Should U.S. Cities and Urban Regions Have Their Own Economic Development Strategies? Part Two: The Question of Costs and Benefits - The Urban Lens Newsletter

Bob Gleeson started this thread of discussion last week and plans to continue building his line of thought soon.  While his discussion takes a broad, strategic look at this question, my own answer is more pragmatic: “Yes, they should.”  But the costs and benefits of each should be carefully, openly and honestly evaluated on a case by case basis. 

Local and regional economic development activities can potentially be vital to the quality of life in specific places.  They can help attract or retain jobs and income, keep public tax receipts up enough to fund municipal services and education, and generally sustain or even improve the quality of life for residents and community members.

But this said, a lot of boondoggles happen in the name of local economic development. They make people who are already wealthy even wealthier, and often at the expense of the less fortunate members of society.  So citizens should insist that local economic development activities are fully documented, transparent, and subject to formal evaluation by qualified, impartial reviewers.

Responsible design and rational implementation of local economic development activities requires recognition of the entire range of factors that influence the creation of local and regional jobs. Some of these factors are amenable to the influence of local economic development strategies, and others are not. 

For example, the number of jobs at any given location is influenced partially at the national and international levels, such as by the growth rate of the national economy, the growth or shrinkage of particular industries, national monetary and fiscal policies, inflation, and recessions.  These and other macroeconomic factors are ones over which local officials have no control whatsoever.

The industry mix of a city or region can have a significant effect on the numbers of local jobs because job growth varies by industry.  For example, job growth in cities and regions that are concentrated in Information technology (IT), construction, personal services, food services and healthcare are likely to benefit by their industrial mix.  These sectors sustained the national economy during the pandemic, and they will likely continue to experience high levels of job growth in this post-pandemic era. 

Other cities and regions can have high concentrations of jobs in slow-growth sectors and/or shrinking sectors.  A city or region’s industry mix evolves slowly over time, so it is unclear whether city or regional economic development deals can yield much short-term change in overall job creation.

Some local job growth is attributable to a competitive advantage within a particular industry or market segment in a city or region.  A local competitive advantage can stem from many roots.  It might come from the characteristics of a workforce, such as the large stock of human capital found in and around Boston, a cluster of firms in complementary industries, such as the wine industry in the Napa Valley and Sonoma regions of California, or something unique and special about the locale itself, such as the ambience of the French Quarter in New Orleans, the country music found in Nashville, or an excellent natural harbor.

Economic development strategies that leverage a competitive advantage can take several different forms.  For example, investments in training and education can improve levels of local human capital.  Cluster development can occur through encouraging the co-location of complementary firms around pivotal and successful local industries.   Public infrastructure can be made available to attract firms by providing the local conditions necessary to increase their productivity.

But many local economic development strategies do not stand up to careful scrutiny.  An especially problematic type are those “beggar-thy-neighbor” ones based on tax expenditures.  These include tax deductions, tax abatements, and tax credits.  Often the idea is to entice large firms to move to the local jurisdiction, or to keep it from moving way, through the public provision of incentives. 

Yet, while the idea of using tax expenditures to increase or preserve local jobs may seem reasonable on its face, the weight of the evidence in the research literature shows that they are largely ineffective and highly inconsistent uses of public funds.  Politicians may continue to see them as one of the most important available local economic development tools, but this is largely because local governments are at the mercy of a larger macro-economic environment over which they have relatively little if any control or influence.  Their lack of control leaves them with few tools at their disposal to create positive economic change in their communities.

Lacking the ability to change the local economic trajectory in any meaningful way, many politicians and local economic development officials are more concerned about creating the political perception that they are making such change than about actually changing economic realities. This is one of the big reasons that so many tax expenditures are used and the costs and benefits of so few are ever formally evaluated.

Two examples in Ohio demonstrate the problem. The first relates to the use of tax expenditures for local economic development, the second relates to direct local governmental expenditures.

American Greetings (AG) is a greeting card company that was headquartered in the City of Brooklyn, Ohio, a financially challenged suburb of Cleveland. About 13 percent of Brooklyn’s revenues, or about $3 million, came from income taxes levied on AG and its employees. In 2010 the citizens of Brooklyn voted to increase the local income tax rate from 2 percent to 2.5 percent to fund local services. AG responded by threatening to move out of the city, and possibly the state.

Brooklyn responded with a promise to lower its income tax rate back to the 2 percent and to sweeten the pot with a local tax expenditure package for AG that was worth $6.5 to $10 million over 15 years.

The State of Ohio then got involved, separately. Fearful that AG might leave the state, the State of Ohio created an additional $93.5 million package of tax incentives, but the State package did not require AG to remain in Brooklyn. Shortly after, AG announced that it was moving to Westlake, OH, a wealthier Cleveland suburb in which a new location was found that was part of a larger development owned in part by members of the family who then controlled AG.

From the point of view of the State of Ohio, the net effect was to provide nearly $100 million of scarce public tax dollars to subsidize the relocation of AG from a struggling local area to a nearby wealthier one, with no net change in state revenues. From the point of view of Brooklyn, the move was financially catastrophic. The already-wealthy owners of AG, and the already well-financed city of Westlake prospered greatly.

An example of direct local expenditures is the $90 - 144 million of public tax dollars that were spent a decade ago to construct a large building in Downtown Cleveland. The building was initially known as the Medical Mart and was later renamed the Global Center for Health Innovation. The facility is funded through a quarter-percent sales tax throughout Cuyahoga County that was decided by the then-three county commissioners, without a vote by the citizens.

It was foreseeable that the Medical Mart would not be profitable from the beginning and it is at best questionable even now what the average local tax payer is getting out of the deal. The preponderance of research shows the cost of building things like this and other attraction venues tend to exceed the benefits, particularly for the average resident.

A family that spends an average of $40,000 a year on items that are subject to the tax pays about $100 to subsidize the facility each year. But what does that family benefit? The chances are high that the management of the Center would not even let that family tour the building. But then again, it has been largely empty for most of the time since it was built. Today the county is now poised to spend another $31 million to update it. So, the question is, who is benefiting from it?

Yes, in my view, U.S. cities and regions should have their own economic development strategies. When used well such strategies have tremendous potential value. But they can also be boondoggles set in place and conducted to satisfy no more than the short-term narrow self-interest of already-wealthy people and the public officials who court their support.

The only way to realize the potential benefits from local and regional economic development is to thoroughly document any proposed strategy, create widespread transparency, and, in the end, to have their costs and benefits formally evaluated by qualified, independent analysts who have no vested interests in the outcome.

Bill Bowen