Begging as an Economic Development Strategy: Let Other States Do It

Joel Kotkin, a contributing editor to Opinion, is a senior fellow at the Center for the New West and an international fellow at the Pepperdine University School of Business and Management. David Friedman, a Los Angeles attorney, is a visiting fellow in the MIT Japan program.

Hughes' decision to consolidate its aerospace operations in Arizona, Intel's expansion plans in New Mexico and the remote possibility that Mercedes-Benz might build a facto ry here have pushed "smokestack chasing" to the top of California's economic-development agenda. Yet, despite the well-publicized victories of states that have, through various blandishments, induced companies to build or move plants into their back yards, smokestack chasing as an overall strategy is a proven failure.

For starters, companies that play the relocation game are often among the weakest and most poorly managed. To survive, they pursue cheap labor, non-union environments and weak pollution controls. And, unfortunately, there are plenty of states eager to accommodate their desires.

General Motors has plied this strategy for decades. It has shifted troubled production facilities to more hospitable states in the South and to Mexico. Whenever possible, it has demanded huge tax breaks as the price for keeping its remaining plants in Michigan. None of this has made GM more competitive and profitable, but it has left many Michigan cities feeling betrayed. At least one has successfully sued GM to keep a plant open after the city gave away millions of dollars in tax abatements and other subsidies.

The foreign experience hasn't been much different. British smokestack chasing, known as the Alternative Regional Strategies, aimed to attract plants to distressed parts of the island. After 10 years of wooing, long-term growth in targeted regions hadn't changed.

Ironically, as some Californians urge subsidies or relaxing the rules to keep Hughes and other companies here, some states are beginning to see the limits of such strategies. A report from the Council of State Planning Agencies, the research bureau of the U.S. Governors Conference, found, for example, that smokestack-chasing strategies, particularly in such southern states as Arkansas and Mississippi, trapped them into "a tradition of low-wage industries" and stripped them of capital for needed investment in health, education and public infrastructure.

New Mexico may face similar long-term problems as a result of giving away more than $150 million in tax breaks to Intel so that the computer chip-maker would expand its plant. That translates to roughly $114,000 per job. "The problem with smokestack chasing . . . is that it doesn't develop long-term industries," says Brad Bertoch, executive director of the Wayne Brown Institute in Salt Lake City. "New Mexico doesn't need to drain $150 million to lure Intel; what it really needs is $15 million in venture capital and the education infrastructure to develop local high-tech industries."

Equally wrongheaded are attempts by more developed regions to outbid smokestack chasers. During the 1970s and 1980s, for example, New York City lavished hundreds of millions of dollars in tax abatements to keep large corporations, many of them in financial services, in Manhattan. Not only did many of them still leave or reduce employment dramatically, but the special deals helped drive up costs for other employers, mostly smaller ones, to levels that have proved ruinous for New York's diminishing entrepreneurial class.

A far more practical policy for states like California is to steer public resources--tax breaks, subsidies, market or technical assistance, regulatory reform--to companies committed to generating flexible, high-wage, high value-added industries. Such policies, built on reciprocity between the state and the private sector, have been successfully tried in Pennsylvania's Lehigh Valley, where locally based companies worked with local officials to help restructure the region's metals, plastics and textile industries.

The outlines of a similar policy can be seen in our Metropolitan Transit Agency's attempts to require that potential light-rail contractors, foreign and domestic, compete for public funds on the basis of commitments to create quality jobs. These commitments would be targeted to boosting long-term economic and technological capabilities of local companies.

Smokestack chasing, at best, offers a quick fix to economic development. It rewards corporate opportunists at the expense of companies with a demonstrable, long-term commitment to a state. Begging is simply not the sort of economic strategy that will return California to economic health.

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