4. The context of economic development policy
Eisinger says the structure, design, and transformation of economic development policy are products ot its political and economic context.
In other words, economic development policy responds to aspects of our federal system and market economy. Changes in the federal system and our economy are driving changes in economic development policy.
He outlines the main components of the political and economic context.
Decentralization of people and industry
This is happening along two dimensions:
Regional migration of people and industry from the Northeast and Midwest to the South and West (the Sun Belt), and
Within regions from central cities to suburbs.
The migration of industry South and West, along with the view that it was, at least partially, a result of incentive use led to the nationwide spread of incentive use and interstate competition for industry.
Federalism
Eisinger states that federalism is the crucial factor that has established states as the primary actors in economic development policy. He notes that the concept of a "state economy" is a political one, not legal or economic. In a federal system states have a great deal of both responsibility and latitude. The responsibilities include safety, education, etc.
The ability of states to perform their functions depends in large part on their ability to raise revenue, which depends in turn on residents' incomes, which depends in turn on the sorts of economic activity in the state.
Since most productive resources are privately controlled, the tax base and labor market are influenced by many private decisions. States adjust their tax and regulatory structures to compete for private investment. Federalism allows states to try to differentiate themselves.
Another federal aspect that promotes state competition is the relative lack of national economic development policy. The federal government has, for the most part, avoided imposing any systematic regional development policy. There has been some, but, as is noted later, even most targeted federal programs are eventually expanded to cover almost any jurisdiction.
Contraction of the federal system
During the postwar period until the late 1970s, federal aid to state and local governments was increasing. By the middle of the Carter administration, the federal government was funding highways, housing, waste-water treatment, fire protection, education, parks,...
In 1978, this changed abruptly. Congress beecame concerned about deficits. Public support for domestic spending eroded. (Prop 13, for example.) Then you had the Reagan adminstration and his version of the "new federalism."
As federal aid decreased, states and communities had more impetus to compete for private investment.
The US in a changing economy
Economic development policy has been influenced by the shift of the American economy from manufacturing to services and by the increase in imports.
He mentions several characteristics of the service sector with implications for development policy.
First, in many areas the increase in service sector jobs doesn't offset the loss of manufacturing jobs. Service sector growth isn't distributed evenly across geography. Small states and less populated areas don't share as much in the service sector growth. Second, it is a bifurcated sector, with few middle-income jobs. The service sector includes highly paid professionals and poorly paid retail clerks and waitresses. Third, at the lower end, service jobs are marginal -- more likley to be part-time, temporary, and have few finge benefits.
Capitalist context of economic development
He says, there are certain assumptions that make the idea of govt subsidy of businesses attractive.
a. The assumption that business has a special claim to efficiency and effectiveness,
b. The assumption that business is allocatively efficient; that resources will be directed to the proper regions and functions, and
c. The assumption that the market is efficient at winnowing out inefficient firms and processes.
[This seems totally backward, to me. Govt intervention in the economy is predicated on the idea that these three assumptions do not hold. It seems to me that if we truly held these assumptions inviolate, we wouldn't have any economic development policy at all. Even if you are willing to relax the assumptions, that alone doesn't automatically favor demand-side over supply-side policies, which is where seems to be headed with this.]
Supply-side theory of urban and regional economic growth
The supply-side explanation of economic growth asserts that growth is a function of resources attracted to a particular location. The critcal idea is locational comparative advantage.
The demand-side, export-base model stresses the need to develop industries that export beyond local borders.
The supply-side has, in the past, had greater influence on policy design. This is partially because the targeting needed for demand-side policy was thought to be beyind the capabilities of state and local development agencies. It also is a role that is perhaps more "vigorous" than American society is/was willing to tolerate.
Supply-side, on the other hand, is administratively simple and politically feasible. Supply-side theory traces its roots to classical location economics (Von Thunen, Weber, Hoover, Isard, et al). Essentially, location theory asserts that firms locate where combined production and transportation costs are minimized.
Supply-side policies attempt to build comparative advantage by lowering the costs over which government has control, such as taxes or regulatory compliance, or by using govt funds to subsidize other costs, such as land or training. These policies often weren't tightly targeted, so they were adminstratively simple.
Eisinger also says that supply-side policies were a good fit with the "old economic order." [The assumptions outlined above.] Since govt wasn't supposed to make investment decisions, they'd just subsidize whoever wanted to come to town. Not targeting was a feature, not a bug, in other words.
The erosion of the old economic order
By "erosion" he refers to the globalization of the economy and the shift to a service-based economy. He says these changes "strained public officials' commitment to the notion that private capital, gently guided by location incentives, would produce local prosperity." (p. 78)
In this section he outlines how the assumptions of the capitalist context listed don't hold; competition isn't perfect, there are information assymetries, etc. In other words, we don't live in an ideal world.
He concludes by suggesting that since competitive free-enterprise isn't perfect, a more "vigorous" role for government in making private investment decisions was called for. The assumptions, he says, haven't been abandoned, merely "recast in the crucible of the policy process by the entrepreneurial state..."
Eisinger, P.K. (1988). The Rise of the Entrepreneurial State: State and Local Economic Development Policy in the United States. Madison, WI: University of Wisconsin Press.
Posted by Chip on July 16, 2004 at 03:46 PM | TrackBack