The proliferation of economic development programs run by state and local government has allowed academics of every stripe and locale ample opportunity to study the respective impacts of such programs. There is rarely unanimity about any broad topic under study in academe. On the subject of economic development, however, it seems fairly clear from research by scholars across the country that results from such programs on balance are not positive.
This review describes a cross section of the research literature in both a broad and narrow sense. It is not meant to be the last word on the state of academic literature. It is to provide the reader with a perspective on past and current efforts to quantify economic development programs broadly and over time, including those with characteristics relevant to the Michigan Business Development Program.
For a wider take on incentive-related literature, the authors recommend reading the literature reviews and technical appendices of three previous Mackinac Center for Public Policy studies. These include, “MEGA: A Retrospective Assessment” (2005); “The Michigan Economic Development Corporation: A Review and Analysis” (2009); and “An Analysis of State Funded Tourism Promotion” (2016), as well as the two studies referenced in footnotes below.[*]
It is customary in academic papers to review the literature that has proceeded some new scholarship. In some instances scholars dedicate an entire paper to reviewing the existing literature on a topic and categorize and sum its findings for other researchers. These are commonly called a “meta-review.”
One of the broadest and most cited economic development meta-reviews was published by Peter Fisher and Alan Peters in 2004. According to Google Scholar it has been cited in 301 other works.
The paper, titled “The Failure of Economic Development Incentives,” was a review of published analyses of state and local economic development programs. Its authors hoped to answer three major questions:
1. Do business incentives actually cause states or localities to grow more rapidly than they would have otherwise? 2. If so, is the growth targeted so as to provide net gains to poorer communities or poorer people, or is it merely a zero-sum game? 3. How costly to government is the provision of these incentives compared to alternative policies?
Their conclusion is that despite the massive costs associated with running state and local economic development programs there is little evidence to suggest job and wealth creation for anyone, let alone the poor or for the governments running these programs. From their conclusion:
On the three major questions ... traditional economic development incentives do not fare well. It is possible that incentives do induce significant new growth, that the beneficiaries of that growth are mainly those who have greatest difficulty in the labor market, and that both states and local governments benefit fiscally from that growth. But after decades of policy experimentation and literally hundreds of scholarly studies, none of these claims is clearly substantiated. Indeed, as we have argued in this article, there is a good chance that all of these claims are false.
Since this was published in 2004 there have been many additional economic development studies published in peer-reviewed journals across the country. The conclusions are mixed — as is often the case with academic studies — but it seems that, overall, they still lean toward skepticism that such programs are effective.
A 2017 project by the W.E. Upjohn Institute for Employment Research — mentioned above — involved creation of a new publicly accessible and transparent database of economic development incentives. This database, which contains information from 1990 to 2015 covers 45 industries from 33 states, and will help researchers better measure the impact of incentives across states and types of incentives. It finds that “[i]ncentives do not have a large correlation with a state’s current or past unemployment or income levels, or with future economic growth.” These findings are qualified in that the research “does not include many other control variables, which might alter results.”
In a forthcoming paper titled, “Do Business Subsidies Lead to Increased Economic Activity? Evidence from Arkansas’s Quick Action Closing Fund,” authors Jacob Bundrick and Thomas Snyder examine cash “deal-closing funds” and their use to spur economic development in Arkansas. The authors report finding scant evidence for programmatic success. Consider the key findings from the conclusion of their working paper:
Our within-county models estimate the four-year cumulative effect of [Quick Action Closing Fund] subsidies. These models offer no evidence to suggest that providing QACF subsidies to businesses within a given county provides the county with any significant cumulative private employment and establishment benefits. Furthermore, the models fail to offer evidence of a significant cumulative employment spillover effect related to the QACF subsidies provided to businesses in a county’s bordering counties. However, we do find evidence of a statistically significant, but economically small, negative cumulative establishment spillover effect related to the QACF subsidies provided to businesses in a given county’s bordering counties. Accounting for the fiscal costs of the program, though, yields no significant relationship between the QACF and county-level private employment and establishments. Finally, our cross-county estimations find little evidence to suggest that the QACF, on average, explains differences in private employment and private establishments at the county level.
This research has implications for our study of the MBDP. Arkansas’s QACF program shares characteristics of the MBDP. First, it is a cash subsidy program. Second, the QACF is designed for use in “highly competitive situations.” The MBDP likewise is described by the MEDC as “economic assistance for highly competitive projects” and “preference may be given to businesses in need of additional assistance for deal closing and second stage company gap financing.” Lastly, the authors attempt to measure relationships between the subsidy program and county employment, and we do likewise.
Another 2017 paper looked at economic development incentives offered through programs run out of Virginia and Maryland between 2006 and 2012. To analyze the impact of each, the author created a group of firms that would serve as a control on his estimates. That is, he would attempt to measure the performance of incentivized firms against a like control group of firms that had not received fiscal favors.
The Virginia program — Commonwealth Opportunity Fund — is a deal-closing fund such as the QACF in Arkansas. Like the MBDP this program too hands out grants and loans and oversees recipient performance. They can also cancel deals and demand a “clawback.” Clawback provisions allow units of government to demand the return of subsidies for failure to meet requirements of an agreement. The MBDP has cancelled deals and demanded that its subsidies be returned too, though to varying degrees.
The Maryland program studied in this paper provides a mix of different incentives that qualify as economic development. Nathan Jensen, the author of the paper, just focused in on those incentives associated with job creation and investment efforts for business, much like the MBDP.
Jensen writes that his “findings cast considerable doubt on the effectiveness of these programs in generating new employment in the short run.” The incentives “have no discernable impact on job creation, which is consistent with previous studies.” He also found excluding firms that had been subject to a clawback provision — presumably for poor performance or “non-compliance” — does not improve the net performance of the programs studied.
Neighboring Pennsylvania runs a “Redevelopment Assistance Capital Program” that hands out cash grants to businesses that move to or expand in the Keystone State. Since 1986 the program has approved $5 billion in grants for 2,200 projects, according to the Mercatus Center, a think tank housed at George Mason University.
The Mercatus study looks at the impact of grants from 2010 — the largest approved expenditure in the program’s history at more than $1 billion. More than $600 million of that was paid out and the author found “a small, positive effect on county employment growth from 2010-2013.” The author adds, however, “this result should be interpreted with caution since it does not represent net jobs created across the state.”
A 2014 National Tax Journal article tackled the question of whether or not increasing the availability of nontax incentives such as “cash and near-cash grants, low-interest financing, free land and buildings, etc.” meant more jobs. The author examined the question using a dataset that ran from 1970 to 2002 and attempted to measure employment growth and level in U.S. counties. She concluded:
[I]ncreasing the availability of non-tax incentives negatively affects medium-term rural employment. There appears to be no effect otherwise, although it is possible that there may be small short-term benefits to urban county employment levels. The finding of negative or no effect calls into question the generally accepted practitioner view that providing more economic development incentives to attract capital will result in more jobs.
[*] A classic work in the incentive literature is a 2001 paper by Terry F. Buss and published in Economic Development Quarterly. Terry Buss, “The Effect of State Tax Incentives on Economic Growth and Firm Location Decisions: A Review of the Literature,” Economic Development Quarterly 15, no. 1 (2001): 90–105. For a highly readable summation of literature surrounding the political economy of targeted incentives, see Christopher J. Coyne and Lotta Moberg, “The Political Economy of State-Provided Targeted Benefits,” Review of Austrian Economics 28 (June 1, 2014): 337–356, https://perma.cc/EY3J-HY3U.