Michael Hicks: Regional cities initiative, an economic boon

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Indiana’s Regional Cities Initiative is an example of one of the most innovative place-based economic development programs issued by any state.

A recent study authored by colleague Dagney Faulk and I conclusively links the program to employment growth in the counties that received the grant funds, and that linkage hints at long-term effects to regional economies (see https://projects.cberdata.org/196/rci-impact). This first causal study should be important to Hoosier policymakers and be of interest to anyone who cares about Indiana’s future.

Gov. Mike Pence in 2015 proposed the Regional Cities Initiative, which would invest $40 million in two metropolitan regions. Behind the concept was a clear understanding that most economic growth was happening in cities with solid quality-of-life investments.

Making Indiana cities more attractive to families required local collaboration across jurisdictions, and communities that worked together were more likely to replicate the success of faster-growing cities around the nation. This focus was a huge departure from traditional economic development. There was no intent to “attract jobs.” Rather, regions were invited to consider infrastructure spending that would boost population, grow incomes or improve downtowns.

Eric Doden, then the president of the Indiana Economic Development Corp., spent a year traveling to every county explaining the program. When it was finally announced, eight regions prepared detailed plans for government spending that would attract people and private investment. A selection committee chose three regions — Fort Wayne, Evansville and South Bend/Elkhart—to receive funding.

The goal of forcing metropolitan regions to submit plans and compete against one another was a critical part of this effort for two reasons. First, it forced local governments to consider how their investments would support the region. Second, it created a great natural experiment for researchers to test whether the program worked. That is especially critical because the disappointing performance of Indiana’s traditional economic development policies are why the Regional Cities Initiative was needed in the first place.

The winners were announced, the state legislature agreed to fund a third region, and money began flowing into projects. Overall, the state spent a bit more than $140 million. That attracted much more private and local government spending, topping $1.6 billion so far.

These cities saw additional expenditures of $367 million on housing and housing infrastructure; $340 million on arts, recreation and cultural amenities; $350 million on parks and trails; $185 million on education and workforce; $57 million on commercial development; $34 million on transportation infrastructure and almost $6 million on incubators and co-working spaces.

This is a substantial amount of investment on quality-of-life attributes anywhere, but in a state that has focused more on attracting jobs than attracting people, it was a stark departure from the past. A natural and important question is: Did it work?

The best way to evaluate the effect of a policy or program is to conduct a randomized control trial, as is done in evaluating medical procedures or new drugs. That’s the scientific method all of us learned in third grade. But, in the real world, these types of experiments are uncommon.

Fortunately, we had the basics of an experiment in the Regional Cities Initiative. We had three winning regions, which comprised our treatment group—think of the extra dollars as the ‘medicine.’ And there were two control groups available—all Indiana counties and those regions that applied but didn’t receive funding in the Regional Cities Initiative.

Of course, winning the funding was not a random event. It is possible that the winning counties were already doing better, so my colleague and I needed to compare growth before 2015 to see if these winning counties were outperforming other places. Across a battery of statistical tests, we determined that they were not.

The next step was to compare the economic changes over time between the counties that received the Regional Cities Initiative money and those that did not. We tested the effects on total employment and on employment in construction, arts/entertainment/recreation, and accommodations/food services. We also compared wages in each of these industries as well as total population, gross domestic product and county home prices.

Across the board, we found positive effects on both overall employment and construction employment. These results remained large and statistically significant even as we changed control groups from applicant counties, all counties, and all counties except the Indianapolis Metropolitan Statistical Area. We found no statistically significant effect on wages in any of these industries. We found large growth in GDP in every sample we used.

The Regional Cities counties also grew faster as a result of the investments, but only when we excluded the Indianapolis region. I interpret that to mean the program is not yet able to boost these counties to equal the success of the Indianapolis region.

So, why is this study useful?

First, because this study finds such big effects of spending, it offers very strong evidence that Indiana has under-invested in quality-of-life infrastructure. If we had been investing heavily, a few million extra dollars per county would’ve had no discernable effect.

Second, this effect is far more pronounced than anything that is being done with traditional economic development spending. That is important because we spend more than $1 billion each year on luring businesses to Indiana.

Third, these findings offer strong insight into the likely effect of the READI grants that impact every county in the state. The only disappointment is that there’s no control group for the READI grants, so a causal analysis of the impacts of these programs won’t be possible.

Finally, this new study allows taxpayers to compare future economic development spending proposals against what we know to be true about the Regional Cities Initiative. For example, we now know that the Regional Cities Initiative has already boosted Indiana’s economy more than the LEAP district is expected to – at a fraction of the cost.

Michael J. Hicks is the director of the Center for Business and Economic Research and the George and Frances Ball Distinguished Professor of Economics in the Miller College of Business at Ball State University.