3. Justifying economic development
Most people understand economic development as creating more jobs. But how do benefits derive from more jobs?
Two models; public benefit and private benefit
Eisinger provides schematics; they look like feedback loops (they are feedback loops)
Private Benefit Model:
Increased Private Investment (possibly as a result of govt policy)
creates New Jobs
which result in Lower Unemployment, Reduced Poverty, and/or Higher Personal Incomes
which result in Increased Demand for Goods and Services
which result in Increased Private Investment (and you are back at the beginning.)
Public Benefit Model:
Increased Private Investment (possibly as a result of govt policy)
creates New Jobs and Increased Taxable Capital Stock
which results in a Larger Tax Base
which either
Increases Tax Revenues producing Better Public Services and Amenities
which leads to Increased Private Investment
or (The Larger Tax Base)
allows a Reduction in Tax Rates
which leads to Increased Private Investment
He notes that political rhetoric is often an amalgamation of the two models; indeed the models aren't mutually exclusive.
But real life often isn't as neat as the models.
They might suffer form slippage. The increased demand in the private benefit model may be directed outside the jursidiction. In the public benefit model, investors may not be aware of the advantages of the community and locate elswhere. [I'd add that the community may subsidize a firm that would have located there anyway.]
Also, the community may have other problems (high crime, poor infrastructure, etc.) that inhibit investment even with incentives.
Growth vs Development
He points out that just counting the number of new jobs doesn't tell you much. What sort of jobs are they? [Courant provides a more complete treatment of the "just don't count jobs" issue.]
He points out that high-wage, high-skill jobs (i.e. "good" jobs) provide more benefit to the community. He makes a case for development as being selective about the sort of jobs you seek for the community. [I think Flammang provides a more complete discussion of the difference in growth and development. Eisinger touches on the quantitative/qualitative dichotomy but doesn't quite fully develop it.]
Empirical basis of the models
Eisinger presents empircal research that's different that what I've seen. He does bivariate correlations between measures of adjacent steps in the models. He finds mostly significant correlations of the expected sign. Look at the figures.
Costs of development
He points out that development (or growth) often means inmigration of people and the atendent costs of population increase. There are fiscal effects, public service degradation, congestion, etc.
[He touches on the issue of whether people follow jobs or vice versa.]
He notes that officials often don't acknowledge the costs.
Decline-distress model
This is the flip-side of the benefit models. Economic development policy, rather than bringing prosperity, may be used to fight off disinvestment, capital flight, and outmigration.
Decline-distress has both private and public costs.
Private costs include the alienation and loss of esteem that comes with job loss. He discusses the difference in cyclical unemployment that will go away when the recession is over, and dislocation or displacement, which is structural unemployment caused by restructuring of the economy. Structural unemployment is a bigger problem.
Displacement tends more to be concentrated in regions, making it more of a target for state or local policies.
Of course, the public costs of decline include increased expenses for welfare, unemployment payments, etc.
In conclusion, he points out that all the models share the feature that the path to well-being is exclusively through the private sector. Neither the creation of public employment nor the socialization of industry are valid alternatives.
Eisinger, P.K. (1988). The Rise of the Entrepreneurial State: State and Local Economic Development Policy in the United States. Madison, WI: University of Wisconsin Press.
Posted by Chip on July 13, 2004 at 08:02 PM | TrackBack