Arkansas' public officials are proud of the state's record-low unemployment rate. As of April, it sat at 3.5 percent, well below the national rate of 4.4 percent, and the 13th lowest rate in the nation. Some conclude that the low unemployment rate means that Arkansas' practice of providing tax breaks and subsidies to select businesses is improving the state's economy.
However, Arkansas' near-worst standard of living statistics indicate otherwise.
According to data from the Bureau of Economic Analysis (BEA), Arkansas' 2016 real GDP per capita stood at just $36,368, ranking Arkansas 47th in the nation. To make matters worse, BEA data also indicates that Arkansas' real gross domestic product grew at a mere 0.2 percent from 2014 to 2015, and just 0.8 percent from 2015 to 2016. This was well behind the national growth rates of 2.6 percent and 1.5 percent over the same time periods.
Furthermore, BEA data shows that Arkansas' 2016 per capita personal income was $39,345. This ranks Arkansas 45th in the country. Moreover, the most recent data (2015) from the U.S. Census Bureau's Small Area Income and Poverty Estimates indicates that 18.7 percent of Arkansas' population is in poverty. This again places Arkansas near the bottom at 47th in the country.
Arkansas may have a low unemployment rate, but our standard of living is relatively poor.
There are many reasons for this--not just the state's economic development policies--but they do have an effect. Targeted economic development incentives create several distortions in the economy that make our standard of living worse off. Incentives largely target one aspect of the economy rather than broad economic growth; encourage business leaders to focus on government programs instead of markets; create an environment of special-interest lobbying; and send bad industry signals to businesses.
Arkansas' tax breaks and subsidies primarily target job growth rather than broad economic growth. Jobs are important, but a low unemployment rate does not necessarily mean that Arkansans are prospering.
Consider an extreme example. Imagine that the state government hired half of all working-age Arkansans to dig a ditch and the other half to immediately refill it. It would make Arkansas' unemployment rate zero, but would it make Arkansans more prosperous?
Targeted economic development incentives also alter the decision-making processes of business leaders. Rather than basing decisions on the particulars of their market, business leaders focus on qualifying for tax breaks and subsidies. For instance, a job-creation incentive may lead firms to hire more employees and forgo automation, even if automation would make the business more productive and add more value to the economy.
The government incentive helps the firm be as profitable as it would have been, but the distortion to business inputs negatively impacts the overall economy.
Moreover, targeted economic development incentives encourage special-interest lobbying. When business leaders use their resources to lobby for tax breaks and subsidies, they use their time and money for activities that add no value to the economy. Rather than innovating to create the next best product or service, businessmen and women spend their resources attempting to obtain political favors. If a business spends $10 million lobbying for government incentives instead of spending $10 million on an improved product, we are all worse off for the loss of innovation.
Finally, targeted economic development incentives frequently lead to businessmen and women using resources for activities in which they are not most productive. Economists call this "regional unrealism." This occurs when politicians use incentives to encourage business activity in industries that they dream the state could be good at rather than what the state is actually good at.
With enough incentives, politicians can encourage any business venture to take place, even if it were to be something as silly as replacing rice production in the Delta with ski resorts. The consequence of regional unrealism is a state that does not produce as many goods or provide as many services as it could, making us poorer than we otherwise would be.
Policy generally gets what it targets. Policy focused narrowly on job creation will likely create some job growth, but there are other costs. However, policy focused on economic growth more broadly will not only create jobs, but it will lead to increases in productivity and incomes.
Rather than distorting the economy with narrowly targeted incentives, Arkansas' public officials should be focused on broad, fundamental reforms. Removing barriers to work by reducing occupational licensing laws and making the tax code more simple, transparent, and fair by broadening the base and lowering rates are both good places to start.
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Jacob Bundrick is a policy analyst with the Arkansas Center for Research in Economics (ACRE) at the University of Central Arkansas.
Editorial on 06/03/2017