must change its policy focus from specific development programs to instead providing a stable institutional environment with strong private property rights and high degrees of economic freedom.”

“Good economic analysis requires policy makers to consider both what is seen and what is not seen,” Powell wrote. “In Oklahoma, it is easy to see particular businesses that have taken advantage of economic development policies. One can readily point to jobs that have been ‘created’ in businesses that are reimbursed through the Quality Jobs program,” for example. “But all of the resources used to create these things could have been used for something else. What goes unseen are the countless ways the money the state has spent on economic development could have been spent and invested by private citizens. If citizens had spent the money, it also would have encouraged businesses to expand and use more labor and capital, but it would have been different businesses than those that the state chose. It would have been those businesses that could efficiently produce the products and services the citizens of Oklahoma wanted most. Efficiently producing more of what people want is the essence of economic development. Once what is unseen is taken into account, it should become clear that the state’s various economic development programs do not promote growth. They get in the way of the real process of economic development that is internal to the market.”

To promote true economic development, Powell says, “the key is to focus on policies that do not favor one producer, industry, or region over another. The state can set an overall institutional environment in which private entrepreneurs can better work to promote economic growth.” This environment would include:

  • The protection of property rights
  • A reduction in the size and scope of state government
  • Tax reduction across the board: income taxes, corporate taxes, capital-value and franchise taxes, et al.
  • A reduction in regulatory burdens, including state occupational licensure

To their credit, Oklahoma policymakers are ignoring liberal think-tank analysts and editorial writers, and are reducing the state’s top income-tax rate from 5.5 percent to 5.25 percent. Gov. Mary Fallin is to be commended for repeatedly articulating the benefits of this tax reduction.

Regrettably, on another front policymakers seem intent on going in the wrong direction. Legislation cleared a House committee this week that creates the “Oklahoma Quick Action Closing Fund,” which will allow the governor to sweeten the deal for companies which are considering relocating to Oklahoma. This policy has been characterized as “pro-business,” but it is certainly not “pro-free-enterprise.” As a matter of fact, it is only pro-business for the rent-seeking businesses which happen to get the handout. It’s not exactly pro-business for the existing Oklahoma firms who are forced to pay taxes to subsidize their competitors.

Stephen Slivinski, senior economist at the Goldwater Institute, made an observation this month regarding Arizona that Oklahoma policymakers would do well to ponder. He wrote:

Imagine you’ve got some money to invest. Would you rather invest it yourself, or ask a friend with a spotty track record of financial success who is always chasing the newest, potentially short-lived fad?

That’s the implicit question for policymakers as they consider Governor Jan Brewer’s proposed “deal-closing” fund. The state would use $25 million to provide taxpayer handouts to firms seeking to relocate to Arizona. But are state governments better than private individuals and businesses at picking winning investments in a competitive global economy?

Government is the equivalent of your friend with the spotty investment record. One of the most comprehensive surveys of the research on state-based economic development projects appeared in the Journal of the American Planning Association in 2004. The authors concluded that, “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and local economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence.”

Showering taxpayer money from a $25 million ribbon-cutting fund on a few politically favored companies or industries won’t do much for Arizona’s long-term job growth. On the other hand, creating an attractive investment climate by lowering the tax burden of all businesses -- not just for a fashionable few -- is a much better approach because investment decisions would be left to the private sector.

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