A version of this post appeared in the San Antonio Express News.
I read with much interest the story last week of the San Antonio City Council approving a direct investment of $1.75 million in city funds to move three startup medical device manufacturing companies to San Antonio.
And by “much interest” I mean the story made me want to stab my own hand with a sharp pencil.
I hate this sort of thing.
Not because of straight up corruption
Let’s leave aside the obvious problem of ‘economic development’ schemes like this, in which public entities give targeted incentives to a specific, private company: You know, because private individuals who benefit may feel quite ‘grateful’ to their public sponsors. Public sponsors in turn – elected and appointed officials – may then have an incentive to direct public funds to private beneficiaries to keep the ‘gratefulness’ cycle going.
That’s all obviously just straight up corruption and not really what I’m aiming for here in my critique of city-directed ‘economic incentives’ for private companies.
What I really hate about this is something quite different, having to do with three business concepts: selection bias, market efficiency, and the structural short-run conflict between entrepreneurial goals and public policy goals.
Taken together, they greatly reduce the odds that this type of economic development works out for the public good in the long run.
I’ll address these in order.
1. Selection bias
Would you like your city (or state, or county) to grow companies focused on wooing public investment and public ‘economic development’ incentives? Or would you like your city to grow companies that focus on profitability without a public subsidy or public investment? Because the way you attract companies to your city (or state, or county) introduces a real selection bias to the pool of companies you end up with.
