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DOES PUBLIC INTERVENTION MAKE SENSE?

Whether such federal subsidies to local development make sense from the national viewpoint has been the subject of considerable argument. From an economist's viewpoint, subsidies were being used to move economic activity into an area that was not its most efficient location in order to achieve some gains in equity. This so-called efficiency-equity trade-off deserves a short explanation, since it underlies much argument about what the proper role of government is in influencing the location of economic activity.

The argument is as follows. If the location in question were the most efficient location for the firm, ordinary market forces would cause it to locate there without any government action. If a subsidy (say, in the form of an industrial park site delivered at a fraction of actual cost) is necessary to cause the firm to locate there, by definition, the site is not the most efficient location. Thus, following this logic, there is a loss of efficiency for the whole economy stemming from the use of subsidies to influence economic locations. This situation occurs simply because encouraging a firm to locate at other than its most efficient location means that the cost of producing a given bundle of goods or services will be higher. In return for this efficiency loss, there is an equity gain in the sense that economic activity is directed to areas of more than ordinary need. This, then, is the efficiency-equity trade-off. Those who support powerful public intervention in locating economic activity generally, either explicitly or implicitly, place heavy weight on equity. Those who generally oppose such public intervention are apt to place a heavy weight, again, explicitly or implicitly, on efficiency.

In general, liberals have tended to favor place-related programs. Conservatives have generally opposed such programs, taking the view that it is the proper role of the national government to provide conditions under which private economic activity can flourish but that the marketplace itself should decide how and where capital is invested.

Federal activity with regard to structural unemployment peaked during the administration of Jimmy Carter (1977-1981) and declined thereafter under both Republican and Democratic presidents. Despite the slackening of federal interest in and funding for local economic development, competition between states and localities has increased in intensity. Voters in every state and most municipalities want more jobs for the local labor market and more tax revenues from industrial and commercial development. Then, too, state and municipal economic development activity seems to have the self-generating quality noted earlier. If one community offers subsidies or tax breaks for new firms, then another community may feel compelled to do the same just to not fall behind.

 
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