St. Louis Should Eliminate Its Economic Development Agencies

A version of this commentary appeared in the St. Louis Business Journal.

In July 2010, Missouri politicians joined the state’s economic development agency to announce the awarding of $17 million in state tax incentives, along with $39 million in local tax subsidies, to the Mamtek project in Moberly. The project called for making artificial sweetener using a process that would start in China and finish at a new plant in Moberly, creating 600 local jobs here. There was just one problem—it was all a scam.

It may seem unfair of me to criticize a government agency for falling victim to a criminal conspiracy, albeit one that really wasn’t that sophisticated, but government economic development agencies are a catch-22 for taxpayers. When they do a bad job—as they did in Mamtek—they waste our tax money. As with the St. Louis Marketplace or the Olde Towne Plaza in Ballwin, we can list plenty of private business projects government had no reason to get involved in but did, to the detriment of taxpayers. But we can only wish they always did a bad job. It’s when they do their jobs right that taxpayers and average citizens really get burned.

When economic development officials do their jobs right, all they are really doing is subsidizing economic activity that likely would have happened anyway for the benefit of politically connected companies. As the old joke goes, economic development officials are great at creating jobs for other economic development officials. For everyone else, not so much. For all their skillful use of political buzzwords and claiming credit when none is deserved, it remains true that “government is a bad venture capitalist,” to quote President Obama’s economic advisor, Larry Summers. Summers was being polite. Government, in the form of local, state, and federal economic development agencies, is a terrible venture capitalist. It’s not that government officials don’t get their bets right often enough; it’s that they actively get them wrong because economic development officials are heavily influenced by the political incentives to reward supporters of the politicians who employ them. A short-term political payoff is more important than long-term success.

St. Louis Mayor Tishaura Jones came into office two years ago pledging to make changes to the city’s economic development process. To a small degree, her administration has reduced the subsidies it is giving out to companies, and for that she deserves credit. But they also figured out a way to somehow make a bad process even worse by imposing an “economic justice” imperative on it. So now, instead of listening to development officials fabricate how their corporate welfare led to jobs, growth, and so on, we get the additional pleasure of hearing how tax subsidies lead to more “equity.” Death can’t come fast enough.

Economist Dick Netzer mocked the exaggerated claims of success made by economic development officials when he wrote, “Who needs oil wells, when a state can be another Kuwait just by increasing the budget of a tiny agency?” Claims of subsidy successes often border on the absurd. The author once heard a Clay County economic development official claim that “All of the growth” in the town of Liberty—a fast growing, suburban community north of Kansas City, the likes of which have been growing across the nation for decades—was due to a tax-increment financing (TIF) package they passed. Chesterfield officials talk about the Valley TIF there in much the same way, as if suburbanization hadn’t existed until Missouri’s TIF law was passed in the late 1980s.

The self-aggrandizement of the economic development industry would be understandable if the system worked, but it doesn’t. The East-West Gateway Council of Governments (EWG) did a major study of TIF and other subsidies a decade ago and concluded that they created one job for every $370,000 in tax subsidies. That is a terrible return on the subsidy, as EWG stated. Economists Alan Peters and Peter Fisher studied tax incentives closely and concluded that they work about 10 percent of the time and are simply a waste of money the other 90 percent. They added that, like the Clay County officials mentioned above, economic development officials often credit all new employment and growth to tax subsidies. Yet our region continues to pass out tax subsidies like other people’s candy, evidenced by the atrocious decision of the St. Louis County TIF commission to approve $300 million in subsidies for the “blighted” part of Chesterfield just last month.

If we really wanted to help our community grow, residents of the St. Louis-area could get no better gift than the elimination of state and local economic development agencies. They are a blight on capitalism and an actively harmful influence on the civic and economic life of our state.