Tuesday, October 27, 2009

What are reasonable expectations for local economic development?

What is economic development?

It is important to understand the definition of economic development. Economic development is expanding the total income of a community. Expanding the total income means attracting dollars into the community from outside the community. This can be through attracting tourists or new retirees, attracting new customers who live outside of the community to businesses already in the community, attracting new businesses to the community that sell their products or services outside of the community, or any action that raises the wages of the labor force by bringing dollars into the community.

The most essential ingredient for successful economic development is the maintenance and development of a high quality of living in the community. This means making the community a place where people what to live, where workers are well educated, and where firms want to do business.

Necessary ingredients for successful economic development


A community must have a appropriately trained labor force. Warehousing requires little or no training. Manufacturing usually requires a well-trained labor force. Professional services can require a highly educated labor force. Lawrence generally enjoys a highly educated labor force. In the U.S. 16% of adults did not complete high school; in Lawrence only 4% did not complete high school. In the U.S. 25% of adults have a college degree; in Lawrence it is 35%. We need to seek employment opportunities that match the composition of the labor force.

A community has to have the right quantity and quality of labor available. If the labor force is too small or not available, then the community will not be attractive. This is usually not a big problem as most new firms are looking for only a small number of employees. Douglas County contains 47,000 workers; most new firms will add fewer than 100 employees.

The labor in a community has to be competitively priced. Unfortunately, Lawrence excels in this dimension. Wages in Lawrence are low in virtually all occupations. Thus, wages are not held down by student labor; wages are low across the board. This makes Lawrence attractive to firms, but sadly it is making Lawrence unattractive to workers.


A community needs to have an adequate supply of appropriately serviced land available. Adequate means the right amount, not too much and not too little. Too often communities are led into preparing large quantities of land that only sits idle. It is unwise to develop more land than can be reasonable absorbed within a decade.

No self-contained community like Lawrence is going to attract an extremely large employer needing a very large site. Virtually all of the firms moving into Lawrence over the last two decades developed on parcels of 25 acres, more or less. While new land for future employment centers may be needed, it is doubtful that the number of acres needed cannot be accommodated by existing sites and by the Farmland Industries site. Remember that the University of Kansas remains the largest employer, and it has provided for its own growth. The community only needs to provide for the non-University growth.


A community is often called upon to provide financing for business expansion and development. As long as this is done in a way that minimizes or eliminates the risk to the taxpayers, this can be a successful tool to facilitate economic development.

Public sector loans can subsidize a development, but they cannot create demand for the product or service to be produced. It is important to remember that subsidized financing can help a good investment succeed, but it will not turn a risky investment into a safe one. Cautious underwriting is required.

Many things do not work:

Tax abatements

Property taxes comprise such a small portion of the operating expenses of manufacturing or research and development facilities that abatements cannot influence a successful firm’s location decision. Property tax abatements are a waste of scarce resources. They have failed in Lawrence, and they have failed elsewhere.

Speculative development

Building structures on a speculative basis is highly risky. Too often they sit empty and only lose money. This has been the case in Lawrence.

Equally, a community must avoid speculative provision of expensive infrastructure in the hope of attracting new development. Lawrence has often failed in this area as well.

Free land

The price of land in the Midwest is sufficiently inexpensive that it does not influence the location decision of firms. Note that Abilene provides free land but has a low job growth rate while Johnson County charges high land prices and has a much higher job growth rate.

Hasty planning

The amount of time it takes to plan and development a project in Lawrence is comparable to the time it takes in other communities. It is not true that Lawrence takes longer; this is a myth pushed by those who oppose careful planning. Good planning takes a reasonable amount of time in Lawrence, just like it does everywhere else.

Practical realities of economic development

Thousands of communities across the nation are engaged in economic development, yet only a few hundred firms will build significant new facilities in any single year. This means that the job growth rate in Lawrence will be driven the natural expansion and contraction of existing firms and only rarely will a new firm be added to the mix.

Manufacturing is declining in Lawrence as it is for the nation as a whole. While manufacturing jobs pay well, Lawrence is going to lose its share of these jobs, and the return of these jobs is not likely in the foreseeable future.

Lawrence should avoid repeating the mistakes that it and other communities have made in the past in the false belief that these efforts improve the competitive position of the city in attracting tourists, new residents, and new businesses. Lawrence should continue to improve the quality of its work force, seek to raise the wage levels of the work force, and seek to make Lawrence a community where everyone wants to live.