INTRODUCTION

State and local “economic development programs”—programs that assist individual businesses with tax or financial subsidies, or special public services, in order to increase local jobs or improve local businesses' competitiveness—have become prominent and controversial. I receive several phone calls a month from reporters about the latest round in the state subsidy wars—such as Alabama's 1993 subsidies of $250 million for a new Mercedes plant, or South Carolina's 1992 subsidy package of $100 million for a new BMW plant. (Schweke, Rist, and Dabson, 1994, p. 23). The reporters seem most interested in criticisms that this is a waste of government resources. Is economic development, as argued by the Illinois Tax Foundation, “the newest form of pork”? (Ylisela and Conn, 1990).

Can economics research say anything useful about whether economic development policies can be effective? My answer is yes. Economics research suggests that traditional economic development policies of “buying growth,” using various financial and tax subsidies, have a high cost per job created. Benefits large enough to justify such costs are more likely in economically distressed areas, in which the unemployed are more desperate for jobs and much of the existing public infrastructure is underutilized. Newer economic development policies, which provide services to enhance business productivity, may improve economic efficiency, but need careful evaluation. Such productivity-oriented services may make sense for low unemployment as well as high unemployment areas.