Recent federal stimulus packages to revitalize America’s troubled economy share a common heritage with the four decade-old Economic Development Administration (EDA)—they both are based on the belief that America’s international competitiveness and economic growth depend on government investments. This approach is fundamentally flawed. Not only do such grants not create economic growth, they are actively harmful to it.
• EDA investments do little more than shift resources from one area of the country or the economy to another. Because government has no resources of its own and relies on taxation for revenue, it can only rearrange resources rather than create them. This was vividly illustrated in 2011 by an EDA grant to Visalia, California, which promptly incentivized the relocation of a factory from Brisbane, California. Such redistribution from one town to another is not economic development—it is economically wasteful.
• EDA’s measures of success are flawed. They value projects according to how many jobs they create rather than to how much value they bring to the community. This directs EDA grants toward projects with large numbers of jobs, like stadiums, convention centers, or other public works rather than to projects that private investors would consider productive. In 2011, for example, EDA gave Cedar Rapids, Iowa, its largest grant ever, $35 million, for a convention center slated to lose $1.3 million by its fifth year. Profitability, not job creation, should be the test for a successful project.
• EDA’s second measure of success—how much private or public investment a project receives—leads the agency to actively harm local communities by encouraging them to raise “development taxes” to qualify for a matching grant. It actually gave an Economic Adjustment Strategies award to Pueblo, Colorado, for raising taxes by $88 million. In Cedar Rapids, taxes went up when EDA offered its grant, even after voters rejected the tax increases.
In the four decades since its creation, EDA has funded professional football practice facilities, model pyramids, wine tasting rooms, and other clearly wasteful projects. But the more significant problem is that it funds projects at all, directing money politically to the benefit of incumbent politicians. EDA’s funding should be immediately revoked, allowing private entrepreneurs to direct capital to the best projects.