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Taking Care of the Goose: Growing the Economy to Close the Budget Gap

Stephen Goldsmith | 04/16/2010 |

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You’ve probably seen the scary projections of the latest White House budget that highlight the imbalance between Washington’s policy promises and its capacity to pay for them. The growing mismatch between revenues and expenses is expected to create an explosion in the national debt.

As scary as these projections are, consider this: the White House budget assumes rosy projections for real economic growth of close to 4% for the next 5 years. So if the economy even stalls, the reality could be even bleaker. As this Pew study points out, the burgeoning debt can’t continue without eventually causing some sort of crisis – inflation, rising interest rates, or monetary collapse is likely to hit before we ever reach the summit of the mountain of debt we are climbing.

If the economy tanks, the picture is grim indeed.

On the flip side, a vibrant, booming economy could make it far easier to close budget gaps and reduce the national debt to reasonable levels. As Steve Forbes put it in a recent article: “If we create an environment for economic growth the assets of the U.S. will surge, thereby making the debt less burdensome, more bearable and more sustainable.” Forbes estimated in November 2009 that just a 15 percent increase in household wealth could potentially eliminate the deficits. While this level of growth is attainable, it isn’t likely if government pursues high-cost policies that bog down the private economy.

In theory, at least, politicians from across the political spectrum are committed to growing the private economy. But how? Public leaders spend a lot of time thinking and talking about improving the economy and creating jobs, but what can government really do to boost private enterprise?

The traditional approach is for state and local governments to spend tax dollars to lure firms who promise to create jobs, which indeed sometimes make sense. But while public officials boast of how many jobs they create from the investment of tax dollars in business attraction and retention, they rarely consider the jobs lost when the quality of life is insufficient or cost of doing business too high.

Diana Furchtgott-Roth of Hudson presents the dilemma in an recent column which notes that jobs created by government are visible, while the workers displaced by the effects of increased taxes and government regulation are easily ignored. She quotes from the French economist Frédéric Bastiat who wrote:

"When an official spends for his own profit an extra hundred sous, it implies that a taxpayer spends for his profit a hundred sous less. But the expense of the official is seen, because the act is performed, while that of the tax-payer is not seen, because, alas! He is prevented from performing it."

As public budgets grow, they extract more money from the private wealth-generating segment of the economy. If one thinks of the numerator as tax revenue and the denominator as overall economic wealth, any city, state or country that grows the numerator faster than the denominator is headed down a slippery slope.

Cities frequently harm property values and job creation when they increase costs. Indeed, for decades (until recently, anyway) city halls have acted as the employer of last resort – seemingly oblivious to the job-killing consequences of their public job creation strategies. The federal government through its mandates penalizes urban residents when it loads costs on businesses and homeowners, who in a regional economy are least able to pay for them.

The federal government through its mandates sucks jobs out of cities. For example, Indianapolis today labors under EPA mandates that will impose a $4 billion combined sewer solution on its 850,000 residents with absolutely no consideration, or care, of whether a less expensive solution would produce the same public value and save jobs and wealth lost as a consequence.

Thus, in these very difficult times, the core job creating strategy must start with the basics of government creating a sound economic foundation of low taxes, reasonable regulation, and strong physical and intellectual infrastructure. I remember early in my first term as mayor when I surveyed thousands of small businesses, asking them what I might do to help them expecting them to respond with the request for some new program. Instead the owners surprised me with their response: “Mr. Mayor, get government to tax and regulate us less.” No fancy programs or sweetheart deals – just the essentials.

Regulatory relief can take many forms, from eliminating needless conditions that do not produce health and safety improvements to reducing outmoded approaches – examples of which we see in what New York City has done.

New York: Easing the Path to Economic Growth

In New York, the city economy has weathered the recent economic storm surprisingly well – especially considering the crisis hit the very industry at the heart of the metropolitan economy. New York’s unemployment rate has remained at or below the national average, real estate prices haven’t collapsed, and overall economic growth has remained strong.

Mayor Bloomberg’s focus on making it easier for business entrepreneurs to do business in the city certainly has helped. A set of business and neighborhood-friendly economic development policies has encouraged industrial re-development.

For instance, Bloomberg modernized building codes and removed unnecessary restrictions to new construction. In the past, private investors have been stymied by a Byzantine environmental approval and inspection process. Reforms have streamlined the process and made them less burdensome.

New York City’s industrial zoning policy, too, was updated for the first time since 1961 to catalyze the process of finding creative uses for the waterfront property, piers and warehouses that had become an economic wasteland. In addition to the regulatory and zoning reforms, the city’s PLANNYC made investments in physical infrastructure to encourage development of these badly underutilized sections of the city.

 

Atlanta: Small Changes, Big Opportunities for Micro-Enterprises

Sometimes, modest changes in policy clear the way for new jobs and opportunities in a city. Mayors can serve as ‘market makers’ – especially when working with neighborhood entrepreneurs and micro-enterprises. An example comes from the city of Atlanta’s Public Property Vending Program. In the first phase of the project, General Growth will install as many as 100 new kiosks, creating at least 100 new jobs and attracting $6 million in private investment in the city. And this in exchange for smart policy changes and $0 in public funding. Here’s how they did it.

At the close of the Civil War, the city passed a law that allowed returning veterans to operate vending stands on city streets. The program was highly regulated. For example, each vending location was established by city ordinance. Over time, fewer vendors joined the program, and by 2000 less than half of the available vending spaces were being used and downtown businesses complained about the physical presence of the vendors. The stations were unkempt and the array of merchandise available was very limited.

The city faced a choice – either shut down the market or find a way to inject new energy and investment into the market they were trying to make. But, to no surprise, public funds to improve the infrastructure and aesthetics were simply not available.

Instead, the city decided to find a private sector partner who could transform the program into a true outdoor marketplace. The City's vision was that street vending was the equivalent of an outdoor mall, and it needed to be managed like one.

To realize this vision, the City rewrote the public vending code in a way that authorized - among other things – the City to outsource the management of public vending to a third party. The City then issued an RFP for public vending management services. The result?

Atlanta selected General Growth Properties, the second largest mall operator in the country, which then designed, built and installed kiosks for vendors to use – paid for completely by vendor rent and advertising. No taxpayer funds were necessary – just a set of policies friendly to a new partnership between the city, the national partner, and local entrepreneurs.

People are rightly worried about our mounting debt and endless deficits, and everyone recognizes the importance of economic growth. The desire for government to spur the economy, however, must be tempered by an understanding of exactly what government is realistically able to accomplish in this arena. The traditional approach of “buying” jobs with tax dollars usually leaves the economy at a standstill – or worse.

The recipe for success is straightforward, but requires political discipline. Start with low taxes, reasonable regulation, and the efficient delivery of critical public infrastructure – including schools. Jobs can be developed most directly when government carries out its basic responsibilities and clears the path to enterprise by streamlining the zoning, licensing, and permitting processes that often act as a barrier to industry.

Stephen Goldsmith is the Daniel Paul Professor of Government and Director of the Innovations in American Government Program at the Ash Center for Democratic Governance and Innovation of Harvard’s Kennedy School of Government. He is the editor of Better, Faster, Cheaper – Smart Ideas for Government.


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