How can Virginia state government best help the economy adapt to the inevitable downturn in federal spending (see previous post) and the resulting squeeze on the economy? William M. Shobe, author of “Beyond the Great Recession: Preparing Virginia for Expected Cuts in Federal Spending” makes some useful observations.
In the long run, argues the Weldon Cooper professor, a population can earn no more in wages and salaries than it can support through its labor and capital productivity. Efforts to increase prosperity that don’t address productivity — say, the lavishing of subsidies and tax breaks upon selected industries — are a waste of time. The proper focus of state government is to improve the productivity of labor and capital deployed in the state. Shobe suggests three broad strategies:
- Build human capital through education.
- Spur entrepreneurship.
- Efficiently provide public goods such as infrastructure, public safety, enforcement of property rights, environmental quality and scientific knowledge.
“It is the effective focus on these three core wealth-creating activities, education, entrepreneurship, and public goods that gives a government
value,” writes Shobe — not the preoccupation with “creating jobs.” Insofar as efforts to create jobs distract from, or detract from, the proper focus of government, they are self defeating.
“Encouraging entrepreneurship is not about giving tax subsidies to small business,” writes Shobe. And creating wealth is not accomplished by giving tax breaks to businesses that locate to the state. “When resources are being used at a level close to capacity, what evidence we have suggests that state spending to lure producers to locate in a state is dismally ineffective. States bidding against other states for a business location decision allows the firms to capture for themselves a substantial share of the social benefits of their location decisions.”
Which brings to mind the latest feeble attempts by the General Assembly to stimulate job creation in Virginia by providing a slew of subsidies and tax incentives. A small business investment grant fund, signed by Governor Bob McDonnell this month, provides a grant equal to 10 percent of a qualified investment in a small business for an eligible investor. Supposedly, this will “incentivize critical investment in small business to spur additional economic development and job creation.”
Other bills the governor signed would create sales and use tax exemptions for purchases of computer equipment used in data centers and would extend Virginia’s capital gains exemption for investors in technology startups. And those are just this year’s initiatives. The list of tax breaks and exemptions for favored industries is embarrassingly long.
Shobe’s analysis may explain why the McDonnell administration’s record for job creation is so mediocre, especially for a state widely reputed to have the best business climate in the country. It also shows why we can expect the same results from Democrats, who offer no alternative except the blind faith that somehow, because they are Democrats, they will do a better job of executing hoary economic development nostrums dating to the 1960s. Virginia’s political class has no real understanding of what it takes to prosper in a globally competitive knowledge economy… or, for that matter, how to prepare for the coming collapse in federal spending.