Texas recently unseated North Carolina as the most business-friendly state in the country, according to Site Selection magazine, and its “not-so-secret weapon,” the editors say, is a $295 million fund established in 2003 “to help lure projects to the state.”

New York finished second in the annual rankings — thanks, no doubt, to the $500 million Washington provided New York after the Sept. 11 terrorist attacks so the city and state could give “incentives” to companies to stay in lower Manhattan. But one person’s incentive is another’s boondoggle.

The federal government alone spends tens of billions of dollars every year on economic development projects. In 2001, for example, the figure was $57 billion. State and local governments spend billions more.

Yet, it is not clear these huge annual expenditures, which have been taking place for four decades, have produced long-term measurable benefits.

Dozens of federal agencies are involved, including the Departments of Agriculture, Commerce, Defense, Housing and Urban Development, and Transportation, the Appalachian Regional Commission, Army Corps of Engineers, Environmental Protection Agency, U.S. Maritime Administration, and Tennessee Valley Authority.

Even the Federal Communications Commission gets involved, with a special “Indian initiatives program” designed, according to the Commerce Department’s Economic Development Administration, to bring telecommunications services “to Indian Country.” All together, at least 73 different government programs parcel out economic development funds, while dozens of city, state, and regional economic development offices scramble for the money.

The stated purpose of these economic development offices is to attract new businesses and industries to communities, or keep existing businesses from migrating. They offer a variety of inducements, including direct subsidies, tax breaks, grants, loans, and infrastructure improvements.

Economic development programs enjoy wide popularity. As Peter Eisinger of Wayne State University has observed, there is “extremely broad agreement as to the desirability of substantial government involvement in the creation of private sector employment.”

Yet, the sad truth is: Government economic development programs rarely have lasting benefits — for the simple reason that they run counter to good business practices.

The most glaring flaw in these programs is the fact that they increase a behavior known to economists as “rent-seeking,” a euphemism for business efforts to secure government favors. Businesses pay lobbyists, lawyers and consultants large sums of money to help them obtain economic development funds. Unfortunately, this makes less money available for higher priorities, such as capital investment.

While grants and subsidies provide the recipient companies and the communities in which they are located an economic windfall, the benefits don’t always last. When the grants and subsidies expire, the new jobs may disappear as well.

Government economic development programs, no matter how well intended, operate counter to fundamental economic principles.

The Government Accountability Office in Washington has attempted to measure the impact of economic development programs using sophisticated econometric modeling. The agency (then called the General Accounting Office) reported nearly a decade ago, in 1996, that it was “unable to find any study” by any reputable organization “that established a strong causal linkage between a positive economic effect and an agency’s economic development assistance.” Yet, the spending continues.

Unsatisfying as it may be to the many proponents of economic development programs, government can best promote economic growth and prosperity by sticking to the basics: protecting private property rights, enforcing the law, providing basic services, and keeping taxes and regulations to a minimum. It should then do one final thing: Get out of the way and let the economy work.

— Arthur E. Foulkes is a research associate at the American Institute for Economic Research (www.aier.org).