How States and Localities Can Get Off the Economic Development Treadmill

Cross posted from GOVERNING.

It has become an article of faith for most governors, mayors, and other state and local elected leaders that they must work to grow their economy.  But despite their innovative economic development efforts, many states, counties and cities must feel a bit like Alice when the Red Queen said “you see, it takes all the running you can do, to keep in the same place.” For without a robust and globally competitive U.S. economy even the best economic development “running” by state and local governments won’t be enough to move them forward.

To understand why, we need to look to the mid-1970s. After enjoying the fruits of a 25-year economic boom the economy encountered the worst recession since the Great Depression. But it soon recovered and grew. However, underneath this growth was a troubling phenomenon. Two economies had emerged:  a slower-growing industrial Midwest and Northeast and a faster-growing South and West.

After WWII and until the end of the 1960s, these regions grew at about the same rate. But starting in the 1970s and through the 1980s, the former areas downshifted into slow growth.

Portrayed in ballads like Billy Joel’s “Allentown” or Bruce Springsteen’s “My Hometown,” places that had become industrial powerhouses now faced shuttered factories, boarded-up homes, and shattered lives. But while these areas struggled, regions like the Rocky Mountains and the West boomed, growing 37 percent and 27 percent faster than the nation, respectively.

Cities that had once powered America’s Industrial Revolution were struggling for their economic lives. Take Buffalo, N.Y. Buffeted by factories moving to the South and West, Buffalo’s total income grew at less than half the rate of Brownsville, Texas, from 1969 to 1986. While Brownsville saw its jobs grow by 75 percent, Buffalo saw its jobs decline by 1 percent. Likewise, Syracuse, N.Y., home in the early twentieth century to companies that manufactured more diverse products than New York City, saw its income grow just 53 percent as fast as that of Santa Fe with jobs growing just 28 percent compared to Santa Fe’s 124 percent.

There was a variety of reasons for the emergence of these two distinct American economies, but a key one was that it could happen. With the completion of the Interstate Highway System in the 1970s, the emergence of jet travel, and nationwide electrification and telephone access, companies now had the freedom to locate almost anywhere in the United States. And they did so, with factories migrating away from the Northeast and Midwest to the South and the West.

When Northeast and Midwest states realized their factories could relocate anywhere in the country, they began to compete fiercely with each other to attract those “smokestacks.” An early example is a 1954 issue of Fortune magazine that included an ad from the state of Indiana that touted its benefits, including “no government debt,” a labor force that was “97 percent native” (with the implication that native-born workers were less likely to strike), low taxes, and ample supplies of raw materials, calling itself “the clay capital of the world.” By the 1970s, virtually every state had established an economic development agency whose mission was to go out and compete with an arsenal of tools ranging from tax breaks, to free land, to workforce training programs.

Today this process has happened again, only this time a global market has emerged.  Container ships, air freight, the development of the Internet and undersea fiber-optic cables have linked national economies into a single integrated global economy. And just like states used to compete for jobs, nations now compete to retain and attract mobile investment, and in particular the high-wage, knowledge-intensive manufacturing, research, information technology, and services jobs that power today’s economy.

As this competition has ratcheted up, the U.S. has been losing the race. Perhaps the most apparent sign has been the decimation of our manufacturing base. The U.S. lost one-third of its manufacturing jobs from 2000 to 2010, with every state except Alaska losing manufacturing jobs. And a large share of the job loss has stemmed from the increase in the trade deficit.   The United States accumulated an astounding $5.5 trillion trade deficit in the 2000s.  And it’s not just a deficit in energy and low-value items, such as clothes and toys; the United States has run a deficit in advanced technology products since 2002.

This failure of the U.S. to maintain its lead in global innovation-based competitiveness is one reason why the number of new corporate facilities and locations in the United States has fallen by about half over the last decade, according to data from Site Selection Magazine.  These are the kinds of manufacturing and other corporate expansions that states and cities aggressively court to get them to locate in their area.

As a result, the same process that played out in the 1970s and 80s, is happening again only on a global basis and with the United States becoming the “Great Lakes” from a geo-economic perspective. “Rust belt” is now “rust nation.” Santa Fe has become the Syracuse of its day, with Shanghai the Santa Fe. Brownsville has become the Buffalo of its day and Bangalore, India, the Brownsville.

So what to do?  As my colleague Stephen Ezell and I argue in our new book Innovation Economics: The Race for Global Advantage, turning around the U.S. economy, and by extension the 50 state and thousands of local economies, will require a robust national innovation and competitiveness strategy focused on what we call the four “T’s”: corporate Tax reduction and reform; increased public investment in Technology and Talent, and much tougher Trade enforcement.

State and local governments can play a key role here, particularly in the technology and talent areas, but they can’t do it by themselves.  Unless the federal government becomes a true partner to help them compete, they will continue to run like Alice, just to keep in place. If they want to get off the treadmill and begin to make real progress, governors, county commissioners, mayors and other elected officials will need to make their voices heard and demand that Washington comes together in a bipartisan way to put in place a real national innovation and competitiveness strategy based on the four T’s.