The Case for Abolishing the Economic Development Administration

October 1, 2012

The Economic Development Administration (EDA) exists to provide investment in areas where the administration believes is vital to economic growth and competitiveness. In October of 2011, a bill was submitted to Congress that would eliminate the EDA. While some protest that the EDA is a useful mechanism for growth, it is necessary to look at the facts of what the EDA actually accomplishes, says David Bier of the Competitive Enterprise Institute.

  • EDA investments simply shift resources from one area to another.
  • For example, an EDA grant to Visalia, California, incentivized relocation of a factory to Brisbane, California. It did not create new jobs or wealth.
  • Furthermore, the measure of success for the EDA looks to how many jobs have been created rather than the impact on a community. For example, rather than looking at potential profits, the EDA gave Cedar Rapids, Iowa, a $35 million grant for a convention center that is going to lose $1.3 million by its fifth year.
  • In addition, the EDA measures success by the amount of investment a project receives, leading local communities to raise development taxes to qualify for a matching grant.

Furthermore, the EDA (and government agencies in general) is poor at reading market signals to know where to make wise investment. The EDA subsidizes inefficient firms to try and keep them in certain areas to prevent out-migration, without regard for the fact that businesses choose their location because of its reasonably efficient market allocation.

Opponents of slashing the EDA argue that the grant money is necessary for projects that help develop and improve infrastructure in distressed communities.  However, many fail to realize that the problems with infrastructure stem from government failure to allocate their huge budgets on projects like roads and bridges. For example, the EDA gave Lee County, North Carolina, $800,000 for infrastructure improvements. However, all the improvements went to Caterpillar to purchase new equipment.

The EDA wants to prevent a "race to the bottom" effect in which local governments undercut each other to attract growth. However, this is nothing more than rigged competition at the expense of letting the market decide the most efficient way to be productive. Quite the contrary, the EDA hurts economic development by having a city match whatever investment measures the EDA takes. This encourages municipalities to create special taxes on its citizens to qualify for EDA grants.

Source: David Bier, "The Case for Abolishing the Economic Development Administration," Competitive Enterprise Institute, September 2012.

 

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