Incentives Won’t Create Jobs

The following article appeared in the Sunday September 16, 2007, edition of the Fayetteville Observer newspaper.

Can state bureaucrats plan and grow the economy better than the market?

This question lies at the heart of last week’s special session, which saw the General Assembly approve a new bill that will send tax dollars to existing North Carolina companies meeting specified criteria. The largest recipient of the approved incentive package is expected to be Fayetteville’s Goodyear plant, with as many as five more corporations lining up to receive cash payments.

The special session created the perfect opportunity to examine the practice of government-sponsored economic incentives to stimulate job growth. So, is it a good idea?

Jim Fain, commerce secretary for North Carolina, expressed his support for incentives in a recent USA Today article, “A well-thought-out portfolio of incentives is vital to being competitive for quality projects.” Furthermore, supporters of “economic development” policies say incentives are crucial to attracting and keeping jobs and growing a state’s economy. The prevailing attitude among lawmakers seems to be, “if everyone else is doing it, so should we.” 

To the contrary, economic incentives make for bad policy no matter how you package them. Ample studies show that “economic development” incentives have no lasting positive effect on a local economy.

Fayetteville residents should take note of Memphis, Tenn., which has aggressively used tax incentives in an attempt to create jobs. For 18 years the city’s program offered property tax exemptions to select companies adding jobs in the city. The result? A study by George Mason University’s Mercatus Center revealed that Memphis’ unemployment rate ballooned from the national average in 1990 to 7 percent in 2006 — two full percentage points above the national average. Furthermore, the poverty rate in Memphis grew to 21.5 percent, twice the national average.

Why is it that economic incentives are inherently doomed to failure? The primary culprit is what economists call the “knowledge problem.” 

In his classic essay “Individualism and Economic Order,” Nobel Prize-winning economist F.A. Hayek tackled perhaps the most fatal flaw of central economic planning. As Hayek saw it, possibly the greatest single point that separates free-market advocates and those that favor strong government intervention in the economy is a “dispute about whether planning is to be done centrally, by one authority for the whole economic system, or is to be divided among many individuals.” This sentiment was a perfect summary of the current contrast between economic incentive supporters and critics.

Hayek argued that the sea of knowledge necessary to grow the economy and create value for society simply can not be held by any individual, or even a committee of lawmakers. Rather, such knowledge is dispersed among millions of individual actors making decisions that affect their own interests. When lawmakers intervene in the economy in an attempt to add jobs, they are delving into a complex system that involves literally millions of varied priorities, needs and outlooks contained in the collective — yet dispersed — knowledge of consumers and entrepreneurs.

History has proven that no single set of politicians can adequately discover all the ways in which the dynamic economy should move and evolve in order to create the greatest level of prosperity. When market decisions are made by a small group of planners, wealth is destroyed because their decisions will inevitably be inferior as a result of the knowledge problem. 

The motivation of those supporting the Goodyear package or economic incentives in general is understandable. But Fayetteville residents be warned: Communities seeking to expand their “economic development” efforts, relying on government officials to properly steer your economy in the right direction, has proven to be fool’s gold.
Economic incentives involve politicians typically acting with good intentions, but suffering from the arrogance of their power. No amount of heartfelt desire on behalf of government officials to “create jobs that otherwise wouldn’t exist” can overcome the knowledge problem inherent in central planning. 

The most proven recipe for improving societal wealth is based upon allowing individuals to freely coordinate mutually beneficial exchange based on their localized knowledge, not empowering government bureaucrats with expanding authority to subvert market forces. 

Never mind the fact that incentive packages make it easier for legislators to avoid making the more difficult reforms necessary to truly improve our state’s economy.

True economic growth in North Carolina will come from low tax rates applied evenly across the board. Instead of undertaking the impossible task of directing the state’s economy via handouts to favored corporations, lawmakers in North Carolina should end the incentives game and focus on removing the barriers to entrepreneurship, thus freeing the market to create sustainable economic growth and job creation.

Brian Balfour is a policy analyst with the Civitas Institute of Raleigh.