With the federal government sidelined by a giant budget deficit and a war, state governments are critical to sub-state economic development approaches. However, since state governments cannot intervene everywhere, a capacity-building effort is the best way to go – one that seeks to improve the managerial and entrepreneurial talent of their public, private and nonprofit sectors; create a pipeline of new, more educated workers; upgrade the existing workforce; encourage lifelong learning; improve amenities and public services; exercise world-class environmental stewardship and growth planning; and cultivate its homegrown economy. ¹

In essence, we are

• Reinventing economic progress (“triple bottom-line”). 
• Spurring and implementing a far-reaching devolution of power and responsibilities. 
• Crafting state, regional, and local development strategies that generate “real” wealth, along with wider opportunities for all. 

These are no small tasks.  But it’s what is needed to truly chart economic progress, as opposed to simply easing today’s problems by creating new ones for the future.

Some choices will raise the standard of living but can also harm the environment.  Some can make the rich richer, while others would expand opportunities for more.  Some can waste the “people’s money” on fiscally irresponsible business subsidies while others can strengthen the tax base.

The goal should not be simply looking for the least painful trade-off. Economic development of the right sort is important.  Hence, we should think big.

Binary Economics states that with the continual modernization of labor, the percentage of work performed by machines, or systems, is increasing and thus the role of capital in production, the actual percent of work being performed by capital, is increasing as well.   The principle difference between mainstream and binary approaches to economic growth is the way in which capital is dealt with.  “According to binary economics, the primary role of capital is to do a growing portion of the work and distribute a growing portion of the income earned from production.”⁴

Kelso’s theory, of course, is different from mainstream economics in terms of how it conceives of capital and labor and their role in production.  “Conventional wisdom says there is only one way to earn a living, and that’s to work.  Conventional wisdom effectively treats capital (land, structures, machines, and the like) as though it were a kind of holy water that, sprinkled on or about labor, makes it more productive.  Thus, if you have a thousand people working in a factory and you increase the design and power of the machinery so that one hundred men can now do what a thousand did before, conventional wisdom says, ‘Voila! The productivity of the labor has gone up 900 percent!’ I say ‘hogwash.’ All you’ve done is wipe out 90 percent of the jobs, and even the remaining ten percent are probably sitting around pushing buttons.  What the economy needs is a way of legitimately getting capital ownership into the hands of the people who now don’t have it.”⁵ 

And with that, Kelso set out to devise a program that would make available capital ownership to those who did not previously have access to it: the poor and working class.  He came up with (in 1956) the idea of an Employee Stock Ownership Plan (ESOPs) that would allow employees to access capital before they actually have it (using their future income to invest in stocks for long-term savings). His goal in creating this new type of capital generation was to give workers the same capacity for savings that wealthy people already have by giving them access to increased capital without them having to use their salaries (which for most workers is not possible due to cost of living). 

In theory, ESOPs instill ownership in workers and full accountability in management and ownership.  In mainstream ideas of economics, introducing a machine to the production process means increased per-unit productivity which in turn raises the overall profit margin.  This raises the bottom line for the company and means greater profits; the problem is there is no guarantee that the worker will benefit whatsoever from this improvement.  The excess capital will most likely be reinvested in the company or reused to absorb and offset other costs.  But if the employee has a share of the company, if he literally owns a percentage of the business, he would benefit in two ways: a) he would benefit directly from a rise in stock prices, and b) he would have more influence into company decisions-- management executives would be more accountable to the worker in the decisions they make.

This proposal was intended not only to benefit the individual worker and his family but also the economy and society as a whole.  “Once poor and working people are empowered to acquire capital with the earnings of capital just as wealthy people do (1) poor and working people will grow more prosperous by increasingly earning more spendable income from their ownership of capital, (2) credit-worthy companies will more profitably (a) employ their productive capacity and (b) invest in more productive capacity, and (3) the economy will grow more quickly.”⁶

ESOPs are by no means a ‘pie in the sky’ concept thrown around by economists—today they are used by thousands of companies around the globe.  Data from the 2006 General Social survey show that “20 million Americans own stock in their company through a 401(k) plan, ESOP, direct stock grant, or similar plan, while 10.6 million hold stock options. That means that 17% of the total workforce, but 34.9% of those who work for companies that have stock, own stock through some kind of benefit plan, while 9.3% of the workforce, but 18.6% of those in companies with stock, hold options.”⁷  In 2005 there were 9,225 companies with ESOP programs in the US, the total growth of assets in ESOP plans in 2005 reaching $600 billion. ⁸

As part of his legacy in the field of Economics and specifically his work in developing the concept of Binary Economics, the Kelso Institute was created as a resource and tribute to the works of Louis Kelso and the continuing work in the field of Binary Economics.   For more information on Kelso’s ideas and policies, visit: www.kelsoinstitute.org.

Entrepreneurship involves moving resources from lower yielding investments to higher returning ones.  It may involve incremental productivity changes, breakthrough technologies and products, a new startup, or ideas from the shop floor.

Thesis 3: Economic development and economic opportunity can move in tandem or in opposition. 

The goal of economic development is to increase the business creativity, productivity and competitiveness of a specific place.  In such an environment, new businesses are encouraged to start and existing firms to expand and modernize.  This will further entail the growth of jobs and economic opportunities.  The objective of an economic opportunity strategy is to enable economically disadvantaged places and people to contribute to this dynamic and take advantage, as employers and employees of this period of growth and restructuring.  The problem is that an economic development strategy of increasing the size of the economy will only trickle down so far. Without equity-based efforts and the dynamic of creative destruction that accompany even the most positive economic changes, such a strategy will likely hurt those who are already hurting.  It is for these reasons that development strategies need to be designed with both fairness and efficiency in mind.

Thesis 4:  Economic development is all about removing barriers.

This entails improving the overall conditions for commerce, as well as working with particular firms, sectors and clusters.   Among the former, actions to upgrade the skills and agility of the workforce and entrepreneurial pool stand  out as critical, given the tight link between technological and market changes and trends.

Thesis 5: The most forward thinking approach to meeting this need is undertaking significant educational reforms and investments, from pre-K through high school, that are required to equip today’s and tomorrow’s workforce with the skills and attitudes for economic success and civic participation in the new economy and polity.

If we want to have educational investments and reform play a larger role in states’ overall economic development plans, then there are four major challenges to be faced as product cycles accelerate and competition for market share ensues from other economies across almost the entire earth:

• We need to curb the rising costs of incentive competition among the states and localities and reinvest a portion of scarce public dollars in educational reform.
• We must create a modern tax system, which boasts lower rates, more predictability, a broader base, more equity, greater simplicity and sufficient fiscal resources for a state’s highest priorities.
• The state must prepare students to leave school ready for work in a high skill, information economy.
• Policymakers and citizens must recognize that increasing proportions of the future labor force will be minorities, new immigrants and workers from economically disadvantaged backgrounds.

Thesis six: Education matters for economic development.

Education funding has been losing ground over the past several years, at a time when our knowledge-based economy demands a different and higher set of skills than those traditionally provided by public education and when increasing numbers of public school students are minorities or new immigrants. A compelling body of research links primary and secondary education to economic development and growth, showing that people are a type of economic asset—“human capital” —and that increased investment in health, skills and knowledge provides future returns to the economy through increases in labor productivity.  Education increases workers’ average earnings and productivity, and it also reduces their incidence of social problems, such as drug abuse, crime, welfare dependency and lack of access to medical care, which can put a hefty drag on the economy.

Thesis 7: Avoid what does not work.

Fortunately, the picture of effective practice in education reform is becoming clearer. However, let us start with what doesn’t work:

• Charter schools with hemmed-in autonomy and no thoughtful, “tested”, unique school strategy do not deliver.
• Lowering class sizes and not altering how kids are taught does nothing.
• Enhancing teacher skills have limited effects.
• Just spending more money does not enhance learning.
• Low-wealth school districts need more fiscal resources.
• Disadvantaged schools typically cannot retain the teaching and principal talent that they need: higher salaries are needed.
• Vouchers are not popular politically and have lost most referendum drives.
• Teaching to pass required tests and meet other standards discourages the customization and experimentation that is needed today for school reform.
• Low relative teacher salaries are hindering retention of good teachers.

Thesis 8: Yet, money wisely spent on schools in the poorest areas can raise student performance. 

Here are three illustrations of innovation in the school and creativity in spreading promising or proven practices.

Alliance Schools, the Texas-based network run by nationally respected community organizing outfit the Industrial Areas Foundation, demonstrate that money well spent on shrinking class sizes, establishing definite and understandable goals, providing high quality and relevant teacher training, structuring incentives, holding students to high standards and getting parents involved can make significant changes.  Most important has been parental and faculty agreement that there are real problems, demanding a commitment to genuine change.  This, along with IAF’s leadership development work with the parents, provided the leverage and energy that led to success.

The University Preparatory Academy, a charter school in Detroit, has grown tenfold in its seven years and exceeded its target of 90% graduation rate and 90% going onto a post-secondary school.  The strategy? 

• Developing the student identity of and motivation to be an excited and successful learner. 
• Aiding the student to become familiar with and adept at understanding and working within mainstream workplaces. 
• Building “soft” and academic and technical skills by individualized learning plans/compacts. 

Strong adult and peer advisee groups are needed to provide “family” and counsel.    Internships are a necessity, so are smaller classes and smaller schools.  High standards curriculum should be used.  There is a great need to set aside time to experiment, reflect and tailor new learning approaches.  Need for greater principal control over hiring and firing.  Critical is creating a school culture which will battle “street” culture.  UPA’s ”never give up” philosophy, which involved walking the extra mile, is definitely a prerequisite for establishing a cycle of success dynamic within the school and raising the trust and confidence of the student.

Minnesota’s nonprofit group, Growth and Justice, has recently held a conference on “Smart Investments in Minnesota’s Students,” whose aims were to acquaint policy makers, advocates, and opinion leaders with evidence on what works in education from Pre-K to the 12th grade and build a movement to raise the number of high school graduates to receive a respected credential or a 2-year or 4-year college degree by 50% by 2020.  In addition, conference participants dealt with and discussed what would be the cost of the likely and most promising program portfolio.

Thesis 9: Investing In What Works

Research confirms the value of investing in educational programs, curricula, technologies, skills and infrastructure, particularly in the following areas:

Pre-K – Longitudinal studies calculate a significant return on investment (ROI) for preschool education as well as a net public-dollar savings because of a decreased likelihood for preschool participants to repeat grades, require remedial education, be incarcerated for crimes and become dependent on welfare.  Many states are moving toward offering subsidized preschool, particularly for at-risk children, but funding these programs remains a challenge.

Primary and Secondary Education – Research shows that a high-quality education increases the earnings of individuals and the economic health of their communities.  Many believe, however, that increased public investment will not necessarily improve the quality of education offered.  To the contrary, recent studies show that education spending can have a direct, positive impact on business climate and can improve the success of at-risk students, whose contributions to the economy are critical if we are to achieve a high-value/high-wage economy in the 21st century.  Such spending will have a greater chance of success if coupled with specific reforms, such as smaller class sizes, greater access to technology for at-risk students, support for teacher training and innovation, and improved accountability structures. 

Community Colleges – The rate of return on community college education is generally positive; those who attend community college earn significantly higher wages than those who stop at a high-school diploma.  Because of their low cost and lack of requirements for admission, community colleges have become the postsecondary organizations that many disadvantaged groups use to gain access to employment.   Thus, community colleges are well-positioned to help bridge the educational, wage, race and class divides in America.

Thesis 10: How To Invest More in People (i.e., Who will pay for all of this?)

Supporting this continuum of programs will require a financial commitment.  Federal and state governments need to take a leading role and a long-term perspective, considering the significant ROI that a productive education and training infrastructure can bring.  Such a long-term and forward-thinking perspective demands courageous reform of the current tax system.  Specifically, CFED recommends the following strategies for financing an investment in education and training programs: 

• Curbing the use of profligate business incentive programs, which give businesses economic “breaks” but do not always guarantee local job creation or economic growth.

• Halting the use of corporate tax-sheltering loopholes, which are eroding revenues generated by state corporate income taxes.

• Modernizing state (and local) revenue systems to be more efficient, effective, customer-friendly and accountable.

Thesis 11: Attaining the Prerequisites for a High-Wage, High-Performance Economy

More American goods and services are facing stiff foreign competition.  If this nation is to achieve a higher and more shared standard of living, U.S. firms must compete on the basis of new, higher quality service and production approaches, utilizing new technologies and a more skilled workforce.  Economic developers call this “the high road.”  Taking the high road will require that we as a nation develop a more seamless, well-endowed lifelong learning system; reform wasteful business incentive programs and redirect the resulting savings into education or other state priorities; and create and maintain a modernized, high-quality revenue system.

States and localities must find ways to encourage more of their employment in high-value sectors and workplaces. A high-quality education and training continuum, while not alone sufficient, is a necessary condition for meeting this challenge.

Now, here are the reasons, absent evidence, rhetoric, or polemic:

1. Progressive taxes are a good deal.
2. They are a moral obligation.
3. They can strengthen the economy.
4. Excellent schools depend on taxes.
5. Taxes help families raise kids.
6. Pollution taxes can save life on earth.
7. Taxes can promote economic justice for all.
8. Taxes pay for economic opportunity.
9. They are good for business.
10. Taxes fuel democracy.

This book provides the ammunition needed to shift the debate on taxes.  Buy it and broadcast its message.

French economist Daniel Cohen’s books on today’s economy deserve wide readership among policy makers, activists and intellectuals.

Hardly a household name or common feature of the American talk show circuit, (or is the proper word “circus”?), economist Daniel Cohen has authored a series of readable, challenging and illuminating works. He is a master of the book-long essay and is big on irony.

Cohen’s core arguments and diverting digressions offer little ideological solace to right or left. Both views are found wanting. Solutions that he proposes tend to draw from each side of the political spectrum.

Misfortunes of Prosperity: An Introduction to Modern Political Economy (MIT Press: 1995) suggests that we are witnessing a healthy return of the classic field of political economy. Further, it can provide decent answers to questions such as

• Are current patterns of economic growth too low to sustain today’s welfare state?
• Will globalization impose a universal economic model, akin to the 19th century’s, and thus end the social democratic state as we know it?
• Is worldwide affluence just a dream? Can modern economies balance their needs for efficiency and solidarity?

In tackling these questions, Cohen intelligently reflects about the causes of the “Golden Age” of post-World War II capitalist growth, the factors explaining slower rates of growth since, an interesting analysis of what causes joblessness, the “shadow” side of Keynesianism, the strengths and weaknesses of monetarist theory and policy, and others.

The Wealth of the World and the Poverty of Nations (MIT Press, 1998) picks up where the last book left off. (In some ways, Cohen is writing just one book, published in installments.) Issues covered include the poverty of much of the world, the East Asian development successes, growing fears in the West about low-wage competition in developing countries, the nature of the Third Industrial Revolution, unemployment and exclusion in Western European economies, and the bankruptcy of present political efforts to deal prudently and fairly with these challenges. Cohen is actually optimistic in the sense that we are intellectually and wealthy enough to foster a decent standard of living worldwide.

Our Modern Times: The New Nature of Capitalism in the Information Age (MIT Press, 2003) is Cohen’s foray into the “New Economy.” He traces the roots of this economy back to the 1960s and its political movements, which sought to reduce standardization, to increase initiative, and promote decentralization and the Global Village. But with flexibility has come added job stress of the new 24/7 workplace. Family, as well as work life is undergoing radical changes, many of which are troubling. In short, what is the future of work? Will there be enough to go around? Will it be spiritually overwhelming and family destroying, while richer in its excitement and learning?

The book, Globalization and its Enemies (2007), is his defense of freer international trading and investment systems and his critique of conventional protectionist policies. Ironically, globalization is generating a stronger opposition, because it has not gone far enough. Developing nations are well aware of their material shortcomings, as shown on the global media. However, economic forces are lagging behind worldwide communication trends. In fact, “the problem is not so much that they {the poor} are exploited by globalization as that they are forgotten and excluded.”

He concludes we must pay attention to these trends:  Asian migration.  Internal migration.  Increased migration.  Temporary migration.  Highly skilled migrants.  Respecting migrants. 

The book provides the sort of rational analysis, the nuances and the calmness needed to craft better policies and to lower the emotional level of current debate.

Lastly, Koser’s work is brand new and hot off the presses.

Edited by Alan Jenkins and Brian Smedley, All Things Being Equal: Instigating Opportunity in an Inequitable Time, is the first publication of a new organization that they run, The Opportunity Agenda.

Boasting a number of respected research authors, the book’s chapters include both critique and alternatives. Jared Bernstein kicks it off with an incisive study of the challenges of advancing beyond your current wealth quintile. Linda Darling-Hammond explores the role of quality education in expanding opportunities to achieve your dreams. Marc Mauer examines the effect of mass incarceration on class and racial mobility. (The U.S. is number one in size of prison population in the world.) Philip Tegler treats the hope and reality of using housing mobility programs to move poor households closer to available jobs. Brian Smedley discusses the importance of universalizing affordable health insurance options for the poor, near-poor and middle class. (Without it, families can lose everything, when faced by costly disease or injury.) The book concludes with a thoughtful discussion of the findings of discrimination research today and yesterday and an article outlining an assimilation and upward mobility effort for aiding our newest immigrants.

This is a practical and visionary work that deserves wide readership. And I will be watching for other publications by The Opportunity Agenda.

Today, we are examining the nature and popularity of business incentives and attraction strategies.

Is Economic Development The Same As Business Recruitment?

What about business attraction efforts?  Why did our discussion about policy levers leave them out of the mix?  Isn’t economic development the same as business recruitment? 

No.  Business recruitment is simply a critical and extremely common strategy for promoting economic development.  We regard them as tool or strategy, not policy lever, for the purposes of this article.

What Is Business Recruitment and Why Is It Still So Popular?

A business recruitment program works to attract new firms to a community by offering incentives, by making appropriate investments in the area’s workforce and physical infrastructure, and by marketing an area’s strengths.  It typically consists of five key components: (1) marketing the location, (2) identifying prospects, (3) prospect tracking, (4) managing the visits of high priority and promising prospects and (5) closing the deal. 

An effective business recruitment effort creates jobs, increases tax revenues and can help to diversify a local or state economy.  It is virtually synonymous in the public’s mind with economic development (“attract jobs”) and will always remain a major development strategy.

What accounts for this appeal?

• It is “tradition” and what most development professionals know how to do, whether they operate at the city, county or state level.
• It is “fast-in”—once the decision is made, jobs come quickly.  Indeed, it is often the best way to create significant numbers of jobs over a short time.  And even if the odds are long, the payoff can be big.  This contrasts with many other approaches, where the risk may be low and the actions are almost always appropriate (e.g., improving workforce skills), but the returns are longer term and more invisible.
• Successful prospecting is a great way to boost city and state morale and visibly make a statement about the apparent healthiness of the area’s business climate.  This high visibility can also generate strong political and public support for economic development: it assures the citizenry that “something is being done.”
• It is easy to explain to the populace. 
• A strong, well-endowed recruitment strategy may be very appropriate investments for some jurisdictions.
• It can be a means of making changes in the business climate that also aid existing businesses and increase support for other types of economic development strategies, such as supporting small business development or improving labor force skills. And recruitment approaches can be meshed creatively with other strategies, such as promoting a new industrial sector.  Indigenous development efforts and business attraction can work hand-in-hand.
• Everyone thinks that they can aspire to mounting a business recruitment effort, while a number of other approaches hinge on the quality of educational institutions, its natural and cultural amenities, its proximity to growing areas and larger retail markets, and so forth.  Elected officials and many development professionals believe this is a game in which they can win, even if their assets are not super strong.  Indeed, an effective strategy, targeting companies with modest workforce skill requirements, may neither be that costly nor require much improvement in sites or infrastructure. 
• Additional expertise in marketing and other relevant development help is typically available from other public and private actors, like the state government, investor-owned utilities and banks.
• Tackling other development strategies requires greater time in building new partnerships and requires knowledge of a range of institutions (e.g., schools, community colleges, etc.) and areas of expertise (e.g., development finance, international marketing, political skills, etc.) that most development professionals do not possess.  These other development approaches are often much complicated and much more difficult to pull off.
• And financial incentives are often available from a variety of federal, state and local sources.

In summary, business recruitment is not anywhere close to becoming extinct and when suitably used, it should remain a key element in an economic development portfolio.

What Are The Limits Of This Traditional Approach?

But these arguments do not imply that all is rosy with business recruitment.  The number one limit of this strategy is that it is largely zero-sum, when viewed nationally.  In the vast majority of cases, these efforts are only determining where the facility will locate: they do not create any net new jobs in the United States as a whole. 

There are other large pitfalls and dangers to watch out for.  The odds are long, because there are not that many footloose projects.  In addition, the number of prize projects, like the large automotive or computer facilities, is actually quite rare.  So, most jobs are created by new and old indigenous companies.  And without a good customized strategy and some exemplary development assets, many jurisdictions are not really prime candidates for the trophy projects.

Second, existing companies may feel neglected, thinking leaders are only interested in new firms.

Third, there is a terrible tendency, in today’s incentives’ “arms race” atmosphere to “give away the store” through providing overly generous financial subsidies.  This can lead to a pyrrhic victory where the project does not even cover its full costs and taxes and fees are shifted to other businesses and the larger populace.  And sometimes the project does not link with the local and regional economy as well as it was predicted and the knock-on job effects and the opportunities for local businesses to contract with this new facility were grossly exaggerated.

Fourth, focusing too much energy on attraction efforts has its “opportunity costs.”  It may discourage policymakers and development professionals from giving sufficient quality time and adequate resources to other more promising development activities.

Fifth, the expectations of recruitment efforts are almost always too high.  In fact, most companies that make initial inquiries about alternative business sites do not even decide to relocate or expand from where they are currently operating.   Moreover, resentment and political fallout can result from projects that do not materialize at the eleventh hour or from suffering a low batting average when comes to bagging these prospects.

Lastly, policymakers often set inappropriate targets, for example, expecting a Japanese investor to locate in their area.  And in other cases, their recruitment effort does not target the types of jobs that their citizenry really need and have a chance to get.

For all these reasons, state (and local) policymakers need to take a more strategic, cost-effective and balanced approach to business recruitment.  Do not put all your eggs in this basket.  And try to educate the citizenry that economic development involves more than chasing computer chips or smokestacks.

How Can Incentives Be Used By States and Localities?

The competition between states to recruit new companies or to retain existing ones has never been more intense. Billions are spent nationwide via a variety of tax incentives and spending programs that have fueled a new “economic war among the states.”

To simplify some, these incentives take two forms: tax incentives and non-tax incentives.

• Tax Incentives.The traditional workhorse of business climate policy is the tax incentive. Tax incentives include various kinds of abatements, exemptions, reductions and moratoria (such as corporate income tax exemptions, sales/use tax exemptions on new equipment, and tax exemptions or moratoriums on equipment and machinery), along with other tax-related investment incentives (investment and jobs tax credits, research and development tax incentives, and accelerated depreciation of industrial and equipment).

• Non-tax Incentives.Non-tax incentives, a growing form of inducement, include grants, creative financing subsidies and customized worker training. One particular mainstay is the Industrial Development Bond, which almost every state uses to offer low-interest loans to firms.

Why Are They So Popular?

Five reasons lie behind this increased use of development incentives.

• Competition between states is an integral part of the federal system. The power of state and local governments to deliver services and raise revenues is much greater than in most other nations. The major cuts in federal development programs by recent administrations and the increased use of block grants have fueled additional competition among states, as each jurisdiction tries to attract and retain jobs.
•  
• The impact of plant closures, work layoffs and economic restructuring, sparked off and reinforced by global competition and new technologies, has dramatically affected the economic health of states. Elected officials are under immense pressure to “do something” about economic development. While they have little power to influence these larger macro-economic forces, they are able to change the tax code or create new non-tax incentive programs.
•  
• Corporate lobbyists, state officials and legislators often work in tandem to provide more incentives. Their actions are fueled by the fear that they will fail to compete effectively with other states and promoted by explicit efforts to help particular and powerful corporations. Others wish to seek a general drop in taxes on business and private investors. Providing incentives is a veiled way to answer this request. And some within these alliances believe this is just sound economic development.
•  
• The “incentives” for taking this approach to economic development are stronger than the “disincentives.” For instance, public officials and staff are more rewarded for making any deal happen, not just the good deals. It is easier to explain to political constituencies about industrial recruitment and the use of development incentives than it is to justify alternative approaches. The successes of landing the occasional trophy project are more visible than the scores of jobs created invisibly by providing good public services. The benefits of success can happen during an elected official’s term, while the additional costs and downside risks may occur later during another political administration.
•  
• Finally, there is an “arms race” mentality that requires policymakers to match any development incentive a competitor offers, regardless of its utility and effectiveness. This is fueled by a host of governments that are constantly striving to strike first in offering a particular inducement.

How Does Uncertainty Affect The Use Of Incentives?

It is worthwhile at this point to talk briefly about the uncertain situation that most policymakers face when it comes to playing the business incentive game.

First, when it comes to pursuing development strategies, most officials are not sure what works other than the use of incentives.  And even if “homegrown” economy approaches do work, the payoff for these alternatives is often long-term.  Furthermore, both game theory and psychological research suggests that participants faced with this complexity will go with a typical “solution set,” an almost formalistic response.  They will do what everyone else is doing.

Second, policymakers also recognize that these development incentives have some effects on location decisions, but they are not sure how much incentive is needed or in which situations they are most appropriate.

Third, only companies know if they are really serious about locating in a particular jurisdiction and what incentive maybe required to close the deal.

Fourth, playing the incentive and recruitment game is widely understood and it is much harder to explain to the electorate why you are not doing it or why you are doing it differently (with lots of accountability measures, for instance) than to simply go with the flow.

Fifth, there is often tremendous political and corporate pressure to offer something of consequence.  Not anteing up or coming up with too little will be typically seen as a sign of a bad business climate.  Above all, the officials must avoid looking like they are just standing by when an important prospect is courting the community or a pivotal company is making signs that it might leave.

Sixth, even if the odds in landing the plant with an incentive are not great, if the fiscal costs are long term, not too big, borne by other levels of government, and/or largely invisible, then the official will almost certainly provide an incentive.

Lastly, politics has a lot to do with credit claiming and taking symbolic actions.  Providing incentives, especially successfully, and playing on the recruitment stage with a lot of aplomb is a good way to do both.

These all represent challenges that will be difficult to overcome.  And probably no state can let their biggest corporate citizens relocate without doing all they can to stop it.  But the rest of this series will describe some promising ways to decrease uncertainties and increase the benefits of using incentives in these situations. ¹

Fresh thinking is required about the way economic development is heading in the United States. We have to move the debate about business climate away from simplistic notions of tax competitiveness or “getting the government off our backs” to focus on the real disincentives to economic competitiveness and opportunity. We explore six critical policy “levers” for creating a better business climate: education, physical infrastructure, regulation, taxation, development incentives and modernization.

Education

Wise investment in public education is an absolute must for creating a positive business climate. This is not about just throwing more money at education — in the recent past we spent 7.4% of GDP (2005) and 18% of total tax collections on primary, secondary and higher education. There has to be a greater concern over outcomes. We have to improve educational attainment at high school and college levels. There need to be higher standards for graduation so that colleges and employers do not have to provide remedial education. Disparity in attainment levels between rich and poor communities and neighborhoods has to be reduced. States should compete on the basis of the quality of their education rather than on the number of dollars they can divert from education to give away as development incentives.

Physical Infrastructure

Often neglected in the anti-tax debate is the importance of basic services, efficiently and cost effectively delivered, to the creation of a positive business climate. The repair and maintenance of highways and sidewalks, the management and operation of schools, the prevention of crime, the safeguarding of public health, the care of public parks, and so on, are all essential to a community’s quality of life. If tax revenues drop to the point where these services can no longer be adequately provided, an area’s competitiveness declines.

It is government’s responsibility to plan and secure the implementation of new and reconstructed physical infrastructure. Water supply and sewers, roads, public transit, and airports are all critical components of an area’s development capacity and long-term competitiveness.

Regulation

Employment and environmental regulations are the main targets of those wishing to deregulate industry. These are the result of decades of struggle to constrain the more unacceptable aspects of the free market. Regulators often have brought much of the present hostility on themselves. They use overly bureaucratic procedures; focus on compliance rather than finding workable preventive solutions; apply uniform standards regardless of circumstances, cost and size of business; and have created legislative frameworks that encourage duplication and inconsistencies. Business focus groups say it is not the regulations themselves that cause them grief, but the way they are administered. A positive business climate is created by regulators who seek to work with business to achieve acceptable standards, whether in the workplace or in the environment. However, government must do so in a fashion that does not compromise its abilities to enforce the law on behalf of other stakeholders.

Taxation

There has been overwhelming emphasis in recent years on tax competitiveness and tax rates. This diverts attention from the fact that our state tax systems are outmoded, and no longer able to meet acceptable standards of adequacy, efficiency and equity. Revenue systems are increasingly out of step with changes in technology, the economy and demography. The burden of taxation is being shouldered by an increasingly narrow slice of economic activity. States are facing structural deficits that force them to make un-strategic changes in tax levels and bases to make ends meet.

The hallmarks of a competitive system should be reliability, stable and certain revenue generation and consistent rates; balance, a spread across a range of tax sources without over-reliance on any one; equity, a fair system that shields subsistence income from taxation, is progressive, and imposes the same tax burden on households earning the same income; efficiency, easy to understand, minimal compliance costs, simple administration; and accountability, public information on sources and uses of tax revenues, including tax expenditures.

Development Incentives

Given what we have said about the overuse and limited impact of development incentives, why don't we argue for their abolition? The reality is that there is no obvious way to stop the bidding wars. The best we can do is try to curb the excesses and ensure that incentives used are cost-effective. Our advice to economic developers and legislators is twofold. First, act like an investor. Incentives should be treated as venture capital investments in private development projects—sharing risk and returns in a mutually supportive partnership. Second, set clear goals and desired rates of return. Goals will vary from area to area, but might include more jobs, better jobs, changing the industry mix, reducing intrastate inequities, or jobs for the economically disadvantaged. Fiscal responsibility dictates that the investment should be fiscally neutral—the incentive should not be larger than the eventual tax payments accruing from the project. There should be other performance criteria relating to the goals—and these should be enforceable, with all the penalties and recessions that would apply in a venture capital investment.

Modernization and Entrepreneurship

For years, much of economic development has also focused on the “homegrown economy” by providing financial support in the form of grants or low interest loans and advisory services to businesses. The focus tends to be on retaining businesses in a particular area or on encouraging successful entrepreneurial initiative. Millions of dollars of public money have been used in this way, even though the evidence of the real effectiveness of many of these programs may be somewhat thin. Questionable and invariably over-optimistic figures are traded about jobs created and jobs saved. Many initiatives have worked well, but are still under-funded. What is certain is that many states have complicated and confusing arrays of financing and advisory programs. The policy landscape is all the more bewildering because year after year governors and legislators add new programs to respond to yet another perceived problem or gap.

The challenge is to turn these programs into effective delivery systems. These must include public and private providers and address the pressing need for businesses to modernize and to upgrade their technologies so they can be more competitive. What is needed are economic development efforts that pursue the high-road of greater skills, higher productivity, and better wages, and that deliver these development services with greater quality, customer-friendliness, accountability and cost-effectiveness.

The pressures associated with the bidding wars and the “cut-taxes-and-deregulate” lobby lead to policy “on the fly.”   Decisions are made in an un-strategic fashion and long-term consequences are rarely considered. Recruitment efforts focus on doing the deal and tax adjustments are made on the basis of political calculus. It is time to set out some basic principles that should inform economic development policies and programs.

We offer seven for starters.

Conventional wisdom suggests that low-cost states and localities are automatically pro-business. Costs are not unimportant, but value for money is at least as critical. A state with low levels of educational attainment, poorly maintained and inadequate infrastructure, and a degraded environment is not attractive even if it has the lowest wages or the most lax regulations in the region. Conversely, a state that offers a skilled labor force, modern infrastructure and a high quality of life, but has relatively high taxes, can hardly be said to be anti-business. The task of economic development should be to identify and work to enhance those assets that add value to the business environment and give better returns on the taxpayer’s dollar.

Investments in development capacity provide the basis of future economic health.

For a couple of decades through the annual Development Report Card for the States, the Corporation for Enterprise Development has argued that strong development capacity is the key to business vitality and economic performance. By this we mean that states ensure that the necessary human technological, financial and physical infrastructures are in place to enable economies to grow and to withstand the impacts of business troughs and recessions. Business consultant Rosabeth Kanter’s important earlier book, World Class: Thriving Locally in the Global Economy, highlights Spartanburg and Greenville, South Carolina, where successful business recruitment has developed a new, globally competitive economy. However, she observes that essential success factors include customized training and continued upgrading of workers’ skills, visionary leaders with a clear agenda for development, and successful collaboration within the business community and with government to improve company quality and performance.

Government is an indispensable partner in the process.

As a provider of essential services, as a conveyor of the broad range of interests within a community, and as the custodian of an area’s assets, not to mention the democratic expression of the public will, government plays a vital role in economic development. There is much support around the country for reducing the size and scope of government, but business also needs government to provide the basic infrastructure within which it can operate. The challenge is to make government work better and to find ways in which the public, private and nonprofit sectors can create complementary and reinforcing roles.

The concept of government-as-usual is bankrupt.

New attention to reorganizing economic development program delivery for greater quality and impact is essential. Development initiatives, like all areas of government, must meet higher standards for accountability, for cost-effectiveness and customer-friendliness. In many cases, the public sector must seek to do more with less. Those that deny these trends, that do not innovate and that do little to educate constituencies and political leadership about the rationale and benefits of their programs, inevitably will face budget cuts and possible elimination. “Reinventing government” is not a fad: it is standard operating procedure.

Economic development is for everyone, not just businesspersons.

Although profitability and returns on investment are the driving forces in any economy, they are not the primary concern of economic development—they are means to other ends. The measure of how well an economy is doing is its ability to provide people with real opportunities for a richer and fuller life. Are there enough jobs to go around? If jobs exist, do people have the skills to qualify for them? Does everyone have a fair chance of obtaining a job if he or she is qualified? Do the jobs pay enough to provide an acceptable standard of living? Failure to address these concerns means that economic development is not serving the broader public interest.

Competitiveness and equity are two sides of the same coin.

The growing disparity in our society cannot continue. There is already evidence that even where suburban and edge city economies are doing well, their regional economies are lagging because of the drag exerted by a struggling metropolitan core. Conversely, where disparities between the core and suburbs are much smaller, the whole regional economy moves ahead. Henry Ford realized that unless his workers were adequately paid, they would not be able to buy his mass production motor cars. Today, as families struggle to makes ends meet and are no longer able to save, they put a brake on overall economic growth.

Economic development has to encourage and enable businesses to be more competitive in the world marketplace and thus expand the economic cake at national and local levels. It also requires opening opportunities for everyone to participate in the economy.

Quality leadership can turn economies around.

Economic success depends on effective leadership, in the business community and in government, education institutions, and the non-profit sector. This works at two levels. At the strategic level, leaders need a vision for their state or local community that encompasses the principles of value-added competitiveness, partnership, inclusiveness, opportunity and development capacity. At the operational level, citizens should expect the highest standards of accountability, openness and integrity. A few critical “spark plugs” can galvanize broad community support and can maintain new development partnerships through good times and bad.

To start, there is the nature and significance of economic development. (The following is based on CFED’s design of its Development Report Card for the States.  Lots of cooks—both CFED and its friends had their mitts in the broth.) At its most basic, economic development is the process by which wealth is created—or how a society increases its level of material and social well-being over time. In a developing economy, employment increases, incomes rise, innovation occurs and the rate of economic growth rises.

Economic development is typically equated with economic growth, but in our view, the terms refer to different things. First, development is both a prerequisite to and a result of growth. Development, moreover, is a qualitative change, which entails changes in the structure of the economy including innovations in institutions, behavior and technology. Growth, on the other hand, is a quantitative change in the scale of the economy—in terms of measures of investment, output, jobs, consumption, income and others. Hence, development is prior to growth in the sense that growth cannot continue long without the sort of innovations and structural changes implicit in development. But growth, in turn, will drive new changes in the economy, causing new products and firms to be created as well as countless small incremental innovations. Together, these advances allow an economy to increase its productivity, thereby enabling the production of more outputs with fewer inputs over the long haul.

Economic development should be concerned with how all the people are faring in this development process, not just the most wealthy, or the most educated, or those with the longest family tree as American citizens. It is for this reason that the Corporation for Enterprise Development (CFED) has always argued that economic development should help to achieve a more widely shared and sustainable standard of living. This overall goal may be broken down roughly into three elements:

• Development entails the enrichment of material and social well-being, which can be measured in the flow of money and goods to individuals over time; increases in the quality and quantity of public goods (such as clean air and water, freedom from fear of crime, better schools, etc.); and access to good jobs (e.g., with wages and benefits sufficient for supporting a family, and opportunities for advancement).
• Shared growth means that there is broad distribution of opportunities for meaningful participation in the economy and enjoyment of the benefits of an increased standard of living.
• Sustained growth means that the above goals are achieved in a manner that does not detract from—but rather enhances—the economy’s ability to achieve the same goals in the future.

Why Is Economic Development So Important?

Continued development is very important for a number of reasons. First, it is necessary for sustaining the competitiveness of the United States economy and raising overall productivity and incomes.  Second, it can maintain a high level of employment and job quality for all Americans.  Third, it can help to create the jobs necessary for providing middle class opportunities for the jobless and working poor. Fourth, it can provide the earnings needed to make further investments in education, government services, amenities, infrastructure and quality of life.  Lastly, economic development must be increasingly environmentally compatible, if it is to play its part in dealing with climate change, habitat loss and so forth.

Why Should Nontraditional Constituencies Care About Economic Development?

All political institutions and major social institutions, ranging from universities to schools, from social service agencies to banks, from business associations to unions have a stake in economic development.  However, some key stakeholders have not had places at the development policymaking table.

First, let us consider human services professionals.  Access to decent jobs, after all,  makes a real difference in the lives of children, families and communities.  Even the most flexible, highly integrated, community controlled and culturally sensitive human service systems would not achieve their intended quality of life goals without the availability of expanding employment opportunities.  And low levels of job creation create a vicious circle of effects that lock children, youth and adults in a self-reinforcing spiral of concentrated poverty, social isolation, increasing crime rates, community decline, middle-class flight and falling tax revenues.

Moreover, spending too many public dollars on ineffective development strategies will limit resources for either adequate income maintenance and quality social services or for new types of anti-poverty oriented development strategies that creatively link economic development, employment training and human services efforts. 

Or, take labor unions.  They are the only organized constituency group whose business is help their members and other working people secure good jobs.  And our approaches to economic development can make this goal either more or less probable.

Educators are dependent on tax revenues for providing quality educational services.  And these funds will only be forthcoming if job creation and income growth is occurring.  In addition, a high quality educational “product” is a critical component in establishing a good climate for business investment and growth.

That’s all for now!  The next article in this series will address economic development principles for design and strategizing.

Are There Grounds for New Hope

At least from a reformer’s perspective, 2006-2007 were not really great years in the history of incentive accountability, transparency and cost-effectiveness.  The state of North Carolina is now a “leader” in size and heterogeneity of incentive packages.  Companies, consequently, are responding by raising their expectations, asking for more money and keeping certain issues “hush-hush.”

• What is the state doing and at what cost?
• What are the state’s economic development goals and should they be changed?
• Are the state’s incentives furthering these goals?
• What incentive approaches in NC and the rest of the U.S. give the best return on public monies?
• How might the legislature be better informed, regarding incentive policies, programs and impacts?
• How are the state’s investments best protected

The Fiscal Research Division of the NC legislature, on behalf of the Committee, is conducting an Economic Development Inventory. (This is a Unified Development Budget under a different name.) The final report will spell out how much the state is spending, on- and off-budget on all types of economic development (not just business attraction subsidies). In doing so, it will help determine what the state’s real fiscal priorities are (e.g., community colleges, small business management assistance, location subsidies, etc.). Included in the report will be timelines of spending growth and how might priorities have changed, comparisons with other spending programs, spending relative to the size of the NC economy. Staff hope this inventory will be updated frequently, as well as encourage better and more current data on tax expenditures.

In addition, the University of North Carolina at Chapel Hill has been asked to undertake a complementary and deeper evaluation of incentives, reaching clear conclusions about what’s working and what’s not.

Keep your fingers crossed. This is a great venue for fundamentally rethinking about what’s most important for fostering economic development.

CFED and others are dedicated to helping these efforts find the truth and make any needed hard decisions. So, there is some new hope on the horizon.

Philip Dine’s “State of the Unions” has a subtitle that says it all: “How Labor Can Strengthen the Middle Class, Improve Our Economy, and Retain Political Influence.” 

Dine has covered the union beat for the St. Louis Post-Dispatch for more than two decades.  His new book is a well-written, fairly comprehensive look at trade unions, who have now shrunk to 12% of the American workforce, but are making some progress in reaching  white and blue collar workers, ranging from doctors and nurses to janitors and catfish processing workers.

When unions were stronger in the United States, they helped raise wage rates and benefit standards in companies that wanted to avoid unionization.  Unionized firms pay better than non-unionized companies in the same industry.  Their economic clout translates into political and policy influence, thereby creating a more virtuous circle, where new workplace protections further empower collective bargaining efforts and strengthen “industrial democracy.”  In sum, they formerly constituted a countervailing power relative to big business.  But now they are a shadow of their former selves.

Is there any reason for hope?  Dine thinks so.  Did you know that poor women, working in terrible conditions for Delta Pride, a major player in the multi-billion dollar catfish industry successfully unionized in the 1990’s, while overcoming the hostility of the powers-that-be in the Mississippi Delta and fighting generations of racial and class prejudice?  This was a tough fight waged cleverly by the women at the plant and union organizers and media experts across a multi-state region.  Wages and benefits are significantly better.  And now the women can go to the restroom when they want and need to, not at the one time per day that it was formerly allowed.  Plus, they have experienced a gain in dignity, which is priceless.

Did you know Senator John Kerry’s Presidential nomination bid was saved from early elimination by firefighters?  Before they got involved, Kerry’s campaign was described as “a dead man walking.”  But his listless state was reenergized by firefighters’ charisma, the esteem in which they are held, and the very creative strategy and tactics of their unions.

Did you know that the American Federation of Teachers and the AFL-CIO played a large role in bringing down the Iron Curtain?

Did you know that workplace injuries have increased during this two decade period of massive de-unionization?  That working family’s incomes have stagnated and not kept up with productivity increases?  That coal mining safety standards have fallen as the proportion of non-union firms have grown?

Did you know that unions are making progress in the service sector? In unionizing Latino immigrants and providing legal assistance?  In trying to “police” firms that exploit temp workers?

Other unions are engaged in confronting a more profit-driven, less patient-sensitive medical system.

Dine’s book tells these and other stories.

The author is more pessimistic than optimistic, but believes that a dual focus on organizing workplaces and politics is needed, along with labor law reform, coalition building and better communication strategies.  He proposes that the unions mount a door-to-door campaign to inform the American people of the state of the unions and their policy agendas, in an autonomous fashion that is totally disconnected from partisan electoral politics.  (He also advises them to not be so dependent on the Democrats.)  In this way, their message starts getting out in its purest form and is not shoved aside during the heat of specific political campaigns where unions might be assisting a get out the vote effort, et cetera.  This is very important, because the media tends to be anti-union.

I highly recommend this book.  My only quibble is that it does not address sufficiently the fact that trade unions today must realize that they are not just in the collective bargaining business.  This is too narrow and limited. 

They are, instead, in the “employee representation” business, which means they must be exploring new types of services (e.g., legal advice, collective benefits purchasing, unions of free-lancers, employee associations that do not engage in collective bargaining, health and safety committees, socially responsible investment consulting, continuing adult education and training, workplace literacy efforts, and so forth).   Joel Rogers and Richard Freeman call these options “Open Source Unions.”  

This is a big, but necessary leap that will require unions to be much more creative about revenue generation, along with meeting workers’ needs in today’s global information economy.