Are Policymakers in a Prisoners’ Dilemma with Economic Development Incentives?

Posted on by Corianna Baier

In a recent paper, Michael D. Farren and Matthew D. Mitchell compare economic development incentive decisions by two states to the prisoners’ dilemma in game theory. Examining this interesting comparison may provide insights into the Kansas–Missouri border war and better explain why policymakers continue to give out these harmful incentives.

In the classic prisoners’ dilemma situation, two armed robbers have been captured by the police, but there isn’t enough evidence to convict them, so they are questioned separately. Each prisoner can either confess and throw his partner under the bus in exchange for a deal, or remain silent. However, each prisoner knows his sentence is also influenced by the other prisoner’s actions. The police have outlined four scenarios for each prisoner, which are shown in the diagram below. The left side shows the options for Prisoner A, the top shows the options for Prisoner B, and each square shows the results of the corresponding actions.

  • If Prisoner A confesses and Prisoner B remains silent, then Prisoner A will not face jail time while Prisoner B faces the full sentence of 8 years (purple square), and vice versa (blue square).
  • If both Prisoners confess, they will both be partially responsible and serve 5 years (red square).
  • If both remain silent then the police will settle for a lesser weapons charge with a 2-year sentence for both (green box).

Though it would collectively be the best decision for both prisoners to remain silent (only 4 years in prison total, instead of 8 or 10), each has an incentive to confess and betray the other. If Prisoner A confesses, he will either do 0 years instead of 2 if B remains silent or 5 years instead of 8 if B confesses. Prisoner B has the same incentives, so it is also in his best interest to confess.

Because each prisoner cannot know what the other will do, he will act in his own self-interest and confess to avoid more jail time, bringing them to the red square. Here is the prisoners’ dilemma: Each player acting in self-interest actually leads to an outcome that is collectively and individually worse than if both had chosen a different option.

Farren and Mitchell relate the prisoners’ dilemma to policymakers’ decisions to offer economic development incentives. This comparison supplies one possible answer to an important question: Why do we see policymakers offering development incentives when research shows that they rarely have positive (and sometimes negative) effects on economic growth?

Let’s take a hypothetical scenario where Kansas and Missouri policymakers are deciding whether to provide economic development incentives, without knowing the other’s decision. Ideally, policymakers would consider the research and not give out subsidies, which would result in the most economic growth for both states(outlined on pages 13–14 of the paper).

That is a desirable outcome for both policymakers and citizens; however, the payoffs of this decision would accrue in the long term. When considering the complex decision-making process of policymakers, Farren and Mitchell point out that short-term political support may be an even more compelling motivator. Because of this, we are likely to see decisions that mirror the figure below, with decisions made based on political support instead of economic growth.

Source: Michael D. Farren and Matthew D. Mitchell. “An Interstate Compact to End the Economic Development Subsidy Arms Race. Mercatus Center.

Policymakers feel pressure to provide subsidies because “voters want policymakers to do what they can to outcompete other states for economic development.” (p 15). Policymakers are incentivized to provide subsidies, so we end up in the bottom-right square.

The dilemma is clear: Policymakers act on their short-term self-interest and offer subsidies, which slows economic growth.

So perhaps the prisoners’ dilemma explains why Kansas and Missouri policymakers offer subsidies when the evidence is stacked against their effectiveness. The best solution to a prisoners’ dilemma is for the two parties to somehow come together and agree to pick the communally favorable option. The solution provided by these researchers is an interstate compact. We’ve seen Kansas and Missouri attempt this with their border truce, but the desired results haven’t come to fruition. Finding a way out of the prisoners’ dilemma could be the key to stopping these wasteful incentives and boosting economic growth in Missouri and Kansas.

Not So Fast, Public School Districts

Posted on by Susan Pendergrass

And so it begins. School districts are announcing their plans for how they will reopen, and the protests have begun. Parents in Rockwood, Missouri protested because they want more in-person schooling than the district is offering. Parents in the St. Louis Public School District want more virtual schooling than the district is offering. (And the St. Louis teachers union just declared that the district must start the year completely virtual.) Virginia parents protested because they didn’t like only having a single option of two days in person and three days of virtual instruction per week. Some Washington state parents are unhappy with the lack of details in their district’s plan. Public schooling is currently a mess.

Unhappy parents everywhere are pulling their children out of public schools. In Nebraska, requests to homeschool are up 21 percent. With textbook Toquevillian can-do attitudes, parents across the country are getting together with friends and neighbors and creating micro-schools. Parent unions are forming and some are calling for a “break up” with traditional education.

What could, or should, Missouri be doing during this upheaval? Number one, we need leadership. The Missouri Department of Elementary and Secondary Education (DESE) has only released reopening health guidelines. Should we expect that all 520 school districts simply figure out a great plan on their own? Meanwhile, Nebraska has created a website (Launch Nebraska) with comprehensive planning guides and toolkits.

Number two, we should be making several easily accessed choices available to parents. At least one district, Maplewood-Richmond Heights, is allowing parents who want a virtual education to enroll their students with one of the state-approved virtual providers under the Missouri Course Access Program (MOCAP). Other districts should follow its lead. This is not a year for inventing things from scratch. Parents should also be able to easily choose in-person enrollment at a private school. There are a number of apps, such as Classroom Wallet, that the state could use to provide parents with funds to purchase tuition. This is not a good year to settle the public versus private debate. This is a year to get kids back to learning.

Third, accountability and transparency must not be allowed to fall to the wayside. For the past six months, public school districts have been held harmless from consequences. If this continues much longer, children will be the ones to suffer and achievement gaps will grow.

Parents were put in the driver’s seat last spring whether they liked it or not. And now they’re supposed to give the wheel back to public school districts that seem to not even know how to start the car. It’s not at all surprising that they’re fed up.

Agreeing and Disagreeing on Health Care Reform

Posted on by Patrick Ishmael

This week, my colleague Susan Pendergrass and I had the opportunity to sit down for a podcast with Stuart Butler, Senior Fellow of Economic Studies at the Brookings Institution and a former researcher with the Heritage Foundation. You can find our wide-ranging conversation here. Mr. Butler is highly intelligent and amiable, and I appreciate him taking the time to talk with us.

Our conversation also highlights that even within the market movement there remains a great deal of disagreement about the best way to reform our health care system. Mr. Butler was an early supporter of an “individual mandate” that required the purchase of health insurance, a position he now has largely rejected but does distinguish from the mandate as passed in the Affordable Care Act.

But the main reason we invited Mr. Butler on the program was to talk about his “Medicare Advantage for All” proposal, which he recently published in the Journal of the American Medical Association. Mr. Butler explains what he means by “Medicare Advantage for All” in the podcast, but to be plain (and perhaps unsurprisingly), I disagree with the idea. I don’t think American patients are well served by the government “designing” a health care system that relies more and more on third-party, government-financed and government-controlled coverage for the vast majority of our health services. Proponents of free market-reforms should, I think, focus most of their efforts on expanding supply to meet public demand for health services, and we’ve certainly talked about those options at length and for some time.

In the podcast, we also talk about Medicaid expansion and proposals for changing how Medicaid is administered. As a general matter, I think Mr. Butler is more optimistic about the prospects of the federal government delegating control more definitively to states to control costs and manage the Medicaid program. I’m not so optimistic. In light of the federal government’s Lucyball treatment of state waiver proposals in both Republican and Democratic administrations, I’m not nearly as hopeful as Mr. Butler when it comes to believing states will be allowed to innovate in the program. All of that said, Mr. Butler provides an important perspective that is already part of a larger debate on the future of American health care.

Mr. Butler’s perspective may not be your philosophical cup of tea, but if it isn’t, rest assured that you’ll have plenty of other flavors to digest in the weeks ahead. In the next few days, we’ll be sitting down with Michael Cannon of the Cato Institute and Christopher Pope of the Manhattan Institute to talk about the future of health care in this country, with more guests planned. We hope these podcasts are informative, and we invite your feedback and ideas.

 

TIF for Tat Two

Posted on by Patrick Tuohey

Back in December 2018, the Show-Me Institute published TIF-for-Tat: The Relationship Between Political Contributions and Tax-increment Financing Awards. A new nationwide study reaches similar conclusions about incentives offered at the state level.

The Institute paper, written by myself and Elias Tsapelas, looked at political campaign giving in Kansas City and found that:

The number of donations made to the campaigns of public officials who have decision-making power for TIF awards appears to increase in the election cycle in which developers apply for a TIF and then fall off in the election cycles afterward.

Companies might describe political giving as a sign of good corporate citizenship, and that may be true. But the fact that the contributions drop after a tax-increment financing (TIF) plan is awarded suggests something more akin to a quid pro quo.

A new study by Cailin Slattery at Columbia and Owen Zidar at Princeton/NBER also links economic development incentives to political campaign activity. They find:

The interaction between an incumbent governor and an election year is highly correlated with increases in incentive spending, suggesting a strong role for political determinants of incentive provision. In the raw data, per capita incentive spending increases by more than 20% in half of the cases in which it is an election year and the Governor is up for re-election versus one-fifth of the cases otherwise.

This study also finds, as do many other serious studies of economic development incentives, a “lack of clear spillovers and equity benefits.”

If a particular public policy shows no substantial benefit to taxpayers, and yet seems to rise and fall based on relationships to political contributions and campaigning, it is reasonable to conclude that there are darker motives at play than the public good. Isn’t it about time Missouri and its various municipalities rein in these incentives in the name of good and efficient government?

New Paper Suggests Kansas and Missouri on the Right Track with Truce

Posted on by Corianna Baier

If you need a reminder regarding the negative consequences of economic development incentives, look no further than this paper published by the Mercatus Center at George Mason University. This all-encompassing paper lays out the many reasons these incentives don’t work. The authors then propose a solution that may ring a bell to those in Kansas City: an interstate compact. Though it’s not an interstate compact per se, the evidence in this paper supports the theory behind the border truce (last year, Missouri and Kansas leaders agreed to a truce in the economic development subsidy arms race) between Kansas and Missouri.  The authors argue that the truce could do more for economic growth than all the incentives combined (if it’s actually followed, of course).

The evidence against economic development subsidies (which this paper defines as “any government-granted privilege that creates exclusive economic benefits for its recipient(s)”) is stacking up. Research shows that subsidies may benefit the specific firm or industry that receives the privilege, but most subsidies don’t result in any measurable improvements in the broader communities that pay for them. In fact, they may reduce economic development in the broader community if states fund them with tax increases or reduced spending on public services, two things that drive away economic development. There’s also little evidence that economic development subsidies sway a company’s decisions to relocate or expand.

So why do policymakers still give out these subsidies?

The paper identifies a few reasons, but one seems particularly relevant to Kansas City’s situation: Policymakers feel pressure and may view it as politically advantageous to offer subsidies if surrounding states are also offering them. This seems to be a driving force in the Kansas–Missouri border war; each subsidy offered by Kansas policymakers encouraged policymakers in Missouri to offer one, and vice versa. As the paper points out, “[between] 2011 and 2018, Kansas and Missouri paid a combined $335 million to subsidize the relocation of around 12,000 jobs from one state to the other, with most companies moving only five to seven miles.”

These researchers propose an interstate compact as a solution, the specifics of which can be found in the paper. The current truce between Kansas and Missouri is a small step in the right direction, in theory. But in practice, it has numerous problems and hasn’t produced the hoped-for results. If lawmakers are serious about ending wasteful economic development incentives and promoting economic growth, they should take some notes from this Mercatus paper and truly end the border war for good.

Are Teachers Essential or Not?

Posted on by James V. Shuls

When the COVID-19 pandemic began, everyone was sent home—everyone except essential workers. Health care workers continued to take care of patients. Police and firefighters continued to patrol streets and fight fires. Grocery store workers continued to stock shelves. Even workers in meatpacking plants, where some outbreaks occurred, continued to do their jobs. They continued to work because they were “essential.” Their jobs were so important to the lives of others that we asked them to take additional risk to continue providing their goods or services to us. Now, as schools are slated to reopen, the essential question we must ask is whether or not teachers are “essential.”

Regardless of where you stand on the issue of schools reopening, there are some fundamental facts here. First, putting kids together with 20 plus students in a classroom and crowded hallways undoubtedly increases the risk of spread. We can debate how much kids transmit the virus or how few deaths occur among children below the age of 18. These are all important conversations to have. Nevertheless, we cannot deny that schools packed with children are a petri dish where germs (and viruses) are spread. Kids will be kids. They will not effectively social distance and they will not wear their masks with fidelity. Without question, teachers in schools would have a much higher risk of catching COVID than teachers working from their living room.

The second unmistakable fact is that not opening schools will lead to large disruptions in the workforce. Parents without other options will be forced to quit their jobs or work from home as they help their children navigate the new online educational environment. This disruption will lead to decreased productivity and could have long-term negative impacts on the economy. Again, there are other issues we could debate, but there is no denying that closing schools will impact the livelihoods of many families.

We ask essential workers to face greater risks because the products of their labor—their service to us or the goods they produce—are integral to the lives of other people. We do not deny that they increase their risk by going to work. We do not deny that sending essential workers home would impact the lives of others.

It does feel strange that the clearest voices arguing that teachers are not essential are the teachers themselves, while the most persuasive essay arguing they are essential that I have read comes from a nurse.

So, I return to the central question—are teachers essential? I’ll let you, dear reader, determine the answer to this question yourself.

Walter Blanks Jr. Joins The Show-Me Institute Podcast

Posted on by Show-Me Institute Staff

On the most recent Show-Me Institute Podcast, Dr. Susan Pendergrass is joined by Walter Blanks Jr. Walter is a communications associate at the American Federation for Children (AFC). Before joining AFC full time, Walter was chosen for the first cohort of the American Federation for Children Future Leaders Fellowship, a year-long advocacy and professional development program for graduates of private school choice programs.

Listen here: https://bit.ly/3a7ctvj

For more of the Show-Me Institute Podcast, visit sound cloud at soundcloud.com/show-me-institute and subscribe on Apple podcasts.

 

As a Parent, You’re Going to Hear Me Roar

Posted on by Jessica Gatewood

I grew up with a mom who was a true lioness. She would march up to the school and advocate for my brothers and me. I am forever grateful that she stood up for us and helped us thrive academically. I am determined to do the same thing for my children, but I am flying blind. It’s been a hard year and homeschooling was no easy task last spring while my husband and I were working from home. We now feel our children are behind academically. The school districts in Missouri were clearly not prepared to deliver sustained virtual learning. School districts have had all summer to get their act together and they haven’t.

The lioness mom in me is concerned. I haven’t heard anything about professional development over the summer preparing teachers to effectively teach virtually on a new online platform. I don’t know if the teachers will bring the same level of care and passion when teaching virtually. And I don’t know how my kids will handle full-time virtual learning.

I also can’t ignore that, to the school, my children represent funding; there is an incentive for the district to keep them enrolled in our school. The district provided no information about the proven virtual alternatives available via the Missouri Course Access and Virtual School Program (MOCAP). If I wanted to enroll in something like K12.com, which was “designed as an alternative to traditional ‘brick and mortar’ education for public school students from kindergarten to 12th grade,” I would need my school district’s permission and would have needed to start the process weeks ago. Many schools are just now announcing their plans for fall 2020, which leaves parents with little time to react and explore alternatives. On July 29 we learned the district will now be going all virtual for at least the first nine weeks.

I am very concerned about my kids falling further behind typical grade-level expectations and forever playing catch up if I simply go with the flow. I realize that teaching my kids is no small task, and as their parent I am responsible for ensuring they get what they need. For my fourth-grade son, we plan to join a few families with fourth graders and create a micro-school. The district’s virtual learning program will be facilitated by one of the moms and we will include some other programming. For my sixth-grade daughter, we are going to do both virtual education with our school district and hire a tutor. If and when in-person learning is possible at our school, she will return to the in-classroom format, which we believe is best for her learning needs.

The pandemic has highlighted the need for parents to direct the education of their children and take responsibility to ensure they have every opportunity to academically thrive. Many will figure out a way to make something work this year because most parents are tireless when it comes to figuring out what’s best for their children. But it didn’t need to be this difficult. I don’t think parents will forget—or forgive—what they had to endure this year because of the failings of the education establishment in Missouri.

Support Us

The work of the Show-Me Institute would not be possible without the generous support of people who are inspired by the vision of liberty and free enterprise. We hope you will join our efforts and become a Show-Me Institute sponsor.

Donate
Man on Horse Charging