Ethics and Economic Development

June W. Catalano, AICP
Copyright 1997 Catalona

Planners may think that they do not engage in economic development, but increasingly, they are drawn into attracting new businesses. While planning has a well thought out system of ethics, economic development has not been in existence long enough to have fully discussed all of the issues. The ethics of distributing economic development benefits is perfectly clear as far as the individual is concerned--don't take advantage of your position--but ethical questions become devilishly difficult in terms of larger public policy. Here are a few examples:

Example One

Two local coffee shops opened in your once failing downtown. They asked your city for a few thousand dollars for facade improvements, but otherwise, they made it on their own. They are moderately successful and have enriched the area. Now, a national coffee shop chain, Starbucks, for example, is willing to go into a vacant building in the downtown. This will reinvigorate your downtown by stimulating much needed foot traffic. The only catch is that the owner refuses to sell the building. The developer asks Redevelopment to use eminent domain to condemn the building and bring the price down to current market value.

FOUL, cry the coffee shop owners. "We took the chance and made it on our own and now you are going to give the big guys a big 'subsidy' to put us out of business."

You think that it's in the City's overall interest to get that anchor in the downtown and you also know that at least one of these coffee shops (both owned by local residents) will go out of business. The coffee shop owners know it too: "All we ask of the city is to do nothing."

Example Two

You have an aging shopping center that is losing tenants as we speak. Walmart is thinking about coming to the center--a sales tax generating engine of over 100,000 square feet. This will provide the retail anchor needed to save the day. All they ask for (this is an example, not the real world) is an extra left hand turn lane that is not scheduled to be put in until the year 2006. Some rearranging of the capital improvement program--taking away that stoplight you promised the homeowner's association--is all that is needed.

The center's owners say, "If we don't survive this whole area will become a slum, a mecca for hoodlums and other nasty things." The downtown businesses say, "We will be out of business and the character of the downtown will be annihilated."--They beg the city--just do nothing.

Example Three

You desperately want to create an auto mall on that redevelopment land by the freeway. It will turn around the entire area, bring the City a zillion dollars in sales tax and keep other cities from stealing your existing car dealers. You can use redevelopment to assemble the land, but because it has lots of toxics, it will cost more than any sane auto dealer (if there are any) would be willing to pay. The auto dealer says in her nicest voice: "We will pay the going rate per square foot that auto dealers normally pay. You absorb the rest and in return we will guarantee to stay here for 10 years with 10 zillion dollars of sales tax coming to you. Use it to feed widows and orphans."

Sounds wonderful until the existing car owners get wind of the deal. "WE want to be on the freeway. Move us. We have been giving you sales tax for 20 years!!. If you can't move us, just don't do anything, or use it for a Walmart."

The Issues

These examples highlight a number of ethical issues arising from the use of economic development tools:
  1. Somebody gets hurt--is this justified? This is the more painful aspect of the job of economic development. By creating winners, you sometimes create losers. In theory, economic development is based on the greatest good. In other words, the end result will be a better, more economically stable community that has all sorts of good things the community wants--jobs, sales and property taxes, interesting businesses, ice cream shops.... These new businesses can kill or injure older, less capitalized ones.

  2. Who gets the benefits? Economic development tools are very powerful--the incentives range from write-down of development fees and even land costs, to provision of infrastructure that the developer would typically pay for, to low interest loans. This represents real cash (which is why so many people cringe when they provide incentives to national chains such as Walmart, or to cash rich businesses such as auto dealers). How can the city really know what will be the best investment of it's money?

  3. Does the city have enough background information to make the "informed decision?" Is the information up-to-date? Have all the variables been considered? The type of information that is needed is typically expensive to come by--economists don't work cheap. Planners often have to beg City Managers to use precious general fund moneys on something as abstract as an economic analysis. The Catch 22: you cannot truly judge who to subsidize unless you know what you need. Walmart may be a great investment, or it may close so many of your local stores, that you lose sales tax. You need an economist to tell you the best strategy (and to blame if things go wrong).

  4. What is the best public policy? Even if you have all the economists you need (or want), you are still faced with key decisions regarding priorities. You may need both manufacturing jobs and sales tax. Do you court industry first and retail later, or vice verse? Even if your City Council has outlined a grand strategy, you will be faced with day-to-day decisions as opportunities arise - that Barnes and Nobles bookstore that is thinking about your downtown. As staff you can offer up sugar plums or sit back and wait until the deal is firmer. These daily decisions in the aggregate are your economic development policy.
  5. Just do nothing? This is one of the most common pleas of those opposing economic development. They state that economic development is interference in the marketplace. Citing a pithy quote from Milton Friedman or Jay Leno they say, "let the market sort it out." Sometimes with crafty subtlety, they ask, "why should my tax dollars be used to put me out of business?" Some of the craftiest question the planners' assumptions. "How old is that economic analysis?" It is at this point that the planner begins to doubt, a painful but often temporary event. Nonetheless, it is here that the true question of ethics hits hardest. Do we know enough to meddle with the marketplace? I maintain that we do.

Ethics and Economic Development

The planners' great tools--the general plan, the zoning code, and design review--are all interference in the marketplace. By specifying where factories and stores and homes can go, the planner manipulates the physical fabric of the community. By forbidding plastic signs that wiggle, the planner substitutes his or her opinion for that of the developer, often on less hard facts than those used in economic development.

(Hey, you say, that's all well and good, but that doesn't involve money. When we're talking economic development incentives, we are talking about subsidies.) I would answer that planners talk big money on a grand scale. Extension of roads, sewers, water lines are major investments that typically benefit landowners. These decisions are based on extensive research, blended with the expertise of practicing planners and the input of the community. Since general plans usually are revised every five to ten years, the freshness of the background research can be questioned the minute you open up a general plan; yet cities routinely invest millions based on such documents.

The bottom line? Public policy is not a precise science (nor is economics, often called a black art). It is in fact a political decision based on a vast number of variables. Economic development definitely has its place in this process. Just as cities now target what mix of land uses they want, in the future, they must target how aggressively they will reach out to those uses that improve the character of their communities. We have a long tradition of planning decisions influencing public policy and a much briefer acquaintance with economic development. What we have not had is a discussion of this latter activity in the context of what a powerful tool it really is. Nor have we adequately discussed how we justify its impacts on individuals. Long ago we decided to accept the fact that planning decisions will cause individuals pain (downzoning being one of the pricks most likely to cause screams). We have not yet had time for an adequate discussion regarding what degree of pain we will accept when it is inflicted because of economic development.

June W. Catalano, AICP
Development Services Director, San Leandro, California