Opinion: Daily Journal

The Elasticity of Economic Development

RALEIGH – One of the most elastic terms in political rhetoric is “economic development.” Spending lobbies have figured out that if they can get their pet projects labeled as “economic development,” they have a better chance of securing appropriations than if they identify their real goals.

A good example was the General Assembly’s creation last year of a new $10 million fund for “site acquisition and economic development projects.” As the Triangle Business Journal reports this week, most of the fund was originally intended to finance two projects at historically black campuses of the University of North Carolina system. But neither campus ended up applying for the funds, leading to an absurd situation in which more than 70 different public- and private-sector groups have submitted grant applications, pitching projects as varied as new industrial parks, business incubators, and expanding the North Carolina Symphony’s “Blue Skies and Red Earth” concert tour to counties in the western part of the state.

Because any expenditure of funds most necessarily involve paying people to deliver some good or service, it’s hard to imagine a project that would not be considered “economic development” if the definition is so elastic as to include anything that might “create” a job. The problem is that policymakers rarely think about the other side of the equation – the jobs that must inevitably be destroyed by the required taxation.

Decades ago, a standard professional use of the term “economic development” was to describe an increase in economic output per worker, as contrasted with the term “economic growth,” which referred merely to overall increases in output. So a region or country could experience economic growth via population in-flows, and yet not necessarily be experiencing economic development because productivity was not increasing.

That’s long ago been supplanted by other definitions. Business recruiters, working for governments or for large institutions such as banks and utility companies, adopted the term to describe their activities, as if it should be considered “economic development” to attract a new firm employing 100 people but not “economic development” if 10 existing firms each add 10 employees. The numbers may be the same, but because the former involves a formal deal negotiated among the parties (increasingly sealed with the use of taxpayer subsidies) and the latter lacked such coordination, recruiters – now “economic developers” – used the more active-sounding “economic development” to describe the deal-making.

With everyone tossing around the term “economic development” when it is convenient, the concept has become not just amorphous but pernicious. It’s offered as a justification for all sorts of questionable government actions, particularly in parts of the state where unemployment is relatively high and the economic prospects are uncertain.

There really is such a thing as a transaction that creates more jobs than it costs, of course. Otherwise, economic progress would be impossible. Every day, individuals buy and sell goods and services with the goal of obtaining greater returns. It is also possible for a coercively funded project to result in net job creation. Government exists precisely because there are functions with significant net benefits that, in the absence of taxation and regulation, would not be adequately performed. The establishment of law and order, for example, bestows tremendous economic gains. And the operation of city streets and roads represents a true public good that, at least until recently, could not efficiently be provided by purely voluntary means because of an inability to establish and collect user fees.

But to establish that arts grants, welfare programs, or even subsidized land deals for industry constitute a net gain in employment, you have to have some reason to believe that state politicians are more likely to know how to spend scarce dollars effectively than are the individual entrepreneurs, investors, and workers to whom the dollars originally belonged. You have to believe that even though folks in western North Carolina would not voluntarily spend their entertainment dollars on symphonic music rather than going to the movies, they’d be pleased if you second-guessed their decision. You have to believe that giving a company free land to locate in Franklin County instead of, say, Wake County would result in a better business investment and thus a net increase of jobs for the state.

If you truly believe that, oh Great and Powerful Oz, I’d like a quick ride back to Kansas.

Hood is president of the John Locke Foundation.