ECONOMIC DEVELOPMENT PLANNING

REPORTER:
CORTEZ, REA ODESA
Many thousands of municipalities, probably the majority of counties, and all 50
states make serious efforts to promote their own economic development.

There are well over 15,000 organizations in the United States devoted to
promoting local and state economic development.

When the operating expenses of economic development agencies, direct

expenditures, and a wide variety of indirect expenditures in the form of tax
abatements are added together, the figure may be as high as several tons of
billions of dollars annually.
The present U.S. political scene is characterized by a high level of intermunicipal
and interstate economic competition.
- Such competition is driven partly by labor market considerations
- local and state governments are also driven to economic competitions for tax
reasons
- interplace economic competition has a certain amount of
“positive feedback”
promoted economic development planning as a major
subspecialty of the planning profession.
HISTORIC ROOTS
Planning for economic development is an old American tradition.
In the nineteenth century, a great many cities took steps to strengthen their
competitive position vis-à-vis competing cities.

Most often, such planning efforts were directed toward the transportation
infrastructure — to increasing the accessibility of the city.

In a day when overland transportation costs per ton/mile were a large multiple of
what they are today, a significant reduction in those costs could give the
merchants in one city or town an overwhelming advantage over competitors in
other cities.
HISTORIC ROOTS
ERIE CANAL
Probably the best known example in the 19th century was the building of the Erie
Canal.
In the early 1820’s, a group of New York City merchants perceived that obtaining
good access to the Midwest would confer a tremendous economic advantage on
the city.
The way to do this in the prerailroad era was to build a canal connecting the
Hudson River to Lake Erie.
By 1830’s, a decade or so after its completion, the canal was carrying close to 1
million tons of freight per year, giving New York an enormous advantage over its
two main rivals of the time, Boston and Philadelphia.
 HISTORIC ROOTS
The age of canal building ended abruptly with the coming of railroad technology, but the same
story of municipal competition was repeated.

In many cases, municipalities purchased railroad bonds to provide the capital to build a line that
would put them on the map commercially.

In other cases, municipalities

guaranteed bonds to make them
marketable.

One writer described this period

as an age of “urban mercantilism”
HISTORIC ROOTS
When the U.S rail system was fairly well developed, competition switched to
other areas.

Example:
In the period after Civil War, a number of southern communities actively
promoted the development of the textile industry by offering various forms of
financial assistance to firms in New England, which was then the textile
manufacturing center of the United States.
PERSPECTIVES ON LOCAL ECONOMIC
DEVELOPMENT
To discuss the present situation in local economic development, it is necessary to
make clear two different perspectives.

For several decades, local economic development efforts were heavily shaped by
federal funding and federal legislation.

Thus there is a national perspective to be considered . There are also strong local
motivations, what is good for a particular municipality or state may or may not be
good for the nation as whole.
 THE FEDERAL PRESENCE IN LOCAL ECONOMIC
DEVELOPMENT
 STRUCTURAL UNEMPLOYMENT
It refers to a mismatch between the supply of labor and the demand of labor. The
mismatch may apply to skills.

Example:
• In the 1960’s, numerous former farmers and farm workers were unemployed because
the postwar mechanization of agriculture had forced them off the land, and they lacked
skills for doing other kinds of work. At the same time, the burgeoning computer
industry was experiencing shortages of programmers, system analysts, and technicians.

• In recent years manufacturing employment in U.S. has declined sharply while health
care has been a major growth area, so high unemployment rates among industrial
workers coexist with labor severe shortages of nurses.
Thus labor shortages may coexist with labor surpluses because of a mismatch
between skills of the labor force and the needs of employers.

To a great extent, this type of structural unemployment is the result of

technological change.
The faster the change occurs, the more serious the problem is likely to be.
The other aspect of structural unemployment is GEOGRAPHICAL.
An area may lose jobs because:
- firms have moved out
- changes in technology have reduced their labor needs
- they have gone out of business
If the loss of employment is not matched by corresponding out-migration of
population, a sustained condition of high unemployment may result.
In general, capital is more mobile than population, so that structural
unemployment does in fact occur in just this way.
The structural unemployment problem did not become apparent immediately after
World War II. In welcome contrast to the Great Depression, the post war period was
one of great prosperity. Thus for a time, it appeared to many that the only important
economic function of government was to maintain this desirable state of affairs by
competent management of national (macroeconomic) economic policy.

After a few years, however, it became apparent, not all regions or all subgroups
were doing well economically.
Appalachia – the first region for which serious concern developed
Lying between the prosperous eastern seaboard and the then-thriving
industrial Midwest, the Appalachian region seemed to be in a permanent depression
of its own.
Beginning in 1961, Congress began legislation designed to address both the skills
and the geographical mismatch sides of the structural unemployment problem.

Area Redevelopment Administration (ARA)

• created by the Congress in 1961
• empowered to make grants to localities to support local economic development
• eligibility for ARA funding was based on county-level data on unemployment
and poverty.
• was replaced in 1965 by the Economic Development Administration (EDA)
Economic Development Administration (EDA)
• Poverty and unemployment statistics developed by the federal government were examined to
draw up a list of counties that were to be eligible for EDA assistance.
Eligible counties were then encouraged to set up economic planning organizations, which would submit funding
applications to EDA.

• Community Industrial Park – typical EDA-funded project

- a combination of EDA and local funds would be used for purposes like site
acquisition, grading, and provision utilities.
- when the site is ready, it would be sold or leased at below cost to firms

From the municipal viewpoint, the expenditure of local funds would be justified by two things:
1. the provision of jobs for local residents
2. the increase in property and other tax revenues from the new facility.

The federal contribution was presumably justified by the decrease in structural unemployment.
Substantial federal support for local economic development has also been available from the federal
government through:
• Community Development Block Grants (CDBG)
- community funds can be used for a wide variety of economic development purposes.
• Urban Development Action Grant (UDAG)

The federal role in local economic development efforts peaked during the Carter administration (1977-
1981) and then was scaled back during the Reagan (1981-1989) and the first Bush (1989-1993)
administrations.

Attempting to reshape the geographical pattern of business investment by means of government programs
is a decision to replace the judgment of the market with the judgement of government, and that is a
decision with which are uncomfortable.
- under presidents Reagan and the elder Bush, funding for EDA was cut back, and UDAG was ended
DOES PUBLIC INTERVENTION MAKE SENSE?
Whether such federal subsidies to local development make sense from the national
viewpoint has been the subject of considerable argument.

• From an economist’s viewpoint, subsidies were being used to move economic

activity into an area that was not its most efficient location in order to achieve
some gains in equity.

• This so-called equity-efficiency trade-off deserves a short explanation—underlies

much argument about what is the proper role of government in influencing the
location of economic activity.
The argument is as follows:
• If the location in question were the most efficient location for the firm, ordinary market forces
would cause it to locate there without any government action.
• If a subsidy is necessary to cause the firm to locate there, by definition, the site is not the most
efficient location.
- there is a loss of efficiency for the whole economy stemming from the use of subsidies
to influence economic locations.
-this situation occurs because encouraging a firm to locate at other than its most efficient
location means the cost of producing a given bundle of goods or services will be higher.
- in return, there is an equity gain in the sense that economic activity is directed to areas of
more than ordinary need.
- this, then, is the equity-efficiency trade-off.
• In general, liberals have tended to favor place-related programs.

• Conservatives have generally opposed such programs, taking the view that it is the
proper role of the national government to provide conditions under which private
economic activity can flourish but that the marketplace itself should decide how
and where capital is invested.
Industrial Revenue Bond (IRB) Funding
- one favorite tool of economic developers that has persisted to the present time.
- municipalities are allowed to issue tax exempt bonds on behalf of firms building
or acquiring commercial or industrial facilities within borders.
- the firm benefits by the lower interest rates it has to pay because of the tax
exemption feature.
- Economic developers like this kind of financing because it is essentially costless
to the municipality.
President Clinton (1993-2001)
- the federal government might take a more active roll in the support of economic development
efforts for lagging areas.

Empowerment Zone program

- the one Clinton era initiative in local economic development
- enacted in 1994
- made federal funds available to a limited number of distressed areas in an attempt
to make those areas more competitive with more prosperous areas in the quest for
business investment.
- total funding over the next decade was to $3.8 billion. Compared with the U.S.
GNP of approximately $10 trillion at the end of century. That was a relatively small sum .
President George W. Bush (inaugurated January 2001)
- showed no interest in federal assistance for local economic development assistance through
most of his term until the 2004 presidential campaign.
- he proposed the creation of a number of opportunity zones.

The main thrust would be to offer tax breaks for investment in places that have experienced job
losses.

Opportunity zones were a low priority item for administration.

 THE RELATIONSHIP BETWEEN PLANNERS AND ECONOMIC
DEVELOPERS
PLANNERS and ECONOMIC DEVELOPERS necessarily have considerable
interaction, for both are concerned with public investment in infrastructure, land-use
controls, environmental regulations, and anything else that affects the what and where of
industrial and commercial development.
Sometimes, the relationship between the community’s planner and economic developer
will be a happy one but sometimes, it will not.
To the planner, bringing in new firms and encouraging the expansion of firms already in
the community will be one of the goals. To the economic developer, these may be, in
practice, the only goal.
Thus the planners’ we want development but it has to fit into the master plan perspective
can conflict with the developers’ do whatever it takes to bring them in position.
STATE ECONOMIC DEVELOPMENT EFFORTS
For many years, the states have supported local economic development efforts.
State department of commerce provide information on the state and try to guide firms to
municipalities within the state.
States have offered a huge variety of financial incentives, such as investment tax credits,
low interest loans, infrastructure grants, labor force training grants, and the like, to
encourage firms to locate or expand within the state’s borders.
A majority of states have overseas trade offices in Europe, the Far East, or both to help
overseas markets for their firms and also to encourage investment in their state.
Most important, states have become increasingly involved in major industrial and
commercial relocation and expansions and are increasingly willing to spend large sums of
money to attract economic activity.
A few and well-publicized deals are the following:
 In 1978, Pennsylvania provided Volkswagen with a $78 million subsidy package to build an
assembly plant in the state.

 In the 1980’s when General Motors indicated that it was seeking a site to manufacture its Saturn
car, numerous governors and states representatives made pilgrimages to Detroit, and a keen
bidding war developed, with states offering sites, promises of major investments in roads, and
substantial tax abatements.
- GM chose a location near Columbia, Tennessee — offer advantages in terms of labor force,
transportation, and utility rates, but which did not offer as large a subsidy package as did many
other places.
 In 1991, Colorado put together a $427 million package of subsidies, direct and indirect, to attract a
$1 billion United Airlines maintenance center to Denver.
- the bid was unsuccessful, UA went to St. Louis where the subsidy package was smaller but
hardly trivial at a figure of $300 million.

 In the 1990’s, Mercedes-Benz opened an automobile assembly plant in Vance, Alabama, and
BMW opened one in Spartanburg, South Carolina.
- the estimated subsidy for Mercedes $250 million range, for BMW, at about
$150 million
- on a per job basis, the Mercedes subsidy was about $168,000 and the BMW
subsidy in the $65,000 range.
In the fall of 1995, Governor George Allen of Virginia and officials of the city of
Manassas announced a $165.7 million deal that would bring a $1.2 billion IBM-Toshiba
chip-manufacturing plant to Manassas.
- the state’s share of the package was about $48 million, of which $38.4 million was a direct
cash payment to the two companies if they met certain stated employment and capital investment
targets in years five through ten.
- the city’s share was somewhat over $117 million, where $96 million took the form of
reduced taxes on machinery
- the plant is estimated to employ about 1,200 at full development—making the subsidy costs
almost $140,000 per job.
- local officials estimated that for every job at IBM-Toshiba, two additional jobs would develop
as a result of the “multiplier effect”— would reduce the per job subsidy to about
$46,000.
For the state or locality that provides a big subsidy package in order to attract a new
industry, the net pay-off may be positive or negative.
On the positive side, there are incomes from new jobs and increased tax revenue
from the additional economic activity and property development.
On the other hand, economic growth promotes population growth—additional
expenses for schools, social services, handling the increased flow of traffic, and
the like.
Whether, after taking account of the cost of subsidization, the increased revenues
will be more than or less than the additional expenses will vary from case to case.
Whether or not a new firm will raise average wages in an area may also be
problematical.
Beyond using their own funds to attract firms, states will often pursue federal
investment within their boundaries.
That attempt might mean using influence and power that the state’s congressional
delegation has to push for having parts of a multibillion-dollar weapons system
made in their state.
It might mean pushing for the opening of a new federal facility built in their state
rather than somewhere else.
It might mean having the state’s congressional delegation do everything it can to
resist a decision to close a military base in the state.
Pursuit of federal funds for highway construction would be another example, for
accessibility is an important consideration when firms make location decisions.