Monday, July 30, 2007

Don't Count Your Chickens: Economic Development

The Mayor wants to create a Department of Economic Development, which would upgrade the operation from its current status as the Office of Economic Development, which is contained within the Mayor's Office.

I do not recall this ordinance coming up for a vote, but I don't think it did, and it has not appeared on the agenda for a vote since it was up for public hearing.

The point is, Economic Development is still an office and not a department. Yet, here is what the sign says on the door:

Does the city know that they are living a lie? Do they know, and just not care??

Although I cannot state with certainty the reasoning behind this, it is a typical result for the city. The laws don't seem to matter. The fact that certain laws and rules exist is a nuisance to the mayor--she will obey them if it's convenient but if not, oh well.

"Those laws are really hard and time-consuming....I'll just do what I want," I imagine her saying.

Enough about this...let's get to the meat of the debate.

We do not even need an office of economic development, and we definitely do not need to make it bigger. I don't care that other cities and counties have such departments; it doesn't matter, they don't belong.

Here is what the economic development office does, and would do on a bigger basis if it could:

-try to increase business opportunities in the city
-give out money to try and do the above thing
-try to promote minority business opportunities
-administer the sister city program

Question: What, in the name of higher taxes, does economic development have to do with the sister city program?

Answer: The mayor can appoint a major campaign contributor and/or friend to be the department head, then pay that person $115,000 per year and fly that person around the world to visit all of our sister cities. It is a mechanism for political favors.

Question Asker: Oh.

And that's that. Moving on, we do not need a department of economic development because the private market will take care of this just fine. An infinite number of market forces determine where a particular type of businesses will open. If an entrepreneur thinks he/she can make money in Annapolis, he/she will try and do it. This process is repeated trillions of times throughout history, and this leads us to the businesses we have now. The city is hopelessly foolish and arrogant if it thinks that it can do better than the private market.

There is, in fact, one argument in favor of an office of economic development that holds some water. You could say:

"Ah-ha, AP, you think you know it all--the private market only works if there is perfect information. Even if Annapolis would lead to profits for businesses, they might not know about it because they could not possibly know all of our laws or opportunities, and they might not even know us at all. The economic development does what a good government should--they eliminate an information problem and therefore correct a market failure."

and you would have a valid point. But you would be ultimately incorrect. The private market almost always gets it right. Even IF the department could have this benefit, it does not justify the downside.

So what is the downside? Mainly, it's that the government operates as a for-profit entity. Private for-profit businesses make investments based on risk and expected rate of return. Some of these investments succeed, and some fail.

The same can be said for the department of economic development. Their grants to minority businesses, subsidies, incentives, etc.--these are all SPECULATIVE INVESTMENTS in certain businesses, no different than a venture capital firm. THE DIFFERENCE IS, THE OFFICE OF ECONOMIC DEVELOPMENT DOES THIS WITH YOUR MONEY. This is not the role of government. There is a horrible equity problem here. The government is favoring a select few businesses as the expense of the many--at the expense of the citizens.

The best possible thing that could result from a Department of Economic Development is a successful business a few years before it would have otherwise been. The worst things that could happen include government-supported inequity, market distortions, businesses that would not succeed without government support, and worthy entrepreneurs that are put out of business because they cannot compete with the select few businesses that receive government help.

Here is how you spur economic development:
-Lower taxes on businesses, and on residents so they can spend more at these businesses
-Streamline the permitting process
-Sit back and smoke a cigar, because the private market will do the rest

Even if you want the government to promote minority opportunities, you can do this through planning and zoning.

Summary: Economic Development Departments = unnecessary.