Fed Study Spawns Conference on
Economic War Among States

John D. Boyd
Knight-Ridder Financial News
Reprinted with permission

Kansas City—May 21, 1996

What began last year as the main think-piece article in the Minneapolis Federal Reserve Bank's annual report has led this week to a Washington conference focused on—like the Fed article itself—an “economic war among the states.”

The conference is intended to explore damage done to the U.S. economy from the headlong competition between states and cities to woo big job-producing projects such as major factories, by handing out tax incentive goodies that average businesses cannot get.

Sponsored by Minnesota Public Radio with major underwriting by the Ford Foundation, the conference takes place Wednesday at the National Academy of Sciences. It kicks off tonight with a dinner speech by White House Budget Director Alice Rivlin, who has been nominated to be the new Fed board vice chair.

Arthur Rolnick, research director at the Minneapolis Fed, argued in the 1995 economic war article that the overall US economy loses some potential growth from the often wasteful rifle-shot incentives. And he argued against the allocation decisions of having all taxpayers in a state subsidizing investment projects that often do not pay off as advertised in job creation.

The bank's chief counsel, Melvin Burstein, co-authored the article with research showing that Congress has the power under the constitution's commerce clause to stop the warfare, and could do so perhaps by taxing away all special benefits a business might receive from a state or municipality.

Leonard Witt, executive director of the radio's civic journalism initiative, plugged the economic war idea in the past year and helped build momentum for the article's central concept to become a national conference.

The concept also gained media attention around the country as examples abounded for cities and states giving away tax plums to bring in or just to keep sports franchises, auto plants, and major office complexes. As an example, this week Virginia announced it would have a Siemens/Motorola joint venture locate there, partly attracted by about $20 million in state grants and tax credits.

Witt told Knight-Ridder that states from every US region will be represented at the conference, along with congressional staff, business and labor organizations, and groups that specialize in the type of grants and tax cuts the conference will examine.

Many top officials of the Fed system will be there as well, Witt said. The Fed's monetary policy leadership, of course, assembled in Washington today for one of its periodic Federal Open Market Committee deliberations on the direction of the economy and whether the Fed should move or leave interest rates alone.

Those Fed officials include not only regional Fed bank presidents and the Washington-based Fed board, but also Rolnick's counterparts among regional bank research directors.

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