The State in Sub-State Economic Development
The years between 1865 and 1933 were years of development, transition, and evolution for states as they were with municipal governments (in this period no one talks about counties). Government, in general, with the Congress as an exception, was undeveloped and thoroughly un-modern and pre-industrial. Large swatches of the West were territories and not even states through much of the transition era. Also, in hindsight, we tend to forget that many states that were states in this transition era were pretty new at it and that population levels of many states are laughable by today’s standards.
Chapters 2 and3 have revealed that a good deal of what went on during this period involved securing some functional autonomy and independence of municipalities from their states and then in the post-1900 period an adjustment of earlier conceptions-structures of municipal government to a management-style which reflected post-industrial realities and technological-physical innovations. Before government, as a government, could play a role in economic development policy and implementation, it first had to create structural integrity and functional capacity. This is an era of Privatism and boosterism for a reason–the private sector was cutting edge, more robust and the leader in American economic development. Talking about state government during the transition era is not something a writer would salivate about.
Accordingly, we will spend more effort in this section on providing the context underlying the state role and dynamic in sub-state economic development. The opening salvo in our perspective regarding the state dynamic is a pretty obvious, but fundamental, assertion that sub-state economic development as a policy area-system is inherently decentralized and driven by local jurisdictions, political cultures, politics, economic base, and local political institutions. The state as the parent of sub-state governance certainly can shape and otherwise affect local structures and policy-decision-making in quite substantial ways, but they do not control the content of local policy-making in any meaningful sense. Sub-state economic development policy-making, despite Dillon’s Law, is autonomous from state economic development policy-making.
Secondly, because of Dillon’s Law, almost all economic development programs and tools at some point and in some way require state authorization to exist and legally function. We learned with BAWI in Tennessee IDBs that this rule can be breached if no one cares enough to compel the local government to behave. Still in our contemporary day and age, state empowerment is a necessary first step to sub-state economic development innovation. Some academic literature has attempted to understand the diffusion of states approving economic development empowerment legislation. Richard C. Feiock[1] summarizes the motivation-process for the 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 regarding diffusion is that all of Feiock’s explanations can be valid and they are not mutually exclusive, but we also observe that a sort of state herd behavior is more likely than not. The larger issue with state economic development empowerment legislation is how much importance we should attach to it. Simplistically perhaps, states (like their sub-state jurisdictions) tend to adopt an “arrow in my quiver” mentality in adopting innovations from other communities, states and regions. 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, in fact 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. Some states will use the arrow intensely; others less intensely and still others the arrow remains in the quiver.
So the Curmudgeon cautions that too much can be made about state empowerment legislation. Usually, state legislation does not require local and county jurisdictions to implement a program or tool–decision-making as to whether to participate in that program or tool is local and the tool may never be exercised by most jurisdictions. Within the confines of state legislation, the local jurisdiction may approve the program or tool but hardly, if at all, ever use it; other jurisdictions could make the program-tool a cornerstone of their policy system. Variations of policy implementation within the boundaries of the state statute can be very real or conversely evident but meaningless. The point is that what goes on in state economic development empowerment legislation at the state capitol may well stay in the state capitol and play quite differently at the sub-state levels.
Our concern with the state role in sub-state economic development is more concentrated in the state’s evolving a willingness and a capacity to exercise an economic development policy system, including structures, separate from and independent of sub-state and federal jurisdictions. This separateness and independence from sub-state jurisdictions can also be somewhat complicated–especially in this transition period. The issue, again, surrounds Dillon’s Law. There was a considerable rural anti-urban bias evident in state legislatures during these years. During this time period, and continuing into the 1950’s, states and state legislatures often exhibited a reluctance to empower municipalities (big city immigrant political machine-dominated especially) or political rivals. Some state legislators actually would set up their own machines or factions based on their ability to control state approvals and policy implementation. Much of this dynamic was more personality-based than a state assuming a separate and independent role in sub-state economic development policy and program. Much of this personalism will work its way out of the system after the 1960’s, but some remains to this day.
Yet another complexity is defining just what constitutes a state-level EDO. Is a state highway department or state energy department a state EDO? They both certainly have serious economic development implications and may even operate clearly identifiable economic development programs. The state provides a wide variety of various infrastructure programs and these can fuel city-building (suburbanization, for instance) and be vital components of a state business climate. The same can be said for many state regulation and tax programs. If we want to throw a wide net into our definition of state EDO, then many state agencies are EDOs. Employing this wide net definition, states in the transition era–especially between 1910-1930– became very active in economic development with major state efforts in highways, transportation-ports, airports, education and even pollution control. State taxation, budget and finance industries (and regulatory agencies as well) were also major players in this period. If anything that has an economic development effect, however, is an EDO, then what is not? The Curmudgeon believes a distinction between economic development-related agency and a primary actor in an economic development policy system is in order.
In this history actors and agencies which are primarily economic development in function and purpose are our primary concern. To be sure we must note the involvement and role of economic development-related agencies, such as state highway departments, but as a criterion for evaluating and understanding an independent state-level economic development policy system primary state EDOs are the fundamental units of analysis. States, to be sure, can have more than one primary state EDO–and it is conceivable that a state may have no identifiable state EDO at all. In fact, during the transition era there are NO clearly identifiable primary EDOs in most states.
Again complications flourish. Many future state EDO’s will emerge from departments such as Commerce (which in this period are more likely to be tourism departments or, perhaps surprisingly, Agriculture departments. In an early twentieth century state with a dominant agricultural economy an Agriculture Department could be legitimately considered as a primary economic development actor? The arrival of planning agencies at the state level during this transition era complicates this issue still further as planning in this period can directly include economic development-relevant activities and programs.
In later chapters “Development” Departments will emerge. Development Departments usually include many economic development programs, but will often be heavily laced with land use and planning-related divisions and programs which often dominate. By the 1970’s state Labor Departments will often administer and serve as the primary state EDO in workforce strategy. In short, by the end of this history states will have developed an economic development policy system in which multiple primary state EDOs participate and which resemble an early “picket fence” federalism metaphor. No matter the form, however, these multiple state EDOs will seriously impact the direction and intensity of the state’s sub-state economic development delivery system.
There may be clearly identifiable state economic development programs during this period, but pure, single function state agencies devoted to economic development are rare indeed. The closest we get are Departments of Agriculture and State Tourism Departments. We acknowledge the potential, perhaps likelihood, that future research may discern more pure state-level economic development than we see in this history. With the exception of Departments of Agriculture and a few examples of state tourism divisions, we do not see evidence supporting a general trend toward a more pure state economic development policy system until the 1950’s. As always, there will be exceptions and time-specific blips, but in most states the economic development functions and programs will be diffused and dispersed among a number of agencies and departments. As such they will lack coherence as a formal state-level economic development policy system–until somewhat later in our history.
Accordingly, in our future treatment of the independent state role in economic development policy we shall conservatively restrict our prime focus to the following types of activities and programs:
- The evolution of single function economic development agency(s) or department(s)
- The evolution of economic development programs and strategies within a multi-function department of agency which serves as the state’s lead economic development role
- The establishment and empowerment of an economic development strategy-program-tool implemented by sub-state EDOs created specifically for implementation of the program
- State regulation (including disempowerment or termination) of sub-state economic development and establishment of economic development programs in which critical decisions are made by the state-level authority and sub-state EDOs or jurisdictions serve as referral, application, outreach, marketing or servicing functions
- The evolution of economic development programs, activities and strategies lodged directly within the state CEO (governor’s) office
We shall, of course, continue to comment and note economic development-related initiatives by other agencies and departments, especially associated with key strategies such as infrastructure, workforce and business climate as relevant to the development and evolution of our profession and sub-state economic development.
Transition Era State Pre-Economic Development: Seedbed and Business Climate
In addition, each state will, for defensive reasons and to take advantage of federal programs and resources, embark on its own distinctive path into other public policy areas–some of which are closely related to economic development (highways, ports and even railroads–not to mention education). In the later years of the nineteenth century, states will forced to “modernize” their structures, capacities and powers as well as augment their own-source revenues. All this will have a profound effect on sub-state economic development. So gingerly during these pre-twentieth century years, states, some more than others, will start down their road toward establishment of their economic development State Sub-State System (our SSS).
Over the next one hundred years or so, the SSS will evolve to be, arguably, a principal feature of our contemporary economic development system. In so doing, the transition years will see evidence of a reinterpretation–battle between federalist and anti-federalist beliefs and practice–away from local and municipal governments to an increasing reliance on state governments during the twentieth century. As discussed previously, our perspective treats both the federal, and now the state governments, as a separate and distinct “player” in the economic development policy process. Privatist and Progressive sub-state jurisdictions and economic development policy systems simply have had to adjust to these new governmental players.
Jon C. Teaford in his history of the evolution of state government[2] suggests that the forces which exerted such tremendous pressure on municipal government to produce the “city efficient” also walloped state governments as well–during the very same time period. As explained earlier, these forces are usually subsumed as the impact of Progressivism, but from our perspective they are much more Privatist and business-led than the social reformer and even “city beautiful” Progressivism which we will discuss in the next chapter. If so, “managerial privatism” found a home in the state capitols as well as the nation’s municipalities.
Accordingly, following our logic state governments in the early twentieth century are adapting their structures (and their politics) and decision-making to the new realities of a then-modern early industrial economy. Budgets, planning, and above all administrative reorganization (a rationalization of the administrative hierarchy and structure of agencies). More than anything, new types of agencies, the Cabinet Agency and regulatory Commissions, for instance are being created (somewhat experimentally and incrementally) and formerly helter-skelter agencies are being consolidated and placed under some managerial control–usually the governor’s office, but sometimes the legislature. Raising revenues and financing through bond issuance were key innovations during the period. Without sufficient financial capacity and management evolution of other policy areas was impossible. The legislatures are also modernizing their procedures and structures as well. In essence, it is premature to expect state leadership of economic development in this period as states, like municipal governments, are finally establishing structures and administrative capacity for the first time in their history. Their ability to assume policy leadership in economic development will develop in later years–not in this period.
Still our earlier mentioned dilemma regarding economic development-related initiatives versus primary economic development initiatives leaps out especially during and following the 1920’s. State governments did address and significantly deliver meaningful economic development-related infrastructure during this period (and to this very day). After the 1916 passage of the Federal Highway Aid Act the few states that did not already have state highway agencies created them. World War I sped up the need for enhanced logistical and transportation improvements and by the early twenties, with the arrival of the Model T, highway construction was on steroids. While critics of suburbanization will later contend this highway sprawl creating trend is chiefly a post World War II phenomenon, the street car suburbs and even municipal bus systems (these being their golden years) are now on the defensive. The “automobile age” is now upon us. Yet, the pace of modernization and infrastructure was quite uneven.
Between 1921 and 1931, the surfaced mileage under state control in the United States rose from 84,000 to 258,000 …. 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 hand the task…[3]
This is also the era of the development of state parks (tourism from the economic development perspective). “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[4]. 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.
Southern-based state and municipal promotion and advertising took a turn which commenced at least as early as the 1920’s: “follow the sun” vacation tourism. Certainly resort tourism had been significant for several generations, but that promotion was almost strictly private: railroads, hotel cooperatives, and other, usually local, private interests. In the 1920’s private tourism still flourished but it no longer enjoyed a monopoly and tourism promotion shifted from coastal resorts to “warm and sunny” coastal cities. For example, the Flagler System’s (founder of Miami and a string of Florida cities) (and headquartered in New York City), flaunted its Florida East Coast Railway as the way for East Coast residents to travel to the “land of sun-bronzed men, beautiful women, eternally youthful—working, playing and actually living in the fullest sense of the word”. So visit “St Augustine, Ormond, Daytona Beach, Miami, the romantic Keys and finally Key West … Modern hotel accommodations to suit both your taste and purse … Through Pullman service to all East Coast Resorts”.[5] In the 1920”s the new raft of state EDO’s (Florida, Virginia, North and South Carolina, Alabama) created during that decade, especially the Florida state Bureau of Immigration added their two cents to southern tourism marketing. Southern-based promotion initiatives were, of course, joined by California cities as well during this period. If we were to focus on tourism alone, one might argue that the rise of the Sunbelt had begun as early as the twenties.
For our money, however, the opening salvo of state-led economic development was not fired by Mississippi’s BAWI or Florida’s state tourism, but by Nevada’s divorce and gambling economic development initiatives of the early 1930’s. Sixty years before gambling became a key economic development tool nationally, and arguably among the first states to consciously approve a notable business climate regulatory initiative, Nevada was a true pioneer in economic development. Certainly it was the Depression that provided the critical mass of public approval which supported these initiatives, but early pre-Depression advocacy was already in operation. Why the initiatives? By 1930, Nevada had 91,000 residents only half that of the next least populated state, Wyoming. Nevada “was largely a desert wasteland”.[6]
Having said this, we would be wise to “fess up” and admit that both Delaware and New Jersey have substantial claims in pioneering business climate economic development initiatives which pre-dated Nevada–and had a significant and long-term record of success. Critics of later Southern cheap labor and right to work business climate initiatives and detractors of the ever-constant tax abatement, tax loopholes and incentive deal-making seemingly ignore the real state pioneers in business climate initiatives were the very blue states of New Jersey and Delaware.
Delaware recognized early on that several unique features of its original state constitution provided favorable treatment to the incorporation of business.[7] By the end of the nineteenth century[8] Delaware was already a leader in attracting the incorporation of business, especially industrial firms, and 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 was actually the leader in this nasty attraction of business incorporation and other states were actively competing as well (Maine, South Dakota and West Virginia, as well as the territory of Arizona)[9]. In 1913, however, reforms passed by the Woodrow Wilson administration came into effect (Wilson argued that New Jersey no longer needed the revenues) and took New Jersey out of the incorporation business. Delaware’s leadership would commence after 1913.
Anyway, back to Nevada. Previous to 1930 Nevada had also tried to compete with Delaware in corporate incorporation and also had repealed its inheritance tax (the only state in the union to do so). “Consequently, it (Nevada) had (by the mid-1930’s) become the official residence of some millionaires seeking to avoid taxation. But its chief-state-induced enterprise 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[10]. In 1931, the state doubled its annual divorces. All good things must come to an end, it seemed 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 the residence period to six weeks and therefore maintaining its lead. In the same year, however, Nevada upped the ante by approving the nation’s first gambling law.
Advocates for legalizing gambling in Nevada had been pushing for favorable gambling legislation during the 1920’s. One advocate, a 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 of Commerce surveyed its membership and uncovered a two to one support of legalized gambling and in 1931 state legislators agreed and 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 (thank you Bugsy) sin would prove a mother lode far more lucrative than the state’s legendary Comstock Lode.”[11]
There is no doubt in our mind that we have opened up a can of worms regarding state competition over favorable business climate for state-led economic development targeted segments and industry-sectors during the nineteenth and early twentieth century. Before there were economic development departments, there was state business climate competition.
[1] 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
[2] Jon C. Teaford, The Rise of the States: Evolution of American State Government (Baltimore, Johns Hopkins Press, 2002); see Chapter 4 especially.
[3] Teaford, the Rise of the States, op. cit. p. 105.
[4] Teaford, the Rise of the States, op. cit. see Chapter 5.
[5] Stephen V. Ward, Selling Places, op. cit. p. 64—quoting directly from a Flagler Systems ad
[6] Teaford, the Rise of the States, op. cit, pp. 138-141. We are indebted to Teaford for the entirety of our description of Nevada divorce and gambling initiatives.
[7] See Lewis Black Jr., “Why Corporations Choose Delaware” at www.delaware.gov; See also, Alan Trachenberg, The Incorporation of America: Culture and Society in the Gilded Age. We are heavily indebted in this section to David McBride, “General Incorporation Laws: History and Economics” Duke Law Review at http://www.law.duke.edu/journals/lcp
[8] Its original law was approved, to our best knowledge, in 1883. See Katharina Pistor, Yoram Keinan, Jan Kleinheisterkamp and Mark D. West, “The Evolution of Corporate Law: A Cross Country Comparison” a background report for the World Bank and included in World Development Report 2002: Building Institutions for Markets (2001). This is available online through www.upenn.edu. P. 808.
[9] See Robert E. Wright, “How Delaware Became the King of U.S. Corporate Charters”, www.bloomberg.com, June 8, 2012, p. 2.
[10] Teaford, the Rise of the States, op. cit. p. 139.
[11] Teaford, the Rise of the States, op. cit. p. 141.
Ron W. Coan 