January Monthly Report - Economic Development Policy

Entering a new legislative session, once again we find that economic development is at the top of everyone’s agenda. That’s no surprise. Unemployment is still high and an unending stream of news articles remind people that businesses are still shuttering and cutting back.

What follows is a survey of the topic.  First, I take a look at the governor’s proposals.  Then how they fit into the current economic development policy, something I call the Hodgepodge.

I assess both the defenses and disparagements of the Hodgepodge.  Finally I review a few alternative ways the state could organize its economic development policy and why they are improbable.

Missouri First, MOSIRA, and Training for Tomorrow
The Governor’s 2010 Jobs Plan has three components – Missouri First, MOSIRA and Training for Tomorrow.

Missouri First
There’s not really any new incentives in “Missouri First.”  It’s a realignment to try to give Missouri firms a better footing in applying for economic incentives.  The idea is that those who have already invested in building their businesses in Missouri should receive some benefit for that at the Incentives Cafeteria rather than getting the leftovers after their out-of-state competitors have gotten first servings.

The MOSIRA (Missouri Science and Innovation Reinvestment Act)
This proposal would retain some of the taxes on the science sector and funnel them back through government incentives and spending to reinvest in growing those industries, by funding certain projects.  The act would establish a baseline of tax revenue and then as that amount grew, some portion of it would be available to be withheld from the state coffers for this purpose.  The specifics (actual $$) are unknown at this time, but it has been well-received.

Training for Tomorrow
This is a $12 million grant for community colleges to expand the course work they offer in healthcare, and high-tech industries deemed the jobs of the future.  The grants are funded by a federal economic recovery program, calling into question the long-term stability of funding.

None of these would qualify as bold, or transformative.  But the state is staring at a budget squeeze, so this is about as much as could be expected.  The political truth is that the governor will keep on introducing jobs bills until the economy is humming. 

 Whenever the turn comes, he wants to be able to point to action he’s taken.  And until that turn comes, he’ll keep acting.

But as Sen. Jason Crowell will no doubt point out this legislative session, DED cannot point to a single job created by last year’s package.  One could indeed be forgiven asking, “What about last year’s economic development bill?  What did that do?”  And that’s the weakness of “the Hodegpodge.” 

The Hodge-Podge
If you peruse the Department of Economic Development’s 2010 budget request, you’re quickly lost in a blizzard of programs, teams, centers and acronyms.  Shall we tour?  MERIC, EDAF, LSRB, DREAM, MTC, Missouri Innovation Centers, Intellectual Property Management Program, MEP, MOFAST, BEST, Main Street Program, MODESA, MODESA Lite, MORESA, TIFs… That’s not even half way through.

Take the ocean of incentives, programs and subsidies and then take a look at the U.S. Bureau of Labor Statistics.  2,730,000 people employed in Missouri in November 2009.  Compare that to ten years earlier when Missouri non-farm payroll was at 2,831,000. 

Yes, we’ve just suffered through a brutal recession. Still the fact is inescapable that Missouri has fewer jobs after ten years!  One recession is not an adequate excuse for ten years lost.

The best explanation is that ten years of economic development efforts – Republican and Democratic – have been misguided.

It’s been years and years of the Hodgepodge.  The Hodgepodge is what you get when you take every federal grant and program and integrate it into your economic development department.  Every incentive from specific industries that will help them compete, and every new “tool” that each new director or governor wants, gets thrown into the stew.  And you end up with lots activity, money and programs with no focus and arguably no effect. 

For the bottom-line remains – fewer jobs in Missouri after ten years gone.

In Defense of Hodge-Podge
There are basically four defense of the Hodgepodge.

  1. It’s mostly free money.  If you look through the Department of Economic Development’s budget, most of it is coming from the federal government.  What’s the use of turning down the money if it does even a morsel of good?
  1. Companies Use the Hodgepodge. Although the vast majority of companies will never use any of these programs or incentives, many companies that we’re attempting to lure from other states do have programs.  They plug all the subsidies they can find on our books and weight them against our costs.  They do make a difference in specific cases.
  1. Our sister states are doing it.  We have to show that we have a full range of support to the companies we’re wooing.  Killing the Hodgepodge would amount to shutting down most of the DED.  That sends the wrong message to companies looking to relocate.
  1. Where’s the Alternative?  Most of the alternatives (below) seem like they’re designed by ideologues with less private sector experience than the technocrats they abhor, or political observers whose occupation is to disparage.  Where’s a viable alternative to organizing economic development policy?  

Big Bet
The best summation for the case for the Big Bet is again simple numbers.  The direction and momentum of the United States economy has a dramatic effect on Missouri’s performance.  The national economy of $13 trillion is a massive ocean compared with our state’s GDP of $.214 trillion.  If we’re going to try to juice our returns, the question is a matter of leverage. That’s what the Big bet does.

Some question the effect of the governments’ $.6 trillion stimulus package. But the Missouri stimulus (or economic development) packages are on the scale of $.0001 trillion, if even.  And with the scatter-shot approach of the Hodgepodge, they can even be tugging in different directions.  (For example, does the historic tax credit program help home builders in St. Charles/  some would say yes; and others no.) 

Individually state incentives are peanuts.  Yes, there may be cases where someone will say it tipped the scales of a company.  But intellectual honesty would have to call the bulk of incentives as favored hand-outs, not strategic economic development.

The Big Bet is to decide strategically that the state is going to focus on one idea.  It could be biosciences.  It could be to become the distribution hub of the Midwest.  Then redirect all the resources and energy to achieving that goal, and pray that it pays off and truly transforms the state economic engine.

The political problem with the Big Bet is that initially there are very few winners.  It’s only those in the industry or build-out that involves the bet.  Later, years down the road, there would be ancillary effects and winners, but politically – in terms of contracts and incentives – there’s very few.  That’s hard to do.  Legislators come to Jefferson City to work for their constituents, not send their tax dollars to buy a dream which may never come.

(The Hodgepodge is the exact opposite; lots of winners now, few benefits down the road. Consider the bonding plan.  No one talks about a big bold idea.  They talk about how they could widen the benefits to get it passed I the legislature.)

Growing, Not Hunting
It could be called the Bartle Theory.  Stated broadly it goes like this: let’s get rid of every little credit, subsidy and incentive we have; add up the cost and reduce the tax burden across all Missourians. 

Make Missouri a lower tax state.  Instead of sending resources trying to lure this or that big company to come with their two or three hundred job plant, we’ll create an environment where small businesses and entrepreneurs can thrive.  They are after-all the ones who create most of the jobs.

Supporters of this approach argue that the state shouldn’t be in the position to be picking winners and losers, and that they usually do a poor job in that role anyway.  Let the market decide what industries flourish in Missouri and which ones fold.

They are not entirely honest though because we all have our preferences, even if they seem to be noncontroversial – like high-paying jobs.  If you’re seeking those, do you really want Missouri to be a place where the market decides that cheap wages, terrible benefits proliferate just because the market will create more jobs of that kind here?
This alternative suffers from the same weaknesses as the Big Bet, the legislative process is rigged against it.

Everyone everywhere agrees that education is the surest long-term route to economic growth.

But even in unanimity there are problems.  First, there is still disagreement over the nuts and bolts – how to spend those education dollars.  Some believe that in a global economy “skills-based training” is foolish.  The skills demanded by the market change too rapidly to believe that .  Rather, we should be sending all of our children to four-year institutions where they can adapt to the changing global economy. Others insist that there will always need auto mechanics, carpenters and electricians, occupations which do not demand years of classroom lectures but rather experience and commitment.

The second problem is more severe.  If a world-class educational system is the truest road for economic achievement, it’s still a long-term, generational journey.  Politicians want to be able to point to immediate results (both tangible things like roads and bridges, and intangibles like lowered unemployment rates).

No one can effectively shut out the demand of resources here and now for a greater pay-off thirty years from now.