Five Challenges for the Future of Economic Development

Economic development is the long-term process of improving the health of a local or regional economy. The principal objectives of economic development are job, business, and income growth. And communities pursue these objectives through plans, policies, programs, projects, and partnerships aimed at business retention, expansion, and attraction (BREA); small business support; place-branding and tourism promotion; and workforce development.

Economic development is one of many functional areas of planning practice, though not all economic development practitioners identify as planners. Many economic development planners work for medium- and large-sized cities, towns, or counties. Others work for regional planning or economic development agencies, nonprofit economic development organizations, or private firms that provide economic development planning services to public agencies.

Researchers and practitioners generally agree that small business formation and growth is more important to long-term economic health than "zero-sum" business attraction and retention efforts that, largely, just shift (or resist shifting) economic activity from one place to another. Nevertheless, many state and local officials desire "quick wins" and headline-grabbing announcements. This has kept the economic development status quo fixated on financial or regulatory incentives, real estate matchmaking, and infrastructure investments that benefit large businesses.

The risks of this status quo are not new, but they are exacerbated by five interrelated challenges. And the compounding effects of these challenges may necessitate new economic development approaches, methods, or tools. Furthermore, each of these challenges can make it harder for planners and other economic development practitioners to design and implement local and regional economic interventions that promote broad-based and equitably distributed benefits.

Challenge 1: AI-Related Automation

Assumption: Major investments in new facilities will permanently boost local employment.

New reality: New facilities may be largely automated.

Artificial intelligence and advanced robotics may enable widespread automation of both blue- and white-collar jobs. This could lead to a decoupling of capital investment, employment, and business growth.

The economic development status quo assumes that major investments in new facilities will create large numbers of new permanent jobs and that new employees will spend money locally, supporting the creation or expansion of other businesses and leading to a significant net increase in economic activity. But if new facilities are largely automated (or are just not inherently job dense), the multiplier effects would likely be much smaller. And if these new facilities create products or deliver services that outcompete more employment-dense local firms without creating demand for new local jobs, they could be a net drag on the local economy.

Challenge 2: E-commerce and Remote Work

Assumption: Surplus revenue from commercial development will pay for public facilities and services.

New reality: There may not be enough demand for stores and offices to sustain existing levels of service.

E-commerce and remote white-collar work may fundamentally transform local land markets and necessitate new fiscal structures. While most retail spending still happens in brick-and-mortar stores and most white-collar workers still work in commercial offices, e-commerce and remote work have both gained significant market share since the onset of the COVID-19 pandemic.

The economic development status quo assumes that communities can use local sales tax receipts to offset the negative fiscal impacts of low-density residential development. And it assumes that dense concentrations of office workers who will spend their money at local stores, restaurants, and bars are key to this strategy. However, permanently lower demand for brick-and-mortar retail and commercial office space could require communities to scale back public services to match lowered revenue or pursue new sustainable sources of revenue.

Challenge 3: Declining Birth and Immigration Rates

Assumption: Long-term local population and economic growth is achievable.

New reality: A shrinking national population of working-age adults may reinforce existing inequities.

Declining birth and immigration rates may lead to fewer working-age adults and increased interregional competition for workers. By some measures, U.S. fertility rates are at an all- time low. This, in combination with current immigration policies, means the U.S. population is on track to start shrinking after 2056.

The economic development status quo assumes long-term growth in the working-age population and, with the right mix of policies and investments, the possibility of sustained local economic expansion. These assumptions underpin the idea that local economic growth doesn't need to come at the expense of neighboring (or far flung) communities. But with fewer workers overall, communities may feel the need to prioritize competing for workers (rather than employers). This could reinforce existing patterns of economic advantage and disadvantage, as workers concentrate in places that already have a high quality of life and plentiful economic opportunities.

Challenge 4: Property Tax Revolt (Redux)

Assumption: Communities can rely on property tax revenue to pay for services and facilities that support economic growth.  

New reality: Limits on property tax collection may strain local budgets.

Renewed state efforts to limit (or in some cases abolish) property tax assessments may threaten the ability of local jurisdictions to provide core public services or invest in economic development. In recent years, rapidly rising property values have led to dramatic increases in property tax bills in many communities and calls for relief from state legislators. Many commentators have equated this current property tax backlash to the "tax revolt" of the 1970s and 1980s, which led more than a dozen states to make constitutional or statutory changes that limited local property tax assessments.

The economic development status quo assumes that local property taxes will be the primary source of revenue for public services and will be available to support investments in economic development initiatives. However, further constraints on local property taxes could push communities into greater reliance on more regressive revenue sources, such as sales taxes, or force cuts to the public services that sustain a high quality of life.

Challenge 5: Climate Change Costs

Assumption: Climate risks are not a determining factor for most business decisions.

New reality: Climate change may dramatically increase development costs and displace existing businesses.

Climate change may make capital investments that support economic development significantly more costly due to higher property insurance rates and the need for climate-resilient infrastructure. Until recently, the availability and cost of property insurance seldom played a determinative role in business site selection or relocation. In recent years, though, escalating climate risks are fueling an insurance crisis, effectively rendering some places uninsurable and unbuildable. Climate change is also driving up costs to build, replace, and maintain roads, bridges, pipes, and other infrastructure necessary to facilitate new business investments.

The economic development status quo assumes that the climate is stable and hazard risks are relatively predictable, allowing practitioners to target industries that best fit the current climate and hazard risk profile. And it assumes that homegrown businesses and businesses that put down roots in a community will stay put as long as the community continues to value their contributions and treat them fairly. But no amount of goodwill can overcome the business risks posed by a loss of property insurance.

Intersections and Feedback Loops

Each of the preceding challenges is formidable in isolation. However, planners must prepare to help leaders respond to the collective effects of these challenges (Table 1). Some interactions will strengthen (+) the effects of a challenge, while others will weaken (-) those effects.

Unanswered Questions

APA seeks to support economic development planners in promoting inclusive and equitable economic development in a time of deep uncertainty. As a first step, we need a better understanding of the current state of the practice:

• How are local and regional planners who specialize in economic development responding to deep uncertainty in their work? 
• How are local and regional economic development agencies and organizations measuring success with respect to advancing inclusive and equitable economic development?
• How are local and regional economic development agencies and organizations responding to the five challenges described above?

APA is committed to exploring the questions above and working to develop practical guidance to help planners formulate and implement plans, policies, programs, projects, and partnerships that enhance local and regional economic health and resilience. In the coming months, we'll be engaging thought partners to help us explore potential planning responses to these key challenges to the economic development status quo. But before that, the next post in this series on the Future of Economic Development will take a closer look at how these challenges relate to data center development.

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