Regulatory Reform and State Economic Development

Each state possesses a unique array of assets and liabilities in attracting economic development in an increasingly competitive and global marketplace. There are no boilerplate approaches that will work all the time. Nevertheless, regulatory reform can improve any state's economic prospects.

Most states have important and unique advantages. These powerful pluses include a strong entrepreneurial spirit generating an unparalleled flow of new enterprises, a "small cap" stock market available to new firms seeking capital, rapidly advancing technology to draw on, and a world-class higher education system to train the next generation of highly skilled workers and managers.

But the liabilities that many states suffer in the competition for economic development should not be overlooked. These weaknesses range from burdensome regulation to arbitrary taxation to a large underclass of people who have dropped out of the modern economy. Some of these shortcomings can be dealt with only via a long-term strategy, which may include revamping elementary and secondary education and promoting the role of the family.

A Healthy Climate

However, let us focus on the shorter- and medium-term possibilities for improving the economy of any state. What can a state government itself do to give its state an edge?

In brief, it can and should help to create a positive and competitive business climate conducive to setting up new enterprises and expanding existing ones. That is the most basic way of encouraging job formation and rising income levels.

This recommendation, though, is not a plea for a new round of subsidies or a veiled request to favor any particular industry or type of business. That approach is neither fair to existing businesses nor effective as a long-run strategy.

In a misguided effort to give their states a leg up in the competition for new enterprise, some legislatures have authorized extremely generous packages of tax, expenditure, and credit inducements. Often, however, these giveaways backfire; after a few years, the company moves the factory or facility to another state with an even more generous set of subsidies. Meanwhile, local companies operate at a disadvantage.

Despite the dismal record of government subsidy programs, some companies and even whole industries request handouts, using heart-rending rhetoric as justification for special treatment. Those of us who have served as government officials in a variety of circumstances know how difficult it is to say "No." But that's a big part of the job.

A basic task of promoting economic development is to examine carefully the unique array of government obstacles that face any prospective new enterprise, or businesses considering relocating to a state.

Sadly, government programs--whether environmental protections, construction, or raising revenue--are often carried out in a bureaucratic fashion that undermines the public good. The disregard for the economic consequences of government action is epitomized by the boast of one housing official, describing how he tries to protect the environment: "I use the pinball approach. I just bounce each developer from office to office to office."

Undo Something

Most state agencies can do much more to reduce the uncertainties, delays, and paperwork burdens that unnecessarily complicate and discourage new business initiatives. It is difficult to underestimate the cost of dealing with government. New enterprises, particularly the high-tech and service businesses that comprise a major share of future growth prospects, need the flexibility to adapt quickly to the rapid changes that occur in the modern global economy. Too many government jurisdictions unwittingly place a bureaucratic straitjacket on business.

Often, it is not a matter of identifying any individual regulatory action that scares away potential new economic development. Indeed, the typical rule-making activity is justified by all sorts of claims of supposed social benefits that will be generated. But the cumulative effects of complying with a great host of regulatory requirements often pose a strong deterrent to locating a new or expanded enterprise in a given state or region.

By contrast, the most important actions a state can take to improve its competitiveness do not involve spending money or diverting potential revenues. Governments should not try to spoon-feed new or growing firms. The most successful ones make it on their own. To repeat the conclusion of my testimony to a legislative committee a while ago: "Don't just stand there, undo something."

Murray Weidenbaum is chairman of the Center for the Study of American Business.

For more information ...

The Role of Government: Promoting Development or Getting Out of the Way? Government should do what it does well--but that is only a few things. (American Institute for Economic Research, August 1997, 4pp.)

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