Economic Development Amidst COVID-19

I work for one of the nation’s larger consulting firms, Ryan LLC, out of Dallas, where I support our clients’ site selection and credits and incentives needs. These are unprecedented times in the economic development world. The primary goal right now is to process the deluge of emergency federal, state, and local COVID-19 programs introduced in the last month. However, in the longer-term, the real work of sustainable economic expansion still has to go on.

In working with regional and local governments recently I’ve gotten a wide range of responses, from: a) “We are putting all economic development legislation on hold until we calculate the impact of COVID-19 on revenue”; to b) “We will do everything we can to support any project that could come out of the ground in the third or fourth quarter of 2020 and generate net new employment”.

Only history will tell us which perspective is more correct, but I can make some observations based on nearly forty-years building business-base in the Fortune 100 world.

Let’s start with theoretical economics. Anyone that has ever been through a basic economics course was taught the principle of economic equilibrium. The theory holds that the market for any product is driven by supply and demand, and when the marginal cost of production reaches the market’s capacity/desire to pay, the market reaches equilibrium. 

Any practical economist will tell you that this is “bullcocky”. No one has a really clear a view of the global marketplace (which by the way is always shifting), so production continues well beyond the point of price equilibrium to the point of overproduction realization. This is the stage at which the producers suddenly realize that they’ve produced far more of a product than they can sell profitably, and they stop and reevaluate. At this point they are forced to sell off their burgeoning inventory at prices below the cost of production, which leaves them somewhat predictably, rather stoic and conservative.  The producers then exit the market, or sharply reduce production. That goes on until the global inventory is sold off and the market develops a shortage. Then the whole process starts over again, developing a sine-waive pattern around a market equilibrium that never stabilizes.  

I bring this up, because it echoes in the public sector. Every local and regional administrator I’ve ever spoken to from Eastern China to Western Alaska, longs for an economy in equilibrium, where taxation covers the cost of public services, and established employers create low unemployment with low job turnover and career opportunities for all.

I tell them that I’ve never found one…There are only two kinds of regional economies to my experience: those that are expanding, and those that are contracting. Just like the capitalist economic world that drives them, local economies are always in flux around equilibrium. One should always embrace the challenges of an expanding economy, to avoid the anguish of a contracting one.

COVID-19 has dealt the world economy a tremendous shock, virtually paralyzing business sectors from retail to manufacturing. When it is over, there will be a lot of stoic and conservative business people, hesitant to reengage against an uncertain demand. Regional economies will either mire in anonymity, or quickly expand, depending on the number of third and fourth quarter projects the community has lined up.    

There are two kinds of businesses in the world, core and non-core. Core businesses import cash into the regional economy and export product (manufacturing, financial services, research and development centers, etc.) These are the real economic engines of a community. Aggressive restarts here will drive economic expansion by bringing in fresh cash spend.

Non-core businesses however, are also key to regaining economic stability after COVID. Non-core businesses attract local cash and generate taxable events that restore public sector financial stability to the community (retail, professional, construction, etc.). Economists estimate that a healthy mix of core and non-core businesses produces an economy where new cash spend (from core industries) is re-spent five times (in non-core industries) before leaving the regional economy. With modern globalism, retaining core business demands such aggressively low taxation, that communities have to increasingly rely on secondary spend to fill the public coffers.

So how do local and regional governments enhance a quick break-out from the COVID recession, if they don’t know what their revenue resources will be?

The first answer is to employ non-cash incentives. Granting a core business expansion project a significant tax holiday to commit to late 2020 execution, doesn’t impact existing revenue calculations and promises to generate a lot of fresh cash spend in the community. I’ve seen income tax abatements of up to ten years recently, and property tax abatements up to twenty years.

If you only have cash incentives in your toolbox, caveat them. First, most cash in economic development packages these days is paid out over time, tied to performance. So, a project with a fourth-quarter 2020 start, likely doesn’t create public sector obligations on cash until late 2021 or 2022. By then the COVID crisis will be long past. Even so, employers are realists, caveat the agreement that the municipality may modify payment obligations if government general revenues have not reached a certain percentage of pre-COVID levels.

Use your federal allocations, which are likely not at risk. Offer CDBG, USDA and USDOT funds to cover offsite improvements related to job generation projects. Incorporate any utility incentives into the economic development package. Support the company in acquiring a growing number of specialty federal grants which are emerging on www.grants.gov and fbohome.sam.gov .

Concentrate on generating expansion opportunities with your existing local employers, challenging them to meet or exceed pre-COVID employment levels, with economic development packages that encourage them to risk rapid remobilization after COVID restrictions abate. You can still also chase new business opportunities (and yes, there are employers using the crisis to re-evaluate their physical plant) but generally it will be far less expensive to encourage existing employers to ramp-up activity than attract new.

There has also seldom been a better time to ask your legislature to modify and enact legislation aimed at rapid post COVID economic expansion. Fix the poor properties in existing legislation, and tailor new incentives to favor employment retention/reinstatement.

Finally, “don’t risk missing the forest for the trees”, or in Total Quality Management speak, “don’t get so caught up in responsive emergency measures that you don’t proactively address the future”.

Good Fortune to you and Good Hunting in all your business endeavors! Jeff Troan.