The Troubles with EEZ

The Enhanced Enterprise Zone in Columbia is a bad idea. The necessary conditions for it to help the city’s economic development do not exist, leaving Columbians with higher taxes or fewer services — or both — and an economy that is no stronger than it would have been without an EEZ. More likely, 20 years from now, the city’s economy will be weaker than it would have been without an EEZ.

Columbia’s EEZ has divided the city between concerned citizens and their elected officials. The exchanges have been heated on occasion. One the one hand, there are highly charged concerns that the word blight conveys, especially with respect to the application to eminent domain confiscations aimed at stimulating economic development. On the other hand, there is the less heated exchange over whether EEZ works.

Proponents nakedly assert that the EEZ will create new jobs and a more equitable income distribution. Armed with EEZ, prescient officials would provide incentives that would entice companies to locate in Columbia. These startups would add people to their payrolls, including members of low-income households, and the economic base would expand and lift other boats in the local economic community. Based on the noble rhetoric, how could anyone not support this magnanimous gesture?

All rhetoric aside

Rhetoric and sheer will, however, do not overturn economic forces. EEZ is not a kind of free lunch for city economic development. More specifically, the subsidies — whether tax abatement or tax credit — redirect resources from other groups of taxpayers to a recipient company. The arithmetic is indisputable. State tax credits mean that the resources are coming from all Missourians who pay taxes. Alternatively, tax abatements redirect resources from either city government or from the local school district. But the resources provided to the recipient company come from somewhere. So the redistribution is more like competing investments, with the resources kept where they are now or redistributed to subsidies associated with the EEZ. Once we agree that the subsidy is a redirection of resources, the appropriate comparison is between the expected returns from the current investment strategy (non-EEZ) and the proposed subsidies/investment that arise because of the EEZ.

Who are the investment advisers with an EEZ? It does not really matter. The group is asked to identify worthy companies. These people will have wonderful credentials, good hearts and the task of selecting from a pool of applicants. Their “investment” decisions should be compared with the returns from a portfolio of projects available to folks. The likelihood that they will do better than the portfolio criterion is about as high as the likelihood that I could pick the jack of diamonds from a pack of playing cards on my first try. The deck is stacked against the EEZ board. For one thing, the set of projects it considers is too small. For another, the incentives are not lined up; the EEZ board does not have any skin in the game, and therefore the vetting that would occur with one’s own money is missing.

Banking on future governments

It is not a question of native intelligence or questionable intentions. The combination of the small-sample problem and the incentive problem does not bode well for the returns from the EEZ investment. Historically, there is simply no evidence to support the view that EEZ boards systematically outperform the market returns. Why should one believe this town will beat the odds? Another argument is that economic models used by REDI show that the local investment will reap extraordinary returns. REDI’s model should be transparent because it is using public funds. My guess is that these models are built on economic theories that were discredited by scientists more than 40 years ago. The returns to the public monies are too important to be redirected by shoddy economic analysis.

Lastly, are the fears of eminent domain abuse baseless? I submit that the Columbia officials are being truthful when they answer these concerns by saying that widespread eminent domain abuses are the farthest thing from their minds. I do not see the current group wielding power willy-nilly to drive residents from their homesteads just to make property available for some startup from California. However, once on the books, there are no restrictions on those in future city governments who see opportunities. Things such as the EEZ could abuse future residents. Time inconsistency is what economists call this lack of a commitment by current government on future governments, and there is no way to impose anti-abuse conditions on these future city governments.

Thus, in order for the EEZ to be a net positive for the city’s economic development, the board would have to be at the top of its game (channeling Warren Buffet and no Mamteks), there has to be strong enough multiplier effect (from a discredited economic theory) and the future government has to be just as noble as the present. If any one of those three conditions fails (and the odds are they all three will not be satisfied), then the EEZ is a bad economic deal for Columbia.