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Economic Development: It’s time for hard questions

Business Lexington, December 16, 2005

By Justin Maxson

 

The recent public debate about financial incentives and industrial recruitment in Kentucky has garnered a fair bit of attention. Three ex-governors and our current governor have all spoken out in support of the importance of the role of incentives in the state’s economic development efforts. It is a critical debate as too many people in urban and rural Kentucky remain in serious need.

 

The debate centers around one question: Do financial incentives and industrial recruitment work as the primary economic development strategy for the state? It is an old argument that continues across the South and the country. It is a particularly important debate for a largely rural state like Kentucky, where the amenities (workforce quality, location, water and sewer, technology, cultural amenities) that most businesses look for don’t exist as widely as in many communities.


Many economic developers believe that incentives to attract new businesses or expand existing businesses are the primary way to encourage economic growth, and can point to evidence to support their position. It seems a reasonable story — incentives mean more businesses, which equal more jobs, which equal a greater return in payroll taxes to public coffers and other benefits.


Opponents of incentive-dependent strategies offer a different view. Much new research indicates that the aggregate economic impact of public investment in incentives is negligible at best, and results in corporate giveaways at worst, particularly when they occur at the expense of investments in other public services like education, workforce development or health care.


The central issue must be how do we create the best economic opportunities for the most people? Until we seriously ask that question, and are committed to making the hard choices necessary to get at the answer, we will continue to stay where we are.


The Mountain Association for Community Economic Development (MACED) recently conducted an analysis of economic development spending in Kentucky. The report finds that almost 80 percent of economic development spending in the state is through financial subsidies (both tax breaks in the tax code and received tax incentive program dollars) to attract businesses. Our conclusion is that while the state does invest resources in other economic development strategies, the lion’s share of state spending is on industrial recruitment.


So the question should be; are we getting an adequate return on this investment of public dollars? MACED’s report did not evaluate the actual effectiveness of this strategy in creating jobs or spurring economic growth. It did analyze the state’s reporting and evaluation efforts. While Kentucky does basic reporting and evaluation on tax incentive programs, the state does no evaluation of most economic development tax breaks in the tax code. This means 60 percent of all annual economic development spending gets no evaluation. So it is hard to say our focus on this strategy is providing adequate benefit to the state.


But it is hard to ignore the basic evidence. While Kentucky has made progress over the last two decades, particularly in education reforms, too many of our economic indicators have been flat or headed in the wrong direction. Consider the following:


~ For the past 34 years, Kentucky has been stuck at 42nd among states in per capita personal income


~ Average annual wage and salary per job in Kentucky has actually fallen relative to the national average - from 92 percent in 1980 to 85 percent in 2003.

 

~ The number of Kentucky’s children in poverty has remained at least more than 15 percent above the national average for 30 years.

 

~ Kentucky holds 16 of the 100 poorest counties in the country (second only to Texas), including two in the top 10.

 

I think we have to take seriously the notion that our economic development efforts need significant reform. The data requires us to think differently about how we are pursuing strategies that meet the needs of low-income and rural Kentuckians. Incentive-based industrial recruitment should remain an important tool, but that investment must be better balanced by other economic development strategies.

 

So while the answers are not easy; here are some directions we must consider as we go forward.


Invest more in the basics. Ensure that the state is adequately investing in the foundations of a strong economy; education, workforce development, infrastructure, environment and technology are all critical parts of a strong economy and healthy communities.


Improve the economic development system. Ensure accountability in Kentucky’s economic development spending and accurate evaluation of its effectiveness, with particular scrutiny given to tax breaks. Require that all tax preferences for economic development purposes be reauthorized when the budget is passed, so legislators must weigh their value in light of other needs and priorities.


Manage economic development as an integrated set of activities. The state needs to better coordinate economic development activities across all of state government, including the creation of a single economic development plan that accounts for all state spending and recognizes that different parts of Kentucky will need focused investment in different strategies.


Promote smart regionalism and collaboration. Urban and rural linkages are critical. Political boundaries mean nothing to market forces. Kentucky needs to identify better ways to link goods and services between regions in Kentucky and other states. Regionalism will mean smart collaboration between local, intermediary and state actors to identify opportunities to support innovation, entrepreneurship and other workforce development partnerships.


Better fund a range of economic development strategies. We need to invest more in strategies that have the greatest potential to create good jobs and promote healthy communities: developing entrepreneurs, investing in value-added agriculture and forestry, promoting tourism, aggressively supporting locally owned businesses, strengthening strategic workforce development efforts and engaging in targeted recruitment activities based on Kentucky’s strengths. Connect Kentucky is a current example of an effort that has great potential.


The future development of our commonwealth is too important to be stuck in political or ideological debates. To adequately address the needs of hard-pressed communities, collaboration is a must. We need political and civic leadership that is willing to ask hard questions, look for difficult answers and be willing to make reasonable compromises with integrity for the good of the commonwealth.


Justin Maxson is the president of MACED. MACED is a Berea-based community development organization that works to create economic alternatives that work for people and places in eastern Kentucky and central Appalachia.