Value-creating businesses drive state and local economies. Yet in a dynamic, market economy, past success does not ensure future success. Innovation is a key to continuous value creation. A new report, Innovative Alabama from the Hoover Institution, offers suggestions about building a more innovative economy.
The Alabama Innovation Commission, established in 2021, commissioned the report by the Hoover Institution, arguably America’s foremost university-based (at Stanford) center. It features six chapters that cover increasing innovation from Alabama’s universities, using outdoor recreation to attract innovative persons, the potential for advanced manufacturing, the role of state incentives and tax credits in growing innovative businesses, K-12 education for an innovative economy, and broadband and innovation. The chapters have an excellent Hoover Institution scholar as an author. For example, the author of the K-12 chapter is economist Eric Hanushek.
I will focus today on incentives and other policies directly encouraging innovative firms. Alabama has recruited manufacturers with targeted incentives and tax breaks since landing Mercedes-Benz in 1994. Incentives have helped build our auto industry.
The report examines whether the 2015 Alabama Jobs Act spurred employment growth. Two statistical comparisons were made: Alabama counties versus counties in neighboring states and targeted versus non-targeted Alabama counties. Job growth was slightly but not statistically significantly higher after the Alabama Jobs Act, meaning that the observed change could simply be due to random variation. Analyses frequently find that state incentive programs have little overall impact on local economies.
This chapter provides perspective on Alabama’s strategy. We rank 41st in the Tax Foundation’s business climate index based on business taxes as written in the statute, but impose one of the lowest tax burdens on new firms. We tax businesses heavily but politicians excuse many from paying.
The report recommends against this. Firms must be able to initiate negotiations to secure relief: “rules of this sort are often cumbersome and costly for small- and medium-sized businesses to navigate.” The authors instead recommend “broader-based business tax cuts such as reductions in the corporate income tax rate.”
The report also offers recommendations for the Alabama Innovation Fund. While not endorsing state investment in private business, they recommend the approach of the Launch Tennessee program: public investment only matches private investment. This imposes some market discipline on government; investors must be willing to commit their money before a firm receives any public investment.
Turning research into innovative products is challenging. The report discusses the “valley of death” between basic and applied research, the process of turning “Eureka!” ideas into valuable products. Universities value and produce basic research yet applied research is less valued by faculty. The report offers Germany’s Fraunhofer Institutes as models of successful public-private and university-industry collaborations.
Yet successful collaboration generally emerges organically and is difficult to copy. Mimicking formal structures or putting the same types of people together rarely yields the same results. Fortunately, Alabama has numerous ties with German manufacturers and can access their innovation.
Cutting taxes could also encourage research because as the report notes, Alabama has “the highest tax burden in the country on mature R&D facilities.”
I will offer another suggestion: controlling regulation. Adam Thierer of the Mercatus Center demonstrates how requiring official permission to experiment crushes innovation. He stresses permissionless innovation, which is “about the creativity of the human mind to run wild in its inherent curiosity and inventiveness.”
Newness and a lack of regulation, Thierer argues, fueled the growth of Silicon Valley and the internet. Bureaucratic gatekeepers must be avoided. Bureaucrats’ natural reaction for something different is, “No!” because they fear angering existing stakeholders and will not share any potential profits.
We need not eliminate all regulation. Keeping rules easy to understand and narrowly tailored and requiring explicit authorization for new restrictions should preserve permissionless innovation. Lawmakers should continually prune away the regulatory thicket and repeal outdated rules.
I hope some of Innovative Alabama’s insights register with state officials. But government cannot make businesses innovate or grow. Both politicians and citizens should remember this.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University. The views and opinions expressed here are those of the author and do not necessarily reflect the policy or position of 1819 News. To comment, please send an email with your name and contact information toCommentary@1819News.com.