State and local governments are locked in a constant competition to attract and retain businesses. Unfortunately, instead of addressing a poor business climate and flawed economic policies, they have increasingly relied on public subsidies in the form of grants, loans, tax incentives, and other blandishments.
Policymakers who champion so-called economic development argue that a state that refuses to offer taxpayer-funded inducements places itself at a competitive disadvantage when it comes to attracting businesses. Thus, Pennsylvania—under the political control of Democrats and Republicans alike—has heavily engaged in quasi-bidding contest with other states for years.
Indeed, Pennsylvania has spent more money—in both total dollars and per-capita expenditures—on economic development than most states. Most recently, we were second (to Ohio) in such spending, and in previous years we’ve been first.
How has that been working for us?
Despite good intentions, Pennsylvania is a prime example that politicians cannot spend a state to prosperity. The evidence is overwhelming for those willing to examine it.
Between 1991 and 2008, our economic growth lagged the national average and ranked among the worst in the nation. During this period, we were 45th in job growth, 46th in personal income growth, and 47th in population growth. The performance under Gov. Rendell’s tenure is likewise abysmal, despite nearly a half billion dollars a year in state government spending on economic development programs.
There is evidence, however, that states’ economies do much better when the private sector makes economic decisions rather than politicians. For example, a Commonwealth Foundation analysis of the 50 states found that those with the lowest tax burdens and that cut taxes the most had much faster economic growth than states like Pennsylvania with high (and rising) tax burdens. According to the Washington, D.C.-based Tax Foundation, Pennsylvania ranks 11th in state and local tax burden and sixth in tax burden increase since 2002. Yet, as noted earlier, Pennsylvania ranks near the bottom in income, job, and population growth, despite all of Harrisburg’s “investments” in the economy.
Again, the lesson is that states that left spending and investing decisions to the private sector significantly outperformed those that tried to manage those decisions.
Of course, there are factors other than state government economic development policies that influence prosperity, but the argument simply cannot be made that states which spend more are more successful than those that spend less.
So what should state government do to stimulate our economy? First, policymakers must understand government’s limitations and incompetencies. Politicians should resist the desire to manage our economy from Harrisburg with new spending programs. They must recognize that the only way out of our economic doldrums is through a vibrant private sector that is unhindered by an over-taxing, over-regulating, and over-reaching public sector.
In fact, had Gov. Rendell and the legislature simply held spending growth over the last six years to inflation and population growth (19.8%), Pennsylvania would currently have a $1.2 billion surplus rather than a $2.6 billion deficit. Additionally, $15.9 billion could have been left in taxpayer pockets—that’s more than $5,000 every family of four could have to invest, pay bills, and save for retirement or college tuition.
Rather than raising taxes to keep spending enormous sums of money on so-called “economic development,” state government should be cutting taxes and putting spending decisions back into the hands of job creators and workers. This, together with a more favorable business and labor climate, is the path to renewed prosperity.
Jake Haulk is president of the Allegheny Institute for Public Policy (www.AlleghenyInstitute.org). Matthew J. Brouillette is president of the Commonwealth Foundation for Public Policy Alternatives (www.CommonwealthFoundation.org).