When most people think of economic development policies, they think of loan programs, direct subsidies and business assistance centers. What this amounts to is offering loans to marginal firms that have been denied them in private capital markets, cutting breaks for firms that would locate in Southern California anyway, and putting individuals skilled at pursuing and obtaining government grants in the position of advising entrepreneurs.

The current alliance proposal, "Partnerships for Progress: An Economic Strategy for the San Fernando Valley," is full of such programs, including a plan to lend $10 million to Valley businesses. Many of the proposed programs merely mimic the missions of existing agencies--crime reduction, business retention, business education partnerships and small-business assistance centers.

It is arrogant to think we can decide which firms will survive, or direct firms on how to prosper. Private lenders and entrepreneurs have more expertise and, because their money is at risk, have strong incentives to fund firms that do well. Small Business Administration loans have a default rate 2 1/2 times that of private lending institutions. From a comparison of default rates alone, we know that loans aimed at economic development do exactly the opposite: They shift funds to firms least likely to survive and least likely to create jobs over time.

Public and public-private economic development programs persist because they benefit politicians. These programs create a constituency of economic development bureaucrats and targeted firms that are indebted to politicians and willing to offer financial support and endorsements in future campaigns.

Those who run economic development programs have the most invested in seeing them persist. They overlook the failure of one such scheme after another to improve the lives of the economically disadvantaged. They make their living spreading the false tale that government agencies or public-private partnerships can direct resources in ways that promote economic growth.

The alternative is to reject traditional economic development policies. The alliance needs a president who understands that to create jobs that offer critical work skills to unskilled workers, we must reduce existing impediments to growth.

Instead of setting up yet another business assistance center to help firms navigate the business permitting process, alliance funds should be directed toward improving the existing city permitting process. Funds could be used to purchase computers, hire data management experts and offer lump-sum payments to unnecessary city workers to encourage them to seek jobs elsewhere. Taking an even more innovative approach, the president of the alliance could try to persuade city and federal officials to let us test the effect of shifting all job training and economic development funds toward lowering city tax rates across the board.

These new uses of public and private funds will encourage firms to grow--the only real way to create stable jobs. The Economic Alliance can gain national attention if it takes the lead in a movement toward growth promoting reforms.

PHOTO: (B1) Shirley Svorny