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Economic Development 101: How to create jobs, or not

Date Published: 06/02/2011

Author: Matt Kane, Director of policy and research

ST. PAUL LEGAL LEDGER CAPITOL REPORT

Minnesota for decades has been handing over precious and limited economic development dollars to individual companies as tax incentives, government-funded loans and other public-sector subsidies, and our state is not alone.

All states, to varying degrees, engage in this highly dubious strategy to lure or retain businesses and please fast-talking promoters who promise glitzy projects, new construction  and “jobs, jobs, jobs.’’

But if jobs really are the target, Minnesota could do better by adhering to sound economic development approaches that favor broad public investments and fewer company-specific breaks and subsidies. The current system of giveaways is complicated, plays favorites and, most importantly, usually fails to spur net job growth.

Why? In large part because these inducements fail one or more of four key tests for ensuring real impacts. The most critical economic development questions are these:

Keen interest in boosting Minnesota’s economic development and outlook for growth drive state policymakers and agency officials to hone in on specific actions and initiatives — but not always ones that can deliver.

One prime example: Economic development is cited as a rationale for reducing or limiting state taxes, but, ironically, reduced revenues force cuts in higher education, transportation and other investments that can help grow the state’s economy in the long term — and yield benefits that continue even if specific businesses downsize or close.

Example two: The proposed Vikings stadium, which has many leaders touting public investment for economic development reasons, despite research showing that the regionwide economic impact will be minor. That’s because most of the increased spending on stadium events will simply reduce entertainment spending on other activities. And public dollars for construction would be better spent on infrastructure that serves many businesses instead of an often-empty home built for the football team.

And the state’s JOBZ program for business-specific incentives and subsidies often misses the mark, too, as shown by studies from the state’s legislative auditor’s office as well as University of Minnesota economists.

Since we all agree economic development is vital, the question becomes, “What works?” Research and experience show Minnesota will do better in the long run following these precepts:

Minnesota’s Department of Employment and Economic Development already runs programs that match up with some of these smart approaches. And no doubt many at the agency would prefer to drop all company-specific incentive and subsidy programs — but such a move becomes problematic for our state when every other state offers them.

But we can take the lead. Minnesota needs to look past the “chase” after specific deals that rarely pay off and focus its economic development on long-term initiatives that fit the proper role for government action and build upon regional strengths to increase economic growth and prosperity.

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A version of this coulumn originally appeared in the St. Paul Legal Ledger Capitol Report on Thursday, June 2, 2011.

Matt Kane is the director of policy and research at Growth & Justice, a policy research organization focused on expanding prosperity in Minnesota, and author of the report “Smart Economic Development for Minnesota: Getting It Right in Tough Times and Beyond.”


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