Economic Development and the Proper Role of Government

by Phil Anderson


“Wisconsin’s declining economic vitality is rooted in the failure of our political and business leaders to develop a serious strategy for expanding economic opportunity.” Robert Kraig, Citizen Action of Wisconsin  

Bribing companies to create jobs is not an effective way to promote economic development. It is not a comprehensive strategy to build for the future. In past articles I used economic and political arguments to support this position. The numbers for Wisconsin show that this strategy doesn't work well. But there is also a simple, common sense reason why this doesn't work. The bribe game is unlikely to succeed because of one simple fact. BUSINESSES DO NOT WANT EMPLOYEES!   You don't have to be an economist or a CEO to realize why this is the case. You just need to think about the real world and how business works. You probably have experienced this in your own work life. Did you ever have an employer keep you employed when business is slow? Have you ever been hired just to create a job and boost the economy? If you have it was a rare exception (or the boss was your daddy or uncle).   Businesses do not exist to hire employees. The goal of a business is to make money. Employees are an EXPENSE. Like other costs of doing business, labor costs must be minimized to maximize profit. Hiring employees is a last resort for most businesses. And they will only keep employees as long as the profit they produce exceeds the cost. So the idea that you can pay businesses to hire more people is contrary to basic business principles.   You may help lower the labor cost for some select businesses with subsidies and tax breaks. But NO BUSINESS WILL HIRE EMPLOYEES THEY DO NOT NEED. IF THEY MUST HAVE MORE EMPLOYEES THEY WILL HIRE THEM WITHOUT SUBSIDIES. Business incentives are not going to build a a stable economy. It is not a sustainable strategy to deal with unemployment.   Most businesses will do everything possible to avoid hiring people. They will pay overtime, increase hours for part time workers, contract work out, use temp agencies, automate, merge with competitors, and use foreign suppliers before they will hire. Some businesses will even pass up sales that can't be handled with existing employees.   WHAT DOES MOTIVATE BUSINESSES TO EXPAND IS CUSTOMERS COMING IN THE DOOR. When there is more demand for their goods and services, business has a real reason to expand. But this demand has to be sufficiently large and likely to last. If it isn't then the business will use the hiring avoidance tactics listed above. This is why sustainable economic development must be bottom up. When ordinary working people have money to spend the economy does well. When money is moving between hands in a stable, predictable, continuous manner you have prosperity. We are all better off when everyone is better off.   Economic development strategies that rely on business incentives are one-time infusions into the economy. They are boom and bust programs. They do not build a foundation that promotes widespread prosperity. A few benefit from paying less in taxes or getting subsidies while the many non subsidized businesses and general taxpayers pay the cost. The best thing government can do to promote prosperity is to do the job of government. Government provides the legal framework, public infrastructure, and the necessary regulation to support the economy. Government should “promote the the general welfare” by collectively doing what people need and the private sector does not do well. Government must promote fairness, equal opportunity, public health, education, and public safety. Government needs to provide those necessary social goods and services that are not profitable or should not be profit driven.   When government does these things it provides the stable foundation on which the rest of the economy rests. Government is about 1/3 of the economy. It is a buyer of goods and services as well as an employer. It is the foundation of the rest of the economy. It provides the stability that the private sector boom and bust lacks.   The only way government can actually create jobs is to hire people. In the 1930's government did this with programs like the CCC and WPA which hired the unemployed to do public service work. If we really wanted to deal with unemployment we would guarantee people jobs. When government hires police offices, teachers, road maintenance workers, building inspectors, nurses, fire fighters, etc., it builds a stable economy. When government creates national parks, public broadcasting, social programs, public health facilities, public transportation, or funds scientific research it supports and supplements the private economy.   Short sighted, ideologically driven, austerity that cuts taxes and under funds these essential government functions hurts the economy in the long run. We need to maintain essential government services ALL the time not just doing good times. Cutting emergency relief programs right before a hurricane is not a good idea. Skimping on road maintenance until the bridges collapse is foolish.     One of the best economic development actions government could do would be a national, tax supported, single payer health care system that was not connected to employment. You want to subsidize ALL businesses? Provide healthy employees and relieve employers of the burden of providing health insurance to their employees.     Another would be to see that everyone has the ability to get the education they need based on their ability rather than ability to pay. Tuition free education in state universities and technical colleges would be a win-win for everyone including the business community. Greatly expanding apprenticeships and on-the-job-training opportunities are also needed. Nothing is “free” and people will pay for it later in taxes, but investing in people will pay off for everyone.   If we are to have real, sustained prosperity (not growth but actual wide spread well being) we have to understand these principles and stop doing counterproductive austerity. We have to put people first. We have to use government to its full potential to support the general welfare. We have to stop playing the bribe game and use that money to do what actually needs to be done to improve everyone's well being.