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Article Excerpt
Economic Development Policy in the U.S. States: Political Incentives Versus Policy Expertise
Economic development (ED) policy makers at the state level in the United States face strong political incentives to do the wrong thing. "Locational" ED strategies, which involve subsidizing existing firms in order to induce them to relocate (or to avoid their departure), win the support of powerful and easily identifiable constituencies and produce favorable publicity as well. Unfortunately, "smokestack chasing," as these strategies are pejoratively known, is typically wasteful, producing a "race to the bottom" as states compete to claim credit for subsidizing high-profile projects. An emerging body of evidence suggests that "entrepreneurial" ED strategies, which focus on nurturing new high technology and other high-growth businesses, may be more effective in fostering sustainable economic growth. However, policies to implement such strategies lack obvious political constituencies, create few opportunities to win favorable media coverage, and tend to take more than one election cycle to pay off.
The growing popularity of entrepreneurial ED strategies among the states in recent years, alongside more traditional locational strategies (which still predominate), is therefore a somewhat surprising development. It has become an important theme in the work of the National Governors Association (NGA), including the initiative of the 2007 chair, Arizona Governor Janet Napolitano, called "Innovation America" (NGA, 2007b). The State Science and Technology Institute (SSTI) reports that about forty gubernatorial "State of the State" messages mentioned an initiative of this sort in the past year (SSTI, 2007). Saiz and Clarke's (2004) more systematic accounting of state ED policies, discussed in more detail later, detects a steady rise and spread of entrepreneurial strategies.
This paper is a preliminary exploration of how the political obstacles to entrepreneurial state ED strategies have been overcome. The primary database for the paper is a set of 16 short case studies of ED programs from around the country. The case studies draw on interviews of ED agency staff, legislators, and others involved in enacting and maintaining the programs as well as on publicly available documents and media coverage. I find that entrepreneurial strategies rarely rely on support from their direct beneficiaries, even when institutions, such as public-private ED partnerships, are created in order to identify and draw in such supporters. Occasionally, such institutions activate constituents, such as bankers, who claim to speak on behalf of entrepreneurs and thus serve as "proxies." The rejection of these hypotheses leads me to generate an alternative, which centers on the preferences of the executive branch officials, especially governors, who appear to have been most often the driving forces in the enactment and implementation of ED programs with entrepreneurial attributes. Legislative involvement in the enactment of such programs also seems to add to their resilience.
The paper begins by laying out the main concepts and the historical evidence on state ED policy. I then set forth the study's two main research questions and its methodology. The findings that follow suggest that neither of these hypotheses are supported, and I turn to the notion of executive dominance as an alternative. I conclude by suggesting that ED policy making may be more technocratic than is commonly believed, and that the educational efforts of policy experts, who generally favor entrepreneurial ED strategies over locational ED strategies, appear to have been fruitful and should be sustained.
The Pull and Peril of Locational State ED Strategies
Interjurisdictional competition is one of the abiding principles of American federalism. The rise of the manufacturing economy in the northern states in the nineteenth century was followed some decades later by the relocation of many plants to the Southern states. Lower labor costs, weaker unions, and looser regulation were among the attractions for businesses considering such a move. Beginning in the 1930s, Southern state governments began to sweeten the pot with incentives for relocation that went beyond these "natural" attractions (Cobb, 1982). State governments elsewhere eventually responded, and a "war between the states" for economic assets, especially manufacturing plants, was begun that continues to this day (Chi & Hoffman, 2000; Markusen & Nesse, 2007). In March 2006, for instance, Georgia announced that it had landed the first Kia auto plant in the United States with a $410 million package of state and local incentives, amounting to some $160,000 for each job at the plant (Maynard & Peters, 2006).
The political forces that drive the states to adopt locational ED strategies, such as the one that Georgia used to attract Kia, are well understood (Dewar, 1998; Markusen & Nesse, 2007). Large facilities provide employment and create spillover economic activity in the localities in which they are sited during both the construction and operational phases. The direct beneficiaries in these communities and in the relevant businesses sectors support the public officials whose largesse brought them the facility. Locational ED strategies also tend to enhance perceptions of the performance of elected officials among voters on a statewide basis. The facilities are highly visible. They garner media coverage for deal signings and ribbon cuttings. Indeed, they may become the enduring legacies of the responsible officials. The headline on a December 2005 obituary that described a life of many accomplishments is indicative: "Ex-Gov. Carroll Campbell, 65; Lured BMW to South Carolina" (New York Times, 2005).
Interjurisdictional competition drives up the cost of locational ED strategies. The number of potential projects that will permit large-scale credit claiming is limited. Many of these projects may be sited in multiple locations; indeed, as transportation and communication costs have declined over time, the range of potential sites for projects has grown, expanding the number of competing jurisdictions (Bartik, 2005). Although competition is driving up costs, the fiscal impact of policies deployed by states to recruit facilities is often hidden or only becomes visible long after the tact. These policies typically involve foregone revenue and are budgeted over a number of years. Rigorous application of cost-effectiveness criteria to such policies at the time of the competition is often precluded by political pressure to get the deal done or overshadowed by media coverage framed in terms of winners and losers (Gabe & Kraybill, 2002; Markusen & Nesse, 2007; Saiz, 2001a). (1) ED policy makers thus have strong incentives to meet firms' demands. As Timothy J. Bartik (2005, p. 147) puts it, "the argument for doing something will win out over the argument for doing nothing."
Unfortunately, the economic benefits of the subsidies provided by states to large facilities usually do not match the political benefits to their champions. As Margaret Dewar (1998) puts it in her excellent case study of the Minnesota Economic Recovery Fund: "Highly visible activities, which lend themselves to announcements and groundbreaking ceremonies, do not necessarily bring about more economic activity than would have occurred anyway ..." Econometric analyses have been somewhat more equivocal, with some researchers (notably Bartik, 1991) finding that tax breaks granted to induce relocation may have a modest net positive effect when the contending locations are geographically proximate, creating a classic beggar-thy-neighbor scenario. (Buss, 2001) In most instances, though, as Peters and Fisher (2004, p. 32) conclude, "economic development incentives have little or no impact." Bartik, in later work (2005, p. 146), concurs: "The problem is that many incentives currently being offered in the United States have costs that exceed benefits."
In principle, the federal government could step in to regulate this wasteful competition, although previous efforts to convince it to do so have not succeeded. State governments might also become more savvy in their negotiations with footloose firms. (Leroy, 2007; Weber & Santacroce, 2007) Yet, as the old saying goes, "you can't beat something with nothing." The growing popularity of an alternative ED strategy, focused on fostering entrepreneurship and technology-based growth, rather than attracting "foreign" direct investment, offers another potential avenue for reform.
The Emergence and Promise of Entrepreneurial State ED Strategies
The emergence of this alternative is commonly dated to the 1980s. The deep recession early in that decade, accelerating international competition in key manufacturing industries and frustration with federal policies stimulated policy innovation at the state level. States experimented with a wide variety of programs, including support for academic research and development (R&D) and technology transfer, venture capital investing, loan programs for small businesses, workforce upgrading, and more. (Clarke & Gaile, 1989; Isserman, 1994; Pages, Freedman, & Von Bargen, 2003; Waits, 2000) The central goals of these diverse efforts were to enable organic growth of existing businesses within the state and to nurture new ones, rather than to chase the elusive smokestacks from outside the state. Peter Eisinger captured the trend for scholars in his 1988 book The Rise of the Entrepreneurial State, and David Osborne popularized it the same year in Laboratories of Democracy.
These early experiments with entrepreneurial ED strategies spread widely and continued to grow over...
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