12/20/2002: "Attitude Adjustment! The First Component of an Effective Economic Development Strategy"
During the oil boom of the 1970s and the tech boom of the early 1990s, the Lone Star State was a leader in securing new and expanded economic activity. In the last few years, however, Texas has fallen behind in a variety of objective measures, primarily because other states have adopted more aggressive initiatives.
Business today is more mobile, competition is more global, and the process for determining locations is more sophisticated. Just as changing technology and mobility have led to modifications in myriad areas of meeting public needs, similar adjustments are required in economic development.
Some people believe Texas has no reason to be actively involved in economic development and that state government should not commit extensive effort or fiscal resources to such purposes. After all, the state does have a long-standing Populist tradition with a general adherence to the concept of limited government. This philosophy shapes much of our public policy, and well it should. It must be recognized, however, that limited government does not mean no government at all, especially in cases where the public sector is the only effective means to achieve socially beneficial aims.
As examples, transportation, municipal services, education, and myriad other functions that promote economic well-being (among other things) are provided or subsidized by government because of their role as public goods; many of these services cannot be efficiently made available by private interests. Economic development as it operates today can be and properly should be viewed in precisely the same manner.
Perhaps the best and most straightforward way to conceptualize this phenomenon is as a market for economic development opportunities, with states and communities (as representatives of their citizenry) as sellers and firms locating in responding facilities as buyers.
Because the opportunities for quality corporate locations are nowhere near sufficient to satisfy the desires of all the areas in the country, much less the world, it becomes a “buyers’ market.” Areas, therefore, must induce firms to locate and, like any rational buyer, decisions will be driven by the buyers’ best prospects for profit.
Since Texas does not consistently provide the lowest cost site (certainly not by a margin significant enough to overcome inducements from other areas), incentives provided by government become a necessary element of being an effective market participant. Similarly, because many of the variable costs differentials adverse to Texas are related to fiscal matters (such as a disproportionate tax burden on capital-intensive facilities), public involvement is required.
Another aspect relates to the fact that other regions provide specific kinds of incentives tailored to the individual project, such as specialized job training or “deal closing” assistance. Such mechanisms become part of the information base and “price” (overall set of available incentives) in the marketplace. As a result, in order to compete, other sellers respond with comparable or more attractive incentives. Because buyers (locating firms) are seeking sellers (competing cities/regions/states) with differentiated terms, effective marketing is also valuable.
It is not practical or economically feasible for those receiving direct economic benefits, such as potential employees or suppliers, to organize the incentives required in the competitive process (just as individuals cannot realistically organize to build public roads). In such a context, it is a proper role of government—even limited government—to manage the process. Economic development is a public good because it brings “positive externalities” or benefits that extend beyond the immediate plant location.
In the same vein, government is not an isolated system; it is a part of the overall social complex. To treat it otherwise is the antithesis of Populism and a limited government philosophy. This concept, which is both traditional and enlightened, is the very essence of the rationale for an aggressive (though limited) role of government in ensuring a steady stream of economic development. The payoff must not be judged solely on the basis of today’s State revenue, but rather on securing prosperity for generations to come.