Economic Development vs. Economic Growth

Economic Development vs. Economic Growth

When people talk about economic development or economic growth, are they talking about the same thing?

Many business people rightly dislike high taxes and government red tape because they increase costs and are harmful when trying to grow a business.  Yet many of these same business people are supportive when the government chooses to spend tax dollars promoting their specific industries. 

But all government spending — even economic development programs — have additional costs that don’t clearly show up on a budget.  This is known as an “opportunity cost.”  Something has to be given up when one option is chosen over another.
Because economic development programs tax some consumers and entrepreneurs to benefit others, it’s not possible to calculate exactly what we’re giving up.  We can measure, for example, the $155 million in corporate tax credits claimed in Nebraska in 2013, but we can’t know what would have been created if those dollars were instead used for tax relief for all taxpayers.

Still, economic development policies are so common, they are usually assumed to be a normal business concept.  The history of these policies in Nebraska shows the opposite is true.

Nebraska’s first state office related to economic development opened in 1947. Technological advances in farming were increasing productivity, but had the downside of job losses among farm laborers. The Nebraska Legislature felt the need to intervene to recruit more industries to the state.  While the office’s aim of attracting employment was well-intentioned, this program took on a much larger role two decades later.

In 1967, Gov. Norbert “Nobby” Tiemann oversaw the creation of Nebraska’s first sales and income taxes and the Nebraska Department of Economic Development. The department was tasked with the goal to plan, promote and develop the economy of the state and work for the fullest development of the state’s human, natural, and physical resources…”  This also led to a larger budget than had been allocated to the first division established in the 1940s.

Today, Nebraska levies the nation’s 7th highest average property tax rate and the 16th highest corporate and personal income tax rates.  Economic development programs are a part of the government spending contributing to this burden.  Last year, the Department of Economic Development spent more than $41 million, and since 2000, the department has spent more than $663 million.

But these figures only include the department’s spending, not tax incentives and expenditures granted to specific business interests.  Ironically, the Department of Economic Development is now responsible for offering reductions to the very taxes foisted upon Nebraskans around the time of the department’s inception.

In our new report, Removing Barriers in Nebraska Part Five: Economic Development vs. Economic Growth, the Platte Institute investigates how Nebraska’s faster-growing rivals approach these same policy choices.  A study of economic development incentives by the New York Times finds that Nebraska spends more per capita than our competitors in Arizona, Colorado, Florida, Iowa, and Texas on special tax benefits, and more than all but two other states.  In the cases of Colorado and Iowa, Nebraska spends more overall as well.

Yet most of these states also outpace Nebraska in job growth, population growth, and the creation of new businesses according to government data, indicating a deficit of entrepreneurship.
To overcome this, Nebraska’s policies should pursue broad-based economic growth, not development of specific business interests.  Entrepreneurship is the key.  Policymakers should consider which policy barriers they can remove to help create a more robust, competitive marketplace that encourages more Nebraskans to try their hand at starting businesses that solve problems for the public, and growing existing enterprises.

The process of entrepreneurship and economic growth is messy and can feel like less of a sure thing than top-down economic planning.  Many entrepreneurs fail along the way.  But as more Nebraskans find they can be rewarded for using their talents and resources in entrepreneurship, they learn more through profit and loss about what consumers really value, and produce more of the innovations that create wealth for everyone.

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