Michael Hicks is is the George and Frances Ball Distinguished Professor of Economics and the director of the Center for Business and Economic Research at Ball State University. His column appears in Indiana newspapers.
It is a remarkable thing that more than a half-century following the demise of the Economic Base Theory, so much of Indiana’s local economic development policies continue to depend on it. To place it in intellectual context, imagine if our public health experts thought smoking was safe and seatbelts weren’t worth placing in automobiles. It is far past time to think differently.
Over the past half-century two major factors have come to explain differences in regional prosperity. Both are people-centric explanations. Economic growth research now almost exclusively counts human capital as the central factor explaining differences in prosperity among nations, states and regions.
Economists who study households, firms and cities find that something called agglomeration explains most differences in earnings between cities. This in turn benefits both workers and businesses. Agglomerations occur where there is a dense concentration of skilled and educated workers in a metropolitan area. This causes workers to be more productive due to better labor market matching and knowledge spillovers.
Differences in economic growth and their distribution within a region are almost wholly dependent upon the places people choose to live. Yet, in our rush to attract business, we divert some $1.5 billion per year from spending on people to spending on businesses. How has that worked for us?
In the places that most vigorously attract businesses and jobs, the benefit is effectively nil. When I think of hard-charging business attraction over the past few years, I think of Grant, Gibson, Delaware, and Elkhart counties. Yet, all these counties have more than enough jobs, and must import thousands of workers each day to fill the jobs they already have.
Their problem isn’t that they have too few jobs, but rather that the folks who hold those jobs don’t want to live in those counties. Business attraction in these places is a bonanza for those folks who work there, but want to live in surrounding counties with better schools, nicer communities and more amenities.
To be clear, there’s a strong argument for maintaining or expanding our business attraction efforts at the state and regional level. But, at the county and municipal level, it is simply a diversion of resources from the real work of attracting people to Indiana cities and towns.
The good news in all this is that in many places, Indiana leaders are focusing on attracting people. For the most part, the winners of the Regional Cities Initiative are doing just that, as are many other places. Still, this isn’t easy work, and Indiana’s local public finance system is not up to the task.
Indiana is facing the 21st century with a 19th century model of local government. It is costly, wasteful and ineffective. Townships alone consume hundreds of millions of dollars each year without benefit. It is time for a statewide debate on the future of Indiana’s local government. And to be clear, the problems with tax caps, school funding, roads and especially TIF are symptoms, not the cause of our problems.