Do targeted economic development deals work as advertised?

Every so often, journalists write quid pro quo stories about government officials who accept favors (campaign donations, sports tickets, airplane rides, etc.) from people who stand to benefit from government-granted privileges (special tax deals, subsidies, favorable government contracts, etc.).

Like this report in the Post this weekend, most of these stories seem to nudge the reader in the direction of thinking that the solution is more regulation of campaign activity or more oversight of gifts to politicians. My question is: why focus exclusively on the gifts that politicians receive instead of on the privileges that politicians dispense? Why focus on the quid and not the quo?

That’s where a five part series by WAMU’s Julie Patel and Patrick Madden comes in. They are only two stories in, but it is shaping up to be an excellent critique of the entire practice of local economic development privileges:

Construction cranes can be seen throughout the district. Less visible are the symbiotic relationships between land developers and city officials awarding tax breaks and discounted land deals. Those government subsidies are meant to revive neighborhoods, and to create jobs and affordable housing. But in some cases, the benefits never materialized, or the subsidies simply weren’t needed.

And what began as a targeted economic development tool now looks to some like government hand outs that could have paid for other city services.

Appropriately, Patel and Madden plumb the data to look for insider deals and conflicts of interest. But their analysis seems to go beyond that. In tomorrow’s segment, for example, they plan to look at whether targeted economic development tools work as advertised:

Developers receiving subsidies pledge jobs, affordable housing and other benefits for D.C. residents. Yet with little oversight and enforcement, many of the promises were downsized, delayed or broken.

Another intrepid reporter who recently asked this question is Louise Story of the New York Times. She and her team “spent 10 months investigating business incentives awarded by hundreds of cities, counties and states” and assembled a unique database along the way.

If local subsidies worked as advertised, we’d expect to see greater economic growth in those states that give away more subsidies. But simple analysis of Story’s data suggests that, if anything, there is a negative relationship between per capita subsidies and economic growth:

Subsidies and growth

In this graph, the x-axis plots per capita subsidies and the y-axis plots real (inflation-adjusted) state economic growth from 1997 to 2011 (the general time period over which Story has data).

I also ran a series of econometric tests, sometimes controlling for other factors (regional effects, the initial size of state economies, and economic freedom) and sometimes not. In every test I ran, per capita subsidies were negatively associated with state economic growth and often the relationship was statistically significant (I should note that the Mercatus measure of economic freedom was always positively and statistically significantly related to growth).

I’ll be the first to admit that this is a back-of-the-envelope exercise (for example I do not try to control for reverse causality). I hope to see more careful research based on Story’s database soon. But based on what I’ve seen so far, I see no reason to presume that local, targeted economic development schemes work as advertised.

Given the social and economic problems associated with government-granted privileges, I think we should view such schemes with a healthy dose of skepticism.