Entrepreneurs take note: When it comes to economic development, the serious business isn't getting done in Washington, D.C., these days.
For more than a century, Cabot Stains stood as a pillar of the Massachusetts business community -- a small, family-owned enterprise that produced high-quality finishes for wood products. But by the later 1970s, president Samuel Cabot III, fed up with both the state's high tax rates and the company's aging industrial plant in Chelsea, decided it was time to make a move.
"Sure we had a sentimental feeling for Massachusetts," explains 44-year-old Cabot, scion of one of the Bay State's oldest families. "But you don't deny economic benefit for your company simply out of sentiment. We were faced with a hopeless situation. Our plant was poorly laid out. There was no way to expand. To use a bad pun, we were painted into a corner." So Cabot decided to head for nearby, low-tax New Hampshire.
State officials soon learned of Cabot's plans -- and they reacted as if he were stealing the crown jewels. "The governor said, 'Do anything to keep Cabot in Massachusetts," recalls John Judge, deputy director of the Governor's Office of Economic Development, adding with a smile, "even if we had to have the state police lined up at the border."
It wasn't clear, however, that the state's good intentions would do the trick. Although Judge was able to locate a feasible plant site, the financing hinged on a federal urban development action grant (UDAG). Cabot's application, filed in June, spent the summer mired in the bureaucratic recesses of Washington, D.C. For three frustrating months, Cabot waited for the UDAG money to come through. "We had the bulldozers raring to go at the edge of the lot," he says, "but nothing was happening."
As it turned out, however, something had happened. In October, John Judge called Washington and was told matter-of-factly that the grant had been rejected. For some reason, Cabot had never been informed.
Faced with the likelihood that the company would move to New Hampshire after all, Judge turned to his colleagues in the Massachusetts Office of Communities & Development. Within two days, the state came up with a $600,000 low-interest, 20-year loan and a $155,000 grant for sewer improvements.
This fall, Cabot Stains, which projects 1985 sales of roughly $20 million, is moving into a new plant that doubles the company's production capacity and reduces production costs by as much as $1 million a year." I came out of this harboring a lot of suspicions about ever dealing with the Feds," Cabot says. "Nothing really happened until the state got involved. I'll tell you, if I had to decide about eliminating UDAG, I'd go ahead and do it -- and leave the money with the state."
The experience of Cabot Stains is part of a drama being played out all across the country. More and more, state governments are taking the initiative in promoting economic development at a time when the federal government seems to be treating from the arena.
Under the Reagan Administration, scores of programs designed to boost economic growth have been severely trimmed. Since 1980, for instance, federal aid to states for employment and job training has been slashed about 50%; community and regional development funds have been cut by one third; and Small Business Administration outlays, except for disaster loans, are down from $950 million to a proposed meager $150 million for 1986. At the same time, there has been a decline in the percentage of the federal budget allocated for improvements in the economic infrastructure (that is, for commerce and housing credit, and, until recently, education). And, to make matters worse, Washington has also imposed strict statutory limits on state use of industrial revenue bonds, one of the most important means by which states have promoted economic development in the past.
In the face of such cutbacks, state governments have had to come up with economic initiatives of their own. "I don't think much about what they're doing at the federal level.I know I can't count on them for assistance," observes Washington's Democratic Governor Booth Gardner. "As a governor, you have three choices: You can cut programs, which have already been cut; you can raise taxes; or you can come up with ways to promote economic growth."
From a political standpoint, of course, that is really not much of a choice at all. Rather than raise taxes or cut programs, governors from Boston to Sacramento have been forced to search for new policies that will encourage economic development and create jobs, and their search has led them to target small, growing companies for special consideration. Tax laws and regulations are being changed to improve the climate for entrepreneurs, while other forms of short- and long-term assistance -- ranging from better education and training programs to direct intervention in the capital markets -- are being development.
Some observers see in all this the emergence of a new set of de facto industrial policies, which are designed to serve the needs of the entrepreneurial economy. Says Bill Schweke, the veteran director of the Washington, D.C.-based Corporation for Enterprise Development, "The states are the ones that are finding the bumper-sticker slogans that the national parties haven't found yet."
This isn't to suggest that any consensus exists on the kinds of state programs most likely to produce a healthy economic climate. On the contrary, there are sharp differences of opinion between those who favor strong state action no encourage entrepreneurial activity in specific, targeted areas and those who believe the state's role should be limited to fostering the general economic conditions in which entrepreneurship can flourish.
But perhaps more significant than the issues being debated is the fact that the debate is happening at all. That fact bears witness to the powerful pressures on state governments to respond to the new growth imperative -- pressures that have forced politicians of both parties to abandon old positions, alter their public images, and generally adapt to life in a changing world. Along the way, erstwhile liberal Democrats have turned pro-business and expressed growing disenchantment with the party's penchant for viewing Washington as the center of the economic universe. "What is called for is a great deal of humility on the part of the federal government," says Don Campbell, an aide to Michigan's liberal Democratic Senator Doland Riegle. "Maybe we should look back now and listen."
