How to Prevent a Bidding War Among States

Today seems to be the day for specious claims and vapid prescriptions. Maybe they’re assuming that no one notices over the weekend. Under the category of vapid prescriptions we have this op-ed from Edward Alden and Rebecca Strauss at the New York Times on the sad strategy of producing growth in your own state by luring businesses away from other states:

Such competition among states is all too common. Each year, state and local governments in the United States spend more than $80 billion, or roughly 7 percent of their total budgets, on tax breaks and subsidies to attract investments from auto companies, movie producers, aircraft makers and other industries. Last year, Washington State granted a subsidy package to Boeing worth $8.7 billion — the largest to a single company in American history — to keep Boeing from moving production to South Carolina.

From a national perspective, this is about as dumb as it gets. Taxpayer money is wasted to pay off companies that would most likely have invested somewhere else in the United States. State governments would be better off if they collectively ended the handouts and competed for business in other ways, such as making investments in infrastructure or education or offering lower overall tax rates. But no state wants to stop first and risk losing jobs if other states don’t follow suit.

That’s a genuine problem but as is the case with so many op-eds the proposed solutions are genuinely vapid. The prescriptions are to explain to the voters the cost of the inducements and for states, for reasons they don’t explain, to enter into bilateral agreements.

Let’s take the example of companies that re-locate from California to Texas. Do Mr. Alden and Ms. Strauss genuinely believe that explaining the costs to Texas voters (in many cases, none) and California entering into a non-compete contract with Texas will solve the problem? Companies move from California to Texas for the more business-friendly climate offered without further inducements by the Lone Star State. You can salute the benefits of California’s more extensive regulations or explain how dearly California needs the tax revenue to support its commitments but I doubt those will be particular inducements either to Texas voters or companies.

Further, governors who court out-of-state businesses are fulfilling their fiduciary responsibilities to the voters that elected them. The governor of Texas has a responsibility to the voters of Texas, not the voters of California. That Texas voters will re-elect or reject him based on what he does for them is an additional inducement.

The brutal reality is that states going out of their way to lure businesses from other states will be an attractive strategy as long as economic growth is as low as it has been since the late recession. As long as re-allocating economic growth among states is an easier chore than producing growth within states, we should expect states to encourage the behaviors that the authors decry.

10 comments… add one
  • steve

    The business friendly, low tax policies have been in place for many years and were not that successful until recently. I think you are correct that in a low growth environment, they become more important. However, I would look at this more broadly. We are beginning to look at a battle between two philosophies. Will we, as a country, have more economic success with a :Texas” model where25% of the population has no health insurance and few top level universities. At present, they can bring in kids from CalTech and MIT. Other states can make the investment in education and the Texas model states can benefit. However, if the states that make those investments can no longer afford to do so, then how do we as a nation perform?

    Lest I forget, it will not just be the quality of students produced, it will also be the quality of research we will lose. OTOH, it may just be that we have to accept the Texas model on the lower end of the income ladder. If we want to compete economically, perhaps low income workers will have to do without medical care and quality education for their kids. Maybe life for those people doesn’t need to be acceptable by most American standards, just better than it is in third world countries. Guess we will find out depending upon which model wins. At present, I would say the Texas model has a major advantage in the short run as they recruit businesses and benefit from the education dollars spent elsewhere. In the long run this seems like a losing strategy for us as a nation.


  • ...

    So, it’s okay for California to import labor from China,India and Mexico but it is a bad thing if Texas imports labor from California and Massachusetts?

    And given that it is steve’s party and leaders that think the way forward is to import tens of millions of Third World peasants, I wonder why he is acting as if that is a bad thing now. After all, that is the desired outcome that he votes for every election.

  • PD Shaw

    @steve, you seem to be claiming that a state’s higher educational expenditures are intended to keep graduates and their skills in-state. I think that is what the public university system would like everyone to believe its true, but in my experience graduates don’t feel or act like it. They go where the best job is.

    And in Illinois, the flag-ship university doesn’t act like it — admissions prefers out-of-state and out-of-country enrollment for better prestige and $$$. Texas has probably historically done better to see to the higher education needs of citizens than Illinois.

  • California has one great public university. Its other great universities are private institutions. I haven’t looked it up but offhand I’d guess that 99% of California’s college-bound students don’t go to UC Berkeley. In other words, public higher education isn’t a particularly relevant subject in comparing California with other states.

    As is typical of my posts the California-Texas dichotomy is a synecdoche. It’s an emblem of many such dichotomies. Let’s take another.

    Indiana is successfully wooing businesses from Illinois. Illinois has two great universities, both private. There’s an argument to be made that it also has one great public university. Indiana is not a pesthole. It has two great public universities and, arguably, one great private university.

    The one thing I would footnote this discussion with is that I don’t think that the higher educational system of the 21st century will be any more like that of the 20th century than the 20th century’s was like that of the 19th century which is to say not much. I would be greatly surprised if someone looking back on higher education in the 21st century thought of it as something that was tied to a geographical location.

  • I would add that I can envision several scenarios under which California can prosper in the years ahead. None of them involves adding large numbers of poor people. California’s income inequality (7th worst in the nation) is its political problem. It’s up to Californians to solve it.

    I think the greater likelihood is that California will increasingly resemble Mexico socially, politically, and economically. Since I tend not to identify with the upper classes, I don’t think that’s a particularly good thing. YMMV

  • Guarneri

    Hear, and elsewhere, there has been handwringing about corporate governance and as always, “how do we get these politicians to listen to us?” How a check and balance like a robust market for corporate domicile could be questioned is therefore odd.

    Anyway. This phenomenon has been going on since I entered the workforce in the early 80’s. State competition for primary and secondary/tertiary businesses in auto, steel, appliances, machine tools and ancillary support businesses has been cut throat – and successful – for at least that period, not just recently. Eastern Michigan, Ohio and PA have practically been picked clean. IL is not far behind. As a former financier and current owner/operator of businesses I can tell you that OH, PA and IL (along with CA) have become awfully close to day one knockouts for investments. Just too hard to deal with these loons.

    I also see bias, and not analysis, in the notion that a state like, oh, IN is giving away the store to attract business. Ever stopped to consider the flip side of the situation? Business unfriendly states have sufficiently and negatively altered the business environment equation such that they are chasing business away? In other words, whine about beggar-thy-neighbor strategies if you want, but don’t lose site of “don’t let the door hit you in the ass” attitudes of local pols. I was going to be nice, but what the hell. Some states, and their voting constituencies, are shooting their dicks off, and now have dumb looks on their face as they ask “what happened?”
    It takes time, but we are seeing this now in spades.

    Pull out whatever whiney-ass stats you want, but people get fine educations in TX, IN etc., K-12 through college; to think otherwise is just arrogance. And then their economies have this strange attribute: they produce employment. Faux sophistos in CA, IL, MD etc seem flummoxed. MD may win by tapping on a parasitic Washington DC, CA on climate. IL? Well, we lost the iron ore boats I guess……

  • steve

    Winning by not taxing them, and by not taxing the rich folks who run the companies. As I said, this works well in the short term. Where does it go in the long run? How well do we compete with other nations when 1/4 of our population has no health care? When our best university is an Indiana University and not an MIT or University of Chicago? Yup, they will have a fine education, but will they be the leaders in research we need to stay not only competitive, but ahead of everyone?

  • MIT and University of Chicago are both private universities. So are Stanford, CalTech, and the University of Southern California.

    Our society is radically different from those of Europe, Japan, or China, not just different in detail. My experience is that Europeans are predisposed to believe that anything worth doing should be done (and maybe must be done) with state support. We have not historically shared that belief.

    Of the top 20 universities in the U. S. 19 are private. Of the top fifty at least forty are private. Of the top hospitals in the country most are private.

  • Andy

    I swear, I am getting sick and tired of pundits incessantly talking about making “investments” in “infrastructure and education.”

  • Sometimes spending on infrastructure and education is an investment. More often it is just plain old garden variety consumption.

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