Economic development policy should put people first

Conventional wisdom says that tax breaks and other incentives are the drivers in state and local development and that their availability and size are the key determinates of business location decisions. Yet, is this true? Most reliable studies of these issues have found that qualified workers, proximity to customers, good public services, a modern infrastructure, and local amenities are more important to most business decision makers – whether they be a new entrepreneur, an existing firm, or a branch plant seeking a more profitable location.

Indeed, a number of new reputable studies reinforce the point of the view that it's people, not finance capital that is most critical to stimulating economic development today. Let's look at two examples.

First, a paper, published by the Federal Reserve Bank of Cleveland, discovered that "real average U.S. per capita income growth over the last 65 years exceeded 400 percent." The authors controlled for factors that other economists had argued mattered, such as: tax burdens, public infrastructure, size of private financial markets, rates of business failure, industry structure, weather, and knowledge "stocks." Their major finding was that "a state's knowledge stocks as measured by its stock of patents and its high school and college attainment rates" largely account for a state's relative per capita personal income.

As for other potential influences, infrastructure has a small positive effect, a higher proportion of manufacturing and mining has negative impacts, and tax burdens seem largely irrelevant. The negative effects of taxation are offset by the positive effects of public investment and services. In other words, when it comes to building your economy, smart people trump low taxes.

A second study commissioned by the Cleveland Fed and undertaken by the Upjohn Institute for Employment Research had comparable findings. The report, "Dashboard Indicators for the Northeast Ohio Economy", indicates that a skilled workforce is the most important element. Immigration is also a positive factor, especially if steps are taken to assure rapid assimilation, including: language training, financial literacy, help with business development, education, workplace training, and others. The degree of racial inclusion mattered too.

Other findings include:

Communities fare better when their populations is not overly dispersed. This aids both rich and poor by discouraging discord, sprawl, market shrinkage, and a collapse of the central city economy.

Less fragmented governmental structures promote regional growth.

A lot of "churning" – high rates of business startups and closings, lots of small business activity – positively affect job creation, but has a negative effect on productivity and does not influence per capita income growth.

Patent rates are a large positive economic driver as well.

On the negative side, a high proportion of mature industries, an older infrastructure, crime, loss of or lower rates of population growth are negative "legacy" issues that must be addressed.

In short, while there is no single "magic bullet" in when it comes to economic development, there are several important steps that place like North Carolina can and should take. These include:

  • Expanding our efforts in research and development;
  • Helping entrepreneurs "commercialize" their inventions;
  • Launching a statewide campaign to change public perceptions and behavior regarding post-secondary education and lifelong learning;
  • Fostering a talented workforce that matches the occupational mix;
  • Investing in continuing education for adults and children of all ages.
  • Lowering the dropout rate;
  • Integrating and strengthening our financial aid programs so that they, along with federal assistance enable all low-income students to attend any public college for up to four years;
  • Experimenting with new methods of re-integrating ex-offenders into the economy upon their return from prison;
  • Exploring on-line education options for adult learners;
  • Adopting and adapting new managerial strategies for running high skilled, high performance workplaces and sharing financially the benefits from increased productivity, innovation, flexibility, and worker commitment; and
  • Lowering the transaction costs of doing the public's business by encouraging more effective collaboration between all the public, private, and nonprofit sectors and all jurisdictions in the name of the greater good.

In sum, we must encourage entrepreneurship and investments in new ideas, products, services, and ventures without neglecting the "social" agenda – workforce development, increased access for all to a good education (including post-secondary), and an abundance of community amity.

It is not enough to promote investment in a community. In many cases, this will make little difference. What's more important is developing the community by building its assets and marshalling its people power.

William Schweke works in the Durham office of the national policy think tank, Prosperity Now

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