The Quixotic Chase After Smokestacks

States ignore broader interests as they try to lure industry

ALTHOUGH Newt Gingrich's revolution promises to send federal powers back to the states, local control of policymaking is not always best for the nation as a whole. Economic development, for example, has turned into a fierce battle between states to attract corporate investment and jobs. The result is an economic civil war that threatens America's future prosperity.

In the 1970s, many states reacted to slowing economic growth with policies of "smokestack chasing," using financial incentives to lure industry across their borders. In the 1980s, they refined and expanded this strategy, setting up trade offices in foreign countries to attract overseas business.

In the 1990s, financial enticements have become standard offerings for virtually any corporation that threatens to leave. More than half the states have financial incentive programs in place to lure companies in. Bidding wars between states regularly break out over prize companies. Many states now have trade offices in neighboring states to get first crack at likely corporate carpetbaggers.

Kentucky, for instance, recently passed a law that allows any company building new facilities in the state to recoup as much as 100 percent of the cost in tax credits. Ohio has a similar law, and Indiana is now considering one. And more than two dozen city and state governments now have trade offices in recession-torn California, actively working to lure away its companies.

As states try to outbid each other for corporations that promise new jobs, they frequently give away many of the economic benefits that would probably accrue to them by winning the projects in the first place. Worse, the battle between the states depletes public resources that could be invested in advanced infrastructure, education, and other programs that benefit the entire American economy.

The use of financial incentives to attract business investment is intensifying because most politicians simply don't understand economic competitiveness. Being competitive does not mean beating your neighbor in a bidding war but rather providing an economic environment in which business will prosper.

Such an environment attracts groups of linked, interrelated businesses - not simply a major company plucked from somewhere else. By creating local economies dependent on one or two isolated companies, smokestack chasing discourages the economic chain reaction that leads to long-term economic prosperity. A strong industrial base, for example, creates opportunities for a network of supporting businesses, including the suppliers, distributors, and marketers of a particular product or service. In turn, the existence of these companies and the jobs they create provide opportunities for many other businesses, from dry cleaners to restaurants.

Furthermore, smokestack chasing often doesn't even lead to the jobs initially promised. Relocated companies often lack the necessary industrial supports to be successful in their new home. In time, many of the lured companies pack up and leave for better opportunities elsewhere. They often leave for the same reason they came: better financial incentives in another state.

Recognizing the need for a truce, US governors took a major step toward ending the border wars in 1993. At the urging of Gov. Jim Edgar (R) of Illinois, the National Governors Association adopted what amounts to a "nonaggression pact" between the states. The governors drafted voluntary guidelines limiting the tax breaks, subsidies, and other freebies states can dangle in front of companies to lure them across their borders.

Enforcing the new rules, however, has not been easy. Past efforts to lessen competition between the states have failed. And slow economic growth has only accelerated the use of direct financial incentives by some states.

Unfortunately, the governors oppose what may be the quickest and most effective solution to the problem: Congress could enforce a truce by withholding federal aid to states that use financial incentives to attract businesses.

Although federal intervention in state matters is never popular, the escalating bidding wars threaten America's international competitive position. Money that could be spent building advanced infrastructure or retraining workers is spent instead on efforts to attract investment that might have occurred anyway.

Smokestack chasing merely shifts jobs from one state to another; it does little to prepare the nation for increasing global competition. If the US is to retain its economic leadership, Congress must make ending the economic civil war a top priority.