New Democrat Update - April 2009
GETTING GOVERNMENT’S ROLE RIGHT
In another "New Democrats Online" program, Colorado DLC President Jim Gibson and author Jeff Madrick debate what should be the role of government in the economy. The discussion, broadcast on KGNU Radio’s program, “It’s the Economy,” highlighted the many agreements and fewer disagreements on economic policy among progressives.
Madrick, author of a new book, The Case for Big Government, is calling for dramatic increases in public investment and higher taxation. He is editor of Challenge Magazine, a visiting professor of humanities at The Cooper Union, a regular contributor to The New York Review of Books, and a former economics columnist for The New York Times. Gibson’s emphasis was on modernizing progressive economic initiatives.
This debate follows the New Democrats Online premiere program, an in-depth discussion with Colorado Senate President Peter Groff. An interview with House Speaker Terrance Carroll will be online in the very near future. Look for all of them here and let us know what people and topics interest you.
THE STATE OF STATE ECONOMIC DEVELOPMENT
As the very nature of our economy has dramatically changed in the last couple of decades, state economic development policy, including Colorado’s, has lagged far behind. It is time for a major update.
Many in the economic development community focus on deal-based "smokestack chasing." Their view believes that a strong economy needs to attract (or retain) capital (usually establishments of big, multi-state firms) by making specific deals that include tax breaks, loans, and grants. These “Industrial Recruiters” contend that mobile operations seek the lowest costs, and the job of a state is to put forth the best package to get them.
Skeptical of government's ability to pick winners, “Free-Market Purists” think a healthy state economy mainly requires a tax code with low rates and a regulatory structure that imposes as few burdens on industry as possible. Like recruiters, they see competitive advantage as largely based on costs but differ with recruiters on favoring any one firm or sector over another, preferring to cut taxes and reduce regulations for all businesses.
“Economic Populists” worry less about business climate or competitiveness, and want to ensure that the wealth generated goes to the people that need it most. Their focus on who gets the benefits - working people, or rich people and corporations - results in policy priorities such as expanding unemployment insurance, funding affordable housing, investing in transit and high-speed rail, and limiting corporate tax giveaways. To the extent they support business development, it's often with an emphasis on microenterprise support, minority- and women-owned businesses, and green companies.
These three economic philosophies provide some useful insights but are flawed guides to effective economic development policy, especially for high-tech, service-oriented economies like Colorado’s. The challenge for policymakers is to pick the wheat from the chaff and mix in some new ideas that will work in today’s world.
Recruiters are right that the composition of an economy matters and targeting assistance to particular sectors and firms can be a key component of increased employment opportunities. Purists have a great point when a state's tax and/or regulations go over the top - the cost-effectiveness of government policies must always matter. The focus of Populists is a good reminder of what economic development should be ultimately about - people.
On the other hand, Recruiters miss the boat by chasing out-of-state, low-expense oriented companies in a global economy where routinized economic activities can be done in other nations with dramatically lower cost structures. Not surprisingly, the evidence indicates that helping existing firms to grow and assisting new firms to start up is much more important than industrial relocations.
Purists and Recruiters get it wrong with their sometimes unfettered overemphasis on reducing taxes and regulations. Such efforts can often come at the expense of the ingredients that enable firms to innovate and learn. Underinvesting in a world-class public education system, research universities, robust broadband telecommunications, a good quality of life and an adequate transportation network will only chase away high-value workers and high-growth businesses.
Of course, Colorado policymakers must always be on the lookout for inefficient bureaucracies, unreasonable regulations, and unnecessary taxes. However, using a shotgun, rather than a rifle, misses the right targets. For example, state tax cuts have little to do with economic growth. According to the Tax Foundation, no relationship existed between a state’s per-capita income growth between 1990-2005 and its tax burden.
The biggest failing of Populists is not realizing that states are very much in competition for economic activity, not just with each other but with other places around the world. While Populists are right to call for greater accountability for corporate tax breaks, not all such incentives are the same. There is a big difference between public help for a low-wage retail firm and a research and development tax credit used by high-tech firms employing high-wage workers making products exported outside the state. The former is almost always a waste of taxpayer money, while the latter is a public investment that generates very real economic benefits.
"INNOVATION ECONOMICS”
What ultimately determines a state's economic success today is the ability of its institutions (private, nonprofit, and government) to innovate and change. Innovation is driving virtually the entire U.S. economy.
Consequently, “Innovators” focus on policies that spur learning and creativity, recognizing that new ideas and entrepreneurship are key, and that both take place in the context of institutions. Their emphasis is on promoting technological innovation, supporting dynamic acquisition of workforce skills, spurring entrepreneurship, supporting knowledge networks, and lowering business costs, but in ways that, at the same time, boost the quality of life.
So, instead of worrying about the number of company-specific deals or only taxes and regulation, Innovators are concerned if entrepreneurs are taking risks to start new ventures, if workers are getting the skills they need, and if companies, with the support of research universities and other government agencies, are investing in technological breakthroughs. Innovators avoid unfairly protecting companies from more creative competitors, and provide the right incentives and tools to adequately invest in and commercialize new ideas. They also promote widespread adoption of advanced information technologies and the broader digital transformation of society and the economy.
As a result, Innovators advocate policies like research and development tax credits and technology-focused university-industry research centers. Recognizing that low costs alone are not enough to drive growth or entrepreneurship, innovators embrace public investments in research universities, infrastructure, and worker skills, which ultimately lead to more broadly-shared wealth generation.
Innovators get it right much more often than their counterparts because they have kept the still-relevant ideas of Recruiters, Populists and Purists. At the same time, this new breed understands that simply creating science and technology programs will never be enough to succeed.
Understanding this new economy is essential to ensuring that future generations do better than their predecessors. “Innovation Economics” is the way to get there.