What's the best way to boost the economy? Hint — it's not tax cuts

Several state leaders have taken to promoting more income tax cuts as the best way to improve Oklahoma’s economy. But is that true? We recently heard Timothy Bartik, senior economist at the Upjohn Institute for Employment Research, discuss the latest research on which state-level policies are most effective at boosting the economy. [You can see the full transcript of his remarks here.]

Bartik explained that across-the-board business tax cuts are usually not the most cost-effective tool for economic development. Because state government resources are small relative to the size of a state’s economy, we need policies with a high “bang-for- the-buck” to see meaningful increases in per capita earnings. Across-the-board cuts are not targeted enough to account for the opportunity cost of paying for them though reductions in public services or increases in other taxes.

Instead, Bartik recommended five policies with proven effectiveness and high bang-for-the-buck:

1) Customized Job Training

In this program, state governments subsidize job training that is customized to the particular needs of an employer. This customized training is frequently delivered by local community colleges. Bartik says the key for a successful job training program is to target unemployed or disadvantaged workers with good basic skills and directly involve employers.

2) Manufacturing Extension Services

Manufacturing extension services provide businesses with free or subsidized advice on how to improve their productivity and find new markets. Both extension services and customized job training tend to provide the greatest benefits to small and medium sized businesses, which have fewer resources than big business to train specialized skills or research productivity improvements. Bartik estimates that these specialized services can achieve the same benefit as across-the-board business tax cuts at 1/60th the cost.

3) Early Childhood Education

High-quality early childhood education has been shown to be the most effective long-term strategy for economic development. That’s because the benefits multiply over time, with a strong start helping kids to get more out of school throughout their educational careers. The economic benefit is primarily long-term, though Bartik calculates some short-term benefit as well, since improved schools will increase local property values. He also cited high-quality summer school in the early elementary years as a program with good evidence of success.

4) Career Academies

For older students, Bartik pointed to high school career academies. These are programs within high schools that partner with local businesses in a specific career field. Businesses help tutor students, provide internships, and give advice on coursework and student activities. The Oklahoma City School District has already embraced this approach and is expanding next fall with academies in engineering, health sciences, finance, information technology, and hospitality and tourism. Bartik said studies have found an 11 to 1 benefit-cost ratio for career academies, and they work especially well for students who would otherwise drop out of school or not attend college.

5) Wage Subsidies

Finally, Bartik said the most effective short-term strategy for creating jobs is wage subsidies that target job creation for the unemployed. He said the key for this program is a significant subsidy, perhaps as much as $10 per hour, but also stringent requirements for both public and private sector employers. These include mandates that workers are hired into newly created jobs, not existing vacancies, that employers keep workers for at least a year after the six month subsidy period, and that the employers and workers receiving subsidies are chosen by a local job training agency that identifies what new jobs will provide the most useful experience.

Bartik’s ideas point the way to the real path to prosperity for Oklahoma. We are already a low-tax state, and state and local taxes make up an insignificant part of business costs. Therefore we have little to gain by pursuing the low tax extreme even further. On the other hand, by combining our resources to invest in proven strategies, we can multiply the impact of every dollar we spend.