Those initiatives still fail to solve some critical problems. For one, the usefulness of clawback provisions is highly suspect. Once a company opens up shop in a state, it's a bold public official indeed who is going to seek repayment for nonperformance and put the company's existing jobs (and the livelihoods of voters) at stake.
3. That leaves the courageous stand advocated by Ohio state senator Charles Horn: unilateral disarmament. "We're building programs that encourage easy solutions, not competition based on training, skill, or technology," he argues, "and for every winner, there's a loser. We're not financing schools, workforce development, and real wealth creation."
The answer, Horn suggests, is for Ohio and other enlightened states to just say no to subsidies, investing instead in research and development, and in knowledge-intensive industries. When others see how productive those efforts can be, they'll gradually wean themselves from the subsidy game and compete in more useful areas.
To pursue his vision, Horn is trying to set up a regional forum that will assess the record of business-development programs, providing objective data to convince state officials that they need to change. Last September he coordinated a statement from 100 economists in eight midwestern states, denouncing subsidies and calling for the immediate cessation of recruitment activity. Unfortunately Horn's objective is shared by few, if any, other American leaders.
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The Casualties Fight Back
America's small to midsize growth firms, like SARA, have the most to lose from the new civil war. Small companies can sometimes secure a few subsidy crumbs left over by politically connected giant companies. Those crumbs hardly compensate, however, for the regional dislocation, added tax burdens, and political misdirection fostered by state business-incentive programs.
Start-ups and growing firms depend far more than larger companies do on the very public goods -- education, training, communication, and transportation -- that are put at risk by development giveaways. They require precisely the regional concentration of skills and business talent that the relocation game puts in jeopardy. Most small companies would benefit from access to cheaper capital, but billions of dollars are being locked up by state bureaucracies and their few lucky clients.
Entrepreneurial companies are far better off operating on level regional playing fields -- where resources are free to flow to productive investments -- than they are helping feed a national race to the lowest common economic denominator. Smaller companies have an interest, if not the highest stakes, in pressing for the national reforms that current business and political leaders can't, or won't, fight for.
If North Carolina is the model for change or if Rio Rancho is the shape of things to come, there is little hope that states can successfully rationalize their subsidy programs. The only effective solution is to impose uniform federal standards (yes, regulations) that all must observe. The alternative is far more unpalatable: wasting billions of dollars churning America's least promising assets while global competition intensifies around us. The new civil war is deceptively silent, but it could prove deadly to many of America's small businesses.
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David Friedman is a Los AngelesÑbased urban economist and a research fellow at the MIT Japan Program.
FLINT, MICH., VERSUS OMUTA, JAPAN
How Two Cities Tackle Similar Challenges
When Omuta, Japan -- home of the mammoth Miike coal mine, in Kyushu -- and Flint, Mich., fell on hard times in the late 1970s, both cities hatched tourism-promotion schemes to rebuild their economies.
Led by the nonprofit Mott Foundation -- funded by GM scion Charles Stewart Mott -- local leaders in Flint decided to create jobs by building an amusement park called AutoWorld that would celebrate the city's unique industrial legacy. Omuta came up with GeoBio World, a theme park glorifying the hamlet's maritime and mining history.
But there the similarities end. Unable to resist political pressure to "do something" for Flint, an army of consultants, Housing and Urban Development and Michigan development officials, and private bond financiers pumped nearly $70 million into AutoWorld. The quixotic project closed less than one year after its gala opening in 1984 and today sits shuttered near downtown Flint.
In Omuta, local officials were able to secure commitments from a similar range of national, prefectural, and private-sector interests, but potential investors participated on the condition that the Japan Development Bank (JDB), a quasi-governmental entity with a history of savvy business judgment, make an independent appraisal. Lacking any direct stake in GeoBio World, the JDB nixed the project, almost certainly sparing Omuta an AutoWorld-like disaster.
The contrast between Omuta and Flint highlights the need for uniform, national legislation to end America's new civil war. Lacking independent legal standards or bureaucratic oversight, which the JDB provided in Japan, American proponents of incentive programs -- like AutoWorld advocates in Flint -- all too often steamroll public and private entities into spending money without adequate safeguards.
RESOURCES
The most influential report on the new civil war is by Melvin L. Burstein and Arthur J. Rolnick, "Congress Should End the Economic War Among the States," in Federal Reserve Bank of Minneapolis 1994 Annual Report, March 1995. (Call 612-340-2341 for information.)
For a policy statement seeking to end state business subsidies -- endorsed by more than 100 economists -- see "Joint Resolution on State Economic Development Policy," September 1995, released by the Buckeye Institute for Public Policy Solutions. (Call 513-224-8352 for information.)
