Four Reasons State Industrial Policy Fails

In previous posts I have noted that there is quite a bit of empirical evidence to show that economic development programs fall far short of expectations.  There are four reasons to which I would point (though this is by no means a comprehensive list).

1.       The Knowledge Problem. Regardless of their good intentions, bright central planners simply cannot possess the knowledge that is necessary to sort winners from losers in the marketplace. At least not in a way that consistently produce a result superior than simply leaving everyone alone.

 

2.       The Takings Problem. In order for government to give something to someone it must first take it from someone else. If I robbed a bank in Lansing and spent the loot at a mall in Oakland County, would the Michigan Economic Development Corporation issue a press release celebrating the increase in retail sales, new direct jobs, spin-off jobs and new income to the state treasury that would result? Of course not, they would appropriately recognize that some people had to lose in order that others may gain.

 

3.       The Horse Problem. When the legislature creates a department for the purpose of administering selective favors to its “winners” it is effectively trying to feed sparrows through a horse. Why force beautiful birds to pick through the substance left by horses after they’ve been fed and processed the meals? The horse (is of course) the government agency. My point here is that the bureaucracies that conceive, staff and maintain these programs don’t work for free and they certainly don’t raise their money by asking nicely or selling Girl Scout cookies. The money they take through taxation simply to run the jobs bureaucracy harms the very economy they wish to help.

 

4.       The Beaker Problem.  Remember Jim Henson’s Muppet Show? Beaker was the lab assistant who was routinely being terrified by his obtuse colleague and boss, Dr Bunsen Honeydew. There was a total disconnect between the actions of the chief scientist and the fear Beaker felt. It was obvious who felt the sting of experiments gone awry. That’s how state and local economic development investments work. The costs of bad decisions do not fall directly on those making them, so what reason do they have to care for the resources in the most prudent manner?

 

When state legislators vote to appropriate $30 million* for tourism spending or other development programs, there is a total disconnect between those who earn that money and those who enjoy the benefits of the additional spending.  I wonder if the Michigan Economic Growth Authority would have chosen to give K mart Corp. a third incentive deal while it was in bankruptcy if the personal wealth of MEGA members was tied to the performance of the company receiving the favors.

Comments

[Nick]

Yeah, but c'mon... without the state getting involved and redistributing wealth we wouldn't have "cool cities!"

--Nick
www.RightMichigan.com

[JGillman]

Picking the winners and losers. One of the reasons I testified against the film credit plan at a hearing in Traverse City.

While the Michigan government sees itself as an instrument of benevolent job creation in that [FILM] industry it contradicts itself in its punishing of business which already provides the real long term employment ANY economy is founded upon.

Clueless. Anyhow good post.