Category: Economics

  • Do economic development incentives work?

    Economic development

    Judging the effectiveness of economic development incentives requires looking for the unseen effects as well as what is easily seen. It’s easy to see the groundbreaking and ribbon cutting ceremonies that commemorate government intervention — politicians and bureaucrats are drawn to them, and will spend taxpayer funds to make sure you’re aware. It’s more difficult to see that the harm that government intervention causes.

    That’s assuming that the incentives even work as advertised in the first place. Alan Peters and Peter Fisher, in their paper titled The Failures of Economic Development Incentives published in Journal of the American Planning Association, wrote on the effects of incentives. A few quotes from the study, with emphasis added:

    Given the weak effects of incentives on the location choices of businesses at the interstate level, state governments and their local governments in the aggregate probably lose far more revenue, by cutting taxes to firms that would have located in that state anyway than they gain from the few firms induced to change location.

    On the three major questions — Do economic development incentives create new jobs? Are those jobs taken by targeted populations in targeted places? Are incentives, at worst, only moderately revenue negative? — 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.

    The most fundamental problem is that many public officials appear to believe that they can influence the course of their state or local economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence. We need to begin by lowering their expectations about their ability to micromanage economic growth and making the case for a more sensible view of the role of government — providing the foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.

    Following is the full paper, or click here.

  • Entrepreneurial activity, Kansas vs. other states

    Entrepreneurship, EntrepreneurEntrepreneurship is important for a growing and dynamic economy. The performance of Kansas in entrepreneurial activity is not high, compared to other states.

    The Ewing Marion Kauffman Foundation prepares the Kauffman Index of Entrepreneurial Activity. According to the Foundation, “The Kauffman Index of Entrepreneurial Activity improves over other possible measures of entrepreneurship because of its timeliness, dynamic nature, inclusion of all types of business activity, exclusion of ‘casual’ businesses, and information on owner demographics.”

    The following interactive visualization presents KIEA data. You may use the visualization below, or click here to open it in a new window, which may work better, as this is a large visualization. Use Ctrl+Click to add or remove states for comparison. Data is from Kauffman Index of Entrepreneurial Activity. Visualization created by myself using Tableau Public.

  • Job growth in the states

    How does your state compare to others in job growth? Is your state growing private sector or government jobs fastest? The interactive visualization below can help you explore this data.

    To use the visualization, click the check boxes to add or remove states from the charts. Click on a single job type to display, and select a range of years. Use the visualization below, or click here to open it in a new window. Data is from U.S. Bureau of Economic Analysis (BEA); visualization created by myself using Tableau Public.

  • State and local government employees, a visualization

    How does your state compare to others in the number of state and local government employees, and the payroll costs of these employees?

    The following interactive visualization lets you compare any states. Data is presented separately for state government employees and local government employees. The number of employees is presented as full-time equivalent employees per thousand population. Payroll costs are presented as annual payroll costs per capita population.

    To use the visualization, click the check boxes to add or remove states from the charts. Click on axis labels to display a sorting menu. Use the visualization below, or click here to open it in a new window. Data is for 2011, obtained from U.S. Census Bureau; visualization created by myself using Tableau Public.

  • Renewables portfolio standard: Good or bad for the Kansas economy?

    Kansas wind turbines

    A report submitted to the Kansas House Standing Committee on Energy and Environment claims the Kansas economy benefits from the state’s Renewables Portfolio Standard, but an economist presented testimony rebutting the key points in the report.

    RPS is a law that requires the state’s electricity utilities to generate or purchase a certain portion of their electricity from renewable sources, which in Kansas is almost all wind. An argument in favor of wind energy requirementy from the Polsinelli Shugart law firm is at The Economic Benefits of Kansas Wind Energy.

    Michael Head, a Research Economist at Beacon Hill Institute presented a paper that examined each of Polsinell’s key findings. The paper may be read at The Economic Impact of the Kansas Renewable Portfolio Standard and Review of “The Economic Benefits of Kansas Wind Energy” or at the end of this article. An audio recording of Head speaking on this topic is nearby.

    [powerpress url=”http://wichitaliberty.org/audio/michael-head-kansas-rps-2013-02-14.mp3″]Michael Head, Beacon Hill Institute

    Here are the five key findings claimed to be economic benefits to the Kansas economy, and portions of Head’s responses.

    Key Finding #1: “New Kansas wind generation is cost-effective when compared to other sources of new intermittent or peaking electricity generation.”

    The first observation to make from this key finding is that if it were true the state RPS policy is not necessary. If wind power is truly cost-effective compared to other sources of energy, state mandates that wind power be used should be repealed, allowing wind power to compete with other technologies to provide low cost electricity in Kansas.

    This point is obvious. The actions of the wind power industry — insisting on mandates and subsidies — lets us know that they don’t believe their own claim.

    Key Finding #2: “Wind generation is an important part of a well-designed electricity generation portfolio, and provides a hedge against future cost volatility of fossil fuels.”

    Hedging has been, and will continue to be, a useful tool for utilities, and benefits the consumer. But the Kansas state government should not engage in this level of industrial policy by regulating just how much utilities can hedge, all for the sake of requiring wind power production. This is not a benefit in itself. Utilities will attempt to maximize profits by consistently analyzing the energy market and making the best decisions, often through long term purchasing agreements. … In short, hedging is a valuable tool when left to the discretion of the utility, but by utilizing a heavy-handed mandate, state lawmakers are actually constraining the ability of the utilities to make sound business decisions.

    Key Finding #3: “Wind generation has created a substantial number of jobs for Kansas citizens.”

    This key finding fails to take into consideration opportunity costs, a concept that Bastiat explained in his 1850 essay, and is a prime example of the reviewed paper only considering benefits. If a shopkeeper has a window broken, this creates work for a glazer to replace the window. However, this classic “broken window” fallacy mistakes breaking windows as job creation policy. At this point “The Economic Benefits of Kansas Wind Energy” is correct, wind generation does create jobs, just as a broken window creates jobs. But the report stops at this point and fails to provide a complete analysis of the effect of wind generation on total employment in Kansas.

    As Bastiat showed, a consideration must be made to the opportunity cost. How would the shopkeeper have spent his money if he did not need to replace his window? He could use the money on capital investment, further growing his business, hire another worker or make various other purchases. Regardless of what it was, they would have all brought him more benefit, than replacing his window. If not, he would have broken the window himself.

    This is one of the most important points: By forcing Kansans to pay for more expensive electricity, we lose the opportunity to use money elsewhere.

    Key Finding #4: “Wind generation has created significant positive impact for Kansas landowners and local economics.”

    This key finding makes a common mistake by assuming transfer payments are a benefit, a fallacy. The transfers of money via lease payments or property tax payments are not benefits. This transfer of money is a cost to one party and a benefit on the other, and can be illustrated easily.

    What if Kansas wind farms vastly overpaid for their land and lease payments were valued at $1 billion a year. This report would place the benefit of wind power leasing this land at $1 billion a year. But the project has not changed, where did these new benefits come from?

    In fact, there would not be any change to the net benefit of the project. Landowners would amass benefits equal to $1 billion minus the land value and utilities would amass costs equal to $1 billion minus the land value. These costs would in turn be passed along to rate payers in the form of higher utility costs. This illustrates the point that this policy is industrial policy. By dispersing the costs of a project to all citizens in the state, small, but powerful, groups with strong lobbying efforts are able to gather the rewards.

    Key Finding #5 “The Kansas Renewable Portfolio Standard is an important economic development tool for attracting new business to the state.”

    This key finding is related closely with the analysis of the job benefits that wind power purportedly conveys. Of course, legally requiring that utilities use specific sources of electricity will attract new business in that sector to the state. But we need to see the whole picture. This policy has costs, which will be borne by state residents and businesses via higher utility prices.

    In conclusion, Head asked the obvious question: “With all of these supposed benefits of wind power, why does it require a government mandate and taxpayer funding?”

  • Youth unemployment: It’s a problem

    Terence Grado of Generation Opportunity calls in to the Joseph Ashby Show to discuss the problems that America’s youth face. Listen below.

    [powerpress url=”http://wichitaliberty.org/wp-content/uploads/2013/02/terence-grado-generation-opportunity.mp3″]

  • Trends in government spending

    The interactive visualization below may help you appreciate the trend in federal and local government spending. Spending is presented as a percentage of Gross Domestic Product (GDP).

    Data from U.S. Office of Management and Budget. Use the visualization below, or click here to open in a new window.

  • Obama will need more economic growth

    To pay for the Obama taxing and spending agenda, the country will need much more economic growth. Unfortunately, the rate of growth is slowing just when we need greater rates of growth.

    It’s commonly thought that annual real (after-inflation) growth of three percent is required just to keep up with population. More than that is needed to restore the loss in middle-class income during Obama’s first term. But here’s what has happened to the rate of growth.

    Gross Domestic Product, Real, Annual Change

    The direction of change in economic growth is moving in the wrong direction, and it’s far below what is needed. Darkening the horizon are the planned increases in spending, in particular ObamaCare, will be a further drag on the economy. Other Obama policies are distinctly anti-growth. It’s difficult to have an optimistic outlook.

    Stephen Moore and Arthur Laffer told the story last summer in the Wall Street Journal:

    The first is how much government spending fell during President Bill Clinton’s eight years in office and how low it was when he left office. When he became president in 1992, government spending was 23.5% of GDP, and when he left in 2001 it was 19.5% of GDP. President Clinton, in conjunction with a solid Republican Congress, cut government spending by more than any other president in modern times, and oversaw one of the greatest periods of economic growth and prosperity in U.S. history.

    Sadly for fiscal conservatives, the biggest surge in government spending came during the last two years of President George W. Bush’s eight years in office (2007-2008). A weakened Republican president dealing with a strident Democratic Congress, led by then-House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid, resulted in an orgy of spending.

    Mr. Bush and Republicans in Congress capitulated to and even promoted each and every government bailout and populist redistribution canard put before them. It’s a long list, starting with the 2003 trillion-dollar Medicare prescription drug benefit and culminating with the actions taken to stem the 2008 financial meltdown — the $700 billion Troubled Asset Relief Program, the bailout of insurance giant AIG and government-sponsored lenders Fannie Mae and Freddie Mac, the ill-advised 2008 $600-per-person tax rebate, the stimulus add-ons to 2007’s housing and farm bills, etc. The script had it that greedy right-wingers were the cause of our collapse, and deficit spending and easy money the answer.

    The numbers are mind boggling. From the second quarter of 2007, i.e., the first full quarter of a Pelosi-Reid dominated Congress and a politically weakened President Bush, to the second quarter of 2009 when President Obama assumed office, government spending skyrocketed to 27.3% of GDP from 21.4%. It was the largest peacetime expansion of government spending in U.S. history.

    Following is an interactive visualization of federal revenues, expenditures, and the deficit as a percentage of gross domestic product that illustrates these trends. Use the visualization below, or click here to open it in a new window.

  • Growth in Gross Domestic Product by metropolitan area

    Here’s an interactive visualization that illustrates the growth in Gross Domestic Product by metropolitan area. Dollar amounts are in chained 2005 dollars to eliminate the effects of inflation. Each metropolitan area is indexed to start at 100% so we can see the relative rates of growth.

    The top two charts show the growth in GDP for government, and then for the private sector. The bottom chart shows growth in GDP per capita (per person).

    Highlight one or more metropolitan areas to make the line stand out from the others. Use Ctrl+Click to add or subtract others. Use the visualization below, or click here to open in a new window.

    Data from U.S. Bureau of Economic Analysis (BEA). Visualization created using Tableau Public.