March 6, 2018

The Political Economy of Targeted Economic Development Incentives

Policymakers at all levels of government seem to be keenly interested in policies that might boost economic growth for their constituents. Increasingly, they have turned to targeted economic development incentives to achieve this end (Bartik, 2017). In recent years, states and localities have spent approximately $70  billion per year on targeted incentives (Good Jobs First, 2017).  Given the ubiquitous use of these incentives to spur economic development, ascertaining the relationship between targeted incentives and another possible strategy for economic development—economic freedom—is an important (and relatively unexplored) line of research.

Questions about government involvement in the economy are often framed in terms of government size and scope, often looking at the level or extent of government spending, taxation, and regulation. The economic freedom literature exemplifies this approach. But  this way of framing the question obscures another important  dimension: the variance in government involvement across firms, industries, or locales. Governments do not just establish levels of spending, taxation, and regulation. They also use a “targeted approach” to economic development that selectively favors particular  firms and industries with benefits like targeted tax relief, cash subsidies, regulatory dispensations, and in-kind donations of land and other valuable goods and services. Instead of using lower taxes or reduced regulation across-the-board (or  economic freedom) to encourage development, politicians select firms to receive these benefits.

In this special issue, the authors explore the relationship between economic freedom and targeted economic development. What is economic freedom, and how do targeted economic development  incentives affect it? Does economic freedom causally determine differences in targeted taxation and spending? Or do targeted incentives causally determine economic freedom? And, finally, what are the economic effects of targeted economic development incentives?