Last Friday Iain Murray and I published an op-ed in The Washington Times, which described how government spending fails to create economic growth. We show how the Economic Development Administration’s spending reshuffles economic resources with several recent examples. Here is the first part of the article with links to the sources:
Government spending fails to stimulate economic growth because, quite simply, we do not see that it depends on resources taken from elsewhere in the economy. That’s how EDA economic grants work. Consider the recent case of its $2 million grant to Visalia, Calif., in the San Joaquin Valley. The EDA claimed the project would create 250 jobs and attract $10 million in private investment. When VWR, a medical supplies manufacturer, decided to build a 500,000-square-foot warehouse in Visalia’s newly expanded industrial zone, the EDA claimed the spending was a success.
But the agency ignores the unseen cost. In this case, VWR closed a warehouse 200 miles away, in Brisbane, in the San Francisco Bay Area, to take advantage of the subsidies offered in Visalia. According to the University at California at Berkley, the closing will result in the loss of 331 jobs and millions of dollars in economic activity in Brisbane.
The EDA claims that its funding role “prevents a ‘race to the bottom’ in which cities, counties and states undercut each other in order to attract short-term growth.” Yet that is exactly what the EDA grants accomplished in this case. Once the EDA incentivized VWR’s relocation, Brisbane policymakers proposed subsidies of their own in an effort to persuade the company to stay. Politically favored businesses win at the expense of taxpayers and their less well-connected competitors. Jobs are not created but merely shifted from one place to another.
The Economic Development Administration demonstrates a point that researchers over at the Mercatus Center have made about the stimulus, namely that government spending inefficiently shifts wealth and resources to political favored firms and locations, but doesn’t build new wealth to grow the economy.