A Better Economic Development Policy

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…an economic development policy that encourages private investments by knowledgeable businesses and individuals with skin in the game has a better chance of working than “next generation technology investments” picked by the governor and the Mississippi Development Authority.

A better economic development policy

I recently wrote about Mississippi’s efforts to create jobs by backing new technology failures such as Kior which received a $75 million interest free loan from the state.  It was supposed to build five plants to produce diesel and gasoline from pine trees.  It was supposed to create 1000 jobs.  However, its first plant in Columbus, Mississippi shut down in December with $254 million in losses without ever operating consistently after almost two years of trying. The loan is unlikely to be repaid, and the 1000 jobs and four more plants are still wishful thinking.

The state’s failed central planning efforts are in sharp contrast with General Atomics’ $11 million expansion to add 80 jobs at its  Shannon, Mississippi plant by relocating existing operations and product lines.  If General Atomics is successful, each job it creates will cost $137,500.  But if it fails, it will cost  taxpayers almost nothing – because it is spending its own money.  The state is providing some nominal infrastructure funding.  Otherwise, failure wouldn’t cost taxpayers anything.  I suspect the company would probably do the expansion without any state aid.   But hey, state and local development agencies and politicians have to do something to justify their existence.

The point is an economic development policy that encourages private investments by knowledgable businesses and individuals with skin in the game has a better chance of working than “next generation technology investments”  picked by the governor and the Mississippi Development Authority.  So how do we encourage private individuals and businesses to invest?  There are several ways.

How to encourage private investments

First, get the state out of the business of “investing” tax dollars in businesses – especially new business startups.  It doesn’t know how.  It has a terrible track record.  It distorts the market.  It creates distrust when political cronies get handouts that give unfair advantage.  It discourages honest investments and competition that serve the public interest.  How many state and local development agencies do we need to hand out tax dollars?  Do the results justify any?

Second, encourage investments by businesses already in the state, that are already providing jobs on their on, and that are not looking for a handout.  Do this by keeping taxes low or reducing taxes so businesses and residents have more to invest.  Do this by limiting fees and regulations that complicate and discourage private investments.

Third, make sure regulators whose duty is to protect and advance the public interest do their jobs.  Over time regulators can be captured by the businesses they regulate.  The executives and lawyers and political supporters of the regulated businesses are constantly before the regulators advocating their causes.  They are organized and well funded.  The public has no such organized representatives presenting and defending its interest.  What’s good for the regulated industry is often bad for its customers – the public.  The regulated businesses’s gains are often the public’s loss.  When the public loses, it has less to spend and invest.  Economic development suffers.

When regulators fail

A case in point is the Public Service Commission and Mississippi Power’s Kemper County Lignite Plant.  If the PSC approves (deems prudent) the $3+ billion cost of the plant as the company advocates, the extra cost of electricity to customers in the company’s monopoly service area will be over $400 million per year.  The extra cost over over the 40 year life of the plant will be over $16 billion  That’s over $16 billion that will be sucked out of the 23 counties in south east Mississippi.  That’s over $16 billion that will not be spent or invested in Mississippi.

The opportunity cost of $16 billion not invested in Mississippi

If others in the private sector can create a job with a $137,500 investment like General Atomics, the $16 billion that will not be spent or invested in Mississippi due to Kemper will prevent the creation of 116,364 jobs ($16 billion divided by $137,500).  If the Kemper plant partially offsets this with 200 new permanent jobs as projected, the net difference will be 116,164 fewer jobs.

Advocating and supporting another new technology mistake with an opportunity cost of 116,164 jobs is not good economic development policy.

We can do better.

Kelley Williams, Chair Bigger Pie Forum, February 12, 2014.

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