THE SECOND WAR BETWEEN THE STATES: THE SHIPS COLLIDE
In the midst of this fiscal turmoil, Business Week devoted a special issue entitled “The Second War between the States” (May 1976).8 The article rang out like a fire bell in the night. The first impulse was to place blame on who started the fire. Southern competition surfaced to the top of America’s 1976 policy agenda. Thoughtful observers, with a few years of hindsight, knew the problem was more complex than the so-called “southern branch recruitment strategy”—which by then was 40 years long in the tooth. In the best of traditions, we shot first and thought later. The problem for our history, however, is the first irrational shots became engrained in our professional and Policy World legacy. In the process, Big City fiscal collapse, suburban growth, and Big City policy system change all became “smushed,” along with allegations of southern piracy (with federal help) into ED’s institutional memory.
How Economic Development Became Ground Zero
It probably began with a Times article by Kevin Phillips that popularized a Nixonian “southern strategy” (Phillips, 1969).9 Phillips asserted that Nixon’s victory resulted from his “southern strategy” (somewhat dubious in that Nixon lost the majority of the South’s 1968 electoral votes to George Wallace). The southern strategy rested on the increase of conservative Republican Sunbelt voters. Impetus behind the southern strategy was a repudiation of the Great Society (and the Civil Rights Movement) (Boyd, 1970). On its face, economic development was not a central player. Nevertheless, the 1972 landslide results (70 percent of the Deep South vote for Nixon, victory in every state but Massachusetts) proved Phillips more right than wrong—although the Democrats retained control of Congress. The political rise of the South was a punch to northern faces.
If regional change meant the rise of the West, that was one thing. If it meant the rise of the South, that was quite another. Regional change was perceived, albeit incorrectly, as mostly southern aggression: a new Civil War fought not with bullets but with tax abatements, IRBs, right to work laws and state and local incentive deals that lured highly visible automotive firms from the North and Midwest to the South. Arguably the opening salvo in this new North–South war was 1976 New Stanton PA Volkswagen Plant bidding war—probably the first public/media “bidding for firms with tax abatements.”
Pennsylvania competed for site location with two sites in neighboring Ohio. Pennsylvania “won.” The state bidding war culminated in the largest incentive package America had ever seen: $71 million (1970 dollars) in tax abatement, highways, rail improvements and assorted (some say sordid) business incentives. Volkswagen invested nearly $250 million to produce the Volkswagen Rabbit C, but simultaneously it also purchased an American Motors plant in South Charleston West Virginia and an auto air-conditioning plant in Fort Worth Texas—each with state incentives. The southern plants captured the media attention and notoriety. The South somehow had won the bidding war. Ironically, by 1984 all three plants were either sold or closed. In 2016 the New Stanton plant sits closed and empty.
Only a scant year later Honda, in 1977, commenced a successful negotiation for a massive incentive deal to build a motorcycle plant in Marysville Ohio. That was the opening salvo in what would later be called the post-1980 “Auto Alley,” stretching from Great Lakes to the Gulf of Mexico (Kilner and Rubenstein, 2010). In any case, in both instances the incentive war was initiated by foreign companies and states competing for foreign direct investment (FDI). The blame for bidding wars was placed on the doorstep of the rising and aggressive South by northern politicians (Moynihan, 1977), the Policy World and the media. Highly publicized works by Kirkpatrick Sale’s popular 1975 book Power Shift timed perfectly with the politically tumultuous post-Watergate years. A Policy World flurry of books proclaimed the existence of regional change and regional competition (Goodman, 1979).
Who’s to Blame?
The widely quoted, somewhat sensational Last Entrepreneurs in particular cemented the image of anti-union southern states peddling tax abatements and just about every other ED subsidy to foot-loose greedy capitalist firms. Goodman (1979, pp. 33–4) argued that southern states “are selling not merely climate or regional culture, but an ever-expanding package of tax breaks, subsidized job training, public financing, and an anti-labor, anti-environmental control climate.” In this war for manufacturing, southern states were labeled “the last entrepreneurs”—a euphemism for pirates. With the exception of the last two incentives, however, the same could be said for northern and midwestern states as well. The reality was an arms race had started long before the actual fight began.
In these pre-deindustrialization years southern states were perceived as the cause of the “increasingly virulent plague of plant closings in the industrial Northeast and Midwest” (Goodman, 1979, backcover). While not without its ideological and pro-labor baggage, The Last Entrepreneurs conveyed a dynamic that had developed after the Second War: state/local governments, regardless of the region, were engaged in a deadly serious competition for migrating business—each for their own reasons. But something had changed. Economic development was always attacked for its “dealmaking,” incentives, bidding wars and inter-jurisdictional competition. It had always been so, of course, but these nefarious activities were no longer confined to the municipal level. The states were now involved—in a very big way. And the competition captured heavy-duty media and Policy World attention.
The numbers were numbing, and the alleged implications so dear to the future—and to the fate of political officials and career economic developers. When confined to municipalities, deal-making and incentives were tied to the urban competitive hierarchy; much less so when deal-making shifted to states. Within the profession, the importance—and the status—of deal-makers changed the character, priority and tone of economic development policy. If in the past retention as a strategy held a slightly greater priority, in these years it began its all-too-rapid descent into a sideshow. Capturing big foreign companies was a matter of public prestige—and any loss public shame wrapped with the ribbon of irresponsible bidding wars.
To make matters even more complicated (and persuasive) the federal government, controlled by Sunbelt Presidents (Johnson, Nixon) and southern congressional committee chairs, had fed federal funds into huge amounts to game-changing new industries such as space travel and national defense (ACIR, 1977). A raft of serious policy and analytic literature documented the seriousness and impact of federal funds in the rise of the Sunbelt (Perry and Watkins, 1977). These works described a political/economic/ social zero sum game in which a negligent North was upstaged by the cagey southern country bumpkin (Editorial, 1976). The task, from the northern and midwestern perspective, was to cut off the spigot of federal spending to the South and reroute it to the North and Midwest, to the central cities.
Federal tax and spending policies are causing a massive flow of wealth from the Northeast and Midwest to the fast-growing Southern and Western regions of the nation … The states at the receiving end of high federal outlays also tend to be those that tax their own citizens least for state and local government services. On the other hand the balance of payment situation generally is adverse in the Northeast and Midwest, where population is stagnant or declining, where unemployment is the most severe, where relative personal income is falling and where the heaviest state and local tax burdens imposed. (Editorial, 1976)
The region-building war-production initiatives and the heritage of military installations and defense spending that followed after the war were critical to the South: Cape Canaveral and the space industry. Federal grants in aid formulas overall were transformative. Make no mistake, federal spending had played a major role in the southern economic transformation. But it also might be noted that no one has counted the benefits set by hegemonic, eastern, Big City corporations, their Pittsburgh Plus pricing et al. and its effects on the more “colonial” regions of the nation. There are two sides to every coin.
Economic development had now become politicized, openly politicized, and the politicians assumed leadership in the initial phases of the second war. The solution to the problem of federal spending was, not surprisingly, federal spending. While economic development was the alleged cause of the Second War, the real underlying tension was the North/Midwest fear that irreversible regional economic change was in process and had to be curtailed or reversed. This demanded resources they did not have. The South (and West) sought the same to protect their new-found growth machine. So the battleground of the second war would not only be the deal-making for mobile industry, but would also be the policy and funding found only in the Oval Office, halls and chambers of Washington.
Hitherto the North had been in undisputed economic ascendency. By 1976, with its central cities “hitting the bottom,” it was likely the North/Midwest’s hegemony was threatened. The time had come to fight back. Viewed from the other side of the Mason–Dixon fence, the “worm had turned.” The two-century pattern of northern economic and oft-times political dominance was visibly changing in the South’s favor. That regional change also included a sort of “coming out” of the West as well, however; but the rise of the South was truly galling—and unforgiveable—demanding special treatment. One may wonder if there was something else going on as well as simple regional change.
Was the Second War between the States a war between the two ships of economic development?
Washington Regional Economic Development Advocacy Policy
Early in 1973 the New England Congressional Caucus formed. As described by Rep. Silvio Conte (R. Conn), the reason for its formation was that “the region has been repeatedly unfairly treated on key economic interests like oil imports, rail freight rates, and defense contracts”; Rep. James Burke (D. Mass) wanted the focus to be “the ailing textile, shoe and electronics industry (Route 128).” Banks and fuel oil firms funded a research organization, the New England Economic Research Office.10 At that point, middle Atlantic/midwestern states were not yet organizationally joined together. The 1976 battles of New Stanton and Business Week, however, tipped the scale. In June 1976 seven governors (New York, New Jersey, Pennsylvania, Connecticut, Rhode Island, Massachusetts and Vermont) formed the Coalition of Northeastern Governors. The spirit of the coalition was expressed by Pennsylvania’s Governor Sharp: “It was largely tax dollars from our urban states that built the Tennessee Valley Authority. Now we find the lower cost of TVA power used against us to attract our industries.”11
In the same year, 1976, the Northeast–Midwest Congressional Coalition began life as a caucus in the House of Representatives (18 states). In the following year the Northeast-Midwest Institute was formed. Cobb reports that:
by February 1979 twelve coalitions had launched efforts to redirect federal monies to the Northeast and Midwest. Their first visible success was adjustment of the CDBG formulas to “direct more monies into northern cities and created the Urban Development Action Grant Program (UDAGs) to aid the nation’s most severely distressed urban areas. (Cobb, 1993a, pp. 198–200)
“It was the proliferation of regional interest coalitions in the North that led southern political and economic leaders to decide it was they who needed to be organized,” argued Cobb.
Not so quick. The South it seems had actually united before the Northeast Governor’s Coalition. As early as December 1971 (two years before the New England Congressional Congress) nine southern governors signed into agreement the Southern Growth Policies Board (SGPB, presently 13 states); in 1973 its staff and research functions were located in the Research Triangle. To be fair, SGPB initiatives and tone were defensive, policy analytical and internally focused. Yet southern congressional leadership through careful attention to detail reshaped Great Society and federal ED programs to increase funds to southern geographies. Over the seventies and subsequent decades the SGPB developed a southern “set of facts,” research and policy—as the Northeast-Midwest Institute did for the North and Midwest. Regional political and economic conflict was now very real and settled in to stay. In 1978 Jimmy Carter tried to moderate the regional division with a White House conference on “Balanced National Growth and Economic Development.” At that conference a panel on “Sunbelt– Frostbelt” included two important contenders, Daniel Patrick Moynihan and Governor George Busbee (Georgia), chair of the SGPB. Each pleaded their respective cases.
Below the Fold: The Perfect Storm Crashes into States and Municipalities?
All this “fussing ‘n’ feuding,” herds and quivers—and the threat of decline—brings out the economic developer in us. There is no single “cause” clearly associated with the raft of EDOs that were formed or reformed during the seventies. It varies to be sure, especially in the timing; but multiple dynamics seem to be in play. Hierarchical competition, both urban and metro, and now regional change and competition are obvious stimulants, but so is the decline in manufacturing and the rise of technology gazelles (see below). The arrival of foreign investors (FDI), notably absent in the fifties and even sixties, stirred up juices within each jurisdictional economic base. The collapse of Big Cities and their policy systems on top of continued suburbanization, neighborhood change and the onslaught of the baby boomers, and the shift away from UR to other ED strategies/tools/programs, all entered into the nexus to form or to rejigger EDO and ED policy/strategy.
Research/survey by Humphrey et al. (1989a, b) found that some 60 percent of Local Industrial Development Groups (LIDGs)—not equivalent to our EDO, which is considerably broader, including chambers, authorities or CDCs for example—were established in the 1975-85 period, and that two-thirds were located in “northern industrial states” such as New York, Pennsylvania, Michigan and Ohio do confirm significant formation of local EDOs in our hegemonic Big City states, and assert factors such as the 1973 oil embargo, global competition and “accelerated industrial restructuring of the 1970s and 1980s were responsible. A survey of their CEOs found that the reasons for LIDG incorporation were: (1) coping with unemployment; (2) competing effectively with other places; (3) and taking advantage of state and federal ED programs (Humphrey and Erickson, 1993, pp. 111–12). A literature concerning formation of EDOs developed in the middle–late 1980s after Bluestone and Harrison’s (1982) crucial work on deindustrialization suggests Big City states formed EDOs mostly in response to changes in their jurisdictional economic bases. We saw evidence of this, however.
But wide-spread creation and restructuring of EDOs characterized the seventies. Three distinct patterns emerged. States rejiggered their EDOs and added more arrows to their quivers. Attraction, incentives and deal-making captured the headlines, but TIF usage increased and IDBs and retention programs proliferated. At the local level counties entered slowly into ED, particularly in the West and South. More prominent was the turn to municipal government from chambers. Municipal EDOs, which, like state governments, were reformed and reorganized, empowered with new tools and programs. Attraction and retention remained pillars of local ED policy/strategy, but experimentation and an appreciation for the rise of technology was also apparent. Business retention, in particular, required states and locals to develop similar tools and techniques to counter alleged advantages and incentives offered by the recruiting/ attracting jurisdiction.
For example, Pennsylvania leaped ahead of New York by five years by approving in 1967 its Economic Development Financing Law empowering municipalities, counties and townships to establish economic development authorities. These authorities “construct, improve and maintain industrial, specialized, or commercial development projects for the elimination or prevention of blight … borrow money and issue bonds … exempting the property and securities of such authorities from taxation [tax abatement].”12 Pennsylvania’s Mid-Atlantic pioneering entrance into the arms race prompted New York, five years later, to reform its state programs and EDOs. In nearly every state, Big City or small city EDOs are being formed or reorganized. The ED landscape, both structural and policy, was clearly in flux.
EDOs developed similar incentive and business climate packages. We do not lack for examples. Consider a case: the Millers Falls Company in Greenfield (rural western) Massachusetts, as relayed to us by Robert Goodman (1979, pp. 62–4). Since 1868 Millers Falls made hand tools in the small town of Greenfield Massachusetts. In the fifties it employed 1300 workers, one of the largest manufacturers in western Massachusetts. Bought by Ingersoll Rand in 1962, 1976 employment declined by nearly 50 percent and the company announced it was looking at sites in North Carolina and nearby Connecticut. Governor Dukakis got in his limo and dropped into town. The company president decried Massachusetts’ high taxes/wages, so Dukakis jaw-boned the union, which after three months’ negotiation accepted lower wages/benefits. The local union organizer summarized the deal as: “We feel we submitted to extortion … The company says you submit or we throw you out and turn this town into a ghost town.” The state offered $285,000 in state money to secure another $775,000 from EDA to prepare a new building site.
Meanwhile Deerfield, an adjacent town, offered the company 30 acres, ten more than the company was asking for. Deerfield also agreed to use its tax-exempt status (IDB) to help Millers Falls raise $1 million at low interest to pay for part of a new $3.7 million plant: “We decided to give the Sunbelt a run for its money,” said the chairman of Deerfield’s industrial development commission (Goodman, 1979, p. 64). So the company moved from the city of Greenfield to the town of Deerfield with a pretty robust incentive package in hand. The company, however, relocated to New Jersey in 1982 as part of a leveraged buyout. The original Greenfield site is now a “Museum of Industrial Heritage.” To our best knowledge, there was never a proposal from a southern state or jurisdiction to the firm. Yet, in the minds of the participants, they were competing with the South.
Cobb presents data suggesting that by the middle 1970s:
if the southern states had once provided more financial support for such [industrial development promotion] programs than did states elsewhere, their competitors had all but caught up by the early 1970s. In fact, Pennsylvania’s per capita investment in development was more than 6.5 times the southern and national average. The southern states maintained only a slight edge in the percentage of the total state budget devoted to industrial promotion. (Cobb, 1993a, pp. 199–200)
Ron W. Coan 