Ideas in Development

The handwriting is on the wall. American manufacturing is only viable if it goes off-shore. We can't compete with Third World wages. If a firm's management cannot turn around their business, why do you think some government program or nonprofit can pull this off?

When I speak to audiences about the challenges facing North Carolina's traditional economic base and the opportunities to avoid many mass layoffs and shutdowns, this is what I hear.

Since its origins, it has been CFED gospel that any worthwhile reform of an anti-poverty policy, program, or project, on the federal, state, or local level, must not just lead to cuts in caseloads or transfer payments but should lead to lasting escapes from welfare or a dead-end, low-paying, benefit-less job. For a number of years, despite reductions in the size and shape of America's safety net, we seemed to be making progress.

About 14 years, ago the irreplaceable Rob Mier and the well-published Richard Bingham (both based at the University of Illinois at Chicago and Viet Nam vets) edited an interesting group of articles in a book entitled Theories of Economic Development: Perspectives From Across the Disciplines, that, in turn, described and applied most of the theories and models of economic development that existed at the time. These included: cost minimization models, cluster theories, agglomeration economies, central place theory, product cycle theory, stage/cycle/wave theories, export base theory, entrepreneurial theories, growth machine models, and many others.

You would think that, with all the public funds being spent on state and local economic development, the controversy over incentives, and the ambiguous and often negative scholarly opinion regarding many popular programs, tough questions about economic development's theory, goals, and strategies would be commonplace.

Economic development is in part a science, (a would-be applied science) drawing on theory and research in economics, geography, regional science, urban studies, rural sociology, public administration, the management sciences and more. Universities teach it. Trade associations offer credentials akin to other professions.

But when economic development policymakers and practitioners raise certain issues or take positions on them or lobby for bills, they explicitly project the interests of certain groups and look after their welfare. When developers hone and systemize their message and engage in debate about a preferred organization of society or economy, their words become a body of doctrine, known as an ideology.

Although I am not calling for the termination of state and local efforts to attract mobile private investment and jobs using subsidies, such as tax abatements and credits, grants, customized infrastructure and workforce training, I think it is important to question.

Would economic life go on after business incentives? The answer is: of course there would be. The number of jobs, additional state income, and tax revenues generated by landing an Intel, a Boeing headquarters, or whatever are dwarfed by the numbers of jobs and new income created by the other firms, governments, hospitals, foundations, and colleges in the state.

The Floor is Open for Debate

In a recent court decision in the case of Summers v. State Street, distinguished Court of Appeals Judge Richard Posner raised some eyebrows and set fire to the employee ownership community and their advocates by comments he made in reference to the effectiveness and viability of Employee Stock Ownership Plans (ESOPs). In his decision, Posner states:

The time may have come to rethink the concept of an ESOP, a seemingly inefficient method of wealth accumulation by employees because of the under-diversification to which it conduces… The tax advantages of the form do not represent a social benefit, but merely a shift of tax burdens to other taxpayers.

Helping the poor, dislocated workers, new immigrants, single parent families, minority youth and others to advance to greater self-sufficiency and ultimately to middle class socioeconomic status is affected by scores of polices.  On the federal side, monetary and fiscal policies, trade agreements, and the use of affirmative action strategies are just a few examples. 

This article has just one simple purpose: provide the reader with a fairly comprehensive map of policies at the state level that could increase a citizen’s economic well-being.  The list below includes economic development programs, along with much, much more.

Major Questions about Economic Development, Business Recruitment and Incentives: Some Questions Come with Answers, Some Don’t

I am often surprised about how much the debate over what is economic development and what would make for more effective strategies goes over the same old ground. But the basics are fundamental. So, this is a five-part series of articles, drawn principally from an earlier CFED publication, Improving Your Business Climate: A Guide to Smarter Public Investments. Part 1 tackles the concept of economic development and its importance. Later installments will propose some principles to guide policy, describe the chief policy levers for achieving “high road economic development,” and then address major incentives and business attraction questions and confusions.

What Principles Should Guide Effective Economic Development?

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.

What are the Policy Levers for Creating a Positive Business Climate?

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

Major Questions about Economic Development: Why Business Recruitment? 

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.

Thesis 1: Economic development is not synonymous with business attraction strategies.

Economic development is not a single strategy, such as business attraction efforts or cutting high marginal income tax rates or earmarking more funds for in-state research and development.  Instead, it should be regarded as a broader dynamic process that these initiatives may affect positively or negatively.  To quote Kenneth Boulding: “Economic progress (or development) involves the discovery and implementation of better ways to address our wants.”  Such a definition could be elaborated into a series of goal statements and relevant data indicators.  So, economic development is not a collection of large capital projects, such new plants and convention centers.  It is an adaptation process, involving how smoothly, swiftly, profitably, and humanely, a sub-national economy can adjust to changes in demography, technology, resource availability and costs, and competition from abroad and within the U.S.

Thesis 2: On the other hand, entrepreneurial initiative in the private, public, and nonprofit sectors is almost synonymous with the process of economic development.

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 1: Economic development is not synonymous with business attraction strategies.

Economic development is not a single strategy, such as business attraction efforts or cutting high marginal income tax rates or earmarking more funds for in-state research and development. Instead, it should be regarded as a broader dynamic process that these initiatives may affect positively or negatively. To quote Kenneth Boulding: “Economic progress (or development) involves the discovery and implementation of better ways to address our wants.” Such a definition could be elaborated into a series of goal statements and relevant data indicators. So, economic development is not a collection of large capital projects, such as new plants and convention centers. It is an adaptation process, involving how smoothly, swiftly, profitably and humanely, a sub-national economy can adjust to changes in demography, technology, resource availability and costs, and competition from abroad and within the U.S.

When it comes to pursuing positive economic change, both the economic development community and active public officials must not get swelled heads.

(Even if they boast a good batting average in the recruit new business contest)  We can only have a limited effect on our home turf.