Working in Iowa

 

 

One doesn’t know whether to mock or pity the passel of petty politicians who would perk up the economy by proclamation.  Iowa Governor Culver is touting his I-Jobs program for a series of infrastructure improvements across the state using borrowed funds, which will in fact spur short term job activity; that is, until the borrowed money is used up.  The state’s Republican challengers for the state’s top job, Rod Roberts, Terry Branstad, and Bob Vander Plaats, all will cut taxes, and by implication government programs, as that, they say, is the magic formula for private sector job growth.  Less government equals more jobs.

 

Politicians do not create jobs, society creates jobs.  Society collectively demands a variety of goods and services that are mostly, but not all, satisfied by the market.  Our consumption informs the market of how many jobs are needed to accommodate our wants.  

 

Government is part of the overall economic structure, too, and it by our mutual consent provides sets of goods and services the private sector fails to supply adequately.  By so doing, society creates the government jobs necessary to accomplish those tasks, and we have learned over the years that a well-functioning public sector is an essential prerequisite for a healthy private sector.  

 

There has been a clamor in recent decades for government to do more to stimulate job growth even though their abilities to directly stimulate private sector job creation are quite puny.  Governments increasingly rely on tax receipts to entice growth.  In Iowa, state government uses taxpayer funded grants, forgivable loans, and job training assistance for eligible firms, and nearly all firms are eligible. Corporate income tax credits might be thrown into the mix to sweeten the deal.  City governments have virtually no statutory limits in Iowa on what they can do in support of economic development, and they use a mix of property tax relief for their prospects, as well as borrowing to support growth.  Combined, the amount of public resources dedicated to chasing jobs in Iowa is massive, perhaps upwards of a half-billion dollars annually.

 

Because every state and major city is engaged in this highly competitive behavior, and because the only bargaining chips states and local governments believe they have are tax breaks, this intense scramble for development capital creates an inevitable “race-to-the-bottom.” To become incrementally more competitive, governments lower business tax costs by shifting the cost of public goods provisions to existing businesses and households.  When the public can bear no more shifting, they must cut public goods and services due to reduced tax revenues.  Cut taxes enough and you gut essential government goods and services.  Gut government goods and services too much and you become a public service wasteland that none but the worst of firms would desire.  

 

Add to this mix the combined job growth pressures of a lingering recession plus an anti-tax and anti-government grumblings, and you get the ingredients for a final frenetic round of business chasing by governments via increased tax-based incentives resulting ultimately in an accelerated slide into utter non-competitiveness, all in the name of job growth.

 

In Iowa, several prominent examples of what politicians count as job creation successes actually couldn’t survive without massive taxpayer support.  Wind energy, ethanol, and biodiesel all demand billions of state and federal subsidies annually.  But long time and well-entrenched Iowa firms like Rockwell Collins, John Deere, Equitable, Principal, Wells Fargo, Blue Cross and Blue Shield, Kemin Industries, and Pioneer Hybrid are all multi-million dollar recipients of state and local aid even though they are profitable firms that were going to expand their operations in Iowa regardless of incentives.  

Their owners and shareholders thank you.

 

In the long run, and it is the long run that matters, states and cities boosting short term growth at the expense of public goods delivery will meet at the bottom of the job development heap.  Their infrastructures will crumble, their workers will be increasingly ill-prepared, and their public amenities will be sparse.  The bottom is not a pretty place, but the bottom is where we go with this economic development logic.

 

Government operates best when providing public goods and services that support the capacity of the economy to grow, as well as by meeting the needs of its citizens that cannot be met by the market.  Business via standard market competition is best at determining when and where to produce a good or service.  Society is a winner when both entities do their jobs well.