The State in Sub-State Economic Development
During the twenties, a new actor (states) 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 that overlapped into economic development. In the Twenties, whatever their name, some state-level “departments” formed and worked with sub-state jurisdictions in economic development. Up to this point, however, economic development as a policy area-system had been driven by local jurisdictions. The state has been mostly reactionary—brought in because of Dillon’s Law, home rule, or gift clause bypass legislation. In instances, such as pre-Civil War canal-building/railroad development, franchises, and bond issuance occurred, the pressure, power and muscle for such involvement came from coalitions of local/private lobbying—and outright corruption, of course—because as far as corruption and incompetence goes the state was a leader in those fields. Economic development, thus far in our history, has been, with a few exceptions, a municipal-level policy phenomenon.
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 shutdown of suburban annexation in many northern states is testimony to the long-run consequences of state economic development-related policy-making in these periods. The situation of western territories/early state governments and southern state governments during, and even after, Reconstruction has also been noted. Political machines, Tweed’s for example, and Pennsylvania/Ohio’s state level machines further complicate state capacity to develop serious or modern policy systems.
State-level participation in sub-state economic development policy-making has always been, and will likely always be, confused by Dillon’s Law. The state as sovereign parent of sub-state jurisdictions is necessarily 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 economic development policy-making. The principal exception is transportation infrastructure—but one wonders if the state played an active role in that strategy mostly to get its fair share of the “opportunities” (i.e. corruption). In any case, most states removed themselves as an independent player in that strategy through gift and loan clauses. Let us not forget the thrust of municipal reform, municipal charter/home rule, was not intended to involve states in the policy area, but rather to free sub-state jurisdictions from state controls/corruption and to allow local governments to determine their fate.
In the following sections, we introduce our State SSS (sub-state economic development policy-system). The development of a modern state-level governmental capacity to make policy is the first task. The prodding role of the federal government in triggering such modernization will be noted. Secondly, the history will consider the formation of state-level economic development-like organizations. Thirdly, we will discuss two state-level economic development strategies that appear previous and up to the 1920’s: state industrial promotion/attraction and business climate. Finally, we comment on the dynamics associated with the diffusion of economic development strategies, tools and innovations across states, focusing principally on their herd-behavior, and the “arrow in the quiver” concepts.
Modernization of State Government: Entry into New Policy Areas
In the United States there are fifty distinctive (state) economic development policy systems (SSS), each with idiosyncratic sub-state relationships/dynamics, distinctive sets of EDOs, and biases toward certain strategies, tools, programs, and service delivery patterns. How that “state” of affairs came to be was first approached in discussion concerning values incorporated into state charters/constitutions and the nineteenth century gift and loan clauses. Dillon’s Law ensured the state could not escape playing a significant role in municipal-level economic development. The evolution of the state SSS into an economic development policy system that is a conscious attempt by the state to play an independent and formative role in joint state-local economic development is primarily a post-1900 development.
In the early twentieth century state governments modernized bureaucracies and rationalized decision-making to deal with realities of an industrial and increasingly global economy[1]. Budgets, planning, and above all administrative reorganization were fairly commonplace in the North and Midwest. Cabinet departments and regulatory commissions were established as formerly independent bureaus and helter-skelter, hodge-podge offices were consolidated into a policy area and placed under managerial control–usually the governor’s, but sometimes the legislature. Financing through bond issuance linked to budgeting, auditing and accounting standards were key innovations. Legislatures also modernized. States, like municipal governments, had finally had developed modern bureaucratic structures and administrative capacity for the first time in their history.
The policy areas that benefited initially were infrastructure (transportation) and education. Directly relevant to economic development, the 1916 Federal Highway Aid Act encouraged the few states that did not already have state highway agencies to create them. World War I sped up the need for enhanced logistical and transportation improvements and so by the early twenties, with the arrival of the Model T, state-financed highway construction was on steroids. Critics of suburbanization contend interwar highway sprawl played a large role in the demise of street cars and suburbanization that followed. In any event. Transportation infrastructure installed during these years was uneven.
Between 1921 and 1931, the surfaced mileage under state control in the United States rose from 84,000 to 258,000[miles] …. With remarkable rapidity the states had constructed a web of paved highways to replace the dirt roads prevalent just twenty years earlier. The pace of development had been uneven, with Michigan pioneering the construction of superhighways and Mississippi barely entering the age of concrete pavement. In fact, the highway programs of the 1920’s pointed up one of the flaws in twentieth century federalism. Some states were more than able to shoulder the demands of the age with no help from Washington D.C. whereas others were too poor or sparsely populated to handle the task…[2]
Also developed in these years were state parks–sparking enhanced tourism initiatives at both state and local levels. For example, “From 1924 through 1928, twenty-eight new state parks were created” in New York by Robert Moses and his Long Island State Park Commission. California tried to keep up with Moses [hiring Olmsted Jr. to survey the state]) and their burst of state park development occurred in the thirties. Other states, in fits and starts, entered into the policy area as well. The later involvement of the Civilian Conservation Corps (CCC) fleshed out many state park initiatives during the rough years of the Depression. State park development was almost exclusively a state-led initiative[3]. Enhanced state involvement in education, K-12, especially was also significant in this period and served as an important pre-condition for future education and workforce economic development initiatives. Between 1910 and 1930 states were active in highways, transportation, airports, education and even pollution control. State taxation structures were also enhanced.
Formation of State-Level EDO
Economic development had not yet acquired a definitional meaning, so we start this conversation by asking if state governments were doing economic development stuff similar to that performed at the municipal level—i.e. attraction/promotion, business retention, industrial parks, lending, financing, eminent domain, and tax abatement. In regards to the latter, it has already been demonstrated that states were active in tax abatement since 1790—and eminent domain for state purposes had always been used as well. But if the reader puts on her 3D glasses, states had, in fact, been long involved in economic development previous to the 1920’s. Contemporary economic developers fail to find this activity because it’s hidden in plain sight. Huh?
States had been actively providing services to agriculture for a century previous. Previous to 1920, America was primarily agricultural. But agriculture as a policy area is seldom considered as economic development. Yet, agriculture “development” in a predominately agricultural economy is, logically, economic development. By recognizing that pre-1920, agriculture was economic development, it is possible to uncover the earliest state-level economic development. The earliest state-level economic development-related staff, activities/initiatives, and programs (usually promotional) 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.
Frequently located in departments of agriculture, but sometimes set apart in an office of its own was tourism. Tourism programs, promotional by nature, in state bureaucracies suggest many states had developed promotional experience, and probably more capacity, than is commonly credited to them. Still the most professional state-level EDOs of this period were state chambers of commerce. State-level chambers, however, were much less directly involved in economic development programs than their local counterparts. State chambers through education, networking and contacts played a more indirect role assisting local chambers to better deliver promotion-recruitment programs, but as a whole played a limited role in economic development strategies and programming.
Until the 1920’s no state that I found had established a department level agency devoted substantially to a “modern urban-municipal” economic development strategy outside of tourism. There are no reliable surveys which deal with this issue in this period[4]. Cobb traces the first state-level EDO to Alabama in 1923 (Alabama’s Department of Commerce and Industries) targeted to agriculture and manufacturing.[5] In 1927, Alabama split off manufacturing into a separate department, Industrial Development Board. Florida’s 1925 Department of Immigration attracted tourists, new immigrants, and business investment. A few other states (Virginia, South Carolina, and North Carolina) created state EDOs in the 1920’s[6]. If Cobb is correct, the first “modern” state-level EDOs were from the South
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[7]. The reader might remember that our research of the New England textile wars revealed the creation of a Massachusetts-state-level promotional EDO in 1928. 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 the end of World War II. Northern states were not far behind their southern counterparts. Dealing with Depression and World War, rather than interstate piracy, were probably key triggering factors for northern state EDO creation.
The real life reality is these early state-EDO were embryonic, sometimes single industry dominated (agriculture, mining, tourism), and creatures of dominant interest groups such as the railroads. Conway’s 1966 publication asserts that 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 [we’re shocked]; functions were planned for political effect; administrative practices were poor; and programs were unprofessional. As a consequence results were poor”.[8] Conway later labels these state-level economic developers as “wine ‘em and dine ‘em pretenders”[9]. If Conway is correct, and I believe he is, early state-level programmatic effects were minimal.
Southern State EDOs in the Twenties
The 1920’s South, it would seem, empowered more than its fair share of state EDOs[10]. Southern state-level EDOs unlike other state EDOs at the time were aggressive promoters of industrial recruitment–not tangentially, engaged in promotion (such as Massachusetts). Moreover, Southern state-level EDOs were often key instruments of gubernatorial policy agendas. The South, as a region, had embarked on a policy to build a manufacturing base, closing the gap with the industrial North in large part through attraction. State-level promotion was a key component of the region’s industrial policy. Still, municipalities in southern economic development were not “creatures” of state programs.
Southern cities entered into vigorous competition to attract industry through tax exemptions, free sites and outright bonuses …. Savannah booster, Robert M. Hitch wrote in 1929 that ‘industrial enterprises are among the greatest builders of our cities’, and accordingly Savannah ‘has assiduously fostered the prosperity and expansion of the industries she has, and is pursuing an undeviating policy of encouraging the coming of others’. Savannah’s ‘undeviating policy’ included a five year tax exemption, free water and cheap labor.[11]
An important factor in southern state recruitment and promotion-focused state EDOs was the rural-small city nature of these states. To effectively complete, i.e. have access to sufficient financial/expertise resources/credibility to operate even a poor program; smaller cities and cotton/mill towns were supportive/dependent on a state leadership. Such programs also fit quite nicely into a stump speech by prospective governors. Redeemer industrial policy almost required southern jurisdictions to attract outside firms rather than “grow” such firms from the barren soil of their economic base. For these reasons, and also a consequence of its Privatist political culture, southern states were first to formally conduct promotional and attraction programs at the state-level. I share with Wright and Conway, however, the sense that 1920’s southern state-level recruitment initiatives were not page-turners. It is likely that southern state promotional efforts seemed more larger than life when perceived by their targets in the North.
State-level industrial recruitment efforts began only after federal policies (New Deal) had decisively reduced the regional wage differential, and they became quantitatively significant only after the last technical obstacle to full mechanization of the plantation had been broken through (the Great Migration). Southern boosterism had existed before at a local level in programs like Forward Atlanta movement of the 1920’s, or the town-building campaigns of the late nineteenth century. But these advocates were always a minority at the state level.[12]
Was the 1925 U.S. Chamber-led American Industrial Development Council fostered by southern rogue advertising and inappropriate “bonus” incentives? AIDC never singled out the south as a prime trigger, its formation predated establishment of southern state EDOs, and AIDC’s surveys demonstrate the issue was national in scope. I believe the 1920’s recruitment-piracy debate flows from (1) an inherent winner-loser characteristic of attraction programs that motivates losers to cry foul, and (2) their pervasiveness across the nation and centrality to chamber-style economic development. The 1920’s formation of southern state-EDOs raised certainly the ante. Intense state-level industrial recruitment, however, was a post-1945 phenomenon. During the war industrial recruitment was expressed through federal lobbying for diffusion of military production related industries—not promotional campaigns.
Business Climate
Climate refers to the combined effect on businesses and individuals of public policies, natural endowments and other assets that positively or negatively affect individual political, economic, social mobility and quality of life and/or business start ups, relocation, profitability, and economic growth [13]. The trick with definitions such as these is in the details—like how can one possibly measure this fairly, accurately, and without ideological bias. For many, business climate boils down some combination of low taxes, regulation that affects the other guy, good schools and hospitals, great weather and golf, and a job far away from the parental units. In recent years, good climates have been endowed with traits such as creative, diverse, green, sustainable and innovative. As the reader suspects, the business climate well gets deeper still.
So rather than engage in “deep well-diving”, at least at this point, how does business climate fit into our history. In the classroom any community can have a climate, but historically states are more associated with the concept—scale is one factor in this, and comprehensiveness of policy areas is another. Given Dillon’s Law states have advantages in both. So I treat business climate as an economic development strategy, mostly, but not exclusively, associated with states. Our broad definition allows for people mobility as well as capital mobility—and it’s a natural fit with competitive urban hierarchy. Climate allows for individual and economic growth—a bias against those who seek decline and unhappiness. In real life business climate includes strong doses of distorted statistics, deep psychological forces, blue and red ideology—and a dash of unintended, unanticipated consequences. That is to say there is great deal of emotion and what philosophers call non-rational expectations built into an individual or a business climate—that’s why businesses hire site selectors, individuals use Yelp, and I drink bourbon.
As intangible, amorphous and immeasurable as climate may be, it is real—and for my money may well be the most powerful of economic development strategies used today. Historically, individual perception of favorable climate accounts for immigration, the Great Migration as well as the Rise of the Sunbelt. For most businesses, low taxes, no unions, cheap/plentiful labor and light regulation, however controversial or unfair, beats the opposite hands down. States in the nineteenth and early twentieth century used climate to attract businesses, or visitors that would buy local goods and services. City builders used free land/transportation, oranges, and opportunity to bring in residents and future taxpayers. Manipulation and marketing of climate seems to be as instinctive to economic development as tax abatement. Sin is always more compelling than virtue.
In the last section we touched on what will be a long-standing and incredibly devisive climate-based controversy—the so-called low tax, non union, little regulated Southern business climate. Privatist to its core, the southern business climate makes Progressive jurisdictions see “red”. As seen in our initial chapter on the South, that business climate was both consciously designed and the seemingly inevitable consequence of what the South” was” during this period. It was both planned and natural—good climates are both. Perhaps a climate is composed of at least two elements: (1) a conscious policy initiative to affect private and demographic activity resulting in some form of economic development, and (2) an unplanned reflection of the economic, demographic-social and cultural realities of the jurisdiction. The underlying silent, but powerful and compelling, business climate reality, however, became obscured as attention focused on the relatively marginal, but in-your-face economic development programs and strategies. Right to work laws were clearly conscious initiatives with serious economic development implications—but, in our opinion, their real strength is they reflect the underlying realities of a state’s social and political culture.
An opening salvo of a planned state-led climate strategy, however was not fired by Mississippi’s BAWI, but by both Delaware and New Jersey. These two states have substantial claims in pioneering business climate economic development initiatives–and had a significant and long-term record of its success. Delaware recognized early that several unique features of its original state constitution provided favorable treatment to incorporate business (and tax them).[14] By the end of the nineteenth century[15] Delaware was already a leader in attracting the incorporation of business, especially industrial firms, thereby 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)[16]. 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 leadership commenced after 1913.
Anyway, back to Nevada (?) Nevada was a true pioneer in economic development. Nevada had also tried to compete with Delaware in corporate incorporation, and, in another climate initiative had repealed its inheritance tax (the only state in the union to do so). Consequently,Nevada had by the mid-1930’s become the official residence of millionaires seeking to avoid taxation. 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”[17]. In 1931, the state doubled its annual divorces. All good things must come to an end, because by 1931 both Idaho and Arkansas entered into the divorce competition. But Nevada being no weakling, responded in that year with new legislation lowering residence period to six weeks, maintaining its lead. In that same year, however, Nevada upped the ante by approving the nation’s first gambling law.
The Depression provided desperation needed for public approval, but the gambling initiative had been on the table earlier. Why gambling? Nevada in 1930 only had 91,000 residents–half the next least populated state, Wyoming. Nevada “was largely a desert wasteland“.[18] Advocates for legalizing gambling in Nevada pushed for favorable gambling legislation during the 1920’s. 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 and so in 1931 state legislators passed 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.”[19]
Do Herds Diffuse?–Horizontal Federalism
Because of Dillon’s Law economic development programs/tools require state authorization to legally exist. State empowerment is a necessary first step in sub-state economic development innovation. Over the years academic literature has attempted to understand the diffusion of states approving economic development empowerment legislation. Richard C. Feiock[20] summarizes the motivation-process for adoption of economic development policies:
… categorized under one of three different headings. The first set of explanations views the enactment of development policy as a response to the social and economic conditions of states and localities. The second type of explanation suggests that the organization and structure (degree of party competition or strong governor) of government institutions may either facilitate or impede adoption of development policy instruments. The third set of explanations focuses on the internal dynamics (politics) of state and local political systems and the organization of business interests (growth coalitions).
Our impression is that all of Feiock’s explanations are valid, but they are not mutually exclusive. I also have observed state herd behavior is more likely than not when an economic development “innovation” appears. The issue with state economic development empowerment legislation is how much importance to attach to it. Better to copy and empower sub-state jurisdictions to act than to let your competitor roam freely over the competitive landscape. If the arrow is used, fine–if not, fine also–it’s there if you need it and no one can say the state is negligent in matching the competition. States (like sub-state jurisdictions) hold an “arrow in my quiver” mentality in adopting innovations from other states and regions. Some states will use the arrow intensely; others less intensely; and still for others the arrow never leaves the quiver. The issue to me is not diffusion, but the intensity of innovation’s use after diffusion, and whether the innovation “travels well”, i.e. is a carbon copy of the original innovation, or tailored in some way by the imitating state.
[1] Jon C. Teaford, The Rise of the States: Evolution of American State Government (Baltimore, Johns Hopkins Press, 2002); Chapter 4.
[2] Teaford, the Rise of the States, op. cit. p. 105.
[3] Teaford, the Rise of the States, op. cit., Chapter 5.
[4] H. McKinley Conway Jr., Area Development Organizations (Atlanta, Georgia, Conway Research Inc, 1966).
[5] Cobb, The Selling of the South, op. cit., p.64.
[6] Peter K. Eisinger, the Rise of the Entrepreneurial State: State and Local Economic Development Policy in the United States (Madison, Wisconsin, The University of Wisconsin Press, 1988), p. 16.
[7] James C. Cobb, the Selling of the South, op. cit., p. 64. 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).
[8] H. McKinley Conway Jr., Area Development Organizations, op. cit., p. 29.
[9] H. McKinley Conway Jr., Area Development Organizations, op. cit., p. 30.
[10] There is a loose end. Eisinger adds Maine to the list of state EDOs created during the 1920’s. Maine is not cited by Cobb—and the source cited by Eisinger is Donald Gilmore’s, Developing the Little Economies (1960). Our copy of Gilmore does not confirm Maine created a state-level EDO in these years. A History of Maine Economic Development conducted by Brookings Institution does not mention this agency, although it would have been relevant. The multi-function state EDO of present-day Maine follows from a 1975 state EDO. There were, however, previous state-level IRB bond-issuing agencies created in the early post-War periods. Peter K. Eisinger, the Rise of the Entrepreneurial State: State and Local Economic Development Policy in the United States (Madison, Wisconsin, The University of Wisconsin Press, 1988), p. 16.
[11] David R. Goldfield, Cotton Fields and Skyscrapers: Southern City and Region (Baltimore, Johns Hopkins University Press, 1982), p. 188.
[12] Gavin Wright, Old South, New South, op. cit. pp. 258-259.
[13] While I changed it substantially, some of the wording was drawn from Joseph L. Bast, Ten Principles for Improved Business Climates, the Heartland Institute.
[14] See Lewis Black Jr., “Why Corporations Choose Delaware” at www.delaware.gov; Alan Trachenberg, 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
[15] 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.
[16] See Robert E. Wright, “How Delaware Became the King of U.S. Corporate Charters“, www.bloomberg.com, June 8, 2012, p. 2.
[17] Teaford, the Rise of the States, op. cit. p. 139.
[18] Teaford, the Rise of the States, op. cit, pp. 138-141.
[19] Teaford, the Rise of the States, op. cit. p. 141.
[20] Richard C. Feiock, “The Adoption of Economic Policies by State and Local Governments: A Review“, Economic Development Quarterly, volume 3, Number 3 (August 1989), pp. 266-270
Ron W. Coan 