Can Government Change a Region’s Growth Path?

1. Can Government Change a Region’s Growth Path? Chapter 11

2. Government’s role in theory • Economic base model • Government spending needed to alleviate recessions • Neoclassical model • Government spending crowds out private investment, or • Boosts one economy at the expense of another • Endogenous growth model • Provides necessary public goods to promote growth (education, infrastructure, property rights enforcement)

3. Why government? • Redistribute income • Provide public goods • Administer fiscal policy programs

4. Equity and efficiency • Allocative efficiency • Technical efficiency • Distributional efficiency • Pareto Optimality—optimal solution exists when nobody can improve their situation without harming another.

5. Investments in public capital • Highways • Construction phase (direct, indirect, induced effects) • Post-construction phase • Facilitates mobility of inputs, output, consumers and labor • Problem: roads go both ways. • Customers outside workers can drive away more easily • Local residents and workers can drive away more easily • Good roads do not guarantee rural growth, but bad roads guarantee the area will stagnate.

6. Decreased transportation costs from trade between two cities

7. Bid-Rent function with decreased transport costs for agriculture

8. Investments in public capital • Education • Parental migration effect for K-12 • Good quality labor force in 4-9 years • Possible brain drain if more graduates attend college and do not return • No guarantee investment will help local area • Poor quality schools guaranteed to harm area since adults with low investment in education generally do not migrate.

9. Investments in public capital • Telecommunications Infrastructure • Crucial for rural development • Complementary to transportation infrastructure, but can’t substitute for it

10. Government R&D • Infratechnology—standardization • Federal or international level • Research university • Firms can access future employees • Potential collaboration with faculty: but confidentiality? • Spillovers from academic research

11. Growth through consumption? • Tourism • Direct, indirect induced impacts • Creates jobs: • Low pay, low productivity, possibly seasonal, • Secondary labor market • Intense competition for repeat visitors • Larger city/county budget for police, fire, … • Is the provision of a tourist destination nonrival or nonexcludable?

12. Growth through consumption? • Arts • May attract professionals and skilled workers • Low employment multiplier (1.3 to 1.5) • Merit goods—is this a role for government? • Creates jobs: • Low pay, low productivity, possibly seasonal, • Many from the secondary labor market

13. Growth through consumption? • Sports teams and Stadiums • Often impede economic development • Redistributes households’ entertainment budgets • Fewer local linkages than other entertainment venues mean a smaller multiplier. • Stadiums and teams are subsidized because of politics, not economics • Creates jobs: • Low pay, low productivity, seasonal, • Many from the secondary labor market

14. Growth through consumption? • Casinos • Redistribute entertainment budgets if less than half the gamblers come from outside the region. • Best locations • Isolated areas near large cities • Next to a state that prohibits gaming • Creates jobs: • Often higher pay than local alternative • Few backward linkages so multiplier is small.

15. Growth through consumption? • Outdoor Recreation Activities • Outside expenditures negligible (everyone packs at home for their camping trip) • No empirical evidence of associated employment growth • Agritourism (Bed & Breakfast, Dude Ranches) bring in extra revenue to farmers.

16. Growth through consumption? • Retirees • Pandora’s box more than panacea • Stable source of spending from young, healthy retirees on fixed incomes • Countercyclical effect if incomes based on stock market/interest rates • Creates jobs • Low paying, retail, service jobs • High-paying industrial or resource-based jobs eschewed in favor of natural amenities • May outlive their assets and depend on community for support.

17. Economic Development Policy • Resembles Cargo Cults of Pacific (WWII) • Waves of Economic Development • 1930s: Smoke stack chasing, beggar thy neighbor strategies for relocating firms • 1980s: Target start-ups, offer business services, business incubators, fragmented, unorganized • 1990s: Government as catalyst, uses holistic approach

18. Controversial legacy • Create regions reliant on government transfers • Interstate analysis tricky because tax law and fiscal policies vary among states • Policies from subsequent waves added to economic development tools, economic development data hard to access • Surveys used to see if firm would have located without government subsidy: Are these reliable?

19. Controversial legacy (concl) • Subsidies for capital expenditure—but capital and labor are often substitute goods. How does this “create” jobs? • Subsidies of inefficient firms merely prolong their death. • Subsidizing the financing or interest rates of the firm not necessary unless business is extremely risky. • Financial markets work. • Should tax money create jobs in a risky industry?

20. Economic development incentive tools • Tax abatement policies • Empirically little evidence that taxes or subsidies influence location of high-tech or service firms • Supposedly counteracts high crime rates or high tax rates (but the land market does that) • Inefficient tax price of public goods for residential taxpayers • Spatial equity concerns: rural or low-income areas subsidize urban areas • Cost-benefit analysis seldom includes opportunity cost of funds • Awarded arbitrary, often upon request

21. Tax Increment Financing (TIF) • Urban revitalization tool, but urban areas don’t always need to show unemployment problems • Small firms and residents may have to relocate to make room for TIF district • City uses tax revenues paid by a firm to directly assist that firm • Allows cities to avoid red tape required to get intergovernmental aid • No need for voter approval

22. Tax Increment Financing (TIF) • Spatial equity concerns: rural or low-income areas subsidize urban areas • Overlapping jurisdictions (school districts) lose tax base within the district • Offers nothing to existing businesses and residents • Blighted areas may grow at the expense of the rest of the state • Geographic substitution

23. Enterprise Zones • Zones within which firms face fewer restrictions and lower taxes • Firms have lower production costs and more freedom to innovate • Main beneficiaries: landowners, building contractors

24. Enterprise Zones • Firms may just relocate short distances to participate in the EZs • Backward linkages diverted from initially viable region • Lower tax revenues mean higher taxes elsewhere or less government spending • On average local governments in US lose $59,000 for every job created with an EZ.

25. Arms race between the states • Officials feel a need to do something to help the poor • Beneficiaries easily identified • Cost per taxpayer relatively small • Negative effect on lowest 20% of income distribution when such programs are often funded with reduced social programs or increased income taxes.

26. In favor of local competition • If it enhances efficiency • Can create agglomeration economies • Can increase use of local public goods and decrease the average cost of using them • New jobs help retain young adult population

27. Against local competition • Specifically contentious if competition is aimed at specific firms • Leads to inadequate levels of public goods and services or higher taxes for same services • Firms often do not generate the advertised number of jobs (winner’s curse) • Prisoner’s dilemma game among states • Net benefits spiral downward • Federal Tax of 100% on all benefits? (Rolnick, 2000)

28. Appendix: Measuring an Area’s Economic Welfare

29. Measuring an Area’s Economic Welfare

30. Sazama’s index of inequality where t is the specific year, i is the category (gender, race, etc., if any), q is the income quintile and Piqt is the percentage of people in each category of the income quintile q during year t. The smaller the index, the less is the inequality

31. Net Migration