Economic-Development Agencies Make Promises They Can’t Keep

E conomics offers powerful tools for understanding our world and making informed choices, but economic analysis is about broad trends, not specific details. That’s why it’s so confusing to real economists when local governments make policy decisions based on, for example, a prediction that some action will create a very specific number of new jobs five or ten years in the future.

Sure, economists have models, and those models give us insight into what is likely to happen — within limits. But those models cannot predict economic indicators and outcomes to the nth decimal point. An economist may suggest that the inflation rate will increase if the Federal Reserve prints more money, but he can’t reliably predict by how much inflation will increase.

Large corporations have teams of economists to help them predict consumer demand and the number of workers they’ll need in the next couple of years, and yet unexpected layoffs are commonplace. Economists are often surprised by the strength or weakness of the U.S. economy, judging from recurring newspaper headlines. They are great at providing a sense of the current state of affairs and where we might be heading, but detailed predictions fail more often than they are proved true.

You’d never know this from the constant stream of press releases by economic-development agencies that claim that a particular taxpayer-funded subsidy will, say, “create 2,450 jobs.” Not only is it impossible for economists to be this specific, economic-development agencies also lack any alternative to compare these projections to.

Economists are generally aware of this limitation. Dynamic-general-equilibrium models predict the impact of potential regulatory or monetary policies on the macroeconomy, including the labor market. But these models consider how the entire economy will be affected by a new policy if all other factors remain the same. Economic-development agencies attempt to predict what one new firm will do to one industry segment in one local economy.

Whatever it is those economic-development agencies are doing to come up with their numbers, it’s not economics. It’s marketing for a public-policy decision that has already been made, and if truth-in-advertising laws applied to the government, they’d be in trouble for it. The future of the economy is unpredictable because “the economy” is what happens when every person goes about their daily life, making decisions and dealing with expected and unexpected situations.

You probably know what you’ll be doing five seconds from now, and you likely have a pretty good idea about five minutes into the future, but as you try to look five hours, five days, five months, and five years ahead, it becomes increasingly harder to make a confident prediction. Economists face a similar challenge when modeling the economy.

It’s important to understand how jobs actually are, and are not, created. New jobs do not cause a local economy to grow. Rather, a growing local economy creates new jobs. It’s the context of that local economy, the conditions that either help or hurt people and businesses, that creates the need for new jobs. Firms can’t just hire more people regardless of whether or not there’s a need for them, and consumers can’t just buy more things if they don’t have the money to do so. When times are tough, times are tough. “New” grows the economy — not new jobs, that is, but new ways of meeting consumer demand and discovering new consumer desires. Economic-development agencies do neither.

Economic-development agencies conflate jobs with growth when neither can be predicted in detail. These hollow promises come with very real costs: Besides government spending, these agencies interfere with the broader economy by advantaging some companies over their competitors. Government-favored industries get a boost, while innovation and entrepreneurship get smothered by red tape and taxation.

America’s economic-development agencies cannot predict, let alone manage, the future — not because they lack expertise but because it can’t be done. Yet they continue to try, and they use your tax dollars to do it. American communities would be better off if these agencies cut the pseudoscience and stepped aside.