John Petro

Cities that Make the Right Investments Will Attract High-Quality Firms

A brief piece in City Journal, a publication of the conservative think-tank the Manhattan Institute, talks about the merits and demerits of local governments efforts to create hubs of technological innovation as an economic development strategy. The author, Dane Stangler, doubts that local government efforts to create these clusters can be successful.

It’s not that geographically concentrated areas of innovation are undesirable… What’s mistaken is the notion that we can set out to plan and construct such areas.

To a certain extent, I agree. Local governments will often spend considerable time, energy, and resources to attract companies in the technology or research fields, to varying degrees of success. Often, these efforts come in the form of development subsidies. Austin, Texas has utilized development subsidies in the past to become a center of technology-based industries. However, the practice of using subsidies in this manner is problematic, especially when there is little or no accountability in the subsidy process. These policies can create a race to the bottom, in terms of corporate taxes, and divert valuable tax dollars that would otherwise be used to provide services (for more, see Good Jobs First). Additionally, after receiving subsidies, there is often nothing stopping companies from getting up and leaving. Minnesota took steps to prevent this by passing a law that allowed the state to recoup development subsidies if a company decided to leave or otherwise did not honor their subsidy agreement.

So is there anything useful that local governments can do? According to Stangler:

The public sector is most effective when its policies act indirectly to encourage spontaneous enterprise: keeping barriers to entry low, allowing businesses to grow without excessive regulation, and making a region attractive to newcomers.

In other words, the same “low taxes and lax regulation” approach that the Manhattan Institute uses as its go-to strategy for just about anything. However, this approach contradicts the last point that Stangler was making, which is a good point, that in order for a city successfully court innovative firms, it must make the types of investments in its physical infrastructure and its human capital that will make the city an attractive place for businesses and residents. The trouble is, with the low taxes approach, a city will most likely not have enough revenue to make the appropriate investments.

The things that add value to a city, such as mass transit infrastructure, good schools, low crime, and great amenities like parks and cultural institutions, all require a certain amount of tax revenue to support. At the same time, a city must make sure that it is making investments in all its neighborhoods, to all socio-economic groups. Cities with large disparities in incomes, education, and opportunities will never be attractive places to do business.

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Posted at 3:29 PM, Apr 01, 2009 in Urban Affairs
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