We’ve been a little heavy on the incentives issue here lately, but one more thing I wanted to share with you if you haven’t seen it. A couple of weeks ago I did an interview with Ed Burghard for Strengthening Brand America that’s generated some pretty good discussion on his site and on some of the LinkedIn groups he posts to. Because of the format, I think I mounted my bully pulpit with even more verve than I usually do (not like I’ve ever been accused of being meek), so I thought you might find it an entertaining and maybe useful read.
The majority of the interview is below; you can check out the nice things Ed said about me and the rest of Strengthening Brand America’s impressive work at
It seems that the use of incentives in economic development has become a hot topic lately. How would you frame the core issue, and what are the potential ramifications of the debate?
From where I sit, the key issue is that we have deep and substantial needs in communities and regions that are calling us to facilitate sea changes in economies, and in many cases our incentive policies do not move us in the direction of those goals. Or they might be doing that, but we don’t know if they are, we don’t have the right information to know what they’re doing, and as a result we can’t demonstrate whether they are doing what we need them to or not. We got used to being able to just wing this – just assume that everything was working fine – when we had local economies that were flush enough to hide a little sloppiness or some wishful thinking or simple assumptions in how we handled incentives. But now, with relief for budget pressures nowhere in sight, and with basics like how work works changing faster and faster, we don’t have that slack anymore. There’s just nowhere to hide.
As I’ve said before, I am not against incentives per se. I have spent much of my career working with downtowns and disadvantaged communities. A well-placed incentive can tip an area or a business sector from economically infeasible to economically possible, and when that happens it has direct and profound impacts on the people who live and work and invest in that community. But if an incentive isn’t having that kind of impact, it’s wasting money that we just don’t have to waste anymore. I’m starting to formulate in my own head how the fundamentals of incentives should be reworked; anyone that hard up for entertainment can check it out here.
One of the things I have been saying to economic development professionals is that I’m not all that much worried about communities as a whole (certain ones worry me a lot). There are thousands of people in the US who do things related to improving local economies – from planners working with neighborhoods, to people running accelerators and hackerspaces, to the growing number of self-organized groups that can kick change in a community into gear simply by their numbers and the ease with which internet technologies allow them to communicate and work in concert. The big question to me at the moment is, where are economic development professionals going to fit into that evolution, and what impact will it have on people and on communities if the profession, and those professionals, simply become irrelevant?
Incentive practices will eventually change because the forces on them are only getting stronger. The question in my mind is, how much of our limited resources will we waste with trying to hold back the tide? And how will that affect the communities, and the professionals, who don’t adapt and find themselves trying to swim in those waters?
Return on taxpayer investment is certainly one objective when deciding if an incentive is appropriate as part of the financial negotiation between a community and company. How should the economic development professional think about the ROI calculation? What factors typically go into the assessment?
ROI on value to the taxpayer can be calculated pretty simply if you want to do it on a strictly dollar-and-cents basis. Most people with a reasonable education can figure out how to do that –if cost is less than benefit, you’re ok, right? Easy cheesy.
Two things tend to get economic developers in trouble – the one is a shortcoming in diligence (or bravery), the second comes from the limitations of the tools we use (like that cost-benefit analysis)
Economic developers get into the first kind of trouble when they get estimates of “economic impact” from developers or project promoters, and they either don’t know how to dig into those numbers to see if they make sense, or – and I think this is more common – they choose not to examine that analysis critically. I have a training I do with Pete Mallow, who also writes for the Wise Economy, where he tells a story about how during his development career he never gave the same calculation of the costs of a project to a bank as to a local government. That’s not just Pete, that’s standard. Unless it’s done by an impartial party, and unless you can see for yourself every assumption, every multiplier that the calculation is using… any decision you make on the basis of that study stands on a foundation of sand. If you don’t see it, you have a responsibility to ask for it. We have to get better, as professionals responsible for administering public or donor monies responsibly, at asking the tough questions, forcing the assumptions into the light, demanding reasonable answers instead of the pie-in-the-sky that we will get if we don’t push for the truth. We used to be able to get away with incentive deals that didn’t measure up to their rosy promises, but the money and the scrutiny is too tight now.
The second thing that gets us in trouble is when we are trying to do the right thing – when we are using an incentive as a strategy for getting something off the ground that the market alone can’t do. There are sometimes very compelling reasons to give an incentive to a project that will never show up in its pro forma – the project will empower people with new skills that they can use elsewhere, it will rehabilitate an eyesore that is damaging the community’s economic prospects, it will seed the growth of new businesses in the region, etc. You can’t justify some projects that will benefit the public interest by straight return on investment – some portion of the benefit may be impossible to quantify, or their benefits can only be turned into a number through the kinds of mental acrobatics that render those analyses suspect. That’s a big difference from how an analysis in the private sector would work. These kinds of opportunities are going to be automatically harder to justify on a dollars and cents basis, and in many cases they might present a riskier proposition. We might have better analytical tools for assessing non-quantitative impacts in future years –social scientists are working on this – but I would argue that the best way right now to manage this risk is to spread the investment. Lots of little bets may have more overall impact than a couple of bet-the-farm propositions, and the likelihood that you get your head handed to you when one goes south drops significantly.
Opportunity cost is something businesses discuss when evaluating their own capital investment options. They take a portfolio approach and acknowledge investing in option A means not investing in option B. Do economic development organizations go through a similar portfolio review and consider the implications of offering an incentive on other investment options like education, infrastructure, community services, etc.? If not, should they? When do you decide to invest the money in improving the community value proposition rather than incentives?
I harp on opportunity costs a lot – and I might be missing someone doing something great, but as far as I know, economic development organizations don’t explicitly identify or analyze opportunity costs. At least, I’ve never myself heard of one doing that, and it’s not a part of any standard economic development training that I know of. It should be.
Part of the problem we have with changing how we do incentives is that we don’t systematically and rationally evaluate what else we could be doing with those funds. But that becomes part of the argument against incentive deals. It’s just a matter of time before someone else does that math and forces the economic development supporters to confront opportunity costs more explicitly. I am a big believer in the MPAA model of self-regulation: if someone is probably going to force you to do something you don’t want to, you might as well take the initiative and use your expertise to do it the right way yourself.
What are the top 2 – 3 questions an economic development professional should ask to determine if offering an incentive makes business sense and is not simply “buying jobs”?
I wrote about that recently, but it was a first step. I’m still trying to figure it out, too. So these are going to be a little vague, but here’s a start:
- How does this proposed project reinforce or carry forward our community’s economic priorities? (HINT: if you don’t have a clear, priority-driven, broadly-endorsed economic development strategic plan that aligns all the players around shared goals and enables them to take meaningful action to meet those, then stop giving out incentives and get yourself a plan. Otherwise, you’re swinging in the dark.)
- How is this incentive going to facilitate positive change – not just for this specific business, but for a place or a business sector that is important per that plan? What are the valuable spillover effects? If you can’t identify important ways that this incentive deal with help move the community toward those goals, not just feeding one business, then that incentive may not represent a good enough investment in the public interest.
- What’s our risk if the project doesn’t work as we hope it will? Clawbacks are fine in some cases, but if your goal is to facilitate meaningful change in the local economy, demanding the money back could backfire. Venture capitalists demand high returns, but they also expect that some of their investments will go belly-up. And in the tech world, which I think tends to be a leading indicator for a lot of other long-term growth sectors, the entrepreneur who has failed is often considered a better investment risk for next time, because presumably he/she has learned a few things that will make the next attempt better. Trying to grab the money back in a case like that could be shooting larger goals to grow a sector in the foot. Don’t get me wrong, people absolutely have to be held responsible for their actions, and communities cannot just say “oh, well” and watch their money get piddled away on boondoggle projects and pipe dreams. But elaborate legal mechanisms to recapture as many red cents as possible may be less useful to communities than two other simple strategies: better evaluation of risks and benefits, and spreading the risks across more incentive recipients.
In your experience, are there viable alternatives to incentives that will practically allow a community to remain on the due diligence short list? If yes, what might they be?
We have plenty of evidence to indicate that the majority of businesses don’t make a relocation decision on the basis of incentives. I get told stories regularly about businesses that get offered an incentive after they have already decided to relocate or expand in a community. We tend to grossly overestimate the impact of incentives because businesses have figured out how to play us. But in most surveys of growth industries, incentives are way down the list of priorities, far below things like labor force characteristics and transportation networks. For non-growth sectors whose primary competition strategy is to shave costs mercilessly, incentives might be a bigger part of the decision. But do you want your community to be the bargain-basement option? How well is that going to work?
People think that you can only compete on quality of life if you’re Austin, Texas, or somewhere uber-cool like that, but I don’t think that’s the case at all. Austin would probably be a lousy fit for many businesses, but for the right businesses it’s so ideal that they don’t need any incentives. The key question comes back to the assets that the community has to offer – what is it that makes us unique? Who would we be ideally suited for? And if we’re not unique or not ideally suited for anyone right now, what can we do most efficiently to make us ideal to someone? We tend to think that incentives are the only arrow in the quiver, but that’s never the case. Building the character and quality and uniqueness of our community opens opportunity.
We don’t pay enough attention to building uniqueness – to finding our community’s niche. If I hear one more town tell me that they’re a great place to live/work/play/sleep whatever, or that they’re within 600 miles of 80% of US consumers (like every other town within 300 miles of them…yeah, that’s unique)…well, I might get crabby. JK
The poor overlooked stepchild in economic development is business retention, and its sidekick entrepreneurship. Let me rephrase: we give those two a lot of lip service anymore. A lot. But where does the money in the budget mostly go?
There’s an old saw that says that where your treasure lies, there your heart lies. There’s so, so much evidence that supporting local businesses and helping grow new businesses makes for a stronger economy long-term than does any recruitment. But if we know that, why does so much money go to incentives, and so little to doing meaningful things to help local businesses get better? Yes, absolutely, incentives should be offered to local businesses –I’d even argue that, all other things being equal, local businesses should probably get priority. But what else can we do with our funds to improve their capacity and resilience? What training do they need? What connections? What information?
Your company offers support to communities on strategic planning, including thinking about the appropriate use of incentives. If a community wanted to reach out to you for help, what is the best way?
Assuming that I haven’t torched all my bridges here… JK
Email is firstname.lastname@example.org, twitter is @dellarucker. Those are probably the two that will get the fastest response!