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Incentives, economic development and some accountability

We hear a lot about economic development in Mississippi. The governor is for it, the Legislature is for it, and mayors and city councils are for it.

Economic development is cited as the reason for abating taxes to attract new companies or to increase spending of public funds on specific projects. Just uttering the phrase “economic development” can motivate the state legislature into immediate action.

But just what do these officials mean by economic development?

In its simplest form, it appears to be just job creation. Any expenditure of public funds that helps to create jobs is by definition economic development and therefore automatically defensible. But job creation should not be the sole definition of economic development, and job creation should not be the prime objective of the public sector. Job creation is most often the indirect result of other more traditionally defined public sector “economic development” activities.

Investment of public funds in education creates jobs by providing the skills needed by the private sector to succeed. Investment of state and local funds in public health programs creates jobs by providing a workforce that is more productive. Investments in transportation systems create jobs by improving the access to markets.

These are the traditional roles of the public sector and create jobs indirectly.

The question of what are and are not proper “economic development” activities for state governments like Mississippi is not a trivial question.

Hundreds of millions of tax dollars are spent each year under the heading of economic development. These are dollars that could be directed to education, healthcare, prisons, highways, etc. Since these “economic development” actions involve public funds, we have a right to ask just how a proposed expenditure will in fact make us, as citizens of Mississippi, better off. Stating that the activity will create jobs is not a complete answer to that question.

Where is the accountability for these expenditures? As citizens of Mississippi, we can and should demand that economic development incentives provided to private firms create a return on investment to the state. When promises of job creation and minimal salaries turn out to be exaggerated, we should demand that state “incentives” be proportionally reduced and repaid through a contractual agreement.

Enforcing contractual agreements between the state and firms receiving public funds was first introduced in Minnesota in 1995 and should be recognized as just good business in Mississippi.

In the December 2004 Mississippi Economic Outlook, the IHL’s Center for Policy Research and Planning raised some serious questions about the role of development incentives in the states economic development. Perhaps a full-scale independent analysis of the impact of past economic development incentives in Mississippi is now badly needed.

One such study recently conducted on New Jersey’s economic incentive programs was not too encouraging and concluded:
“Maybe the best way to build an economic climate hospitable to business and job creation is the old-fashioned way: fully investing in areas like schools, colleges, job training, transportation infrastructure and environmental protection. Such spending has a proven record of success.”

Dr. William Gunther is professor of economics and director of the Bureau of Business and Economic Research in the College of Business at the University of Southern Mississippi. Contact him via e-mail at mbj@msbusiness.com.

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