Industrial planning manufactures a false sense of accomplishment
Earlier this month Site Selection magazine awarded its grand prize to Ohio for being the state with the most major business expansions in 2011 at 498 projects. The runner-up was Texas with 464 such projects. As might be expected, Ohio officials, including Mark Kvamme as head of Governor Kasich’s JobsOhio program, declared the victory a vindication of their efforts and suggested Ohio would remain a leader in attracting major expansions and new businesses, thereby producing good job growth for Ohioans.
Hopefully, this claim will prove prophetic as time progresses, though the outcome is far from certain. For many years both Republicans and Democrats have followed a policy often dubbed “industrial planning” which attempts to identify businesses — or perhaps business sectors — which are judged to provide good opportunities for growth over time. Then, in an attempt to take advantage of this supposed information about future winners/losers, government officials provide incentives to the chosen few in an effort to spur desired economic development and job creation.
All-in-all, industrial planning activities always seems to sound wonderful to politicians, regardless of party affiliation, and it may seem as though the success cited above confirms the wisdom of such policies. But then again, perhaps such efforts are counterproductive in the long run and may well hinder aggregate job creation.
As a possible counter-weight to the above favorable ranking, it might be instructive to examine what may be a more comprehensive comparison of Ohio’s competitive stature relative to other states. According to the Tax Foundation, Ohio ranked the 39th worst state in terms of business tax burdens last year. This was the second consecutive year in this unenviable position, and gave Ohio the dubious distinction of being the least attractive Midwest state.
Given such a poor ranking, one might wonder if engaging in industrial planning — with the favorable tax treatment provided to the chosen “winners” — would move Ohio into the ranks of the more business-friendly states. On this matter, the Tax Foundation made it clear that favorable tax treatments via abatements and the like are not the answer. “Lawmakers create these deals under the banner of job creation and economic development, but the truth is that if a state needs to offer such packages, it is most likely covering for a woeful business tax climate.”
What’s more, one has to wonder just how much mileage Ohio taxpayers really get out of net job creation relative to other uses of these tax monies, and the ability of government to assess such factors objectively. Consider the recent case of Sears. In an effort to attract the retailer’s headquarters into Ohio, a reported $400 million in incentives would have been provided. According to some secret formula developed by the Kasich administration, the investment would be “repaid” in approximately two years and Ohio would become a net winner.
Since that time, Sears has decided to stay in Illinois, perhaps to the benefit of Ohio given announcements of additional Sears and Kmart store closings and the total shut-down of the (modest) Great Indoors division. Were these developments factored into the calculations? How would an advanced knowledge of this have changed the offering? What if such unfavorable — and unanticipated — outcomes occur in the future with government-chosen (but consumer-rejected) selections?
Over the long haul, it may well be better for politicians of all stripes to simply control their instincts to suppose they can select winners and losers. Far better may be to provide the lowest business tax environment possible for everyone, regardless of size and/or sector of the economy within which businesses operate.
In the final analysis, whatever the source of funds (including state liquor sales) needed to provide added tax incentives to a favored enterprise to create that boatload of new jobs every administration desires to trumpet from the mountaintops, someone else — very often smaller, already established businesses — will suffer.
And when considering new employment opportunities, small businesses are almost always the major engine of job creation. As well, in terms of job availability over time, it is vitally important to realize that the only jobs Ohioans can lose are those that already exist. So for net job creation, perhaps government should concentrate on keeping (via a favorable tax treatment for everyone) the jobs that already exist before moving on to attracting new business opportunities. It may not be glamorous or create big headlines, but such actions may serve Ohio’s job holders/seekers much better as time progresses.
Dr. James Newton serves as chief economic advisor to Commerce National Bank and is an auxiliary faculty member in economics and statistics at OSU Marion and OSU Newark. Dr. Newton’s views do not necessarily reflect those of Commerce National Bank or OSU-Marion/Newark.