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Trade-Offs: the oft-forgotten fundamental of economics

Economic development is a tough game, with few ‘right’ answers. Still, there are fundamentals that need to be revisited by economic developers, politicians, and communities alike.

One of these key fundamentals is the basis of economics, and really life in general- every action has a trade-off. Communities at large rarely ask of their representatives and economic leaders what the true financial costs of their decisions are, let alone the opportunity costs of choosing specific pursuits. Yet understanding the trade-offs required for certain economic activities is vital to create growth.

There are always other options for decisions that are taken, and it is important that the community always pays attention to what those other options may be.

Before we can even dive into trade-offs, we have to realize that sometimes what sounds good, or maybe even logical, is not always what is best. The genius economist Thomas Sowell said in his book Basic Economics that 'perhaps the most important distinction is between what sounds good and what works… the former may be sufficient for purposes of politics… but not for the economic advancement of people in general'.

We often pursue things that sound good while sacrificing things that really work; we give up beautiful, long term depth for short-term, surface-level sexiness. Our political system partially incentivizes this behavior, as the immediate ‘wow’ factor is more likely to get one reelected or help one keep their job. We naturally kick the can of consequences further down the road for others to deal with.

This simple reality makes it vitally important for developers and the community itself to flex their muscle and ask, ‘what else could be done?’. We must ask what the trade-offs of all economic development decisions are, and we must have a guidepost for deciding which of many options to choose. This guidepost is to understand the purpose of ‘economic development’- the creation of wealth within the community (with the overall purpose of generating tax revenue). By boiling the goal down to something simple - creation of wealth - any future decision can be bounced against this objective and we can ask if what we’re doing serves that goal.

As the public, we often look at pure jobs numbers, rather than wealth creation, as a measure of success, which has several problems that I’ve posted about in the past. Pursuing only big jobs numbers by doing things such as attracting a major employer into the region is a costly activity, yet we rarely ask about what the actual cost of the pursuit is in marketing dollars, in travel, in salaries, and more. We almost never ask our politicians and developers what else they could have been doing with those scarce and limited resources; those salaries, marketing dollars, travel funds, etc.

How much does it really cost us to ‘create’ a job? And is each of those jobs worth the expense, or, even more frightening, worth more than jobs you may lose by inadequately spreading resources? Are we getting the best bang for our buck?

Let’s look at examples.

I always point to Roanoke, since I live here, but this challenge is common across all of the rural areas in which I’ve worked. Still- let’s start at home.

Without getting into the growing debate about a craft beer bubble bursting, the recent news that Deschutes is ‘re-evaluating’ their decision to open a facility in Roanoke should raise concerns about how resources were spent to lure them to the area.

Based on the reporting I’ve seen so far, we know that incentives are being adjusted and the plan for the land is changing, which should be happening at the very least. But how much time, focus, and effort from our numerous local politicians, economic developers, and more have already gone into this likely dead dog? It seems that it’s difficult to get an accurate picture, but combining the travel, the meetings, the events, the negotiations, and more should raise eyebrows.

What else could the local government be doing to support its already existing businesses? Was the value of this pursuit really creating more wealth than any other activity or attempt to maintain jobs in the area? These are especially relevant questions in light of continual shrinkage by firms like Norfolk Southern in the area, combined with an aging population and incomes that have been stagnant for years.

In another project my team works on, we see numerous economic development agencies in Tennessee trying as hard as they can to attract the Toyotas of the world to their expensive industrial park sites. Rarely is it asked what else could be done with those sites. Many of them are in prime locations for opportunities in agricultural processing or transportation, but these aren’t the big number job-creators that get developers and politicians onto the front pages.

There needs to be a major shift in rural economic development if these areas truly want to compete. It is rare to land a big fish. I would posit that it’s even rarer that that big fish is worth the costs, financial and otherwise, of attraction to a rural community.

The key is that wealth comes from the businesses that choose to be in the area. The born-and-bred local businesses combined with the people who love being there are the drivers. Building the wealth from within creates an attractive, thriving, and growing community, which also makes the costs of attraction, the costs of marketing, the costs of landing that big fish less. Grassroots growth and creation of wealth are key, and are much less risky and costly (in the long term) than the way things tend to go now.

In the end, one question needs to be answered: what are the trade-offs of the way our resources are used?