Opinion and Economic Development and Taking Issue

KENNEDY: A cautionary tale about politics and policy

November 5, 2011

Sheila Suess KennedyHow did we get from enterprise zones to Litebox?

Back in my Hudnut administration days, I remember enthusiastic discussions about enterprise zones—a new tool promoted by then-congressman Jack Kemp to encourage investment in depressed areas of the city. The idea was to offer tax incentives to businesses that were willing to locate in such areas and hire the unemployed who lived there.

It was a great—if reality-challenged—idea.

It didn’t take long for Carmel and other affluent bedroom communities to begin competing for those employers by offering incentives of their own. I don’t know whether those original enterprise zones still exist, but I do know state and local governments are falling all over themselves to lure companies with ever-more-lavish inducements, courtesy of their taxpayers.

Which brings us to Litebox.

Amid great hoopla, Mayor Ballard and Gov. Daniels announced the award of major incentives to Litebox, a company promising to create 1,200 jobs. Its sole proprietor was a man who turned out not only to have no history of entrepreneurial or business success, but also multiple unpaid tax liens and judgments against him in several states.

The story makes vividly clear how slapdash the city’s vetting process has been, and how politically motivated the decision to announce this “job creation” success was. (Really, in the age of Google, this level of incompetence is incomprehensible.)

But the story makes a bigger point, albeit implicitly, about the entire policy of cities “buying” jobs by offering financial incentives to companies that promise to move and/or expand.

The obvious arguments against such efforts are familiar: It puts government in the position of helping some businesses but not others, which troubles those of us who believe in real markets; and it is a zero-sum game overall, since the company that moves from Ohio to Indiana is not creating more jobs—it is simply moving them from one place to another.

But the Litebox fiasco points up another problem with these programs. Even if competent people are running them, they are unlikely to know enough about the technologies and economic realities to make truly informed decisions.

The same technological and cultural changes that increasingly challenge tech businesses and that make investment decisions risky even for savvy and highly knowledgeable experts make it virtually impossible for government officials to accurately gauge the viability of tech business deals. (In this case, reporters quoted industry sources who pointed to “ridiculous” assumptions in the Litebox business plan, but in most cases, the miscalculations are more difficult to spot.)

As a recent Indianapolis Star article reported, citing several examples, even companies with sound performance histories and none of the obvious red flags that were ignored in the Litebox example routinely fail to deliver the jobs promised.

When you add in the inevitable politics involved—the temptations of cronyism, the huge pressures to score political points, to look like you are delivering on your campaign promises—it’s no wonder the jobs frequently don’t materialize.

It’s long past time to re-examine these programs and the policy assumptions. It was probably inevitable that the use of tax and other incentives would not be limited to truly depressed areas; I was among those who failed to appreciate that inevitability.

Here’s a truly radical suggestion: What if we took the tax dollars that are siphoned off to these favored businesses and used them to create a city people want to live in?

What if we decided to compete not with handouts, but with a superior quality of life?•

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Kennedy is a professor of law and public policy at the School of Public and Environmental Affairs at IUPUI. Her column appears monthly. She blogs regularly at www.sheilakennedy.net. She can be reached at skennedy@ibj.com.

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