THE INVISIBLE HAND

By ALAN J. PALMER

First you must exit Interstate 90. Then keep your eyes open, for this is South Beloit with its tree-lined boulevard accentuating the home town friendliness. And yet, she has its thriving, fast pace business community as well. Family owned and corporate giants alike, existing side by side. So successful this mix has become that this community has promoted itself as having "Small Town Charm with Big City Opportunities." If the reader has discretionary voting authority then this article may be of special interest.

Repeatedly, my city council colleagues and I are asked to consider resolutions affecting our community. For economic success to continue, it's essential that any profit motive associated with any expansion not be adversely affected by unnecessary restrictions. The resulting support from our employees and constituents has been favorable.

Reasons for any community's prosperity or stagnation can be numerous. Any explanation would be somewhat vague, perhaps invisible. Yes, we have had our share of Illinois financial grants, but this opportunity for such acquisitions exist for other communities as well. Although other communities outpace our economic development program, our results have been excellent when considering that South Beloit only has a population of 4,200.

Some advocate the city's continued commitment to capital investment and infrastructure expenditures, while keeping consumption spending to a minimum underscores the success ratio. Other reasons have been argued, each defended in their own right. My colleagues probably wouldn't explain any scenario in theoretical economic terminology, but then again they don't have to. They know their pragmatic actions are working, and very well indeed.

Maybe an economic theory could explain this anomaly. One logical argument has existed for generations. First explained in his book. The Wealth of Nations (1776), Adam Smith referred to "The Invisible Hand" principle. Smith explained that an individual, or group of individuals, will pursue their own selfish interests. As if led by an invisible hand, their selfish interests of good intention will ultimately benefit everyone, including the unintended. He continues by saying that any interference by government is almost certain to be injurious to the invisible hand concept.

Pure laissez-faire personifies one extreme case of economic thought. Ideal as it seems, this concept can not work in all circumstances. Business will not pursue any endeavor where its deserved revenue and profits are difficult to collect. Abraham Lincoln advocated that government should only do for its people what is necessary, and then only what the people can not or will not do for themselves. Experience has shown us that some government activity that will modify trends and clarify what is necessary may be needed for society. Deciding what is necessary however, has become increasingly skewed in the last few decades resulting in accelerating tax rates.

Like other communities. South Beloit provides the usual and customary services of fire & police protection, sewer system operations, etc., but then goes on to concentrate on capital and infrastructure expenditures while holding consumption spending to a minimum. Allocating capital, most notably in the form of a city sponsored industrial park, provides low cost expansion opportunities for business.

South Beloit purchased land, invested in infrastructure, and enacted precipitative and aggressive marketing procedures to attract new business. Once land parcel prices were established, the city reduced these prices, offered tax break incentives, and arranged for low interest loans from its revolving loan program to the prospective business. Various combinations of incentives were offered depending upon the perceived value of the proposed business expansion. Job creation, business prestige, and magnitude of the building construction are all factors considered. The higher the perceived value to the community, the higher the luring incentives to expand the tax base. The resulting low and stable tax rate thus became further incentive for additional business expansion. Homeowners too benefit from this attitude because of flexible interpretation of residential housing ordinances. Subsequently, the real estate tax rate has decreased, on average, by 3.3% annually over the last six years.

In order for South Beloit officials to pursue their perceived interests and elected duties, they too unconsciously practice and have now become captive of The Invisible Hand. Perhaps many of you have already concentrated on tax base expansion. For those of you who have not, or are skeptical of such pursuit, consider the other possible alternatives.

One should not ignore the possibilities of stagnation of growth or negative economic spiraling. Eliminating capital investment and concentrating on consumption spending would inherently increase the tax rate, given the fact that certain city services must be maintained

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under all circumstances. Serving your community within the confines of anticipated revenues may be difficult when some revenues are reduced or even eliminated. Remember Federal Revenue Sharing funds? Maintaining the status quo of services during moderately inflationary times requires an increase in revenue just to nullify escalating costs. To avoid this economic quagmire, expanding the base through various incentives will actually increase revenues in the long term. This paradox of giving something away so that you can receive, becomes your best option. As for Adam Smith, his principle appears to be still relevant even today. •

July 1990 / Illinois Municipal Review / Page 23