"Stupid is as stupid does." So said Forrest Gump in referring to how stupid individuals do stupid things. Yet governments also do stupid things. President elect Barack Obama’s $800 billion+ plan to stimulate the American economy raises a host of interesting questions about how to achieve the "biggest bang for the biggest buck." Are some types of projects better than others to stimulating the economy?
Governments often adopt many ideas that social science evidence tells us that don’t work. Like bad meals that forever repeat, or a vampire who never dies, these ideas too are recycled and never seem to go away.
As Congress and the Obama administration contemplate spending billions on economic development, here are four ideas that should be avoided.
Tax incentives are needed to encourage business relocation decisions. At the top of any list of political myths is the idea that businesses make decisions about where to locate based primarily or perhaps even exclusively upon taxes.
The economic literature is clear—tax breaks to encourage economic relocation are economically inefficient and wasteful. Hundreds of studies reach this conclusion. When businesses are surveyed regarding factors important to their economic [re]location, taxes often come in way behind proximity to markets, suppliers, and the quality of the labor force. These other factors occupy a larger percentage of a business’s budget than do taxes, and all of them are far more critical to long term success than are taxes. Businesses occasionally admit this. Nearly 62% of those interviewed in a California study on hiring tax credits indicated that they had never or rarely affected their decision to employ individuals. In the same study, nearly half stated that tax incentives for relocation did not affect their decisions. Tax incentives reward businesses for decisions they were already going to make. Bottom line: Tax incentives are inefficient and wasteful.
Enterprise zones are an efficient means to encourage economic development. Enterprise zones were developed to revitalize depressed areas that were lacking in investment or job production. Much of the logic of enterprise zones relies upon the same assumptions of using tax incentives for business relocations. But in the case of enterprise zones, there is an identified geographic region which is deemed to be economically disadvantaged or needing special help.
Tax incentives, along with perhaps infrastructure assistance, are supposed to induce businesses to relocate into the enterprise zone, thereby bringing with jobs and all the benefits associated with their move. While elegant in theory, how have enterprise zones really worked? Bottom line: They are generally a cost ineffective failure in encouraging economic development and in producing meaningful employment opportunities. At best, they move jobs from one community to another, robbing Peter to pay Paul.
Public subsidies for sports stadia are a good economic development strategy. Should a city or community fund the construction of a new sports stadium in order to stimulate economic development? The overwhelming evidence is that the public use of tax dollars for a sports stadium is economically inefficient and a bad investment that produces no real net economic benefit to a community. Bottom line: Professional sports actually are a small portion of a local economy compared to the arts, and the jobs produced, except for the overpaid athletes, are low wage and few when compared to how the same money invested elsewhere can produce better results.
The building of convention and other entertainment centers are successful tools for economic development. The 1989 baseball movie Field of Dreams is famously known for a voice echoing "If you build it they will come." This line captures a theory of urban economic development that places an emphasis upon the building of convention and entertainment centers as a spur to economic development. Does the building of these facilities to promote tourism alone revitalize an urban core or area economy? The simple answer is no. There are many reasons why the convention-entertainment center/tourism strategy has been unsuccessful. First, so many communities built these types of centers that they cancelled one another out. A second and more fundamental reason behind the failure of the "if you build it" philosophy is premised in the belief that a single factor makes an urban center economically viable. Bottom line: There is no quick fix to development, and convention centers are a poor way to revitalize economies.
Overall, spent well, $850 billion can help the economy. Yet any spending should be guided not by stupidity and myth but by social science evidence that informs policy makers what does and does not work.