Economic Growth in Delaware: Costs, Benefits, and Realities

Economic Growth in Delaware:Costs, Benefits, and Realities

Dr. William R. Latham III

Dr. Kenneth A. LewisUniversity of Delaware

College of Business & Economics

Examples of SuccessfulRegional Development

Silicon Valley

Austin

ResearchTriangle

Delaware

Route 128

Examples of FailedRegional Development

Silicon Forest

Bionic Valley

Ceramics Corridor

Laser Lane

Medial Mile

Optics Valley

Satellite Alley

Silicon BayouSilicon Desert

Silicon Mountain

Reproducing a “Silicon Valley”In Delaware Is Unlikely

• Silicon Valley guru, Frederick Terman, failed torepeat success in ventures with Princeton andSouthern Methodist University– Unique interactions with Stanford and Berkeley led to

success in Silicon Valley

– Post-World War II defense spending in electronics

• Large market for resources and products existedalong Route 128

• Consortium of microprocessors in Austin, TX

What Factors Caused Failure?

• Unprepared labor force

• Insufficient time for success

• Failure to recruit key firms/industries

• Inadequate infrastructure

• Inability to take the “second step”

• Cultural/institutional barriers to growth

What Can We ReasonablyExpect In Delaware ?

• Sustained moderate economic growth isattainable.

• We can avoid the mistakes of failedregional development efforts.

• We can build on the foundations wehave.

Foundations of RegionalEconomic Growth

• People

• Sites

• Infrastructure

• Cultural/Institutional Environment

• Amenities

• Cumulative and Reinforcing Effects

Research Findings:People

¥ A concentration of college-educated adultshas a strong positive effect on growth inproducer services (Porterfield, 1990).

¥ High school attainment level has a significantpositive relationship with entrepreneurialactivity (Bartik, 1989).

¥ A large proportion of new jobs are created byautonomous small and medium enterprises(Reynolds, 1994).


• People

• Sites

• Infrastructure


• Amenities


Infrastructure

¥ Roads and highways

¥ Telecommunications

¥ Sewer

¥ Water

¥ Airports

¥ Ports

Research Findings:Infrastructure

¥ Infrastructure investment increases the regionaldemand for private inputs and stimulates themultiplier effect within the economy (Fox, 1990).

¥ The greatest benefit of infrastructure is its abilityto serve as a catalyst for development and increasedproductivity through improved efficiency (Garrison,1994).

¥ Considerable debate exists regarding the exactmagnitude of infrastructure investment (Aschauer,1989; Munnell and Cook, 1990; Harmatuk, 1996).


• People

• Sites

• Infrastructure


• Amenities


Cultural/InstitutionalEnvironment

¥ Incentives: Taxes, EnablingLegislation

¥ Sharing of intellectual property rights

¥ Labor laws: Right-to-Work,Compensation

¥ ÒOne-stop shoppingÓ

¥ Clearly delineated land use rules

Research Findings:Cultural/Institutional Environment

¥ Incentives have historically been provided throughfiscal policy; however, Ònew waveÓ regional growthpolicies (support of innovation, industrialmodernization, technological advancement, andtechnology transfer programs), have recently moved tothe forefront (Bartik, 1991).

¥ Tax abatements and deferred tax payments have beenfound to be insignificant in stimulating economic growth(Walzer and PÕng, 1995).

¥ Right-to-work laws reduce the cost of labor by 10% to18% and the cost of capital by 9% to 19% (Garofalo andMalhotra, 1992).


• People

• Sites

• Infrastructure


• Amenities


Research Findings:Amenities

¥ Regional amenities are important to economicgrowth (Kohler, 1997).

¥ Firms migrate to regions where profits can bemaximized; lower wages in areas with significantamenities attract new business (Clark andCosgrove, 1991).

¥ In firm location decisions, avoidance ofdisamenities is more important than attraction toamenities (Gottlieb, 1995).


• People

• Sites

• Infrastructure


• Amenities


Research Findings:Cumulative and Reinforcing Effects

¥ Access to pools of specialized labor reduces trainingcosts and minimizes the loss of productivity resultingfrom the mismatch between workers and firms (Kim,1987).

¥ By following other firms, new companies can reduce orentirely eliminate the search costs involved withindustrial location (Pascal and McCall, 1980).

¥ By locating in an established urban setting, firms canmaximize information-intensive business contacts, whichspawns product innovation (Davelaar and Nijkamp,1989).


• People

• Sites

• Infrastructure


• Amenities


Realities of Economic GrowthPolicy for Delaware

• Economic development resources arelimited– Delaware does not have sufficient resources to

promote economic development of all kinds inall places.

– Delaware must be selective with regard toregional growth policies.

• Benefits and costs should be the basis forthe selection of growth policies

Benefits of EconomicGrowth in Delaware

• Providing desirable job opportunities forDelawareans

• Expanding the tax base to support increased publicgoods and services

• Increasing private property values

• Ensuring Delaware’s future: growth is cumulativeand reinforcing

• Expanding markets to support increased consumerchoices

Research Findings:Benefits

¥ One in five new jobs created goes to localresidents with the other four going to in-migrants(Bartik, 1994).

¥ New JerseyÕs property tax base grew by 24% inthe 1970Õs and by an additional 75% between1980 and 1987. The business tax base peremployee almost doubled in real terms (48%) andgrew almost three times faster than the rate of jobgrowth (17%) in the 1980Õs (Danielson andWolpert, 1991).

Research Findings:Benefits

¥ A dollar increase in median incomeproduces a $0.20 to $0.40 increase inland values per acre (Ottensmann,1977).

Benefits of EconomicGrowth in Delaware

• Providing desirable job opportunities forDelawareans

• Expanding the tax base to support increased publicgoods and services

• Increasing private property values

• Ensuring Delaware’s future: growth is cumulativeand reinforcing

• Expanding markets to support increased consumerchoices

Potential Costs of EconomicGrowth in Delaware

• Congestion

• Crime

• Environmental Degradation

• Urban Sprawl

• Loss of Local Identity

• Cross-border Effects

Research Findings:Congestion

¥ Congestion cost the the British economyapproximately 3% of GDP in 1987 (Banister,1994).

¥ Congestion is increasing most in areas of rapidemployment and/or income growth (NationalTransportation Statistics , 1997).

¥ Economic benefits of the transportationinfrastructure can best be realized by using theexisting stock more efficiently (Boarnet, 1997).


• Congestion

• Crime


• Urban Sprawl



Research Findings:Crime

¥ Growth of population makes theapprehension of criminals more difficult andencourages illegal activity. Transientsincrease the incidence of property crime(Jarrell and Howsen, 1990).

¥ Higher per capita and aggregate incomeslead to higher total crime rates (Hemley andMcPheters, 1975).


• Congestion

• Crime


• Urban Sprawl



Research Findings:Environmental Degradation

¥ Economic growth brings an initial stage ofdegradation followed by a period ofenvironmental improvement (Arrow et al.,1995; Grossman and Krueger, 1995).

¥ When a particular standard of living isattained, constituents begin to focus onsurrounding environmental amenities(Grossman and Krueger, 1995).


• Congestion

• Crime


• Urban Sprawl



Research Findings:Urban Sprawl

¥ Urban sprawl leads to conflicting land uses,pressures on agricultural and open space, highercost of service provision, transportationcongestion, and social disparities (Thomas,1990).

¥ Estimates of the cost associated with urbansprawl range from as low as 3% higher than thatof planned development (Peiser, 1984) toÒsignificantly higher.Ó (Real Estate ResearchCorporation, 1974).


• Congestion

• Crime


• Urban Sprawl



Cross-border Effects

¥ Realities: DelawareÕs growth is fueled byout-of-state workers from Pennsylvania,Maryland and New Jersey.

¥ Benefit: Expanding income tax basewithout resident costs (e.g., schools)

¥ Costs: Must provide transportationinfrastructure to accommodate thoseworkers


• Congestion

• Crime


• Urban Sprawl



The Desirability of GrowthVaries by Industry

• Benefits vary by industry

– Wages and salaries

– Tax base

• Costs vary by industry

– Environmental degradation

– Congestion

Research Findings:Average Salary by Sector

Sector Salary

FIRE $36,109

T ra n s . , Comm., and Util. $34,739

Const ruct io n $31,446

Services $26,006

Agriculture $19,657

Retail $14,992

The Desirability of EconomicGrowth Varies by Location

• Benefits vary by locationFor example, per capita income is approximately $31,500in New Castle County, but only $21,000 in Sussex County,so a $25,000 job raises average income in Sussex Countybut not in New Castle

• Costs vary by location

– Environmental sensitivity

– Congestion/Identity Trade off• New Castle County vs. Sussex County

Research Findings:Distribution of Benefits

¥ Distribution of benefits is wider than that ofgrowth: stability in the distribution of benefitsamong communities, large gains for communitiesthat grow most rapidly but benefits for communitiesthat experience little or no growth directly(Danielson and Wolpert, 1991).

¥ During the 1980Õs, northern New Jersey gained400,000 jobs but only 150,000 new residents. Mostof the benefits were attained without many of theassociated costs (Danielson and Wolpert, 1991).

What do we mean by“economic growth”?

• More jobs?

• More people?

• More tax revenue?

• More public services?

• Higher per capita income?

Research Findings:ÒEconomic GrowthÓ

¥ Gross output and employment are adequatefor measuring aggregate growth. However,personal income is more relevant fordetermining the economic welfare and averagematerial well being of individual constituents(Malizia, 1990).

Toward a Systematic Evaluationof Growth Proposals

Agr. Constr. Man. Trans. Whole. FIRE Retail Service Gov'tNew

Castle Kent Sussex

Job OpportunitiesPublic G&S

Property ValuesFutureConsumer ChoiceCongestionCrime

EnvironmentUrban SprawlIdentity

Industrial Sector County

Benefits

Costs

Example of Growth ProposalEvaluation

Industrial Sector CountyFinancial, Insurance, Real Estate New Castle

Job Opportunities ++ +Public G&S Property Values Future + +Consumer Choice + +

Congestion - -CrimeEnvironmentUrban Sprawl - -Identity

Costs

Benefits

Proposal: A firm in the Financial, Insurance, and Real Estate sector desires to locate in New Castle County


Industrial Sector CountyManufacturing New Castle

Job Opportunities + +Public G&S ++ +Property Values + +Future + +Consumer Choice

Congestion - -CrimeEnvironment --- ---Urban Sprawl - -Identity

Costs

Benefits

Proposal: A firm in the Manufacturing sector desires to locate in New Castle County


Industrial Sector CountyManufacturing Kent

Job Opportunities + +Public G&S ++ Property Values + +Future + Consumer Choice

Congestion -CrimeEnvironment --- -Urban Sprawl - Identity -

Costs

Benefits

Proposal: A firm in the Manufacturing sector desires to locate in Kent County

What Should We ReasonablyExpect In Delaware ?

• Delaware can attain sustained moderateeconomic growth in the future.

• Provided that we...– understand the costs and benefits associated

with proposals

– avoid the mistakes of failed regionaldevelopment efforts, and

– build on the foundations currently in place

Documents

Economic Growth in Delaware: Costs, Benefits, and Realities