Funding Public Services Is the Best Route to Prosperity

Funding Public Services Is the Best Route to Prosperity

Amherst – The New England states, can no longer afford to spend scarce resources on tax credits and other business giveaways. Instead, the region needs to focus its economic development efforts on rebuilding neglected infrastructure and improving education for people at all levels, from pre-school youngsters to older adult workers.

Those are the conclusions of a new study released today by economist Jeffrey Thompson of the Political Economy Research Institute (PERI) at the University of Massachusetts, Amherst. Thompson’s paper is based on his extensive analysis of research on what works and doesn’t work to create jobs and strengthen state and regional economies. It suggests a better approach to economic development, one that the New England states should pursue as they slowly dig out from the Great Recession that began in late 2007.

According to Thompson, the New England states have for too long viewed funding for public services and economic development as competing interests. That’s a false dichotomy, he says.

“In many cases the most effective options for creating jobs are the same options that support public services,” Thompson says in Prioritizing Approaches to Economic Development in New England: Skills, Infrastructure, and Tax Incentives. “Spending and investing in areas at the core of the public sector mission—providing education and maintaining infrastructure—are effective at creating jobs in the short term and building prosperous economies over the long term . . . . The tax-cuts-and-business-subsidies approach to economic development, on the other hand, will do little to create jobs in the short run, and is not the most effective approach to generating growth over the long term.”

The study provides ample evidence that infrastructure (roads, bridges, dams, energy transmission systems, drinking water, etc.) and education are effective approaches for creating jobs and generating economic growth in the state and region. Many of these activities — road and bridge repair in particular — bring in matching funds from the federal government as well as triggering investment from private businesses. And by necessity, infrastructure repairs employ local workers and local materials: it’s just not possible to have an underground water main located in Providence replaced in China.

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These activities would be simultaneously meeting an increasingly urgent need: the evidence reviewed by Thompson shows that in New England, 40% of bridges are structurally deficient or functionally obsolete; most roads are in poor or mediocre condition, and drinking water infrastructure is in need of $12 billion worth of repairs and renovations over the next 20 years.

Thompson goes onto demonstrate that investing state funds — even when scarce — in education not only helps attract business to the state, but has been found to raise gross state product, increase employment in metropolitan areas, and raise personal income. In the shorter term, education spending is one of the strongest job-creation engines there is: each million dollars spent by the states creates between 25 and 39 jobs for teachers, aids, custodians, nurses, professors, bus drivers, and others.

Unfortunately, Thompson describes how, instead of making these investments, state policymakers are too often turning to corporate tax breaks to lure businesses, and public subsidies for employers who promise to hire workers. These policies have been tried for decades, but the evidence suggests that these tax subsidies — to which the region dedicates billions of dollars each fiscal year — just don’t work.

But the real harm done by corporate tax incentives and subsidies is that they deplete resources that could be spent on the education and infrastructure investments that do create jobs, and real economic growth, for our region. According to Thompson, “In the short-term, as well as over the long-run, the best policymakers can do to create jobs and generate economic growth is to make the state’s economy more productive by investing in infrastructure and education.”

Economists welcomed the study as a refreshing reassessment of economic development opportunities for Massachusetts and the region.

“Direct public investment in physical and human infrastructure is the best path for state and local economic development,” said Randy Albelda, professor of economics at UMass Boston. “Better roads as well as a well-educated and well-cared state populace generates much needed employment today and creates the necessary foundation for continued economic growth. It is by far the best economic bang for the buck.”

Municipal officials say government has an important role to play in economic development by investing in and maintaining the essential public structures that actually expand our productive capacity and help the economy to grow.

“Infrastructure expansion is essential to achieving our long range vision for Somerville,” said Somerville Mayor Joseph A. Curtatone. “The MBTA Green Line will be extending into our community by 2015. When that occurs, we will go from having 15% of our community within half a mile of mass transit to 85% of our community within half a mile of mass transit. An additional Orange Line station also is slated to be built in Assembly Square, where the largest mixed-use development on the Atlantic seaboard will be taking place. We expect new infrastructure to provide benefits to this community for generations to come in the form of jobs, a stronger tax base and a better quality of life.”

Jeffrey Thompson is a research economist based at the Political Economy Research Institute at UMass, Amherst and funded, in part, by the New England members of the State Fiscal Analysis Initiative network.

The full study Prioritizing Approaches to Economic Development in New England: Skills, Infrastructure, and Tax Incentives, as well as a policy brief, are available at www.peri.umass.edu.

>> Download Prioritizing Approaches to Economic Development in New England: Skills, Infrastructure, and Tax Incentives

>> Download the accompanying policy brief