In December 2010, the State of Kansas, City of Wichita, and Sedgwick County teamed to offer economic development incentives to Wichita-based Hawker Beechcraft. The incentives were offered not to create new jobs, but to retain existing jobs.
Economic development officials took credit for saving 4,000 jobs. Now that Hawker employment has fallen to 3,372, will we update our economic development scorecard?
Past practice suggests we won’t. I can imagine officials arguing that after all, these jobs were preserved for between one and two years. Also, the amount of subsidy Hawker will receive is trimmed a little as a result of the reduced employment.
In his State of the City address in January 2011, just after the Hawker deal was reached, Wichita Mayor Carl Brewer told the audience that “We responded to the realities of the new economy by protecting and stabilizing jobs in the aviation industry.”
Later he added “The deal with Hawker Beechcraft announced last December keeps at least 4,000 jobs and all existing product lines in Wichita until at least 2020.”
Well, not quite. Now there are 15.7 percent fewer jobs than the mayor promised. The news that Hawker will shed its business jet line means the loss of a product line, and probably more lost jobs.
There’s no joy in reporting this news. People have been hurt. Investors have lost money. Sadly, it’s quite certain that Wichita will not learn from this sad news, as Mayor Brewer and others want to double down on the strategy of targeted economic development investment. Brewer called for a dedicated funding source for this in his State of the City address delivered yesterday.
The danger we in Kansas, and specifically the Wichita area, face is the overwhelming urge of politicians to be seen doing something. We see this now in the call for more spending on economic development. In response to the departure of Boeing last year, Brewer called for the community to “launch an aggressive campaign of job recruitment and retention.”
It is likely that we will become susceptible to large-scale government interventions in an attempt to gain new jobs or retain what we have. But our best course would be to take steps to make Kansas and Wichita an inviting place for all firms to do business. The instinct of politicians such as Brewer, however, is to take action, usually in the form of targeted incentives to spur economic development.
We’ve seen the disappointing results — not only with Hawker and Boeing, but also in a report showing that Wichita has declined in economic performance compared to other areas.
There’s other evidence that Wichita is not growing and prospering, compared to other cities: “The inflation-adjusted gross domestic product for the Wichita metro area declined 0.4 percent in 2010, according to initial estimates from the federal Bureau of Economic Analysis. The decline slowed from the year before, when this measure of economic growth plummeted by 7.7 percent. … Wichita’s decline came even as GDP grew by 2.5 percent nationwide in 2010. GDP increased in 304 of 366 metro areas nationwide.” (Wichita Business Journal, Wichita’s real GDP declined in 2010 amid national recovery, database shows.)
For those who prefer pictures, charts here and here illustrate.
The targeted economic development efforts that Wichita uses fail for several reasons. First is the knowledge problem, in that government simply does not know which companies are worthy of public investment. This, however, does not stop governments from creating policies for the awarding of incentives. It also doesn’t stop the awarding of incentives willy-nilly without a policy, as the Wichita City Council has done for a hotel.
This “active investor” approach to economic development is what has led to Boeing and other companies escaping hundreds of millions in taxes — taxes that others have to pay. That has a harmful effect on other business, both existing and those that wish to form.
Professor Art Hall of the Center for Applied Economics at the Kansas University School of Business is critical of this approach to economic development. In his paper Embracing Dynamism: The Next Phase in Kansas Economic Development Policy, Hall quotes Alan Peters and Peter Fisher: “The most fundamental problem is that many public officials appear to believe that they can influence the course of their state and 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 expectations about their ability to micro-manage economic growth and making the case for a more sensible view of the role of government — providing foundations for growth through sound fiscal practices, quality public infrastructure, and good education systems — and then letting the economy take care of itself.”
In the same paper, Hall writes this regarding “benchmarking” — the bidding wars for large employers that Wichita is sure to undertake in response to the loss of Boeing: “Kansas can break out of the benchmarking race by developing a strategy built on embracing dynamism. Such a strategy, far from losing opportunity, can distinguish itself by building unique capabilities that create a different mix of value that can enhance the probability of long-term economic success through enhanced opportunity. Embracing dynamism can change how Kansas plays the game.”
In making his argument, Hall cites research on the futility of chasing large employers as an economic development strategy: “Large-employer businesses have no measurable net economic effect on local economies when properly measured. To quote from the most comprehensive study: ‘The primary finding is that the location of a large firm has no measurable net economic effect on local economies when the entire dynamic of location effects is taken into account. Thus, the siting of large firms that are the target of aggressive recruitment efforts fails to create positive private sector gains and likely does not generate significant public revenue gains either.'”
There is also substantial research that is it young firms — distinguished from small business in general — that are the engine of economic growth for the future. We can’t detect which of the young firms will blossom into major success — or even small-scale successes. The only way to nurture them is through economic policies that all companies can benefit from. Reducing tax rates is an example of such a policy. Abating taxes for specific companies through programs like IRBs is an example of precisely the wrong policy.
We need to move away from economic development based on this active investor approach. We need to advocate for policies — at Wichita City Hall, at the Sedgwick County Commission, and at the Kansas Statehouse — that lead to sustainable economic development. We need political leaders who have the wisdom to realize this, and the courage to act appropriately. Which is to say, to not act in most circumstances.