In this chapter, Eisinger reviews empirical literature regarding the effects of supply-side economic development incentives. I'm not going to summarize his review other than to say that his summary is the generally the same as what passes for near consensus today: incentives have small effects on the margin of business location decisions. The effects are more measurable when comparing extremely close subsitutes, such as municipalities within a metro area. However, the quality of public services and amenities affects the decisions also.

He also outlines the other factors that affect location decisions. He groups them in four broad categories. They are listed below along with major determinant factors:

Processing costs: taxes and regulations
Primary inputs: land, labor, capital, energy
Market access: transportation access and infrastructure
Contextual elements: services, amenities, geography

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.

Eisinger continues his description of supply-side policies with a discussion of geographically targeted policies.

Four major program types: site-development programs, financial assistance to firms in distressed areas, tax-increment financing, and state enterprise zones.

He notes controversies over balanced-growth (aid everywhere) and targeted policies. Balanced-growth policies have political appeal; they're "fair," they don't get hung up by intrastate rivalries, and some argue that distressed areas are less able to take advantage of subsidies. Also, state officials are reluctant to call certain local areas "distressed" or "declining."

He says the most important obstacle to targeted policies is the view by businesses that some areas are so screwed up that no incentive can make them attractive for investment. Despite that, Eisinger notes growth in targeted policies, especially as the decline in federal aid forced states to use resources most effectively.

These programs provide reduced-cost sites at which firms can locate. There are two major types of programs: industrial parks (much more common) and land banks.

Industrial parks are suitable sites with transportation access, utilities, and other infrastructure already in place. Publicly owned industrial parks appeared in the 1940s. The land and infrastructure is commonly paid for with the proceeds of municipal bonds which lowers the cost of the property. Also, until the lots are possessed by a commercial firm, they are publicly owned and exempt from property taxes, further lowering the costs.

He says the while industrial parks are geographically targeted, they seldom are a part of a program to draw business to distressed areas.

Land bank programs are programs in which the local govt buys and holds land suitable for industrial or commercial development.

Targeted financial assistance

These programs can include subsidized land or loans, tax abatements, or any other incentive. However, receiving the incentives is contingent on locating in an indentified distressed area.

Another type of program makes grants to local governments in distressed areas to use for infrastructure development. Either way, the point is to focus resources on areas that need it most.

Tax increment financing

He says that state and local officials are holding TIF in ever-higher regard. But that TIF is encumbered by its perceived complexity and controversial reliance on interlocal subsidies. [Yep.]

TIF controversy goes beyond the normal "corporate welfare" controversy. It involves diverting school district and county property tax revenues to municipalities. The interlocal subsidies are justified [by the munis] on the basis that the muni has to provide the services, but all districts reap the benefits in tax revenue.

TIF began in California in 1952, but didn't really spread to other states until the early 70s when it was seen as a way to replace federal urban renewal funds that were then going away.

TIF is used in areas of economic distress, using "blight" as the definition of distress. Eisinger notes that blight is the broadest definition of distress. [Boy howdy!]

He notes that TIF is used to finance land acqusition and infrastructure, not private buildings or equipment.

State enterprise zones

First proposed as a federal program, but actually taken up by the states.

The original formulation was to free the zones from regulations as well as taxes. In that respect they would have been more about stimulating new investment as opposed to attracting industry. But as they were implemented, they focused on tax abatements and new-job credits and thus became a location-specific supply-side policy.

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.

This chapter begins the discussion of state and local economic develpment policies. This chapter specifically focuses on business climate policies that don't have any particular substate local focus. He summarizes (in the introduction to the next chapter) these policies as those with the object "simply to lure outside firms across the state's doorstep and to keep existing firms within it." (p. 173) These policies try to make the state more attractive to business.

Eisinger says that the notion of comparative business climates is the main factor that sustains the maintenance of location incentives as economic development policy.

Various researchers and other observers identify policies thought to influence business location decisions (or business profitability), weight them, and then rank states according to some aggreggate score.

He notes that individual state rankings tend to vary greatly from one survey to another and even over time within a single survey. This is largely due to the fact that there is little agreement about the precise factors that matter or their relative weights.

There appears to be no real consensus about the accuracy of rankings or how seriously businesses take them, but state officials and politicians seem to take them seriously. But they can't control all the elements of the ranking, just taxes and spending, including incentives, and the regulatory climate.

Tax policy

Government officials consider their tax profiles as a central characteristic of their business climates. [When all you have is a hammer...] The tax profile has two components: the general tax structure and tax incentives. The general structure applies to all businesses (type of taxes, rates, overall burden, etc.) Incentives apply to particular businesses or businesses in particular industries or locations and limit of mitigate the effects of the tax structure.

Tax reductions or other business-favorable changes to the tax structure, aside from any empirically measurable effects, have a symbolic or signalling value. They indicate to businesses that the state has a friendly and flexible attitude toward business. A second persistent theme in tax policy is the desire by a state to mimic its geographical neighbors. They don't want to be seen as out of line from nearby states. [Kenyon addresses issues of yardstick competition and identifying competitors in more detail.]

Eisinger says that in this context, incentive policy is less related to economic theory than to advertising.

But he notes that tax competition hasn't resulted in a "downward spiral of unremitting tax reductions." (p. 140) No race to the bottom, in other words. He says this is because states are responsible for spending on education, roads, etc. -- things that also affect business location decisions. He says this requirement has resulted in tax-system diversification over time. More states using more types of taxes.

Tax competition has also contributed to the trend of more burden falling directly on individuals and less directly on businesses. Along those lines, he points out two other trends in postwar state and local fiscal policy. One is the rise in real expenditure levels [this trend has been affected by the post-1990s swoon in state revenues], the other is the attempt to mitigate the impact of higher tax levels by switching to less visible taxes, applying selective relief, and shifting the burden.

Tax increases tend to occur "only under duress" (p. 145) and even then officials claim (sometimes accurately) that the increase is only temporary.

Incentives

Incentives may be available to all businesses as a matter of right, or only to those meeting certain criteria, or only as a result of selective negotiation.

General incentives include those such as accelerated depreciation or job-creation or investment tax credits. These incentives may have some restrictions or requirements, but they usually apply as a matter of right to all who qualify. (i.e. no negotiation required) [I seem to recall that Fisher and Peters give a good overview of incentive typology.]

A common incentive that is often not general is the property tax abatement. He cites Cobb on the Southern genesis of tax abatements and notes that until the late 1970s tax abatement programs were mainly limited to southern states. But in the late 1970s they quickly spread nationwide as a result of intensified interstate competition. He notes the political controversy (corporate welfare, etc) surrounding abatement policy.

He also notes three features that make them popular with policy makers. The cost is forgone future revenue, not revenue out-of-pocket; they are adminstratively simple, and they have unambiguous signalling value.

Debt financing

Debt-financing (i.e. cheap capital) is a classic supply-side policy. It started in the South, during the depression. [See Cobb.] It comes in several forms: direct loans, pooled development funds, loan guarantees, and revenue bond financing.

In direct loan programs, states make low- or no-interest loans from their own capital. Often the loans are only available to firms that can't obtain financing elsewhere. [!]

Pooled development funds are run by business development corporations and loan from a pool provided by private investors. Some states subsidize these pools by offering tax credits in return for pool investments.

In loan guarantees, the state promises to see that some portion of a loan is paid back even if the firm defaults. By taking on part of the risk from the lender, the state lowers the interest rate charged the borrower.

The main debt-financing program is tax-exempt bond financing. This has become a universal feature of state and local economic development policy -- some form of it exists everywhere. A state or community sells tax-exempt bonds and uses the money to construct facilities for an incoming business. The debt is paid off from lease payments from the firm. The firm essentially is allowed to borrow money at the lower, tax-exempt government bond interest rate.

Like tax abatements, this was mainly a southern state policy until the 1970s. Since then, boom! The advantage of these programs is that the US treasury bears most of the costs in the form of reduced tax revenue, since interest paid to bondholders is tax-exempt.

Over time, the feds have put restrictions on the volume of bonds issued. [Largely at the urging of northeast state officials and politicians that felt like the South was being subsidized to raid northern states of their manufacturing.]

IRB programs are predominantly local (not state) programs, although states may limit their use to high-unemployment or other distressed areas.

Labor incentives

Labor affects business climate through wage rates, availability, and worker productivity and reliability -- factors largely beyond the control of the state. Consequently, state labor policy aims to lower the cost of labor through policies in three main areas: right-to-work laws, job-training programs, and worker comp and unemployment insurance programs.

Right-to-work laws prohibit closed union shops, weakening unions and reducing their baraining power. This tends to hold down wages and frees employers from union work rules, etc. RTW started in the South and spread to the West and central plains states.

Job-training programs are often provided as part of the package of inducements to attract a new firm. States often use their vocational and technical schools to provide specialized training for employees of the new firm.

Finally, states can tailor the burden of the quasi-taxes that businesses pay in the form of workers comp and unemployment insurance premiums. As with taxes, states often try to mimic the burdens of their neighbors.

Regulatory policy: Growth versus the environment

Environmental regulation is costly to business so "negotiable" environmental enforcement enhances a state's business climate. [Cobb outlines just how negotiable Southern states could be.] But federal laws and growing widespread environmental concern have reduced interstate differences.

State have also tried to streamline their permitting process; that's one cost of business that can be reduced without harming environmental quality.

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.

This chapter starts Part II of the text, which concerns the supply-side tradition.

He says that the "intensity and variety" of state and local programs shouldn't obscure the "rich history of federal policy in this domain."

Federal programs have provided assistance and guidance to subnational efforts, at least since the depression. He cites stats that show that economic development-related grants to state and local government dwarf state and local own-source spending. He also notes that the federal figure includes spending that isn't strictly development related and doesn't include spending that only indirectly supports development, like aid to universities.

There are also many federal programs that don't have as their primary purpose strengthening subnational economies, but that effect them anyway. In this category are military bases, highway and transportation programs, federal research facilities, etc.

He claims that most federal economic development aid has supported supply-side policies by enabling communities to offer business subsidies. He also notes that some programs were not originally intended to be economic development programs, but that their flexibility allowed state and local govts to make them into economic development programs. CDBGs are one example.

Pre-WWII federal aid

From the Revolution onward there are many examples of federal aid aimed at subnational economic development. Tariffs to boost local manufacturing economies in New England, railroad and homesteading land grants, the land grant college system, the 1916 Highway Act, depression era public works programs, etc.

Pre-war federal aid had two main features that distiguishes it from post-war aid: First, it was episodic; policies were a response to particular events in particular locations. Second, much of the federal aid was in response to projects initiated at the state or local level, such as highway or canal projects.

There are two more features that exist in federal programs today. Assistance for building public infrastructure to facilitate commercial and industrial growth and decentralized participation, allowing subnational governments to make many of the implementation decisions.

Next, Eisinger surveys several key postwar federal programs.

Urban renewal: 1949-1974

The main goal of this program was to redevelop "slum areas." The federal government would provide 2/3 of the cost to acquire and clear the property, which would then be turned over to private developers for implementation of the local redevelopment plan.

The subsidy came in the form of the reduced costs of the land to the developers. According the the rules of the program, it was supposed to be sold at market value but it was typically sold for less than the cost of acquisition and clearing. It also allowed the developers to get land they couldn't get otherwise, since the local government could acquire land through exercise of eminent domain. [Does this sound familiar?]

The program was also part of the federal response to the postwar housing shortage. Slum clearance was supposed to limited to areas that were "predominantly residential," but didn't make clear whether that referred to before or after redevelopment. Consequently, a lot of predominantly residential land got cleared and turned into commerical development. Eventually the program was amended to allow commercial areas to be cleared for new commerical development. The reasoning in both situations, residential-to-commerical and commercial-to-commerical, was to replace low-tax value property with high-tax value property. [Deja vu!]

The program was terminated in 1974 when it was rolled into the CDBG program. Eisinger cites stats that claim the program in total saw the demolition of 100,000 more housing units than it developed. [Some housing program.]

He cites as benefits of the program the large amount of provate investment compared to government funds and a large increase in property tax revenue, even as it decreased total taxable land in the redevelopment areas. No statistics exist measuring employment effects.

Small Business Adminstration programs

The SBA provides assistance directly to businesses, not governments, mostly in the form of loan guarantees, but also through direct loans, technical assistance, and venture-capital funding.

These locations aren't place-oriented, but are rather location-neutral. Since most SBA programs don't aid subnational government in competing for business, they really aren't a part of federal aid for state and local economic development.

There are some exceptions. He list three SBA place-oriented programs: Small Business Development Centers, Certified Development Company Program, and Office of Private Sector Intitiatives. But these programs are much smaller in terms of funding than the loan programs.

He notes that the SBA also aids subnational governments by serving as an information clearinghouse.

Economic Development Administration

This was established by the Public Works and Economic Development Act of 1965 (PWEDA). It targeted distressed areas of the country, i.e. those with lagging growth rates and high levels of structural unemployment. It provided funds to local governments for public works construction, local economic development planning, and provided capital subsidies to industry.

The EDA was very much in the supply-side tradition in that it aimed to help local governments to attract industry.

In the 1970s the definition of "distress" was expanded to allow distress to be measured along several different dimensions. By the peak years of the Carter administration 84.5% of the nation's population lived in a distressed area.

Four main EDA programs (from largest to smallest):

Title I - Public works loans and grants
Title II - Business loans and loan guarantees
Title III - Technical planning and assistance grants
Title IX - Special Adjustment Assistance; to help communities respond to sudden changes, i.e. plant or military facility closing, natural disaster, etc.

Community Development Block Grants

Not originally intended as an economic development program, but discretion built in to the program and certain statutory changes led to rapid growth in the portion used for economic development purposes.

This was part of Nixon's "new federalism." CDBGs were a consolidation of several categorical grants into a more flexible block grant. The goal was to grant state and local officials more responsibility for program design and implementation.

The funds were granted as an entitlement according to a formula that took demographic variables such as poverty into account. In 1977, a second formula was authorized to correct a "bias" in favor of southern and western cities. [Cobb mentions this. It was part of the struggle between Sun Belt and northern polticians.]

Eisinger notes that the program is generally, but not totally, targeted toward needy cities. Some affluent cities get aid also.

Economic development was not originally one of the purposes for CDBGs, but the inherent flexibility allowed them to serve economic development ends through infrastructure construction aqnd the like.

In 1977, economic development was added as a specific purpose. This allowed cities to make grants out of CDBG funds. They were allowed to give the money to non-profit development corps that could, in turn, make loans, buy property, make site improvements, or other actions to attract business.

In 1981, the law was changed to allow direct aid to for-profit entities.

The 1977 changes also allowed cities to use their grant to capitalize a revolving loan fund for economic development purposes.

He has figures demonstrating that the 1981 changes produced a sharp upturn in the use of CDBGs for economic development.

Urban Development Action Grant

This was added as a part of the CDBG program in 1977. It was like a super CDBG. Much larger grants for much larger projects. It was awarded competitively to "severely distressed cities and urban counties."

A lot of these funds were used for downtown development, convention centers, hotels and the like. HUD classifies expenditures in two groups: infrastructure development and direct incentives to private firms. Both are classic supply-side type policies.

But Eisinger claims that the program was "shaped in its implementation by emerging entrepreneurial impulses..." These were exemplified by the use of UDAG funds to establish revolving loan funds [I don't really get how that is entrepreneurial where the use of CDBGs for the same purpose was not] and the establishment of public-sector equity positions in UDAG funded projects (i.e. partnering).

He notes that the job creating features of UDAG projects were probably overstated and that the jobs they did create (hotel workers, etc.) were often part-time, temporary, and/or low-paid. Furthermore, as with all incentive programs, there is no guarantee that the investment wouldn't have happened anyway.

Conclusions

All this federal activity doesn't add up to a coherent national policy on subnational development.

Different programs have different goals; some acquired an economic development purpose only after passage.

Job creation, through capital subsidies, is the primary goal of federal programs.

While some programs have the goal of targeting distressed areas, in actuality, most programs are wide spread.

Most federal programs have been supply-side in nature.

He notes that in the 1980s federal intervention and business subsidies fell out of favor. The Reagan administration proposed the use of enterprise zones, where taxes and regulations would be reduced in distressed areas to stimulate investment. This didn't get anywhere at the federal level (for Reagan anyway) but states took up the idea and established EZs on their own.

He says the EZ story is a sign of the times. The only new idea to originate at the federal level was taken up by the states.

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.

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.

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.

Most people understand economic development as creating more jobs. But how do benefits derive from more jobs?

Two models; public benefit and private benefit

Private Benefit Model:

Increased Private Investment (possibly as a result of govt policy)

creates New Jobs

which result in Lower Unemployment, Reduced Poverty, and/or Higher Personal Incomes

which result in Increased Demand for Goods and Services

which result in Increased Private Investment (and you are back at the beginning.)

Public Benefit Model:

Increased Private Investment (possibly as a result of govt policy)

creates New Jobs and Increased Taxable Capital Stock

which results in a Larger Tax Base

which either

Increases Tax Revenues producing Better Public Services and Amenities

which leads to Increased Private Investment

or (The Larger Tax Base)

allows a Reduction in Tax Rates

which leads to Increased Private Investment

He notes that political rhetoric is often an amalgamation of the two models; indeed the models aren't mutually exclusive.

But real life often isn't as neat as the models.

They might suffer form slippage. The increased demand in the private benefit model may be directed outside the jursidiction. In the public benefit model, investors may not be aware of the advantages of the community and locate elswhere. [I'd add that the community may subsidize a firm that would have located there anyway.]

Also, the community may have other problems (high crime, poor infrastructure, etc.) that inhibit investment even with incentives.

Growth vs Development

He points out that just counting the number of new jobs doesn't tell you much. What sort of jobs are they? [Courant provides a more complete treatment of the "just don't count jobs" issue.]

He points out that high-wage, high-skill jobs (i.e. "good" jobs) provide more benefit to the community. He makes a case for development as being selective about the sort of jobs you seek for the community. [I think Flammang provides a more complete discussion of the difference in growth and development. Eisinger touches on the quantitative/qualitative dichotomy but doesn't quite fully develop it.]

Empirical basis of the models

Eisinger presents empircal research that's different that what I've seen. He does bivariate correlations between measures of adjacent steps in the models. He finds mostly significant correlations of the expected sign. Look at the figures.

Costs of development

He points out that development (or growth) often means inmigration of people and the atendent costs of population increase. There are fiscal effects, public service degradation, congestion, etc.

[He touches on the issue of whether people follow jobs or vice versa.]

He notes that officials often don't acknowledge the costs.

Decline-distress model

This is the flip-side of the benefit models. Economic development policy, rather than bringing prosperity, may be used to fight off disinvestment, capital flight, and outmigration.

Decline-distress has both private and public costs.

Private costs include the alienation and loss of esteem that comes with job loss. He discusses the difference in cyclical unemployment that will go away when the recession is over, and dislocation or displacement, which is structural unemployment caused by restructuring of the economy. Structural unemployment is a bigger problem.

Displacement tends more to be concentrated in regions, making it more of a target for state or local policies.

Of course, the public costs of decline include increased expenses for welfare, unemployment payments, etc.

In conclusion, he points out that all the models share the feature that the path to well-being is exclusively through the private sector. Neither the creation of public employment nor the socialization of industry are valid alternatives.

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.

As he outlined in Chapter 1, this chapter:

summarizes the rise of economic development as a policy issues and discusses the framework principles of operation ... of this policy domain. (p. 12-13)

Most of the elements are stable, but some are changing, and it is the change that is producing the shift to demand-side policies.

Economic development policy can be traced back to a public-private partnership between Alexander Hamilton and the state of New Jersey in 1791, which, among other things, resulted in the nation's first industrial park (p. 15).

He makes several statements about the modern development of economic development as a policy domain:

There is a quantitative difference in pre- and post-1970s policy, i.e. the shift to more demand-side measures.

It's not a function limited to the industrially underdeveloped states in New England and the South, but a universal public function.

It's marked by an increasing degree of institutionalization and policy elaboration.

It's moved from a relatively marginal item on state and local political agendas to a central, or even pivotal, one.

Universaliation and institutionalization

1923-27: Alabama, North Carolina, Florida, and Maine establish agencies to encourage ecooniic development and attract investment.

Depression era: nearly every state forms state comprehensive planning agencies as condition of receiving federal public works funds. After the federal program ends in 1943, so do most of the state agencies.

1930s: Some southern states maintain some sort of industrial development boards as part of industrial development program. (See Cobb, 1984 for details.)

Widespread establishment of state economic development agencies is a relatively recent development:

of the 44 states responding to a ... survey in 1982, 13 reported that they had established economic development agencies as recently as the 1970s, and 8 said that they had formed such units only in th 1980s ... (p. 16)

Policy elaboration and intensification

He provides stats showing that over time there is a greater total number of programs and that each state increases the number of programs that it uses. He develops a policy penetration metric and shows that it is increasing over time.

The growing number of policies in use is accompanied by increasing intensity of their use. He cites increases in total value of bonds issued, taxes abated, etc.

Finally, economic development has over time become more central to state and local political agendas, not just as a discrete issue, but also as a "framework issue" that comes to bear on all other issues, such as taxes, transportation, education, etc.

Framework elements of economic development policy

Public-private partnership

Not complete socialism, not complete laissez-faire, but rather private-sector market activity supported in some way by government action.

He says government support is justified by the fact that unless there is government stimulus private investment will occur in insufficient quantities or will miss ventures likely to provide the most collective economic benefit.

[He's talking about market failure justifications, especially perhaps agglomeration economies, but really provides no theoretical justification for some pretty bald statements.]

Historically, government efforts have been supply-side subsidies intended to lower costs of operation to induce investment. These efforts have been ultra-competitive and unfocused. Demand-side efforts rest on the same justification, but are more focused and allow government to take on some of the risk and be more actively involved.

Decentralization

Economic development policy has been developed and practiced almost exclusively by state and local governments, along with many private and quasi-public organizations.

Federal involvement has been fairly limited, compared to state and local efforts.

He suggests a couple of drawbacks to a mostly state and local effort:

It doesn't allow full use of the superior resources available to the nationa government, and

In a federal system, regional inequalities affect the ability to fashion policy, so it tends to reinforce regional inequalities.

Two more consequences worth noting:

Decentralization also contributes to policy variety and interjurisdictional competition.

States copy policies of other states, consequently over time, almost every state implements almost every policy ever implemented by any state.

Furthermore, as states copy each others policies, they are stimulated to create new policies in order to stand out from the others. And so on, ad infinitum.

He notes, wothout saying so directly, that supply-side competition for footloose industries is often driven as much or more by political benefits of success than by economic benefits.

Demand-side policies provide an opportunity to develop home-grwon capital rather than competing for mobile capital.

Absence of planning

He notes that initial economic devlopment efforts pursued "targets of opportunity," i.e. whatever firms expressed interest in relocating. Even gubernatorial "raiding parties" sought footloose firms.

Development goals have been no more complex than just attracting more jobs.

The lack of systematic planning effort stems at least partially for American suspicion of central planning and comfort with liberty and disorder in markets.

He sees an increase in planned efforts. At the mild end are efforts to identify broad sectors at which to target promtional efforts. At the more vigorous end are state-led efforts at strategic economic development planning. A crucial aspect of such planning is the "identification of certain industries likely both to provide high economic development benefits and to flourish in that particular state's environment." (p. 27)

He claims that this increase in planning effort is a genuine change in a structural element of the policy domain, which he says has arisen from the need to better focus resources.

The primacy of capital

Supply-side policies predominantly subsidize capital. Employment is affected through an indirect (he says "trickle-down") process.

Other than the occaisonal wage subsidy, we don't really address employment directly.

Some supply-side efforts actually have an anti-labor element. (See Cobb, 1993)

Eisinger says that demand-side policies reject the notion that low wages are a competitive advantage. High wages aid the development of local markets, by increasing disposable income.

Pragmatism

He notes that neither ideology nor theory has constrained state and local economic policy development. Officials have been willing to experiment to try to find what works. This, he says, has advantages and disadvantages:

Advantages

it permits flexibility and encourages innovation,
allows policy to be tailored to the locale,
offers the possibility of integrating a learning process into policy-making

Disadvantages

interjurisdictional competition accelerates the pace of policy development ot the point that policy evaluation is difficult,
pragmatism contributes to a reluctance to use theory in policy design,
it may lock jurisdictions into policies for which there is no theoretical justification.

Conclusions

He marks the beginning of the rise of economic development as a public policy issue from the start of BAWI.

The invention and elaboration of policy has been shaped mainly by two fixed structural features: federalism and cultural commitment to an economic order featuring market mechanisms and private enterprise.

These features have produced an environment in which states and local governments compete for private investment.

Environmental changes in the 1970s (which he will address later) have produced a shift away from supply-side and toward demand-side polcies.

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.

1. An introduction to state and local economic development policy

The purpose of this book is to ... characterize and analyze the policy domain of subnational economic development as a whole by exploring its modern origins, its justifications and practical elements, and the basis of its dynamics. (p. 4)

He gives three reasons to do this:

1. Economic development is an increasingly important government activity.

2. To document an unusual development in the way in which government in America relates to the economy.

US government market involvement is normally of the "weak state" model. Economic development has domonant features that are more toward the "strong state" end of the spectrum.

3. To suggest the importance of attending to subnational (rather than national) policy developments.

Policy domain: an arena in which actors seek to craft and implement solutions and responses to one or a set of given public problems.

The problem of interest in the economic development domain is to

oversee the creation of sufficient, stable, well-paid employment to ensure and enhance collective well-being. (p. 6)

Relevant actors are a fairly small elite:

Political CEOs: governors and mayors

Development professionals in the public and private sectors: planners, development specialists, etc.

Specialists and episodic participants: labor leaders, bankers, real estate developers, etc.

This is similar to the postwar "progrowth coalitions" described by Mollenkopf (1983).

The policy domain in which these actors operate has certain structural elements. Eisenger's contention is that the domain is in the midst of an environmental transformation; that some of the structural elements are changing.

It is the new elements that define the "entrepreneurial state."

The entrepreneurial state

He discusses Schumpeter's concept of the entrepreneur: a risk-taker who exploits opportunities to produce new goods, new methods of production or transport, or new forms of organization that are unseen by others. The entrepreneur meets with skepticism and resistance, which he must overcome.

It is the entrepreneurs that drive the market and produce growth and change.

Eisenger says there are situations in which private entrepreneurial activity is insufficient to provide the economic growth we have come to expect. This is where the enterpreneurial state comes in, he says.

The enterpreneurial state seeks to identify opportunities on behalf of private actors that whose pursuit of the opportunities will serve public ends. The state becomes a partner in risk-taking.

The entrepreneurial state pays attention to the demand side of economic growth. Growth comes from exploiting markets. The state's role is to

identify, evaluate, anticipate, and even help to develop and create these markets for private producers to exploit, aided if necessary by government as subsidizer or coinvestor. (p. 9)

Yikes!

His main thesis

Subnational economic development policy has undergone a shift from almost exclusive reliance on supply-side location incentives to an approach that puts greater emphasis on demand-side policies.

This shift has important implications.

Demand-side policies promise opportunity for genuine capital formation and less interstate competition.

The shift to demand-side policy is a product of three shifts in environmental forces:

(1) Geographic shifts of people and jobs

The industrial diaspora south and west has increased interjurisdictional competition as northern states reacted to southern state policies.

(2) Changes in the federal political arrangement

A decline in federal aid to states and local governments

(3) Transformations in the nature of the economy

Globalization and the shift from manufacturing to service economy.

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.

Cobb is starting to wrap up the book. In this chapter he addresses the main question: Why did industries locate in the South?

Was it access to cheap labor? Access to markets? Access to raw materials and natural resources? Access to government subsidies?

In brief, the answer is "Yes. But not all of those things, everywhere, all the time."

Industries varied in the importance of market access, labor costs, and need for raw materials.

Government subsidies mattered the most to extremely competitive and cost-conscious industries like textiles. But once an industry had two or more suitable locations in mind, subsidies and other government aid could tip the balance. In a competition between closely-matched locations, secondary factors could become of primary improtance.

The most attractive subsidy varied by industry also. IRBs were attractive to those with high capital costs relative to labor costs. But were less attractive to those with high labor costs.

This is an interesting chapter in the details he gives. But if you've read any amount of industrial location literature, you'll find nothing too surprising.

Cobb, J.C. (1993). The Selling of the South: The Southern Crusade for Industrial Development, 1936-1990. (2nd Ed.). Urbana: University of Illinois Press.

In this chapter, Cobb addresses the growth that the South experienced in the post-war era. I'll set up the summary with a portion of his concluding paragraph:

The Sunbelt boom resulted from the interaction of seemingly contradictory influences. On the one hand, an influx of relatively affluent consumers combined with the cumulative impact of a high birth rate and increased federal spending to supply the momentum that neo-New South promotional strategies had failed to muster. On the other, the traditional development policies that had once confirmed a pattern of slow growth had also preserved the cost advantages and favorable business climate that made Dixie even more appealing to market-conscious industrialists. (p. 208)

According to Cobb, southern industrial location policy hadn't brought the South to the point of "rapid, self-sustaining growth," but it had set the stage. All that was needed was a "sharp external stimulus." (p. 179)

He lays out two broad categories of external stimulus.

Federal spending. Expansion of military bases in the South brought an influx of people and money. [Gregory Hooks, finds empirical evidence that, contrary to the beliefs of many, the South didn't get more WWII military spending, but that the spending it did get had a bigger effect. Perhaps because of the South's smaller initial economic base.] The space industry contributed to Florida's population boom. Big federal projects like the TVA not only directed federal dollars south, but also provided cheap power for industrial growth. And an increasingly redistributive federal government implemented more programs that gave money to, or spent money on behalf of, the poor, resulting in a net flow of dollars to the South where there were lots of poor people.

Some of this was promoted by journalists as a second civil war. Northern officials felt like their states were paying federal taxes to aid the South in stealing their industries. Northern congressmen started working together to modify federal programs to direct less money to the South and more to the North and Midwest Rust Belt. Cobb gives example of block grant rules. In response, southern governors formed the Southern Growth Policies Board, which still promotes southern development even today.

While one can dispute whether northen industries were moving south, new manufacturing facilities were opening in the South at a much greater rate than in the North during the 70s. Also, the South was seeing more foreign investment than the North during the period.

Population growth. Florida, with its attractive climate, led the way. It was the first southern state to attract a critical mass of population that allowed it to develop the sort of economy the whole South was aspiring to. Its ability to tax tourists allowed it to provide low taxes to residents and businesses while maintaining a higher service level. The space industry boom helped it to attract companies with high income managers and workers -- engineers and the like. It had a better image than most of the rest of the South; it was viewed as less racist and less backward than say Georgia or the Carolinas. Florida eventually had a large enough and affluent enough population to attract a significant number of industries interested in serving the market and not just in accessing cheap labor.

The growth of manufacturing in the South helped to generate inmigration from the North as workers and managers moved South to the new plants. The South also had a higher rate of natural increase. Also, in the post-Civil Rights movement South of the 70s, blacks began moving back to the South from the North.

This helped the rest of the South to reach a point where southern incomes and living standards began to converge with those of the North. But the South was still poorer than the North.

Cobb, J.C. (1993). The Selling of the South: The Southern Crusade for Industrial Development, 1936-1990. (2nd Ed.). Urbana: University of Illinois Press.

The first chapter, The Shaping of Southern Growth, provides some background information not addressed in Selling. It discusses the course of Southern industrialization during the period between the Civil War and the Great Depression.

Cobb, J.C. (1984). Industrialization and Southern Society, 1877-1984. Lexington, KY: The University Press of Kentucky .

Even after the Civil Rights movement somewhat rehabilitated the South's image with regard to race, the region faced other impediments to economic development. In general, the region was viewed as being backward, with inadequate public facilities and institutions.

The anecdotal information in this chapter backs up what has been empirically demonstrated: that public services -- not just taxes -- affect business location decisions.

Location experts were fond of citing the case of Union City, Tennesee, which was "jilted" by a company whose executives decided to locate a $17 million plant elsewhere. When questioned about this decision, company spokesmen told a local leader, "There is nothig wrong with your city that a good city government wouldn't cure." (p. 152)

Having a reputation as a speed trap and admitting that much of your city revenue came from fining "misbehaving Negroes" was also viewed as not conducive to economic development.

In Mississippi, the MERIT program led to efforts to improve libraries, start beautification projects, and upgrade sewage facilities. The goal there, as elsewhere in the South, was to make southern communities excellent places to live.

The effort to attract industry also stimulated efforts at political reform. In 1946, a group of political reformers in Augusta, GA took control of city govt away from the entrenched machine. Similar rebellions happened in other communities, such as Hot Springs, AR.

Louisiana provided the best example of a state whose poor image apparently retarded its industrial growth. A reputation for high taxes, free spending, and a shady and ineffective government that was openly hostile to business had dogged the state since the tumultuous era of governor and then senator Huey P. Long. (p. 157)

Political reform also led states to discard county unit systems which gave rural areas more clout than their populations warranted. These changes gave greater power to more moderate urban business interests by taking power away from more reactionary rural interests.

These changes also meant that business interests tended to be better represented than those of the poor. For example, slum-clearing urban renewal was more likely to result in a new commercial district, not low-income housing. This isn't to say that social welfare was a the forefront prior to reform, just that reform didn't really benefit blacks or low-income whites as much as business interests.

In the 50s and 60s industrial promoters started shifting from recruiting strictly low-skill, low-wage industries and sought more advanced, better-paying industries. This shift renewed the interest of promoters in improving education systems. Industry executives that were going to be moving to the new location wanted good schools for their kids.

The desire for more sophisticated industries also highlighted the need for occupational training. Southern states institutionalized the existing practice of providing training for new industries. This stimulated the expansion of the vocational education system, especially post-secondary education -- junior colleges and tech schools.

In a sense, though, the training programs were just another location subsidy that improved the profitability of the new facility. Training was specific to the needs of the firm, "there was little attention to the trainee's needs..." (p. 169)

Some promoters saw a need for states to get involved in technological efforts, research and development. The development of the Research Triangle Park in NC was one of the earliest examples of this.

Cobb, J.C. (1993). The Selling of the South: The Southern Crusade for Industrial Development>, 1936-1990. (2nd Ed.). Urbana: University of Illinois Press.