Why State "Economic Central Planning" Fails

(Editor's note: This entry is adapted from an article that originally appeared on Industrialpolicy.org.)

Reams of empirical evidence indicate that when it comes to increasing the prosperity and opportunities of the people in a state, nation or society, government "economic development" programs fall far short of what their proponents advertise. Here are three of the reasons this is true.

Far and away the most important reason is what economists call "the Knowledge Problem." Regardless of their good intentions, and no matter how brilliant they are as individuals, government central planners simply cannot possess all the knowledge that's necessary to sort winners from losers in the marketplace. At least not in a way that consistently produces a result superior than simply leaving everyone alone.

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The magnitude of the problem is illustrated by annual "job churn" figures. Every year in Michigan, some 400,000 jobs disappear — around 10 percent of the entire state payroll workforce. In a good year, slightly more than 400,000 new jobs are created. In recent years, somewhat fewer than this were created. The same is true in every other state in America's dynamic economy.

Where do all those new jobs come from? No one can say. A few years from now, government economic data may give broad statistical indications, but even in hindsight it won't be able to identify specifics, like, for example, that Rosie's Diner in Midland added two part-time prep-cooks in June because Rosie put a new chili recipe on the menu that had diners waiting in line. Certainly the bureaucrats at the Michigan Economic Development Corp. could not know this in advance, and there is no conceivable "incentive" that legislators could authorize to generate more employment from better local diner chili recipes.

Here's the bottom line suggested by all this: It is impossible for those central planning bureaucrats and lawmakers to make better decisions on where to allocate human and material resources for maximum wealth and job creation than can be done by millions of entrepreneurs, investors, employees, managers and consumers, each bringing their own little pieces of the total "knowledge pie" together in ways that produce, among other things, better chili recipes and higher employment at local diners that create them.

Another reason these government central planning programs don't work is the "Takings Problem." In order for government to give something to someone, it must first take it from someone else. If I robbed a bank in Lansing and spent the loot at a mall in Oakland County, would the Michigan Economic Development Corp. issue a press release celebrating the increase in retail sales, new direct jobs, spin-off jobs and new income to the state treasury that would result? Of course not; they would appropriately recognize that some people had to lose in order that others may gain.

Finally, there is the "Beaker Problem."  Beaker was a puppet on the old "Muppet Show" who was a lab assistant for the obtuse "Dr. Bunsen Honeydew." Beaker was routinely being terrified (with good cause) by the dangerous experiments performed by Dr. Honeydew, who himself was oblivious to the risks. In other words, there was a total disconnect between the actions of the chief scientist and the fear that Beaker felt. Inevitably, it was Beaker who felt the sting when the experiments went awry.

Similarly, the costs of bad decisions made by state and local economic development officials do not fall on our state's bureaucratic and legislative "Dr. Bunsen Honeydews," so what reason have they to care whether the resources they are entrusted with are used in the most prudent manner possible ?

For example, would the trustees of the Michigan Economic Growth Authority have voted to offer Kmart a third special tax break deal shortly after it had emerged from bankruptcy if their own personal wealth had been tied to the future performance of that company?

Lansing politicians should adopt a New Year's resolution for 2010, to not only recognize these central planning shortcomings, but to cease embracing government economic development "solutions" to Michigan's long-running unemployment problems.