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Hicks: Traditional economic development doesn't work

September 20, 2014

Economic development is big business, with Indiana communities spending perhaps a billion dollars on operations, incentives, abatements and infrastructure spending. Anything this big needs serious research.

The Great Depression brought us modern economic development. From the 1930s to the 1970s, about half of American counties and cities started an earnest effort to attract businesses.

There is some evidence it was modestly successful in the early days. That shouldn’t be too surprising, since in the 1930s maybe half of jobs were in businesses that could be lured to a new town with enough cash. But the world changed.

By 1990, nearly everyone had an economic development team, but by then fewer than one in five jobs were footloose in the sense they could choose a place of business untethered to local demand for the good or service they produced.

Over the past quarter century, the share of jobs in footloose firms has dropped to under 5 percent, maybe much less. The average size of firms has plummeted, and scarcely 150 new large manufacturing establishments (500-plus workers) open each year.

The sum of all these facts is that the cost of luring a firm to town has skyrocketed, while the benefits have plummeted. The United States has created more than 90 million net new jobs over the past 45 years, but fewer “attractable” jobs are available today than in 1969. Yet, communities throughout Indiana continue to pour money into attracting those jobs.

Understanding why there are so few of the jobs in our economy is important. As we get richer, we spend more on services such as entertainment, health care and the like, and less on manufactured goods. Add to that the automation in factories and the result is far fewer businesses with fewer employees who could be lured to our state.

So what makes rich places rich and poor places poor? With almost all jobs tied to local demand for goods and services, most workers can choose to live anywhere they wish. That makes attracting people, not business, the successful strategy. Places with great schools; nice, safe neighborhoods; and good recreational opportunities attract more people.

That is what makes places rich. Not having these attributes makes them poor. It is just about that simple.

Traditional business attraction efforts at the local level have not made Hoosiers better off. Smart mayors and county leaders know this and are shifting policies.

Still, it isn’t necessary that every Indiana community modernize its economic development efforts. Just the ones that want to grow.•

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Hicks is the George and Frances Ball distinguished professor of economics and director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

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