There's a relevant question to ask here, and I wouldn't be surprised if you were asking it right now. Don't the states have big economic development programs in place already? Aren't the states "laboratories of democracy," creative sources of entrepreneurship where innovative ideas about economic policies are often test-driven? Wouldn't it make sense for all this state-level economic development to become the first line of attack deployed in the service of national economic recovery?
Well, not necessarily. The reason is that economic recovery and economic development are two entirely different things. The first one is a short-term effort to kick-start the economy when conditions turn bad. The second is a long-term effort to create enduring prosperity through a whole variety of means, such as recruiting new businesses to your state and helping to grow them at home. States--and local governments, too--are frequently good at economic development, especially if they are able to approach it strategically and consistently over a long period of time. But even the biggest states--and obviously the biggest municipalities as well--are not well positioned to influence short-term economic recovery.
The reason is that they just don't have the right tools for the effort. In down times, states and municipalities may possess ingenuity, know-how, economic development savvy--all kinds of advantages. But there are a couple of valuable cards they can't play. Obviously, they don't have the ability to influence the national or global economic forces that are causing the downturn in the first place. And second, in a down economy, they don't have the one commodity required above all others to kick-start the process--substantial amounts of money.
Even though they lack the breadth to deal with large-scale economic problems, state and local governments sometimes try to use the tools they do have to make a dent. As I reported in a column a few months ago, it's relatively common for local governments to waive fees for developers in hopes of getting the local real estate market going. Since I wrote that, some California cities have taken this one step further, offering to foot the sales tax bill for local residents buying cars from local auto dealers. In many cases, this is a drastic move to help the dealers--who may be on the verge of going under.
Such measures may help to ameliorate the situation a little, but they won't turn things around. These days, a recession isn't local or even regional. It's national or global. And that's the reason why it usually requires federal action to stimulate the economy.
And the feds can borrow--or, if necessary, print--money on a large scale. Unlike the federal government, states and localities are usually required by their constitution or their charter to balance their budgets. They can't deficit-spend their way out of a recession on a program of Keynesian economics. They can sometimes engage in financial tricks through which long-term bond funds can be used, essentially, to pay current bills, as New York famously did back in the '70s and as California has been doing to a lesser extent to get out of short-term budget trouble in more recent years.
But these tricks are not usually undertaken in the service of economic recovery; in most cases, a state or city resorts to this chicanery to balance the budget and avoid facing painful political reality. That can provide a weird and temporary kind of economic stability--people aren't thrown out of work, at least not right away--but it's no strategy for climbing out of an economic hole and staying out.
So what can states--and localities--do, other than just grab the money coming out of Washington as quickly as possible? After all, there's not much time for strategic thinking when the federal government says you have to spend the stimulus money within 120 days.
Maybe the answer really is to be "shovel ready." The state and local governments that are going to benefit from the stimulus package the most--the ones that will get the most bang for the buck and move their economies back to prosperity most quickly--are those that did their strategic thinking long ago. They didn't wait for the stimulus package to start mulling what their priorities should be and which projects to pursue. They'd already identified their biggest needs--and now they can use the stimulus money to make some of those things happen.
And that's ultimately what economic development is all about: setting the table, planning ahead, understanding how to spend the next dollar, the next grant, the next infusion of stimulus money to its greatest effect. In this recession, the best economic development effort is the one that was completed before the recession began.
