Do all business incentives have the same national benefits?

I argued in a previous post that business tax incentives did not have large national benefits because such incentives did nothing directly to raise the economy’s productivity. But some business incentives do seek to directly raise business productivity. Can such business incentives have greater national benefits than costs? The answer is yes.

For example, one common business incentive is customized job training. This seeks to encourage additional business activity by helping provide training for the business’s current or new employees.

Another possible business incentive is manufacturing extension. Manufacturing extension offices provide small and medium-sized manufacturers with free or low-cost technical assistance to improve their productivity.

Services to help business improve their productivity can provide net national benefits. The key issue is whether the benefits of these services, in improved productivity, exceed their costs.

For both customized job training and manufacturing extension, there is good evidence that these programs can have productivity benefits greater than costs. This evidence is reviewed in chapter 5 of Investing in Kids.  The evidence is also discussed in a recent policy brief I wrote for the Hamilton Project of the Brookings Institution.

One point this illustrates is that early childhood programs are not the only way to enhance the economy’s human capital. Increasing skills is perhaps the most important way to improve economic productivity.

Such a skills increase can be brought about by early childhood programs. Because early childhood programs intervene so early, they can better increase more general skills, and can often help a wide variety of persons.

But later intervention to improve human capital is also feasible. For such later intervention to be successful, these human capital improvements must be more targeted on particular types of individuals and more attuned to business needs.

Early childhood programs are part of a continuum of services that can efficiently improve the economy’s productivity, and thereby raise per capita earnings. Early childhood advocates should keep in mind this broader human capital agenda for the nation.

One way to help finance a portion of this human capital agenda is by scaling back business tax incentives for economic development. Some of the funds saved by this scaling back could be devoted to business services that enhance productivity, such as customized job training and manufacturing extension.  Other funds could be devoted to expanded early childhood programs.

However, this reallocation of resources may be difficult at the state and local level. There is a mismatch between the benefits of different policy options from a state and local perspective, versus a national perspective. Future blog posts will discuss implications for federal and state policy.

About timbartik

Tim Bartik is a senior economist at the Upjohn Institute for Employment Research, a non-profit and non-partisan research organization in Kalamazoo, Michigan. His research specializes in state and local economic development policies and local labor markets.
This entry was posted in Business incentives, Incentive design issues, National vs. state vs. local. Bookmark the permalink.

2 Responses to Do all business incentives have the same national benefits?

  1. Pingback: Federal policy towards business incentives | investinginkids

  2. Pingback: Reforming business incentives: possibilities for state and local reforms | investinginkids

Comments are closed.