Michael Hicks is the George and Frances Ball Distinguished Professor of Economics and the director of the Center for Business and Economic Research at Ball State University. His column appears in Indiana newspapers.
It is the end of 2018, and the Indiana Economic Development Corp. just announced another record year of business attraction effort. Over the year, IEDC closed deals with 293 new businesses who report that they will eventually create 30,158 new jobs and invest $7 billion in new plant and equipment in Indiana.
The IEDC should be proud of this accomplishment. These projects are difficult undertakings, and to close more than one new deal every working day of the year is a monumental achievement for a staff of perhaps 65 employees with many responsibilities. The IEDC not only closes these deals but also acts as a sort of statewide concierge for businesses asking questions from workforce availability to environmental regulations to local tax laws.
At the same time that we praise the leadership, talent and work ethic at IEDC, we ought to understand what these jobs are and what they are not. In so doing, we can better comprehend what is and what is not happening in job creation and new capital investment across the state.
The IEDC jobs announcements are simply what a small number of businesses say they will create over the next several years. So, these are what 293 out of 479,059 businesses say they will be doing over the coming years. They report that about 0.0612 percent of Hoosier businesses intend to employ just under 1.0 percent of Hoosier workers at some point in the future. They will bring an additional $7 billion in capital, which is about 1.6 percent of the state’s gross assessed value of property, or about one third of all the property now in TIF districts. All this welcomed, but it comprises a small share of Indiana’s economy.
The IEDC jobs announcements are not net new jobs in the state. In fact, we cannot even use these data to predict new jobs in Indiana. For example, in 2008 when Indiana’s economy shrank by more than 96,000 jobs, IEDC announced deals bringing 18,659 jobs to the state. That was not a lie; in fact, 2008 was probably the toughest year on record for doing this work. It simply illustrates that the announcement of new jobs reflects only one small part of the total job creation and destruction that occurs in an economy during good or bad times.
For example, in the last four quarters for which we have data, new job creation from businesses amounted to more than 604,000 jobs. These are gross new jobs created by new firms opening in Indiana or existing firms adding new jobs. Over the same time, the shrinking or closure of businesses in Indiana destroyed 575,000 jobs. The net result was 29,000 new jobs.
One way to think critically about these job numbers is simply to understand the limits to traditional economic development efforts. In a record year like 2018, IEDC managed to aid in attracting new jobs that amounted to just under 5.0 percent of all the new jobs that were created in Indiana last year. That is a bit better than in past years, but it is still only one out of every 20 new jobs created each year.
To illustrate the idea more plainly, consider the state’s economy as a giant bathtub. The level of the water is the number of jobs in the state, and there are thousands of water faucets adding jobs, and thousands of drains removing jobs. In 2018, about 20.5 percent of total jobs flowed into Indiana, while 19.5 percent flowed out. That is the typical job creation and destruction in a year. The IEDC job creation numbers are a very modest part of the in-flow of jobs in the coming year, and have nothing directly to do with the net job growth in a given year.
The lesson here is an old one. The jobs attraction efforts at the state level are useful, but they have a very, very modest effect on the overall state economy. In fact, over the past 25 years, "job attraction" has accounted for less than 1.5 percent of all the jobs currently in the state.
We should welcome new jobs announcements in the state, but we must also be mindful of the cost of luring them. Statewide economic development efforts cost taxpayers well more than $1 billion each year. Most of this is in the form of tax incentives. Most of these costs either divert tax dollars from other high-value uses, or result in higher taxes on those businesses who have created the other 98.5 percent of current jobs in Indiana. As 2018 ends, we should all come to understand that traditional economic development likely suffers the lowest return on investment of anything designed to improve the economy. We should be investing in it very sparingly.