Tuesday, March 09, 2010

Brain Drain Aversion

by Daniel L. Bennett

Daniel Luzer has an interesting post over at the College Guide blog discussing a proposal in Michigan to convert its merit-based Promise scholarship into a tax credit for graduates who remain in-state to work after graduation. The goal of either program:
to counteract “brain drain” and try to keep bright, hard-working students in the state after graduation.
While it is reasonable that the state, which invests in higher education (at least partially) to improve its economy, would want to retain the graduates that it subsidized in order to get some benefit from its investment (i.e. to expand its tax base), such a policy of brain drain aversion through incentives is misguided. The reason is simple: college graduates (so-called skilled labor) follow the jobs made available by employers, not the other way around. Offering a tax credit for remaining in state to work will have no effect if a graduate is unable to find suitable employment.

Employers are not going to relocate to the state of Michigan because it has an excess supply of college graduates...unless the state offers an attractive environment to do business. The nearly 15% unemployment rate in Michigan signals that it does not offer an attractive business climate. Rather than dumping more taxpayer money into college education in a misguided attempt to improve its economy, Michigan (and other states) would be better off to use its resources to make it more attractive to do business in the state. This would attract employers who would create jobs for the state's graduates, as well as likely attract skilled workers willing to migrate from other states. This would mitigate the need to incentivize students to stay in state to work, saving the state money and likely boosting its economy and tax base. That is, unless the stated goal of investing in college education to improve the economy is a false premise for some other social goal.


Kadim said...

I'm not on board with this analysis. After all, California is a terrible place to do business, but Silicon Valley endures, thanks to the talent there. New York City is an even worse place to do business, but it endures as well.

While many places have taken Richard Florida's ideas too seriously, I think his core idea remains true: employers follow talent more than talent follows employers.

Funny, Michigan (and my home state of Ohio) are notoriously aggressive at using tax credits/subsidies to bring businesses in. However, that system works poorly in the long run because they were bringing in businesses with only marginal interest in the respective states (since it was the aggressive incentives that brought them in.) So it is no surprised that they were less than permanent.

Daniel L. Bennett said...
This comment has been removed by the author.
Daniel L. Bennett said...

Kadim -
You make a good point about California and NYC being poor places to do business. However, you must remember that Silicon Valley and Wall Street (or the fashion industry) attract talent from all across the world. In other words, people migrate to these places because it is where the jobs are in their field.

DC is another great example. People migrate here from all over the world to obtain employment in the defense, policy and non-profit fields, among others. Most of the folks that I meet here are not homegrown talent, but rather transplants who came here for work. And many private companies doing business in this region are (no surprise) located across the river in northern Virgina, where the business climate is much better than in the district or neighboring Maryland.

It is also worth noting that many companies have moved their HQs away from unfriendly business states such as NY and CA, to more friendly ones such as TX, DE and the southern states. Northrop Grumman recently announced that it plans to relocate from CA to the DC (likely VA) area. I'm betting that its many of its employees will follow.

You make a point in noting that short-term incentives to attract business may not be effective at maintaining them in the long-run, but remember, that businesses are only going to relocate if the long-term benefits from moving outweigh the long-term costs from staying put. In other words, it does no good to lure in business with sweet carrots that will later be attacked with sticks.

Daniel L. Bennett said...

Dr. John Ellis's essay over at Minding the Campus provides additional support to my argument.

Kadim said...

Well it's hard to argue with California, NYC or DC because those areas also offer a particular quality of life that is hard to find elsewhere (in addition to the businesses that might already be there.) A bit of a chicken and egg thing.

But I believe that Florida's analysis shows that a significant amount of college graduates today choose where they want to live first, and then try to find work there (at least this is prior to the credit crisis.)

I also point out that, regardless of tax rate, if Ohio, say, imported 2000 software engineers from Bangalore and put them in Toledo, the businesses would undoubtedly follow, and wouldn't need tax incentives to work there.

As far as I can tell, Ellis' thesis is that California's over concentration of college students/graduates have made its state legislature hopelessly leftist, and the result is that California's mismanagement.

It's an amusing argument, and it may place as a reason on a top 25 things wrong with California government, but I certainly wouldn't put it all that high, given all the many other problems California government has. (California Republicans were terrible spendthrifts, up until Prop 13. The state had decades of such strong growth that it never created a culture of fiscal responsibility, as there was no need. Even today, a Californian's ballot is a choice between tax and spend Democrats and borrow and spend Republicans.)

I am libertarian leaning, but I reject the idea that leftism automatically brings with it fiscal mismanagement. The socialist Concertacion government in Chile took fiscal responsibility very seriously. (Though I'll admit that might have something to do with Argentina, which Chileans knew they didn't want to emulate.) The Nordic countries, while having high taxes, do have high quality of life, good services, reasonable growth, and are debt-averse.

Apologies for the tangent. :-)

Daniel L. Bennett said...

Let's be realistic here. The state of Ohio will not import 2,000 (or any amount) of software engineers. That is not how things work. It might be that case that a private business or the public sector in Ohio lures these workers there, but that would then support my argument that labor follows the jobs, not vice versa.

Now, it might also be the case that 2,000 software engineers from Bangalore migrate to Ohio because I don't know, they like how the name rolls of their tongue. Assuming there are not enough job openings in Ohio, many of these workers would likely face one of 3 outcomes:

1) they end up working in Ohio in a field other than software engineering

2) because software engineers can often work remotely, a firm from another region hires them and allows them to work from their home

3) they realize the job market for software engineers sucks in Ohio and many of them move to where there are jobs

It is also possible that the Bangalore software engineers stay put in their home country and that technology firms upon up shop there and hire them at a relatively low cost. In this case, yes, firms may relocate to where there are more skilled workers, but it is not an all else equal scenario. Regulations are likely much less strict and and taxes are likely lower than is the case in the US. Labor is also much less expensive.

Kadim said...

Well it doesn't work that way because Ohio thinks the only thing that can be done is luring business, not people.

I believe it is possible to set up shop in India, work with immigration authorities and make it possible to import talent directly to an area with the intention of creating jobs there.

So having said that, I will respectfully agree to disagree with your analysis. Unfortunately, we'll have to wait a bit to see if anyone tries anything like it.