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.

Posted by Jim Newton on Mar 14 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.