Thursday, June 10, 2010

Good Questions, Bad Analysis

The Keystone Research Center released a report this week entitled Making Smarter State Investments: The Geographic Distribution of Business Subsidies in Pennsylvania, which purports to measure whether state economic development programs invest in the “right places.” The report has a remarkably simplistic definition of what “the right places” are – according to the report, if the money went to a business located in any city, borough, or first class township, it went to “the right place,” but if it went to a second class township, it went to the wrong place.

You might ask: “What is it that second class townships did to deserve being discriminated against in this way?”

For that matter, you might well ask, “what in the world is a second class township, anyway?”

What the report claims to be doing is measuring whether money went to “older Pennsylvania” vs. “outer townships.” It concludes that from 2003-2008, more business subsidies went to “older Pennsylvania” than between 1998 to 2003; the report declares this to be progress.

Unfortunately, rather than doing the careful and tedious work of trying to determine which communities are really older and which are newer, the authors used the same shortcut as the Brookings Institution did in an earlier report, namely, labeling all second class townships as “new” and everything else as “old.”

As a result, Seven Fields Borough, which was incorporated less than 30 years ago in 1983, is considered an “older area,” while Moon Township (one of the infamous second class townships), founded 220 years ago in 1788, is listed as a “newer” area.

So what exactly is a second class township? Is it inferior in some way to a first class township? No; the only real difference is that under state law, a township has to have a population density of at least 300 persons per square mile to be designated as a first class township. However, even if a township has more than 300 people per square mile, it can choose to remain a second class township, and many have. So, for example, South Fayette Township in Allegheny County, a first class township, had a population density of 603 people per square mile in 2000. Moon Township, a second class township, had a population density of 939 people per square mile in 2000. Yet the Keystone Research Center report claims that second class townships are the “less dense” townships in the state.

Even if the report had actually figured out what was really an “older” municipality, however, its basic approach is still fundamentally flawed in multiple ways:
  • What the report is presumably trying to get at is whether the state is reinvesting in already developed areas vs. contributing to sprawl. The fact that money was spent in a municipality that is older or denser than another tells you little or nothing about that, though. There are greenfield sites in older communities, and brownfield sites in newer communities (including many second class townships). The report doesn’t look at that, though; it implicitly assumes that everything in an “older” community is a brownfield site, but nothing in a “newer” municipality is.
  • The report looks only at three of the state’s many economic development programs (the Opportunity Grant Program, the Infrastructure Development Program, and the Pennsylvania Industrial Development Authority). In a footnote, the report acknowledges that these programs represent only 30% of the $300 million the state spends each year for “traditional subsidies” and only 10% of the state’s $1billion annual spending on economic and community development programs. It’s an even smaller share when you consider other state programs for highway construction and maintenance, transit construction and maintenance, water and sewer system construction and maintenance, etc. that aren’t considered “economic development.” The fact is, the report is only looking at a very small slice of where the state is spending money that affects business and community development, and it makes no more sense to draw conclusions about how “smart” the state’s investments are based on that than it would be to evaluate someone’s overall investment portfolio based on how much they have in their bank savings account.
  • The three programs that the report does look at are specifically designed to assist businesses in locating or expanding in the state. The report implies that somehow the state could decide where to spend the money, and businesses would have to follow. In fact, it’s exactly the opposite – a business is not going to locate in a community where it’s not economically viable to do so. In most cases, the state money that’s provided merely helps to offset the serious competitive disadvantages that the state has in terms of business climate (e.g., the second highest corporate net income tax rate in the country), topography (the near impossibility of finding flat land for a large business facility), or infrastructure (poor quality bridges, sewer systems, and water systems). It is rare that the 3 state programs examined in this report provide enough money to convince a business to locate in a completely different community. And if the money were restricted to being spent in “older” areas, it’s more likely that many of the businesses wouldn’t be in the state at all rather than relocating to the older areas that have inadequate infrastructure.

What the report should really be asking is two questions:

1. To what extent does the state’s investment in a project leverage existing infrastructure and past investments that state or local government have made? For example, it clearly makes economic sense to take advantage of the hundreds of millions of dollars that have been invested in Pittsburgh International Airport and the highways around it. One of the best examples of industrial reuse in the region is the Airside Business Park, which enabled new businesses to locate on the site of the old airport terminal. Yet any state assistance that was used to help businesses locate there would be viewed as a bad investment because Findlay and Moon Townships – where the airport is located – are both the second class townships that the report implicitly disparages.

2. Is the state helping businesses to locate at sites where the state’s workers can easily access them? Here again, the airport area is a perfect example – it sits at the crossroads of I-79 and I-376, enabling workers from Allegheny, Beaver, Butler, Greene, Lawrence, Mercer, and Washington Counties to easily access jobs. In fact, Allegheny, Beaver, and Washington Counties formed the Tri-County Airport Partnership in 2003 to jointly promote development of businesses in the airport area because it was such a strategic location for the region. Yet state investments in that area are viewed by the Keystone Research Center as being in the “wrong place.” The airport is not the only example – beginning in 1998, the region began working to develop new industrial sites and buildings to attract and retain manufacturing plants, and in most cases, the only locations with sufficient flat land and good transportation access for such plants are in so-called “outer” townships.

The above critique does not mean that the state’s investments have, in fact, been in the “right” places. Some have clearly not been, but poor state investments have been made in older communities as well as newer communities. Unfortunately, this flawed analysis wasn’t done smartly enough to provide any useful guidance as to what should be done differently to make investments “smarter” in the future.


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