Some people prescribe tax cuts whenever the question of how to accelerate economic growth comes up. But is that prescription right for this region?
I have been immersed for many years in fostering regional economic development sparked by rapidly growing technology businesses. Over the years, I have spoken with a broad range of educators, entrepreneurs, policymakers, economists and other stakeholders in economic development, and I have gathered a pretty comprehensive picture. Let me share some of what I have learned.
Maintaining our region’s ability to create high-paying jobs requires that we stay in the vanguard of new industries. The leading edge of what is truly new is where consumers and businesses are most willing to pay high prices and where demand is often the strongest. The combination of high prices and high demand creates businesses that can pay workers well and provide for career advancement. The challenge is that staying at the forefront of innovation requires a willingness to undertake basic research that is often expensive and equally often entails a substantial period where there is no profit opportunity.
Regarding the workforce, it is abundantly clear that already existing technologies are displacing unskilled workers and, to growing extent, skilled workers. Moreover, they do so at an increasing rate. Meanwhile, existing approaches to training and developing talent are not adapting to the new jobs that are being created, thereby creating supply shortages or leaving workers on the sidelines.
Infrastructure is chronically underfunded. We see it in Metro and the roads. Less visible but equally important is how many people lack broadband in our region — either because the infrastructure doesn’t exist or because it is far too expensive to sign up.
These are issues that can only be solved by collective action and substantial investment. We know how to do this. The difficulty is motivation. Solving these problems creates long-term social benefits, which are hard to measure. Financial returns are easy to measure — it’s how much additional money you get from investment. While we sometimes try to measure social benefits in financial terms, the reality is investing for financial profit and investing for long-term broader benefit are different.
The most successful regions in our country have figured out how to balance financial investment with social investment. Those that do it best are the ones that lead new industries. These orchestrated investments can be seen in communities that develop infrastructure (e.g., Research Triangle Park in North Carolina), commit to business attraction and support (e.g., efforts to attract Amazon’s HQ2), support local research institutions (e.g., connecting business entrepreneurs with university researchers) or support an environment that integrates larger and smaller businesses into a single community (e.g., Nashville’s rapidly growing innovation culture around health care). There is no single way, because no two regions are exactly the same.
Which brings us to tax cuts.
I will be the first to admit that tax cuts are a very seductive policy prescription. Who wouldn’t love to have more money to spend? But that is the point.
Historical data show that when tax cuts are targeted at higher income levels, the tax savings goes disproportionately into financial investments. There is no guarantee that the money will be invested in businesses (think of index funds, for example, where no direct investments in companies are made) or even a guarantee that the money is invested in the United States. The greater financialization of our economy may make some investors wealthier but it doesn’t provide for a pool of capital for social benefit.
I believe that right now, the best way to grow our region’s economy is increase social investment. To create a skilled workforce, to develop a 21st century infrastructure and to foster new industries, we need to make long term and considered investments. We need to be both wise financial and social investors.
At a time when objective data show that our overall tax burdens are at historical lows, is putting more money into financial assets what is best for our business and innovation community?
There are times where you can’t cut your way to success. This is one of them.