States and Economic Development
Chapter 19 Elgar Updated
Pre Elgar Chap 22 Draft
Planning and State EDO formation
Chapter 9 States in 1920’s
The State in Sub-State Economic Development
States (mostly southern) had become involved with sub-state ED as early as the 1920’s. The takeover and redirection of federally-inspired state/regional planning entities in 1944 by states jump-started many passive states and provided a home for whatever offices and divisions already developed in matters related to sub-state ED. Attraction and tourism and economic planning followed. In the 1950’s the shadow war and the various IDB programs generated by it, spurred the formation of additional state-level (often quasi-public hybrid) EDOs, and probably diffused state ED initiatives in various departments. Finance and business assistance programs and data bases were evident, as were some state-level urban renewal entities that acquired powers similar to those used at the municipal level. State housing agencies can be found during the 1940’s. Some states, like Massachusetts, empowered entrusted these powers to state and regional entities, primarily transportation and highway—and were therefore key participants in municipal urban renewal programs. By the 1960’s most states had a network of formal EDOs, and offices/divisions attached to associated departments, tasked with ED-related programs, powers and initiatives
As municipal government EDOs multiplied, typically lobbied by activist chamber and private investment, alongside municipal urban renewal agencies, mainstream ED acquired a governmental dimension it had lacked. The late 1950’s and certainly the 1960’s witnessed a host of new types and functions for these municipal government mainstream EDOs. States appear to have copied some of this, or were drawn into it, sometimes by virtue of their empowering of local action. The implosion of hegemonic Big Cities during and following the imposition of the Great Society and the destructive sixties urban riots—combined with Big City fiscal crisis that shortly followed—compelled States to “play” more aggressively in their urban sandboxes during the 1970’s. As Big City jurisdictional economic bases deteriorated, and neighborhoods became an ED/CD priority, States again were brought (dragged?) into the sub-state picture often by Big (and small) cities desperately needing State resources and powers. Certainly post-1975 the States were engaged in sub-state activities, relationships, and initiatives, and were looking for ways to intensify that involvement. The national scope and genuine state-level spontaneity for a new ED initiative/strategy, the EDZ is vivid testimony that by the late 1970’s States on their own dime, were finding ways to become involved in municipal and sub-state ED/CD.
Still by the late 1970’s State sub-state ED/CD was regarded as a new venture into uncharted areas and the first national effort to sort out what was going on was a joint-report by the National Academy of Public Administration and the ACIR, the States and Distressed Communities (1979), whose purpose was to identify and outline, “the potential state role in shaping community conditions”—a role that was “terra incognita” to federal (and state) urban policy planners[i]. Annual updates were issued through 1983. The beauty of these reports is they studied both mainstream and community development state involvement. These reports, while indicating federal facilitation of state involvement in urban affairs, acknowledged they were “largely indigenous efforts motivated by internal consideration” and “developed in response to clearly perceived problems facing the State and its communities”[ii]. These reports shed considerable light on the incremental municipal ED/CD involvement of States during the 1970’s into the early 1980’s—a very critical period.
Eisinger in his classic, The Rise of the Entrepreneurial State observes:
State bureaus designed to implement efforts to stimulate industrial and other economic development spread after the war, but did not become a universal element of state government machinery until recently. … of the 44 states responding to a Council of State Governments survey in 1982, 13 reported that they had established economic development agencies as recently as the 1970’s, and 8 said that they had formed such units only in the 1980’s”[iii].
While Eisinger certainly defines a state-level EDO narrowly, primarily restricted to government multi-function postwar Mainstream ED department dedicated exclusively to ED—as opposed to quasi-public, chambers, specialized commissions (tax-exempt bond issuers, for example), port authorities, or the host of CDOs that had formed since the Great Society that pursued local and/or state community development strategies and programs—his larger point is accurate: many states in the eighties had not only taken their role in economic development more seriously, but were asserting in many ways their leadership over their sub-state actors. He makes particular mention that such intense entry was characteristic of those states firmly lodged in my then-defunct northern industrial hegemony that had imploded a decade or so previous to his writing[iv].
Partly because northern hegemonic states (and their urban jurisdictional economic bases) were in considerable stress, if not actual decline by the 1980’s, one sees the linkage between them and the rise of the entrepreneurial state. The Sunbelt regions were obviously growing, in the ascendancy, the spearhead of the new service sector-technology driven economy and less motivated to revitalize declining sectors and firms. In addition, the entrepreneurial state approach often embraced by young, ambitious McGovernite democrats (and Rockefeller-like Republicans) were sympathetic to, and close to the emerging baby boom policy world cohort, Progressive in its inclinations, which had entered into the Great Reindustrialization Debate’s policy discussion which diffused into state-level political and economic policy-making. In this environment, the makings of a distinctive “blue state” approach to ED began to develop. Eisinger captured this conceptually by isolating several themes common across these early pioneering states.
While I do not find his distinction between “supply versus demand” economic development as useful in 2017 as it may have been in 1988, the entrepreneurial state focused on (1) growth (2) created by planning to discover, expand, develop, or creating new markets for local goods and services (3) facilitated by local capital, investment and other “indigenous sources” (4) facilitated if not directly provided by an active state government and private sector allies (5) primarily through new business formation and small business strategies in targeted sectors and industries (6) which the private sector may have overlooked or be reluctant to pursue (Dukakis’s gap financing for example and Eisinger’s emphasis on state venture capital) including the discovery and creation of new markets, products, and even industries[v]. The last was less evident in Eisinger, although his focus on technology is quite evident. Eisinger precedes the development and use of clusters. Cluster facilitation/development became identifiable as an economic development strategy during the 1990’s. Cluster strategy, often driven/led by the private sector and the industries themselves, were in the Transition Era a new approach within mainstream ED and was a logical application of the Great Reindustrialization Debate’s evolution to the rejection of sunset industries and the creation of sunrise sectors through creativity and innovation.
Eisinger clearly demonstrates the new approach moved beyond the previous paradigm of mobile capital making decisions and driving decline, spurring the competition among states and cities for investment through incentives that lowered the cost of production, capital, and land and the creation of pro-investment, low-tax business climate. In the previous paradigm government while providing most of the incentives was reactive to private and corporate strategies about when and where to invest and what products to make/market. In 1988 he acknowledges that the new paradigm had not “displaced supply-side activities” (p. 12). The increased power and the apparent growth opportunities associated with the global competitive hierarchy, however, generated in its own right new strategies to seize the opportunities in the growing and highly competitive Sunbelt states. Western and southern regions were embracing new strategies within mainstream ED for reasons other than the hegemonic declining northern industrial states—embracing for different reasons entrepreneurial programs identified by Eisinger. States regardless of whether they were growing or declining embraced Eisinger’s demand-side initiatives—but they did so for different reasons than those that motivated northern industrial declining hegemonic states. Consider Utah’s 1985 ED approach as expressed in a report provided by Eisinger which demonstrate strong continuity with “supply side” mainstream ED while adopting for opportunistic reasons “demand-side” strategies (export and university-driven ED):
Fifteen years ago [1970] promotional efforts of the Department of Community and Economic Development were limited to tourism and to responding to out-of-state industrial clients. Today [1985] the on-going programs of the Department … include: the Urban Development Program which recruits business to the metropolitan areas of the state; the Rural Development Program which coordinates with rural areas … for recruitment of industry; the Business Development Program … charged with helping existing businesses [using] financing initiatives; the International Development Program which works to attract foreign investment in Utah [and] encourage export of Utah products {and} promote Utah as a destination for the Pacific Rim tourist …; and the Centers for Excellence Programs which encourages greater ties between Utah’s colleges and universities and the private sector[vi].
The “style” of ED pursued by the state such as Michigan and Massachusetts, reverted back to the days of comprehensive and later urban renewal plans and instead centered on industry sectors and innovation “created” by private and public conscious action. Local “plans”, however, (think of Robert Moses) acquired a reputation for their reaction to, and incorporation of local and private redevelopment projects—consider the inconsistent implementation of Gruen’s many plans—not so with state plans that stressed new industries not yet of consequence in the policy process or without a meaningful presence in the local economic base or workforce. That latter point was actually a weakness in Michigan’s new direction in that it was layered on top of traditional state politics and local pressures, and became more a gubernatorial signature initiative. This meant in these states a separation between whatever local economic and community development that had existed and which continued through the Transition Era and the economic/community development “creation” strategy embraced by the State. In time convergence would occur—that was some of what the Transition Era was about. In that a “creation” strategy was more suitable to the State, local ED continued to follow its business assistance, neighborhood CD, and physical redevelopment—and attraction—while the State followed its own path.
When states/governor’s that lacked a strong link to universities—like Massachusetts, California and Michigan—or when the State was not a former industrial hegemonic State, States like Texas and Tennessee and Arizona which had in the past relied on infrastructure, attraction and business climate did not in this period embrace “creation or demand” strategies but instead broadened their business climate to include better services, education, roads and modernized efficient least-cost, lower tax government—and right to work. In other words, not needing to recreate their industrial bases, they were after all still in the Cold War and what industry they had was still in high demand (and their new economic system was centered on the New Economy of FIRE, services, tourism). Rather, still possessing a number of rural and relatively undeveloped, frequently poor areas/counties, their pressing need was dealing with rural poverty and weak economic bases incapable of proving jobs as way out of that poverty. Attraction and new businesses and industry was a logical strategy.
Up to this point, however, economic development as a policy area had been driven primarily by local jurisdictions. The state had been mostly reactionary—brought in because of Dillon’s Law, home rule, or gift clause bypass legislation. During the twenties, a new actor (states), however, appeared on the economic development scene. In this decade “entrepreneurial states” can be found. In decades previous, states had established divisions and bureaus, especially tourism, “development”, and agriculture/natural resource that overlapped into economic development. In the Twenties, whatever their name, some states formed state-level “entities” and worked with sub-state jurisdictions in specific ED strategies. Other states consciously adopted an attraction strategy that took advantage of the state’s so-called “climate” that favored and attracted certain groups of firms and people.
It is hard to ignore a sad reality that for most of the nineteenth century the states were arguably the most corrupt and incapable level of government in the United States. Most state legislatures and state election districts adjusted poorly to the rise of their urban areas. The lack of “redistricting” meant rural, often blatantly anti-urban/immigrant interests prevailed in state legislatures and obstructed urban economic development. The late nineteenth/early twentieth century state legislative shutdown of Big City suburban annexation is testimony an example. Gift and loan clauses yet another. The situation of western territories/early state governments and southern state governments during, and even after, Reconstruction has also been noted. States could not hope to avoid ED issues, but they preferred to deal with them thru sub-state jurisdictions. State-level participation in sub-state ED policy-making has always been confused by Dillon’s Law. The state as sovereign parent of sub-state jurisdictions is intimately involved in authorizing/empowering local structures, electoral and governance systems, bureaucratic activities and functions, programs and policy-decision-making. Passage of authorizing/empowerment legislation, however, especially during the nineteenth century, does not support the existence of any coherent, conscious ED strategy or goal.
The principal exceptions are transportation infrastructure and ED tools of tax abatement/eminent domain. When times were tough, however, states jettisoned ED transportation infrastructure back to sub-state jurisdictions through gift and loan clauses. States were active in tax abatement since 1790—and eminent domain for state purposes had always been used as well. States actively provided services to agriculture a century previous. By recognizing pre-1920, agriculture was economic development, we can uncover the earliest state-level economic development strategies/programs. (usually promotion–l) were located in state departments of agriculture or, in Western states, Departments of Mining or Natural Resources which played a similar role in non-agricultural economies. The reality is these early state-EDO were embryonic, sometimes single industry dominated and creatures of interest groups such as the railroads and mining companies. Frequently located in departments of agriculture, but sometimes set apart in an office of its own was tourism. Tourism, also promotional by nature, suggest many states had developed experience, and probably some capacity previous to 1920.
Until the 1920’s no state had established a department level agency devoted substantially to a “modern urban-municipal” economic development strategy, excepting tourism. There are no semi-reliable surveys until Conway’s in 1966 (Conway, 1966). Cobb traces the first state-level EDO to Alabama in 1923 (Alabama’s Department of Commerce and Industries) targeted to agriculture and manufacturing (Cobb, 1993, p. 64). Florida’s 1925 Department of Immigration attracted tourists, new immigrants, and business investment. In 1927, Alabama split off manufacturing into a separate department, Industrial Development Board. A few other states (Virginia, South Carolina, and North Carolina) also created state EDOs in the 1920’s (Eisinger, 1988, p. 16). North Carolina’s Department of Conservation and Development acted “in the nature of a state chamber of commerce”. Virginia and South Carolina’s centered about promotion and advertising (Cobb, 1993, p. 64). If Cobb[vii]/Eisinger are correct, the first “modern” state-level EDOs were from the South.
The 2nd Phase of the New England textile wars (discussed below) led to the 1928 formation of a Massachusetts state-level promotional EDO. Frankly, we would not be surprised to find other northern states with small, non-descript promotional programs in these years. Although slightly past the time period of this present discussion, both Pennsylvania (1939) and New York (1944) created state-level multi-function lead EDOs (Departments of Commerce) previous to World War II end. Northern states were not far behind their southern counterparts.
Conway’s 1966 publication asserts the professionalism evident in state-EDOs of the sixties was the result of “trial and error” learning over the course of many years. “In their early days state development agencies were, in fact, generally characterized by a lack of efficiency. Personnel were selected on a political basis; functions were planned for political effect; administrative practices were poor; and programs were unprofessional. As a consequence results were poor” (Conway, 1966, p. 29). Conway later labels these state-level economic developers as “wine ‘em and dine ‘em pretenders” (p. 30). If Conway is correct, and I believe he is, early state-level programmatic effects were minimal—and focused on state-level attraction of tourists and business.
State Business Climate
So it seems given the above “history” that states, to the extent they involved themselves in ED, primarily pursued some form of an attraction strategy. Tax abatement for manufacturing firms was probably the first and was fairly commonplace even in colonial times. The first” manufacturer’s tax exemption” my research uncovered was Massachusetts in 1785 (Seligman, 1895, p. 231). In those days, sector tax abatement was less attraction than a startup incentive, and as used in nineteenth century probably contained equal parts of startup, retention and attraction. The idea of using state law beyond tax abatement to favor, promote or attract people, firms, and revenues in a systematic, sustained and conscious program initiative, what we today describe as “climate” is another matter,.
Business climate is an ED strategy, mostly, but not exclusively, associated with states. Climate refers to the combined effect on businesses and individuals of public policies, laws, judicial rulings, natural endowments and other assets that positively or negatively affect political, economic, mobility, behavior, quality of life, profitability, and economic growth of individuals, firms and industry sectors[viii]. Our broad definition allows for people, firm, sector and capital mobility. The opening salvo of a planned state-led climate strategy was probably fired by both Delaware and New Jersey.
Delaware recognized early that several unique features of its original state constitution provided favorable treatment to incorporate business (and tax them)[ix]. By the end of the nineteenth century[x] Delaware was already a leader in attracting the incorporation of business, especially industrial firms, using its laws, court system and tax code to garner revenues and professional jobs for the state. The surprise is that, by the turn of the twentieth century, it was New Jersey that actually led in this nasty attraction of business incorporation. Other states were competing as well (Maine, South Dakota, West Virginia, and the territory of Arizona)[xi]. In 1913, however, reforms passed earlier by New Jersey Governor Woodrow Wilson came into effect, taking New Jersey out of the incorporation business. Delaware’s took the lead in business incorporation after 1913.
Nevada had attempted to compete with Delaware in corporate incorporation, and, repealed its inheritance tax (the only state in the union to do so) to compete in that area as well. Consequently, by the mid-1930’s Nevada was the most common official residence of millionaires. But its chief-state-induced climate initiative was the divorce trade. “As of 1928 the state was producing more than twenty-five hundred divorces annually, earning millions of dollars for the state’s lawyers and for the hotels and dude ranches that housed divorce-seekers for the requisite three months” (Teaford, 2002, p. 139). In 1931, the state doubled its annual divorces. In 1931 Idaho and Arkansas entered into the divorce competition. Nevada responded with new legislation lowering residence period to six weeks, maintaining its lead. In that same year, however (1931), Nevada upped the ante by approving the nation’s first gambling law.
The Depression provided the desperation needed for public approval, but the gambling initiative had been on the table during the 1920’s. Why gambling? Nevada in 1930 only had 91,000 residents–half the next least populated state, Wyoming. Nevada “was largely a desert wasteland” (Teaford, 2002, pp. 138-41). One advocate, Las Vegas “entrepreneur” Thomas Carroll, ran newspaper advertisements that gambling and horse racing would increase tourism and make gambling “the biggest industry in the state“. In November 1930 the Las Vegas Chamber surveyed its membership and uncovered two to one support of legalized gambling. So in 1931 state legislators were convinced to approve gambling legalization. “Faced with a history of economic failure and the onset of hard times nationwide, Nevada opted to profit from the wages of sin. This was an economic strategy that was already paying off in the 1930’s and after 1945 sin would prove a mother lode far more lucrative than the state’s legendary Comstock Lode.” (Teaford, 2002, p. 141)
A long-standing and incredibly divisive climate-based controversy—the low tax, non-union, little regulated Southern business climate was both consciously designed and the seemingly inevitable consequence of what the South” was” at certain historical periods. It was both planned and natural. Right to work laws in the 1940’s were clearly conscious initiatives with serious ED implications—but, turn of the nineteenth century low-wage, nonunion, low-tax (because mills were outside city limits) Carolina textile mills, in our opinion, reflected the surplus labor and Redeemer political culture of the era. That “climate” was not purposely created to attract outside investment, in fact many Redeemers did not want industrialization. Climate can be unplanned as California business incorporation law that favored Silicon Valley startup technology.
Planning and State-EDO Formation
War production was closely associated with expansion of state, regional and municipal planning. The National Planning Board (issuer of “Our Cities”), always controversial, never penetrated day-to-day New Deal decision-making, yet “hung around” under a variety of different names (National Resources Board, National Resources Committee) during the 1930’s. To coordinate war production, FDR in 1939 Executive Reorganization Act lodged the now-called National Resources Planning Board (NRPB) in the Office of the Presidency. The intention was NRPB would play a valuable role in making America the “arsenal of democracy”. It didn’t. Instead, as an unintended by-product, it established the nucleus of a goodly number of State/regional economic development organizations at War’s end.
War production was pretty much dictated by the service branches, the Treasury, and, of course, the National Defense Advisory Commission (and successor agencies). NRPB ran eleven regional field divisions that worked with the various state-level planning organizations set up to satisfy federal legislation that such entities develop plans around which federal aid and projects could serve. In 1933 there were fourteen state-level planning entities–by 1938, forty-seven[xii]. State-level planning entities served as a magnet to attract economic development/agriculture-related functions, research, programs, and staff—a 1938 annual report commented that state planning entities “engaged in a bewildering variety of activities”, and in many geographies, the Mississippi Delta being one, states had set up corresponding regional entities to deal with Cotton Belt decline—the TVA also fostered a number of regional “planning” entities as well. From hindsight, it is apparent these planning entities were not perfectly integrated into the politics and budgets of state governors and legislators. Such agencies were semi-regarded as agents or facilitators of the federal government; as one might suspect, southern states had their own ideas about these entities. Apparently, it was not popular in Congress either.
Congress abruptly terminated NRPB in August 1943—specifying that its “functions exercised … shall not be transferred” (Scott, 1969, p. 409). “It was a “don’t let the door hit you in the butt” kind of legislation. Planners and Progressives in general were less than thrilled, nor was Mel Scott. In any case, our story concerns what happened with the state-level entities after NRPB’s termination. “Alabama, California, Georgia, Illinois, Indiana, Missouri abolished their state planning agencies and replaced them with postwar planning agencies specifically concerned with problems of employment and economic expansion … Arkansas, South Carolina and Washington ….[created] economic organizations and abolishing their state planning boards … [and] in 1944 Nebraska, Kentucky and New Jersey established development commissions or departments … By the end of 1945 … there were forty-five or more of the newer agencies with titles denoting their legislative mandate to improve the state economy (Scott, 1969, pp. 411-15).” State-level EDOs had arrived, in some form, on the national landscape.
The South had its own ideas regarding state-level development agencies. Several states in the Twenties had already established state-level EDOs (Alabama, Florida, South and North Carolina, and Virginia) (Lepawsky, 1949, p. 8). When NRPB was dissolved, only Virginia, Tennessee and Alabama retained planning agencies—two, of which already had state-level EDOs. Georgia, Mississippi, Kentucky, Oklahoma, Louisiana, Florida, Arkansas, South Carolina and Texas had by 1945 scrapped the state-level planning entirely or combined it with an EDO. Each southern state by war’s end had a multi-function state-level EDOs (Cobb, the Selling of the South, 1993, pp. 65-70, Table 2). Most southern state-level EDOs were led by gubernatorial appointees, many included boards or commissions with private sector membership reflective of regional constituencies, were staff-driven (some more professional, others political). Emerging from the war, these new agencies played a crucial role in retaining war-time employment/relocation gains—and provided incentives to assist their conversion to peacetime production. (Cobb, the Selling of the South, 1993, pp. 67-9).
In 1946, the Southern Economic Development Council (SEDC) led by W. Porter Grace Memphis Chamber Industrial Department, organized informally, as the Southern Industrial Development Council. Meeting each year, the organization grew in size and ambition. At Fort Worth in 1951, an invitation was “extended to all practitioners of industrial development in the southern region” and the Council officially incorporated with W. Porter Grace its first elected president. By 1958 the Council had nearly 200 members. In 1961, the University of Oklahoma at Norman was approved as its “Institute” and a three week course of “instruction in industrial development” commenced. AEDC later assumed responsibility for its operation. In 1981 SEDC headquartered in Atlanta (where it remains today–with a short digression to Austin, Texas). SEDC in 2013 claimed 1000+ members from 30 states.
[i] Charles R. Warren, the States and Urban Strategies: a Comparative Analysis (Washington D.C. U.S. Department of Housing and Urban Development, September, 1980); National Academy of Public Administration and Advisory Commission on Intergovernmental Relations, the States and Distressed Communities: Indicators of Significant Action (Washington D.C., September 1978.the states and Distressed Communities: the Final Report (November 1983-updated 1985. A-101
[ii] Charles Warren, the States and Urban Strategies, op. cit., p. p.15.
[iii] Peter Eisinger, the Rise of the Entrepreneurial State, op. cit., p.16.
[iv] Peter Eisinger, the Rise of the Entrepreneurial State, op. cit., pp.-911.
[v] Peter Eisinger, the Rise of the Entrepreneurial State, op. cit., pp.11-12; see Chart 1-1, p. 12
[vi] Peter Eisinger, the Rise of the Entrepreneurial State, op. cit., p. 17.
[vii] Cobb appears to have drawn these dates from Albert Lepawsky, State Planning and Economic Development in the South (Kingsport Tennessee, Kingsport Press, 1949, p. 8; Paul Barnett, An Analysis of State Industrial Programs in the Thirteen Southern States, Bureau of Research, School of Business Administration, Division of University Extension, University of Tennessee, XIII, (Knoxville, University of Tennessee Press, 1944).
[viii] While I changed it substantially, some of the wording was drawn from Joseph L. Bast, Ten Principles for Improved Business Climates, the Heartland Institute.
[ix] See Lewis Black Jr., “Why Corporations Choose Delaware” at www.delaware.gov; Alan Trachtenberg, The Incorporation of America: Culture and Society in the Gilded Age. David McBride, “General Incorporation Laws: History and Economics” Duke Law Review at http://www.law.duke.edu/journals/lcp
[x] Its original law approved, to our knowledge, in 1883. See Katharina Pistor, Yoram Keinan, Jan Kleinheisterkamp and Mark D. West, “The Evolution of Corporate Law: A Cross Country Comparison” background report for the World Bank (2001), www.upenn.edu. P. 808.
[xi] See Robert E. Wright, “How Delaware Became the King of U.S. Corporate Charters“, www.bloomberg.com, June 8, 2012, p. 2.
[xii] https://www.planning.org/growingsmart/guidebook/four01.htm
Ron W. Coan 