The Region

Like all wars, this one requires political leadership

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Gary H. Stern - President, 1985-2009

Published June 1, 1996  |  June 1996 issue

By now, readers of this bank's publications are familiar with the topic that is the focus of this special issue of The Region magazine. Articles on "the economic war among the states" have appeared in the fedgazette, our quarterly business and economics newspaper, in the Quarterly Review, published by the bank's Research Department, and, of course, in this magazine's 1994 Annual Report issue, "Congress Should End the Economic War Among the States."

That 1994 essay, written by two of the bank's senior officers—Mel Burstein and Art Rolnick—maintains that the escalating competition between states to lure business through preferential tax breaks and other incentives has caused those states to misallocate public resources; in other words, money that should be spent on schools, roads and police protection is going instead to private business. This is worse than a zero-sum game—where jobs from one state move to another with no advantage to the country—rather, it's a negative-sum game, Mel and Art say, because the states have fewer funds to do such things as educate their citizens or to build roads. In effect, even though it appears that jobs are created in a particular state, those jobs would have been created anyway; additionally, because those jobs are subsidized by public dollars, everyone is actually worse off. In part, what distinguishes Mel and Art's work from other papers that have come to similar conclusions about the economic issues is that they offer a bold solution: Congress, by virtue of its power under the Commerce Clause of the Constitution, should act to end these economic wars.

When executives at Minnesota Public Radio's Civic Journalism Initiative read the bank's 1994 essay, they thought it was an important topic for debate. The Civic Journalism Initiative had recently been formed to investigate policy issues in a public forum, with the intention of informing the citizenry and, perhaps, inspiring further action. Minnesota Public Radio had previously held forums at local or regional levels, but they immediately saw the benefit of conducting an "economic war" symposium on a national scale. The result was a Web site dedicated to the issue, including a case study created by the Kennedy School of Government at Harvard University, programming on public radio stations across the country, this special issue of The Region magazine and a conference in late May in Washington, D.C., attended by over 70 economists, politicians, labor leaders, business developers, lawyers and corporate executives. It has been this bank's pleasure to be associated with the symposium, and we gratefully acknowledge the efforts of Minnesota Public Radio, as well as the funding and support of The Ford Foundation.

I attended the conference, which was characterized by lively debate on the broad questions and fine points of many issues relating to this topic, and all attendees certainly returned home with a deeper understanding of the issue. I came away from the conference with a number of impressions, one of which is that although the attendees represented different—and sometimes disparate—constituencies, they frequently found common ground. For example, even though they argued the finer points of whether certain types of incentives were better than others, there was general consensus that in some egregious cases the public good was sacrificed at the altar of political expediency. Also, most attendees agreed that more uniform public disclosure of these public-private deals was in order, although they differed on exactly what details should be disclosed and in what time frame.

But that's the easy stuff: Agreeing that some business incentive deals are worse than others and that the public should be better informed about those deals is nine parts common sense and one part inspiration or leadership. To address the tough questions—such as, What should be done to minimize or eliminate the negative effects of this economic war?—is going to take a reversal of that ratio, especially as it applies to our elected officials. To illustrate: Attendee after attendee at the conference made reference to noncompete pacts that have been signed by governors in recent years—all broken soon after the ink had dried on their signatures. This is not entirely the fault of the politicians; clearly, political incentives encourage our elected officials to continue playing the incentives game. What governor wants a professional sports team to leave on her watch? Or wants to lose a major automotive facility to a neighboring state?

It seems to me, then, that superseding all the economic and legal issues addressed at the conference, there is one political question: How to get elected officials to act in the long-term interests of their state and country, rather than the short-term (mostly political) interests of their home state or city. When Mel Burstein and Art Rolnick addressed that question, they came to the conclusion that, on their own, politicians would not—indeed, could not—stop playing the incentives game. Most attendees at the conference agreed with Mel and Art's conclusion, but not all accepted their solution—congressional action. As the conference attendees and others continue to address the issue of preferential business incentives, one factor—absent congressional edict—is prerequisite to any solution: political leadership.

And one factor that can influence political leadership is an informed citizenry. We hope that this issue of The Region, along with the other efforts related to the national symposium, will help educate the public about this important debate. In an era when states may soon be granted the power to disburse federal block grants, it becomes paramount that citizens know how their state and local officials plan to spend the money.

For readers that wish to participate in this continuing debate, the Minneapolis Fed's Web page has dedicated a growing site to the issue, including this bank's research and links to Minnesota Public radio's National Symposium site, and to selected reports and media citations.

(See "The symposium goes cyber" for more information.)

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