State Economic Development Programs: A Boost to Small Business or Political Grandstanding?

By SBE Council at 15 October, 2015, 11:11 am

by Raymond J. Keating

Politicians love small business. How do we know this? Most will take any opportunity to declare their deep affection for entrepreneurs and Main Street enterprises, with many also pointing to all kinds of legislation and programs they’ve proposed or supported as evidence.

Unfortunately, such declarations and programs too often amount to nothing more than political grandstanding lacking in substance.

Consider some key findings of a recent survey of leaders of small business groups across 25 states, conducted for GoodJobsFirst.com and the Ewing Marion Kauffman Foundation, focused on state economic programs. As reported, the key findings found:

-“92 percent believe that the spending balance on incentives between small and large businesses in their state is biased toward big businesses (69 percent strongly believe).”

-“79 percent believe that their state is overspending on big incentive deals, hurting state finances (56 percent strongly).”

-“87 percent say that small business interests in economic development issues are not effectively represented in their state’s capital (36 percent strongly).”

-“85 percent believe that economic development incentives in their state are not effectively addressing the current needs of small businesses that are seeking to grow (36 percent strongly).”

-“72 percent do not believe their state’s current incentive policies are effective in promoting economic growth (23 percent strongly).”

Well, hardly a ringing endorsement.

No one should be surprised by such findings. Oftentimes, state economic development programs involve politicians and/or their appointees taking tax dollars and doling them out according to political incentives. They not only lack the incentives and knowledge to make wise investment decisions, but they are clearly biased in favor of big projects that involve ribbon-cutting ceremonies and grandiose claims about the presumed impact. This might be good politics, but it’s certainly not sound economic policy.

What actually matters for entrepreneurship and small business growth from a policy perspective is to establish climate in which entrepreneurs, businesses and investors are free to innovate, invest, compete and grow, with the market guiding resource allocation rather than government, thereby driving economic, income and employment growth forward. That means keeping tax and regulatory burdens low, property rights protected, and government limited but as effective as possible in its legitimate undertakings.

As a result, SBE Council’s Small Business Policy Index, for example, focuses on broad policy measures that affect all businesses, as opposed to politically targeted programs. As noted in the latest report: “Of the 42 measures included in the 2014 edition of the Index, 24 are taxes or tax related, 9 relate to regulations, five deal with government spending and debt issues, with the rest gauging the effectiveness of various important government undertakings.”

So, it’s anything but a surprise that small business leaders in the states are down on state economic development programs. Officials leading these programs often focus on the wrong things, which means many of the initiatives simply don’t work.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.