Stimulus Slows Our Economy

Why does government stimulus spending fail? When considering the success of economic programs, the 19th-century French economist Frederic Bastiat urged us to look at both “what is seen and what is not seen.” Now a program at the Department of Commerce provides ample evidence of Bastiat’s prescience. The Economic Development Administration (EDA) provides a strong warning against future stimulus spending: When it comes to stimulus, the unseen costs are often greater than the visible benefits.

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 of California at Berkeley, 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 responded with 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.

This pointless redistribution of wealth is bad enough, but EDA does further damage by funding harmful projects. For example, the agency’s largest grant ever, for $35 million, went to build a convention center in Cedar Rapids, Iowa, in 2010. It’s still too early to measure its economic impact, but a mere glance at similar projects shows what a failure big-ticket items like convention centers are at creating economic growth. For example, after Washington, D.C., built its new $850 million center, attendance and hotel booking fell.

The Cedar Rapids project rapidly became a money pit, but the EDA kept paying for the digging. Project costs were estimated originally at $67 million, but in less than a year, they increased by $8.6 million. Rather than acknowledge a mistake in funding it, the EDA keeps funneling taxpayer dollars into the project. A year after the original $35 million grant, the EDA responded to the increased costs with an additional $2.9 million grant. The city’s own projections show the center losing almost $1.3 million by its fifth year.

When Heywood Sanders, an expert on convention-center economics, pointed out to a local paper that convention centers are economic losers, the city’s project manager was blase. “It will lose money. He’s absolutely right,” he said. “We know that. The city knows that. The question is, how do you minimize the loss?” The city easily could have avoided the losses by not entering the failing convention-center industry. Instead, the city can treat the losses as incidental as long as it is receiving tens of millions of dollars from the federal government. That kind of money provides too strong an incentive to push forward projects that make no economic sense.

The EDA claims it is “guided by the basic principle that communities must be empowered to develop and implement their own economic development and revitalization strategies.” But its grants and interventions undermine this goal. In order to be able to claim that its projects have leveraged large amounts of public and private investment, the agency often encourages municipalities to create special development taxes to qualify for EDA matching grants.

Pueblo, Colo., for instance, was granted an Economic Adjustment Strategies award for raising $88 million to meet an EDA matching grant. In the Cedar Rapids case, a sales-tax increase to pay for the center was rejected by voters, but city planners went ahead with the project after the EDA intervened.

Meddling in local affairs that leads to tax increases and greater government spending will not create real economic development. Policymakers need to end their addiction to spending taxpayer money and admit they have a problem. A good first step would be to end the Economic Development Administration.