Michael Hicks: US debt will change local economic development policies


The U.S. national debt is near its politically unsustainable level. That means substantive changes to both taxes and spending in the foreseeable future, which also means less federal funding for state and local governments.

County government, municipal government, schools, libraries and other local governments need to start planning now for a future with far less federal money.

At the start of the Great Recession, our national debt hovered at roughly 60% of gross domestic product. Today, it is a tad bit over 120%. Right now, the federal government is spending about 23.4% of GDP, while collecting taxes of about 17.4% of GDP.

The last time we balanced our national budget, both taxes and spending ran between 19% and 20% of GDP. That seems like a reasonable political compromise: raising taxes substantially and cutting spending substantially. By substantially, I mean reversing all the tax cuts and spending growth of the past 25 years.

There’s no easy way to do this. For example, our entire military budget is at a post-World War II low of 2.7% of GDP. We could eliminate all the armed forces, and sell all our equipment, and it would not cut the annual deficit by half.

We could eliminate the Veteran’s Administration, the departments of education, energy, state and agriculture, and still not balance the budget. We could cut all our foreign aid, all our research and development spending, and yet the savings wouldn’t round up to one-thousandth of the debt.

To balance the budget, we will need to cut Social Security, Medicare and Medicaid. Those cuts won’t come just in the future. They will need to come to current recipients.

To balance the budget, we also will need to raise taxes on everyone. Those tax increases cannot be limited just the rich or super rich; everyone will see an increase in taxes.

I know this is an unpleasant realization that is probably causing many readers to come slightly unglued. Sorry, the arithmetic is unavoidable. There are no easy answers. There’s no tax cut that will generate rapid economic growth, nor is there some magical spending mix that will cause a big spike in productivity. I wish there were, but there is not. This debt will be lowered the old-fashioned way.

Among the unavoidable casualties of budget cuts will be significantly fewer intergovernmental transfers, from a wide range of programs. Many local governments have come to anticipate federal spending. Poor places, in particular, receive a disproportionate share of federal spending on roads, housing, economic development, education, healthcare and social services.

I don’t think local governments should be viewing this with dread. Instead, I think it is, in the words of FDR, “…preeminently the time to speak the truth, the whole truth, frankly and boldly.” Prospering communities are mostly a consequence of local action, not state or federal largesse. Even in places where state or federal development efforts are effective, as in Indiana’s Regional Cities Initiative, the effects are modest when compared to the benefits of local action.

Sometime over the next decade or so, we are almost certain to enter a period in which state and local governments can expect much lower federal spending. It would be wise to begin preparing residents. If you want additional or improved infrastructure, better schools and other quality of life improvements, now is the time to begin planning those investments.

I recommend a three-part approach.

First, there must be a frank review of local economic conditions. There are more than 200 Midwestern counties in the midst of long-term economic and population decline. It takes courage to confront unpleasant facts head-on. Without doing so, no place will be lucky enough to reverse economic course.

A second step is to take stock of the policies that you’ve been using for the past several decades. I am amazed at the number of places who complain of inadequate school or municipal funding, while spending millions of dollars a year on traditional economic development. Add up all the assessed value locked into tax increment financing (TIF) or in property tax abatements and assess that value at the current tax rate. Add up the cost of your economic development office, and any direct spending program, like a revolving loan fund.

The results will shock and dismay. There is no community in the Midwest where traditional business attraction policies have yielded prosperity. I’d be very surprised if a single county saw the benefits of that spending outweigh the costs over any 10-year period since the 1970s.

For the 200 or so Midwestern counties in decline, the level of lost spending on attracting new businesses will be terribly vexing. These are exactly the same places in need of vast infrastructure improvement, ranging from bridge replacement and new schools to water and sewer facilities. This process should make clear that there’s plenty of resources to support local improvements. They are simply being misspent.

Finally, local governments should think hard about what residents want out of their communities. Don’t ask them what types of economic development they want. Ask them what they want their community to be for their families. They should be asked in surveys and focus groups, preferably after they’ve seen presentations about economic conditions and their economic development policy history in their city or county.

In most cases, you’ll hear about a lot of little things: parks, eateries and recreational activities. Some will want their school to be better — particularly if they’ve seen clear data on student outcomes. I suspect most people will want a city or county that could keep their children around after they graduate.

These steps will allow local elected leaders and their constituents to better understand the challenges of tighter federal budgets and fewer federal resources to poor places. They may also set a community on a healthier path, focused more on the building blocks of prosperity, and less on economic development policies crafted for the middle of the last century.

Michael J. Hicks is the director of the Center for Business and Economic Research and the George and Frances Ball Distinguished Professor of Economics in the Miller College of Business at Ball State University.

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