Assessing the Economic Impact of the Proposed Aerotropolis Legislation
This essay discusses the costs and benefits of the proposed Aerotropolis tax credit legislation currently before the Missouri legislature. The main purpose is to provide a methodology for evaluating whether state tax credits and direct export subsidies are warranted in this case. In order to do so, I first review the traditional arguments for state intervention in a market economy. With the potential exception of so-called agglomeration externalities, the traditional arguments for state subsidization are found irrelevant with respect to the Aerotropolis project. Simply stated, there seemingly exists no market failure on which one may justify government intervention in support of an Aerotropolis at Lambert-St. Louis International Airport (Lambert).
Second, I briefly summarize the methodology used to analyze the effects of public-sector market interventions. This methodology, named cost-benefit analysis, is generally accepted in academic literature and mandated by the federal government for many federally-funded projects. Based on this short review, I have concluded that it is very unlikely that Aerotropolis would need public subsidies. Given the absence of well-identified market failures it follows that if Aerotropolis were a project involving government subsidies it would also be a project that private markets would be willing to finance without subsidies, provided there is an economic justification for the project in the first place.
Third, I focus specifically on the costs and benefits of the Aerotropolis subsidies by means of two simple theoretical models. Aerotropolis subsidies come in two varieties: direct export subsidies and warehouse development subsidies. The direct export subsidies would most likely be captured by exporting firms that would use Lambert as a shipping hub. Given Lambert’s location, the benefits of these subsidies would significantly spill over into regions outside Missouri. In fact, some of these benefits would likely accrue to foreign consumers of the exported goods. The warehouse development subsidies, on the other hand, would directly benefit the current owners of land neighboring Lambert or otherwise qualifying for special tax credit treatment, with likely spillover effects showering the local construction industry.
The lack of careful studies addressing the economic impact of the proposed legislation exposes one very surprising aspect of the Aerotropolis discussion. While a few very rudimentary calculations on job creation and economic output have been presented, no serious cost-benefit analyses have been reported. This essay explains why job creation and output impact estimates are not the right way to evaluate policy interventions like Aerotropolis, even if we take their numbers at face value.
Finally, I quickly review the economic agglomeration rationale for the Aerotropolis subsidies. Because agglomeration effects are hard to quantify and hard evidence supporting same is missing, I leave this topic as an open question for consideration.