What Works to Create Work:
Job Creation Isn't Easy, but Subsidies and Tax Incentives Aren't the Answer
by Dane Stangler
In late 2011, a Midwestern state provided hundreds of thousands of dollars in tax incentives to an international company to assist in adding 150 new jobs to its existing office in the state. Press releases went out and business journalists duly covered the news; it was greeted as another notch in the belt for the governor and state department of economic development, and as a boon to the state economy.
Yet this event, which repeats itself all over the country every year, is the mark of a hollow economic strategy. Dollars for job creation is a tried, tested and failed method of spurring economic growth. In past attempts, the new jobs that are announced by a company tend to be filled by people who already have jobs. No “new” jobs get created in that city or county. In the example at hand, in fact, this company had cut a few hundred jobs from this location just a few years before.
Studies have found, moreover, that incentive schemes like this attract in-migrants to fill the “new” jobs created—usually from elsewhere in the same state. From a local perspective, this is mostly a good thing. Even though non-locals fill the jobs created, this still means new demand for housing and new dollars circulating in the economy. But from the state’s perspective, this merely reshuffles employment.
The voice of the academic literature on incentives, tax credits and “place-based” policies is almost uniformly negative. If the goal is new job creation, higher wage growth and better standards of living, they do not work. States and local governments, however, show few signs of ceasing this activity. When, after all, have policymakers listened to researchers anyway? The studies themselves have shortcomings: time periods dictated by data availability rather than economic realities; varying definitions that make comparisons difficult; and, often, ideologically motivated findings.
Most frustratingly, for scholars no less than policymakers, a tremendous number of non-policy factors heavily influence state economic performance. The effect of these—weather, coastal distance, the existing economic mix of a state—also varies from state to state. For some states, policy can make a large difference to the economy; for others, not so much.
Faced with tightening budgets and increasing exposure to global competition, states have turned to entrepreneurship as the latest policy strategy. After years of modest or even negative returns on the type of incentive package described above, states now seek “home-grown” economic development through assistance to new and small companies. This counts as progress but, unfortunately, we often find old wine in new bottles. Industrial districts and enterprise zones—generally ineffective policies—are relabeled “startup hubs.” Another popular tool is a loan guarantee program, whereby the government guarantees bank loans to business borrowers—especially entrepreneurs—who would otherwise not get loans.
Loan guarantees, however, have been found to be rather underwhelming in their effect and typically do not lead to the increase in business formation and job creation that policymakers seek. This finding actually applies to most subsidization schemes and is the thrust of Josh Lerner’s book, Boulevard of Broken Dreams, which documents how attempt after attempt to use public money to spur entrepreneurship has failed.
So what can states do? States are right to see entrepreneurship as a more promising pathway to economic growth than tax incentives, but it is clearly no easier to promote entrepreneurship. In February, the Kauffman Foundation will release a menu of policy ideas for states wishing to boost firm formation. We recognize, as noted, considerable variation in state economic situations—the ideas will apply with more or less force depending on a state’s other characteristics.
We believe that states can do a good deal in the following areas:
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Free the process of technology commercialization in universities from bureaucracy and monopoly.
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Encourage land use flexibility and inter-jurisdictional competition at the local level.
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Simultaneously simplify and broaden the base of the corporate income tax.
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Promote effective entrepreneurship education programs at colleges, universities and community colleges.
While entrepreneurship education programs exist by the dozens across the country, few of them have shown positive results. A new wave of experiential programs has emerged from places such as the University of Miami, Syracuse and Stanford that might be better models for other schools to replicate.
More details will be forthcoming in the Kauffman report, but the basic thrust of these and other ideas is that states must embrace “economic turbulence”—the starting, failing, shrinking, and growing of new and old companies that is the source of productivity gains and rising standards of living. In the past, through subsidies and tax incentives, states have sought to suppress such turbulence. That can no longer be the case.
Dane Stangler is a director at the Ewing Marion Kauffman Foundation, which strives to advance entrepreneurship and improve the education of children and youth. Its program areas focus on entrepreneurship, advancing innovation, education, and research and policy. Stangler researches and writes on a wide variety of subjects, including entrepreneurship, expeditionary economics and cities. He initiated and manages the Kauffman Foundation Research Series on Firm Formation and Economic Growth, and contributes to the blog, Growthology.
