Continue the conversation: Remaking Economic Development Incentives

As usual, when I post something about economic development incentives to economic development groups on LinkedIn, I get some insightful feedback.  The comments below are selected from responses to my recent Remaking Economic Development Incentives post here.  They raise a number of insightful questions and challenges to our current modus operandi that I think are worth a broader discussion, such as:

  • How do we build/support political leadership to make the tough decisions to realign incentives with what the community needs them to do?  Is education sufficient? Have our methods of education been inadequate?
  • How can economic development practices (and the profession itself) reposition to benefit from the methods businesses are using to handle change and find new opportunities in the evolving economy?
  • If, as one person wrote, “a monetary incentive is the easiest way for elected community leaders to say ‘we respect you, want you and want you to invest in our community,’ ” is that a worthwhile use of funds?  What are the (presumably) harder ways to do that, and is the return on investment for incentives vs. “harder” ways changing?
  • If we know what the right answers are, how do we advocate for that change in the face of the fear of “dusting off my resume?”

As usual, these comments were made in a public or quasi-public setting (depending on the group structure), but I’ve removed the names to avoid causing anyone problems.  DGR is me, the other initials are other people.  If anyone wants to claim their role in this conversation, please be my guest.  But I hope many more of you will join in the discussion.

 

It’s Time to Re-Make Incentives. http://wiseeconomy.com/?p=1978

 

Perhaps it’s time to take a big step back– to revisit what an incentive was supposed to do in the first place. And perhaps it’s time to screw our courage to the sticking point, confront where and how our practices are going awry, and re-formulate incentives programs– not throw them away, not just control them better, but fix them, so that they do what our communities need, and so that they are worth the money we invest in them.

First, let’s take the Wayback Machine to Econ Development 101:

The purpose of a tax incentive is to make something happen in the free market that market forces alone can’t do. An incentive is supposed to…

 

 

D • Della – this is a great topic re: a very complex policy question. There is considerable opposition in many legislative circles to any use of taxes as a means for altering markets and pricing in “externalities” when applied to “progressive” agendas; social engineering is a term often used in opposition of these initiatives. A carbon-tax is an obvious example but there are many others. An example where “tax incentives” are used widely among states is for economic development and job creation. There have been many papers written questioning the wisdom/value to the public of the “competitions” that states engage in to lure private investment, but legislative support for their use is accepted when related to job creation, even in very conservative states. So a fundamental pre-requisite for the use of incentives is political, as in: Is the leadership and legislative will-power in place to address Problem X, and if so what types of incentives will be acceptable?

The list of “filters” you outline for reviewing incentives will be more or less acceptable when applied to an incentive program depending on the political framework that supports them. Using a “Directly Improve the Community” filter may work against urban renewal and carbon tax programs if the political makeup of the governance body holds the view that the role of government should be limited. That same body may be more receptive to incentives related to urban renewal and carbon tax programs if they are cast within the framework of “Grow Workforce Capability” filters. Without judging their applicability to any particular social issue, the use of incentives needs to be crafted in context with the political and social make-up of the community.

 

DGR • D — nicely said, thanks.

The key missing element behind many incentive programs — and the piece that elucidates the political will element that you articulated so well — is a clear, well- documented economic development plan that was developed through a broad community-based process. The only way I know of to deal with the political component is to identify clearly where the community’s will (its political will, in a sense, lies), and build the economic development plan around that. It’s basically the same process that we would identify as good planning on the land use front, just applied to the community’s economy. Too often economic development plans are developed by small groups of insiders in an echo chamber — and then we wonder why there’s no political will to support them.

As I think I said in this piece, I don’t support throwing incentives out entirely — sometimes they are needed entirely because of the need to push a local economy in a direction that it’s not going by itself. In some respects, that’s the “social engineering” that D referred to, although of course people don’t use words like that when it’s a change that their community needs because the old industries have tanked. But the incentive needs to fit the objectives, and fit it very closely and intelligently.

 

M • Incentives are not the problem, it’s the entire economic development practice, approach and processes that are outdated and needs to be reimagined. Certain states have been very innovative with their incentive programs, but that’s only part of the equation.

 

J • M: can you provide some support for your statements? In what ways is a “tired” profession responsible for the use and misuse of inducements and incentives? How should the profession change? I wish more people were weighing in in this, because it is critically important.

 

 

M • J, I can elaborate on a few things here, but it’s a complex issue and I may or may not have the entire solution. I know many fine economic development professionals and would never use “negative language” to describe it.

— The profession faces the same challenge of “relevance” that many companies face in today’s changing business environment. As we grow into this “new economy”, there’s a paradigm shift that’s taking place. This transition is from bureaucratic capitalism and heavy government and corporate influence to entrpreneurial capitalism, where smaller companies and entrepreneuers will become much more influential. For that reason, the engagement model for economic development is flawed because the origin and practice is rooted in government. While that’s unlikely to change, to remain relevant in the “New Economy”, the practices and approaches must align with the”dynamic” and rapid changes in the direction of the businesses, the country, and the economy with an eye on “the future” — It’s also very insular. We created that depicts its insular nature that quite compelling and would peak any professionals interest. …

What the profession needs is a more modern approach to business recruiting, business retention and expansion that’s more focused, service oriented and balanced, with an engagement model that emphasizes “economic innovations” and finding “the next big thing”. It should encourages an ROI on incentives that’s “fair and balanced” and more closely aligned with entreprenurial capitalism and the future direction of business, the country, and the evolving state of its economy. It should also align more closely with communal values, where all stakeholders (including taxpayers) are invited and capable of becoming team players.

DGR • M — that’s very well said. You’ve done a good job here of summarizing the fundamental challenge — the world has changed and is changing and we’re still trying to play by increasingly irrelevant “chump” rules — and how the work needs to change to become more far-sighted, more in keeping with what’s actually emerging in this economy, and more responsible to its community.

 

DC• We all know some people respond to incentives or economic benefits for performing an action you would like to encourage. When talking about incentives you can’t use the phrase “business.” The term you need to think in is “business owner” “CEO/President”, or “board of directors.”

A business does not respond to incentives; however, the individuals making the decisions certainly do, they are people like all of us. Some may respond to money, others to a kind/comforting word form a head elected official, or others to words from piers in similar industries. Some are just headstrong and don’t respond to anything you put in front of them.

In the end, business owners want to know that communities they invest are sensitive to their good will, company’s interests, and ability of their entity to produce long-term profits. A monetary incentive is the easiest way for elected community leaders to say “we respect you, want you and invest in our community.” Incentives bridges the gap between “saying” you will do something and actually “doing” something for the company.

The playing field was never level, the economy has always been dynamic, and business leaders need to be looking at every competitive advantage they can get. Communities that want to be safe, appealing, and enjoyable for their citizens must understand that real wealth is created in private enterprise. Private enterprise is run by people, who want to be treated like a person and surround themselves with other like minded individuals. People who run enterprises are typically “doers.”

 

JC• We had a similar discussion in a different group a while back. My summation was that we as a field are all fighting for the same pieces of a smaller pie, when we could be collectively working to just make a bigger pie. The limit, in my view, is a political barrier more than a knowledge gap, though there may be a bit of knowledge/issue, too. In general, it’s the elected officials who drive economic policy, hence we get the short-sighted goals and strategies. I’m sure we, as practitioners, all agree that a sustained, long-term effort and investment is what’s needed, but the decision-makers always have at least one eye on the election cycle. The times I’ve tried to speak truth-to-power usually resulted in my dusting off my resume for update.

DGR• JC: Understood (and I suspect there’s some wincing back behind that statement!)

Since I spent an early part of my career in downtown revitalization, it always surprises me a little bit how seldom economic development types don’t use a tool that good downtown folks often wield very successfully: clear communication with the public and involving them in the development of the plan of action. I don’t mean political mobilizing in support of an action — obviously that’s not ethical for a public or quasi-public official — but pulling a broad range of consituents into making the plan, setting the priorities. It’s amazing to me how often the strategies, programs, etc are developed in a back room echo chamber, and then we wonder why the electeds don’t support it. If there has been broad public involvement underlying the plan that justified that program, then there’s a group of people who have a stake in it and are more likely to carry the water for an initiative that they previously identified as important. Too often we don’t try to include them, or we issue one weak invitation to come to a meeting and give up when they don’t immediately grasp why it would be worth their time.
DGR Do you all know if anyone has attempted to correlate incentives with their inferred impacts, like change in average income? We all know that the NYT story demonstrated that proof of causation of positive incentive impacts on communities was extremely hard to come by, but I am wondering if anyone knows of academic studies, even case studies, that had such an impact. I know of some anecdotally in the downtown revitalization and urban reinvestment world, but not outside of there. My suspicion is that no one has seriously tried to answer those questions yet, and I’d argue that this is a key piece of research that the profession ought to try to make happen.

 

 

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