Voice For Liberty

Tag: Economics

  • Urban planning: Wichita should reject the fads Portland has followed

    By Randal O’Toole

    Randal O'Toole speaking in WichitaRandal O’Toole in Wichita.

    Urban planners say they can make our cities more livable, our downtowns more vibrant, and our traffic calmer. The problem is that urban planners do not understand how cities work, so all of their plans often turn out disastrously wrong.

    Many urban planners are quite capable of planning a sewer line, a road, a bus route, or a school. But it is huge leap from “I can locate a water main” to “I should have the power to decide how every piece of land in your urban area should be used.”

    That is the power urban planners want. But cities are too complicated for anyone to plan, so giving anyone this power is asking for trouble.

    Take my former hometown of Portland, Oregon, whose planners say they are making streets “vibrant” and the city “livable” by encouraging walking and transit ridership and discouraging driving.

    To stop “sprawl,” planners told rural landowners around Portland that they cannot build a house on their own land unless they own at least 80 acres and earn $80,000 a year farming it. To promote “compact development,” planners rezoned many neighborhoods of single-family homes for multi-family housing with zoning so strict that, if someone’s house burns down, they can only replace it with an apartment.

    Planners believe your only property rights are the rights planning commissions decide to give you — subject to change any time.

    Portland has spent well over $2 billion building light-rail and streetcar lines. To encourage transit ridership, planners allowed rush-hour congestion on all major freeways and streets to increase to stop-and-go levels. Doing anything to relieve congestion, planners feared, “would eliminate transit ridership.”

    To further encourage transit and walking, planners zoned all the land near light-rail stations for high-density, mixed-use development, so people could walk from their apartment buildings to a cafe or grocery store. When nothing got built — developers said Portland already had a surplus of multi-family housing — the city started subsidizing it, and has so far given around $2 billion in public funds to developers.

    The results are attractive if you like the idea of dodging trolleys as you wander through canyons of four- and five-story apartment buildings. But the practical effects on Portland residents are mostly negative.

    Planners successfully increased congestion by more than six times since 1982, about the time most of these plans began. But that hasn’t gotten people out of their cars: the share of commuters taking transit to work declined from 9.8 percent in 1980 to 6.5 percent in 2007.

    Planners more than doubled housing prices, so a $150,000 home in Wichita would cost well over $300,000 in Portland. But that hasn’t made high-density housing particularly successful: many of these developments have high vacancy rates and several have gone bankrupt.

    High housing prices forced many families with children to move to distant suburbs, and the remaining childless households eat out a lot, so Portland has lots of restaurants. But it also has high taxes and urban services have deteriorated as funds once dedicated to fire, police, public health, and other programs have been diverted to subsidies to developers.

    Terrible traffic, unaffordable housing, high taxes, and reduced property rights: those are the legacies of Portland planning. That’s the future planners want to bring to Wichita. I recommend you just say no.

    Randal O’Toole (rot@cato.org) is senior fellow with the Cato Institute and author of The Best-Laid Plans: How Government Planning Harms Your Quality of Life, Your Pocketbook, and Your Future. He recently visited Wichita for a series of speaking engagements and meetings.

  • Randal O’Toole discusses urban planning in Wichita

    Randal O'Toole in WichitaRandal O’Toole in front of WaterWalk Place in Wichita, a monument to the failure of TIF districts, eminent domain, and urban planning by government.

    Last week Cato Institute Senior Fellow Randal O’Toole was in Wichita. He delivered a public lecture Thursday evening to a crowd that braved poor weather to attend.

    O’Toole said he spent 15 years studying urban planning, and he said he’s learned this: “Urban planners promise us paradise on earth, but first we have to give them the power to create it.”

    Imagine an urban planner in 1950 writing a 50-year plan for Wichita. O’Toole showed illustrations of some things we take for granted today but were unknown at that time, such as direct dialing a long-distance telephone call, using a personal computer, and flying on a commercial jet aircraft. But, he said, nearly everyone had rode on trains.

    We know that predictions made in the past often turn out to be nowhere near accurate. But urban planners still make these type of long-range plans. The problem, O’Toole said, is that when plans are made, someone is going to benefit from that plan. Those people will lobby to keep the plan in effect so that they continue to benefit. This will be true even if the plan turns out to be totally wrong and a disaster for everyone else.

    Cities are too complicated to plan, O’Toole said. There are too many people, and there are too many parcels of land with too many possible uses. Despite this complexity, planners think they should be allowed to dictate the use for each parcel of land.

    Since planning is so complicated, planners follow fads. As an example, O’Toole showed an example of a city that created a pedestrian mall downtown, as did some 200 cities across the country. Almost all have since been reopened to traffic.

    Another fad was slum clearance, where high-rise housing projects were built to replace slums. These buildings proved to be unlivable, and many have been torn down.

    One of the latest fads is “smart growth,” which seeks to increase the density of urban development. O’Toole’s hometown of Portland has embraced this fad. There, an urban growth boundary limits the expansion of developed areas. Instead of growing out, planners want the city to grow up. Minimum density zoning means that high-density housing replaces single family housing.

    Row houses in PortlandRow houses in Portland. These replaced a single-family home.

    O’Toole showed a photograph of a nice house that he said sells for $160,000 in Houston. In Portland, at the peak of the bubble, a similar house would sell for $380,000. He said that Portland planners are proud of the fact that developers will buy a house on a quarter-acre lot, tear it down, and replace it with four skinny row houses.

    Could this happen in Kansas, he asked? O’Toole said that President Obama’s Secretary of Transportation has decided to require all metropolitan areas to write plans to include compact development.

    Light rail is another favorite tool of urban planners that hasn’t worked. O’Toole told how Portland built light rail rather than highways. Federal dollars encouraged this. But light rail was so expensive that Portland had to cut back on its thriving bus service. Bus fares were raised and service was cut, so bus ridership plummeted.

    Light rail in MoscowA light rail train in front of an apartment building in Moscow …
    Light rail in Moscow… and the same in Portland.

    Portland built still more light rail, however, urged on by campaign contributions from rail contractors. Land near the light rail stations was zoned for high-density development. But no one wanted to develop there, because there was a surplus of high-density development and no parking around these light rail stations — except for train riders, and few people rode the trains. So Portland subsidized high-density development along light rail lines.

    Portland also created tax increment financing (or TIF districts) along the light rail lines. O’Toole referred to the money allocated to TIF districts as stolen from police and fire services, and from public schools. But still more TIF districts were created along even more light rail train lines.

    Cars parked illegally in PortlandCars parked illegally at a high-density, transit-friendly development in Portland. Management knows that if parking regulations are enforced, tenants will leave.

    The claim by government officials is that light rail promotes economic development. But it’s a zero-sum game, O’Toole said. Development is promoted in one place at the expense of development elsewhere. The added tax burden of TIF makes it a negative-sum game, as the cost of TIF financing slows the economic growth of cities that use TIF compared to those that don’t.

    O’Toole showed a photograph of a mixed-use development in Portland with three floors of apartments upstairs, with shops on the bottom floor. But all the stores are empty, because there is no parking for shoppers.

    All the spending on light rail in Portland has led to a decrease in the share of commuting trips taken using transit, O’Toole said.

    So what is the result of following urban planning fads in Portland? O’Toole said: “If your goal is to make housing unaffordable, make your streets more congested, increase taxes or reduce the quality of urban services, then by all means follow the kind of fads that Portland is doing.”

    O’Toole said that cities should follow the type of planning efforts that Anaheim, California has followed in the Platinum Triangle. Instead of using TIF financing to sell bonds and take land by eminent domain, cities should not rely on eminent domain and subsidy. Government should get out of the way, he said.

    Randal O’Toole’s appearance on the KPTS Television public affairs program Kansas Week may be viewed at Urban planning discussed on Kansas Week.

  • Urban planning discussed on Kansas Week

    Economist, author, and Cato Institute Senior Fellow Randal O’Toole discusses urban planning and redevelopment on the KPTS Television public affairs program Kansas Week. Tim Brown is the host.

    Coverage of O’Toole’s visit to Wichita is at Randal O’Toole discusses urban planning in Wichita.

  • Government spending does not create prosperity

    In his op-ed Don’t buy canard about spending, Alan Cobb of Americans for Prosperity writes about the illusion that government spending creates economic growth.

    It’s an important topic, as we’ve just been through nearly a year of Obama stimulus spending, and people are wondering if the effort has paid off. Locally in Kansas, spending advocates argue that reducing Kansas state spending will cause economic growth to suffer. Even more locally in Wichita, city council members and city hall bureaucrats argue that government is responsible for managing economic development in Wichita, some going so far to proclaim that free people and free markets have failed and can’t be trusted.

    In yesterday’s Wichita Eagle, Wichita businessman Fred Berry takes issue with Cobb, and this disagreement provides a useful illustration of the difference between government and private action.

    Cobb wrote this: “If I take $20,000 from my neighbor and hire a gardener, the economy certainly hasn’t grown by $20,000. It’s simply been a shift of money.” Cobb is illustrating the effect of government spending.

    Berry wrote: “But let me use Cobb’s example in a different way. Suppose he and his neighbor decided to share a gardener, because neither needed one full time. Because Cobb’s garden was twice as large as his neighbor’s, he agreed to pay two-thirds of the cost.”

    What’s the difference between the two examples? It’s simple: Cobb is illustrating a government-coerced transaction, while Berry uses a voluntary transaction.

    There’s a world of difference between the two. Voluntary transactions are the way that wealth and prosperity are generated. These transactions happen because both parties believe they will be better off if the transaction takes place.

    This leads to what John Stossel has termed the “weird double thank you moment” when people engage in voluntary trade: One party says “thank you,” and so does the other. This happens at the grocery store and nearly everywhere people are making voluntary exchanges that benefit both parties.

    But when you pay your taxes, do you say “thank you?”

    Milton Friedman has written and lectured extensively on the topic of free markets. Here’s an example from his monumental work Capitalism and Freedom:

    Fundamentally, there are only two ways of co-ordinating the economic activities of millions. One is central direction involving the use of coercion — the technique of the army and of the modern totalitarian state. The other is voluntary co-operation of individuals — the technique of the market place.

    The possibility of co-ordination through voluntary co-operation rests on the elementary — yet frequently denied — proposition that both parties to an economic transaction benefit from it, provided the transaction is bi-laterally voluntary and informed.

    Exchange can therefore bring about co-ordination without coercion. A working model of a society organized through voluntary exchange is a free private enterprise exchange economy — what we have been calling competitive capitalism.

    It’s surprising to me that a businessman — here I specifically do not use the word “capitalist” — like Fred Berry would fail to recognize the distinction between free markets and government coercion. I guess I should not be surprised, as Berry made large campaign contributions to the Wichita school bond campaign in 2008, and the public schools are definitely unfriendly to capitalism. In addition, he has made contributions to enemies of capitalism like Wichita Mayor Carl Brewer and city council member Janet Miller.

    For more explanation of how free markets work from Milton Friedman, view the video below.

  • Don’t buy canard about spending

    By Alan Cobb

    “Canard” is a funny word.

    It keeps popping into my head anytime I read another self-anointed do-gooder who claims that government spending leads to economic growth.

    “Canard” means a false report — and we’ve got lots and lots of them about these claims.

    If I take $20,000 from my neighbor and hire a gardener, the economy certainly hasn’t grown by $20,000. It’s simply been a shift of money. Rearranging the furniture in your living room doesn’t increase the number of easy chairs or TVs.

    That’s what happens when your taxes pay for someone else’s salary, build a government building or pave a road.

    We value good roads and good government. But that doesn’t mean those things cause economic growth. Arguments otherwise are either deceitful or horribly misinformed.

    Many say that we don’t need to do anything but spend more government money and — voila — a land of milk and honey.

    Given the Kansas highway lobby’s assertions, Kansas should do nothing but build roads and the Sunflower State will become the promised land.

    Oh, if it were so.

    As Margaret Thatcher said, big government doesn’t work because eventually you run out of other people’s money.

    There’s also something never discussed by those wanting to line their pockets with what used to be in your pocket. The money doesn’t drop from the sky and it isn’t in your grandmother’s basement. It’s our money, and we taxpayers might do something more productive with it — though that is never measured. The citizens of Kansas might spend the billions the road lobby wants to spend on more roads (in a slow-growing state with great roads already) on something else, like starting new businesses, which would lead to growth.

    The multipliers used by those pushing the canard, cooked up in a fantasy lab, make it look even better. Multiply the $20,000 gardener salary by three — sprinkled with fairy dust — and all of the sudden the transfer of $20,000 magically becomes $60,000. So anything is justified. Want $3 million in economic growth? Just raise taxes by $1 million. You don’t need Billy Mays to sell this stuff.

    Add up all the multiplier studies and poof! Kansas’ economy is the size of Texas’.

    In a recent Wall Street Journal commentary, a Stanford University economics professor dismissed this notion and said the government-spending multipliers are actually negative. Outlays by the government crowd out private spending and require future taxes.

    Measuring the economic value of shorter commutes and fewer car repairs, accidents and fatalities is doable, but never done. Similarly measurable are the benefits of an educated populace, but the benefit is not the sum of teachers’ salaries plus the cost of the bricks in a school addition. Taking the input (tax dollars) and applying a castle-in-the-sky multiplier is not magical; it’s wrong.

    Saying the Pizza Hut that moved from downtown to the new bypass outside town is “growth” is equally wrong — and dishonest. But that’s what we hear from those pushing the canard that government spending is growth.

    There’s that word again.

  • Wichita’s pursuit of convention business: a wise strategy?

    One of the reasons Wichita city leaders say we need to provide subsidy to a proposed hotel in the downtown WaterWalk development is that the rooms are needed to support the city’s effort to gain convention business.

    On its face, this pursuit of convention business seems like a noble effort by city leaders. Vast streams of economic development will follow if they are successful, they say. Providing subsidy to a hotel in support of this effort, they say, should be a simple decision. Especially when supporters like Wichita city council member Jeff Longwell tell us that much of the subsidy to the hotel will be paid by visitors to Wichita.

    But I’ve not seen discussion in Wichita on whether this pursuit of convention business is wise. Heywood T. Sanders, who is professor in the Department of Public Administration at the University of Texas at San Antonio, is a noted critic of public efforts to chase convention business for economic development. His report 2005 Space Available: The Realities of Convention Centers as Economic Development Strategy was published by the left-leaning think tank The Brookings Institution. It provides a look at the realities of the convention trade.

    Heywood writes that convention center business has been on the decline, and it started well before the terrorist attacks in 2001. In a section titled “Trends: Portrait of a Faltering Industry” we can read that attendance is down, exhibit space demand is down, and hotel room demand in cities has fallen too.

    The author notes that the decline in convention business is a structural decline: “[Reasons for decline] are the product of industry consolidation, particularly in the hardware and home improvement industry, reductions in business travel in the face of increasing cost and difficulty, and alternative means of conveying and gathering information.” These are not cyclical trends that are likely to reverse in the future.

    Despite shrinking demand, cities are building more convention space: “Despite diminishing demand, the last few years have seen a remarkable boom in the volume of exhibit space in U. S. convention centers.” The building of larger convention centers in many cities means that more cities are able to host the larger events, or, cities can now host several smaller events simultaneously. The result, says the author, is fierce competition for both large and small events.

    Then, what about the costs? The author introduces a section on costs with: “The studies that justify both the new center space and the publicly-owned hotels paint a picture of tens of thousands of new out-of-town visitors and millions of dollars in economic impact. Despite that rhetoric, these projects carry real risks and larger potential costs, particularly in an uncertain and highly competitive environment.”

    The convention center is just the start of costs: “A new [convention] center is thus often followed by a subsidized or fully publicly-owned hotel.” Wichita, of course, has a fully publicly-owned hotel, the large 303-room Hyatt. Now Wichita seeks to subsidize a hotel in the WaterWalk development. This proposed hotel does not provide as many rooms as Wichita convention planners say the city needs, so it is likely not to be the last such proposal for a subsidy to hotel developers.

    Other things Heywood says that are likely to be proposed are a sports arena. Wichita, of course, just opened a taxpayer-financed and government-owned facility. Entertainment, retail, and cultural attractions are often proposed, he writes, and Wichita downtown planners have indicated their desire for these. Downtown boosters are likely to propose a sales tax to support these efforts.

    The conclusion to this paper describes Wichita’s current situation and foreshadows what is likely for the future of Wichita:

    But if taxing, spending, and building have been successful, the performance and results of that investment have been decidedly less so. Existing convention centers have seen their business evaporate, while new centers and expansions are delivering remarkably little in terms of attendance and activity.

    What is even more striking, in city after city, is that the new private investment and development that these centers were supposed to spur — and the associated thousands of new visitors — has simply not occurred. Rather, city and convention bureau officials now argue that cities need more space, and more convenience, to lure those promised conventions. And so underperforming convention centers now must be redeemed by public investment and ownership of big new hotels. When those hotels fail to deliver the promises, then the excuse is that more attractions, or more retail shops, or even more convention center space will be needed to achieve the goal of thousands of new visitors.

    We already see some of this excuse-making taking place: Private investment in downtown Wichita has been weak, it is said, because there’s not yet a critical mass of development. It is promised by downtown boosters that given enough public money critical mass will be achieved, and private investment will rush in. But since there is no definition of what constitutes critical mass, this excuse is always available to justify failure.

    Listen to an interview with Sanders from 2009. A transcript of an interview with Sanders from 2004 is at “A Lot of Hooey”: Heywood Sanders on Convention Center Economics.

  • ‘The Audacity of Hypocricy’ in Wichita

    The Great American Forum hosts another event: “Come hear our panelists discuss the failed policies of the first year of the Obama Administration, and common-sense solutions to fixing our country! The topics will be: Homeland Security & Defense (Ben Sauceda), Cap & Trade (Rick Macias), Healthcare (Kenya Cox), and Economics (Brandon Rudkin). There will be a question and answer period.”

    Thursday, January 21, 2010 from 7:00 pm to 8:30 pm, at Rhatigan Student Center Room 215 at Wichita State University.

  • Ticket scalping is a market function, not a criminal activity

    At the Intrust Bank Arena in downtown Wichita, some concerts are very popular, which leads to people frustrated at two things: the inability to buy tickets when they go on sale, and then the high prices that ticket scalpers ask for tickets on the aftermarket.

    I understand the frustration of the stymied ticket buyers. Who wants to pay $300 for a ticket that was sold by the arena’s box office for $50? It would be great if everyone who wanted to attend could do so for $50 — or for $5, for that matter. And that gets to the heart of the problem and why it isn’t likely to be solved: human behavior and economics.

    Walter Block has a chapter in his book Defending the Undefendable that defends the ticket scalper. (The book in pdf form is here.)

    As it turns out, scalping is a beneficial economic activity. But even if you don’t believe this, scalping could be avoided if venues like the arena would sell tickets in a different manner.

    According to Block, scalping requires “a fixed, invariable supply of tickets.” After all , if the supply of tickets was unlimited, everyone could buy all they wanted at list price (the price printed on the ticket, and what the venue sells them for).

    Also, scalping requires “the ticket price chosen by management be lower than the ‘market clearing price.’” Markets clear when people want to buy the same number of tickets that are for sale. This balance is achieved by allowing the price of the tickets to freely adjust. When the list price of the ticket is less than what some people are willing to pay, that’s when scalpers have an opportunity to earn profits.

    This points to one way that scalping could be eliminated, if concert promoters wanted to: They could sell tickets like shares of stock or bushels of wheat are sold. These items don’t have a list price. Instead, their price is whatever people are willing to pay.

    Why would concert promoters price tickets at less than some people are willing to pay? If a scalper can get say, $300 for a ticket that the box office sells for $50, why doesn’t the box office price the ticket at $300? Or maybe $200? Here’s what Block writes:

    For one thing, lower prices invite a large audience. Long lines of people waiting to enter a theater or ballpark constitutes free publicity. In other words, management forgoes higher prices in order to save money it might have had to spend on advertising. In addition, managers are loath to raise ticket prices — even though they would have little difficulty selling them for a big event or special movie — for fear of a backlash. Many people feel that there is a “fair” price for a movie ticket, and managers are responsive to this feeling.

    There are several other motivations, less compelling, for keeping prices fixed at below equilibrium levels. Taken together they ensure that this pricing policy — the third condition necessary for scalping — will continue.

    In other words, better for scalpers to bear the brunt of public ire for setting market-clearing prices. Can you imagine the public backlash at the Intrust Bank Arena and Sedgwick County if ticket prices for very popular concerts were set at market-clearing prices?

    The chapter goes on to explain the two ways that scarce goods — concert tickets in this care — are rationed: price rationing, and non-price rationing. Price rationing, as you might imagine, relies on the price mechanism to determine a market-clearing price so that supply equals demand.

    Non-price rationing, on the other hand, relies on something else. Block mentions “first-come, first served” (camping out the night before at the box office window) and favoritism (those connected to or favored in some way by arena management get special privileges) as two methods of non-price rationing. The Intrust Bank Arena has used another method — a lottery — for some concerts.

    So which is “fair?” Does price rationing favor those with the ability to pay high prices? Certainly scalping makes it easier for rich people to obtain scarce tickets. But Block says that scalping provides entrepreneurial opportunities. Someone with a small amount of capital (just enough to buy one or more tickets) but a lot of spare time (someone without a job) can camp out in line and earn profits by selling the tickets. Or, they could simply wait in line and be paid a wage.

    By the way, scalpers are not guaranteed profits. If there is not much demand for tickets for an event, scalpers will have to sell the tickets at a loss — or they may not be able to sell them at any price.

    Back to Wichita: According to a Wichita Eagle article, a group named Taxpayers for Tickets has been formed to take action against scalping. Reading the website, it seems that the group’s focus is on more laws and enforcement of them to effect the goal of getting tickets in the hands of the taxpayers who paid for the construction of the Intrust Bank Arena.

    I don’t favor this approach. First, as we’ve seen, scalping is a socially beneficial activity that provides market-clearing prices for tickets.

    Second, there is plenty of actual crime in our community that causes death, injury, and loss of property. We don’t need to squander law enforcement resources on victimless crimes like people willingly and voluntarily engaging in market transactions.

    In a letter published in the Wichita Eagle, Todd Allen, head of Taxpayers for Tickets, wrote “I figured that since the taxpayers paid for the arena, that makes us the owners.” I hate to disappoint Mr. Allen, but that’s far from the case. Try requesting a contract, as in Sedgwick County keeps lease agreement secret. Not even Sedgwick County Commissioners are able to see the lease of the arena’s flagship tenant.

    Another article on ticket scalping is Ticket Scalpers Are Hidden Heroes.

  • Wichita city council discusses economic development incentives, again

    At this week’s meeting of the Wichita City Council, underperforming companies that have received economic incentives was at issue.

    Wichita grants incentives — usually in the form of an escape from paying property taxes — to companies. Usually there are conditions attached to the incentives, such as a certain amount of capital investment or employment targets. Recently — and in the past two or so years — several companies that received incentives have not met employment goals. Should the city rescind the tax breaks in these cases? Or should there be recognition that there’s a tough economy at the moment, and should the company be excused from meeting the goals it pledged?

    During a period of questions from the bench, council member Sue Schlapp remarked: “We have to be flexible, don’t we? … Especially in today’s economy, we need to be very careful that we’re not too rigid in what we’re doing.”

    Council member Jeff Longwell said he’d like to see something that rewards companies that bring in business from outside our community. Economic development head Allen Bell answered that the policy is limited to companies that bring in wealth from outside. Businesses that are here because their customers are here are not eligible for economic incentives, he said.

    Longwell also expressed concern about companies that use temporary employees. Should that increase in payroll be included as a benefit, even if the employees are only temps? Bell said yes, even though these jobs are not as good as direct hire placements. Wichita City Manager Bob Layton interjected that we shouldn’t count seasonal peak employee ramp-up in benefit calculations.

    Longwell added that we ought to include the fact that some companies drive up hotel occupancy rates due to the nature of their business. Bell said that this is a factor in the WSU analysis.

    Vice-mayor Jim Skelton inquired about details of the model that WSU uses to calculate the economic benefit of incentives. These calculations, Bell said, are required by the Kansas Legislature. The model presently used is unique to WSU. It focuses on the fiscal impact that an economic development project has on cities, counties, school districts, and the state. It takes into account jobs created, capital that is invested, and other factors. It includes such factors as the need for additional police and other government services, additional sales and bed tax, and other revenue sources. It then performs a present value calculation and produces a ratio. A value greater than one means the benefits exceed the costs.

    City manager Layton said that these incentives represent a contract between the business and the city. The business promises to grow the economy, and the city makes an investment in the company. The council presently is struggling with how to judge the performance of companies that have received incentives in a down economy. The WSU index makes sense, he said. If economic conditions are poor, we now have a tool to judge the performance of the companies that received incentives. There are now extenuating circumstances, he said.

    Mayor Carl Brewer said that we recognize there are challenges, and that in an ideal world we shouldn’t have to provide incentives. But he said we have several options: Be competitive and provide incentives and fight to keep what we have, or don’t provide incentives and see what happens. He said we know what would happen in that case. Businesses will go where they can get these incentives, he said, and we can’t argue that. There will always be incentives, he said, and we have to be competitive.

    The council unanimously approved a revision to the policy that recognizes down periods of economic activity. Then, it approved the extension of tax breaks to three companies that had not met all their performance goals. Passage was not unanimous in two cases, with some council members voting against the extension of the incentives. Dion Lefler’s reporting in the Wichita Eagle is at Wichita City Council eases rules on tax abatements.

    Analysis

    Contrary to the belief of the mayor, council members, and city hall bureaucrats, economic development incentives aren’t all they’re promoted to be. The state of Kansas spent some $1.3 billion on incentives over five years. In a recent report produced by the Kansas Legislative Division of Post Audit, one of the summary points is this: “Most studies of economic development incentives suggest these incentives don’t have a significant impact on economic growth.” See In Wichita, let’s have economic development for all for more on this report and a link to the document.

    There is an interesting academic paper titled The Failures of Economic Development Incentives, published in Journal of the American Planning Association. 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.

    On the surface of things, to the average person, it would seem that spending (or granting tax breaks, it’s the same thing) to attract new businesses makes a lot of sense. It’s a win-win deal, backers say. Everyone benefits. This is why it is so appealing to politicians. It lets them trumpet their achievements doing something that no one should reasonably disagree with. After all, who could be against jobs and prosperity? But the evidence that these schemes work is lacking, as this legislative audit and article show.

    I have suggested to the city council that a broad-based tax abatement on new capital investment could propel economic growth in Wichita. See Wichita universal tax exemption could propel growth.

    But a plan like this doesn’t give bureaucrats much to do, and gives politicians little to crow about to their constituents at election time. All it’s good for is the people who want economic growth.