The Rationale for Government Economic Development

Every state in the union operates economic development programs. Local units of government from Rhode Island to southern California also run a myriad of very specific programs designed to "create" jobs. One question is, Why?

Jobs were created in the United States long before the advent in the 1930s of the modern "Economic War Between the States," which now pits various state economic development programs against each other.[*] The publicly stated rationale for the involvement of government economic development programs in the marketplace is, in its broadest sense, threefold.

  1. The view that government can "create" new jobs where they may otherwise not exist.

In this view, the state can intervene in the marketplace to create more jobs in a locality or state with targeted financial assistance, from cash subsidies, low-interest loans, tax abatements and tax credits to gifts of land and technical advice. This notion transcends virtually every economic development policy: that with such market involvement, a state has more net new jobs than it would otherwise have.

  1. The view that government can prevent the "theft" of existing jobs.

State and local political jurisdictions have created economic development programs and incentives to prevent other political jurisdictions from luring their job providers across borders. In this sense, the programs are weapons in the "economic war."

In Michigan, the state's premier tax credit program, the Michigan Economic Growth Authority, asks corporate leaders about the reasons they might locate their firm somewhere other than Michigan. One of the common responses is that other states are allegedly offering them financial incentives to make the move. The fear of losing a major manufacturing or other concern often drives policymakers and economic development officials to provide increasingly generous awards for companies that promise not to leave.

In fact, in their chapter titled "Economic Development Policy in Michigan," authors Timothy J. Bartik, Peter Eisinger and George Erickcek allude to the administration of Michigan Gov. John Engler and the "hiatus" in economic development work by the state in the early 1990s. They write that:

"[T]he political reality of modern American states is that governors are expected by opinion leaders and the public to take specific actions to attract and retain business. This expectation led to criticism of the Engler administration when General Motors in 1992 announced the closing of the Willow Run Plant in Ypsilanti after a publicized contest with a Texas GM plant to see which would be downsized. ..."[3]

In other words, the administration felt bludgeoned by the bad press and the political pressure associated with losing a high-profile jobs provider to Texas. Gov. Engler responded by dropping his previous opposition to targeted economic development programs and aggressively putting his own stamp on them. This ultimately led to the creation of such programs as the Michigan Economic Development Corp., the Michigan Economic Growth Authority and "renaissance zones."

  1. The view that government programs can redress "market failure."

When major businesses struggle or a state's economy is seen as deficient in some way — slow job growth, an undiversified industrial base — the marketplace is often perceived as having failed. Development programs are meant to correct these apparent failures. In this light, it would not be necessary to subsidize venture capital firms, offer tax relief to a Benton Harbor business or provide government-financed job training to an Oakland County auto supplier if the marketplace were providing greater abundance and opportunity.

[*] It is necessary here to emphasize "modern." There were some early American "economic development" initiatives, such as a New Jersey industrial park created for Alexander Hamilton. The administration of George Washington also attempted to own and run its own fur factory, part of which did business in Michigan.

[3] Timothy Bartik, Peter Eisinger, and George Erickcek, “Economic Development Policy in Michigan,” in Michigan at the Millennium, ed. Charles L. Ballard, et al. (East Lansing: Michigan State University Press, 2003).