Finance

How to Stop the Economic Development Wars

Tax incentives and other giveaways to business don't create prosperity. It's time for a federal law to stop the bribery and make better use of capitalism's strengths.
by | November 25, 2013
 

For several decades we have been conducting an economic-policy experiment in state and local governments, and now it's time to stop the testing because the results are clear: The dominant paradigm, incentive-fueled competition among these governments, does not create economic prosperity.

Two big facts confirm this conclusion. First, as the New York Times reported last December, states, counties and cities are giving up more than $80 billion each year to companies in tax breaks, outright cash payments, and buildings and worker training. Second, the wages of the taxpayers who have been footing the bill for this stuff have been flat since at least 1979. Indeed, some economists, including stalwarts of the establishment like Larry Summers, have concluded that we are now in an economy whose normal state is one of mild depression as a result of inadequate demand. It seems obvious that the lack of demand is the result of depressed wages.

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The bankruptcy of the current approach to economic development has reached its apotheosis in the Boeing deal in Washington State, in which the corporation demanded both a massive subsidy from the state and significant wage and benefit concessions from its workers. The state acquiesced, granting Boeing $8.7 billion -- the largest state-tax giveaway in the nation's history -- to keep production of the new 777x airliner in the Seattle region. The workers showed more spine. The president of the machinists' union called the company's proposal for compensation cuts "a piece of crap," and the union voted to reject the deal by a two-to-one margin.

The result of the union's rejection, the company says, is that it will open up the competition to other potential locations for the 777x assembly. Other states will now scramble to see how much they can offer Boeing in what Timothy Egan, in an op-ed piece in the Times that deserves sober consideration, called a "race to the bottom" that illustrates "the utter bankruptcy of economic policy prescriptions offered by both political parties."

The voters of Seattle apparently agree. This month they elected Kshama Sawant of the Socialist Alternative Party to their city council. In her victory speech, Sawant said that a decision by Boeing to move its business out of Washington "would be nothing short of economic terrorism. Our only response to this terrorism is to tell Boeing, 'If you want to go, then you can go!'" She added, "The machines are here, the workers are here. Let us take this entire productive activity into democratic public ownership and retool the machines to produce mass transit."

I would stop short of that. Capitalism generates wealth, and without wealth living standards cannot rise. But capitalism does this in markets and, as Alex Marshall pointed out in The Surprising Design of Market Economies, markets are designed and constructed by governments through laws and regulations. In the case of global corporations like Boeing, state and local governments are simply unequal to the task. We need a national law that prohibits corporations from extracting bribes from state and local governments and bans governments from donating tax dollars to private entities -- a sort of domestic equivalent of the Foreign Corrupt Practices Act, which prohibits American companies from bribing foreign governments.

Some will argue that such a law would damage America's global competitiveness and drive companies to outsource even more of their work abroad. I think that, on balance, this is not so. America is a magnet for global talent because of the quality of life offered here, and current economic trends are damaging to that quality of life.

The governors of the six states that Texas Gov. Rick Perry is targeting, urging their entrepreneurs to pack up and move to the Lone Star State, ought to support such a federal law, and Missouri Gov. Jay Nixon should lead the charge. For years the economy of the Kansas City metropolitan area has been damaged by the "border war" of incentive-fueled competition between Kansas and Missouri. Recently, in response to big tax cuts pushed into law by Kansas Gov. Sam Brownback, the Missouri legislature enacted massive tax cuts of its own. Nixon vetoed the legislation, saying it would gut the state's ability to deliver services, and he called for an end to the destructive competition between the two states "The competition with the highest stakes … isn't between Kansas or Missouri, or between Jackson County and Johnson County." Nixon said. "It's with Brazil and Russia, South Korea, Germany and India."

With the predators reined in by a federal law, states and localities could more safely try alternative forms of economic development such as those championed by the Democracy Collaborative. Its model, called Community Wealth Building, emphasizes democratization of wealth, focuses on place and local economy, promotes broader ownership of capital, seeks to anchor jobs locally, stops the leakage of dollars from communities and supports individual and family wealth-building.

It's time for experiments aimed at testing and developing a new paradigm for economic development, one that channels capitalism's strengths while protecting the commons and producing a more broadly shared version of prosperity.

Mark Funkhouser  |  Director, GOVERNING Institute
mfunkhouser@governing.com

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