Exploring the Tradeoffs Local Governments Make in the Pursuit of Economic Growth and Equity

By Eric Stokan (University of Maryland, Baltimore County), Aaron Deslatte (Indiana University Bloomington), and Megan E. Hatch (Cleveland State University)

Local governments play a central role in promoting the economic health and vitality of their community.  Ensuring adequate jobs and bolstering revenues falls squarely within the purview  of municipal governments, and they have the capacity to use a range of policy tools to this end (tax abatements, tax increment financing, business incubators, etc.).  Research has noted a shift in the type of policies that have been used over time, referencing distinct economic development “waves” where local governments in the United States have shifted focus from business attraction to retention to entrepreneurship and more recently to promoting equity and sustainability.  This is reflected in the type of policies they use, from traditional financial tax incentives like property tax abatements to retention surveys to business incubators and finally to community development loans and provisions to ensure affordability of housing and the formation of community development corporations.  Researchers have long been curious about the factors that drive the decision to use certain types of policies and why local governments would place greater weight on goals related to economic growth than on equity or sustainability.

Our recent research suggests several environmental factors are important in explaining local governments’ decision to focus on economic growth or equity over time.  We use Resource Dependence Theory (RDT), developed around the need to manage an organization’s external environment, as a lens.  In this case, local governments function within an open system of governments, firms and citizens, facing social constraints on their ability to act. They need businesses to grow their economy and will generally utilize a range of policies to attract or promote them.

However, those governments which face less competitive pressure within a metropolitan area and have greater resource capacities might be more willing to focus on goals other than simply economic growth or equity. They are less constrained in their decision-making. However, interconnectedness means they may still not possess the ability to produce desired social outcomes alone, and we find more interconnected governments are more likely to use policies to balance economic growth and equity. 

The policy and organizational sciences have long understood that overcoming path dependency–or the natural tendency to stay the path and continue using the same policies–is challenging.  In fact, we find local governments which originally used property tax abatements in 1994 were much more likely to be using them in 2014 and those local governments that were offering job training in 1994 were much more likely to do the same in 2014.  Yet, these factors are not deterministic.  Local governments need not stay this course.  Rather, our findings suggest local governments can overcome this path dependence. Local governments that forge partnerships with other governments, especially if they find ways to forge cooperation rather than directly competing for economic development in their metropolitan regions, will be able to change course and promote policies that foster equity. Of course, there are limits to the benefits of interconnectedness, and much research suggests that collaborative efforts can impose search, bargaining and monitoring costs. Resource dependency implies that interconnected actors must be able to mutually satisfy each other’s demands as well as those of all other interconnected actors. Governments clearly gain some resource advantages when they identify partners. However, managing these interdependencies is a complex effort.

Now more than ever and in light of COVID-19, local governments need to be thinking about cooperation within their region and ensuring that those at the lowest end of the economic spectrum have access to basic necessities right now and will have access to jobs when the economy re-opens.  Rather than offer businesses like Amazon multi-billion dollar incentive packages, fostering a diverse local economy that is inclusive of all citizens has never been more critical.  Crises present rare opportunities for rethinking the current economic and social structures, and our research suggests that overcoming typical policy approaches are possible.

Practically speaking, local governments need to be creative. Revenue outlooks for state and local governments are going to necessitate cutbacks. Governments will be more apt to use policies that do not require an outlay of funds today, relying on tools that forego future revenues like tax abatements and tax increment financing. Retooling these to address equity will be crucial. Our research suggests the typical response will be focusing on traditional growth-oriented policies. However, the deep seeded inequities that are amplified by the pandemic cannot be ignored. It will not be easy to convince citizens that rather than attracting businesses promising a large number of jobs through financial incentives, the focus needs to be on bolstering the community from within and ensuring economic gains are better distributed across citizens. This will ensure better outcomes for the most vulnerable populations. We recommend part of this experimentation be a renewed focus on intergovernmental cooperation. We find that when local governments cooperate rather than compete, they are more likely to adopt equity-focused policies. The COVID-19 pandemic has highlighted what happens when governments fight for resources such as personal protective equipment. We need to learn from those mistakes and instead focus on coordinated efforts to address inequities within and between jurisdictions.

It is a very appropriate time for rethinking the path forward, and local governmental experimentation is exactly what is needed today.

Read the UAR article here.

Photo by Gordon Mak on Unsplash

Author Biographies

Eric Stokan is an assistant professor of political science at the University of Maryland Baltimore County. His research focuses on understanding local government decision making, policy processes, and evaluating the impact of policy decisions.

Aaron Deslatte is an assistant professor and director of the MGMT Lab at the O’Neill School of Public and Environmental Affairs at Indiana University Bloomington. His research focuses on the roles that public managers play in enhancing economic, environmental, and social sustainability at the local and metropolitan scales.

Megan E. Hatch is an associate professor of urban policy and city management at Cleveland State University. Her research focus is the causes and consequences of policies that disproportionately affect vulnerable populations.