State Economic Development Policy: Strategic Approaches for the Future


Joseph Schumpeter characterized economic development in free-market economies as “creative destruction,” a process by which old industries, jobs, and social patterns are constantly eroded and new ones are continuously born. This pattern of development has emerged forcefully in the past several years in the United States. At the national level, it has sparked debate over how to restore national economic health and create a firm basis for future prosperity. This debate centers on economic arguments concerning how public policy can influence the development of a market economy.

Although this debate has commanded a great deal of attention on a national level, it has obscured the major arena in which these issues are addressed: state and local governments and regional economies. While national initiatives in economic policy remain paralyzed by indecision, an array of state economic development policies has been developed. An example of this state/national dichotomy is manifested in the Reagan administration’s urban enterprise zone proposal. Heralded as the supply-side approach to urban eco-nomic problems, the proposal has been immobilized in Congress for almost five years. In contrast, 23 states have instituted some type of enterprise zone policy, and others are considering such legislation. A proposal from the other end of the federal policy spectrum, the Reconstruction Finance Corporation (“RFC”), has not advanced far on a national level, either. However, several states have experimented with publicly-financed investment banks or mini-RFCs.

Experimentation by states is an historic feature of American social policy. Unlike regional authorities in other capitalist countries, U.S. state governments enjoy a great deal of autonomy in the design and administration of taxation, commerce, and social welfare policies.

Traditionally, federal socioeconomic policies have been cautious. Proposals for income redistribution or overt governmental involvement in industry have been avoided in favor of programs offered as temporary solutions or integrated into the private sector. Social Security, the most successful federal income redistribution program, is still viewed as an insurance fund that pays individuals from personal accounts. In reality it transfers income from current wage earners to retired persons and has substantially lowered the rate of poverty among the elderly.

Traditional state economic development efforts also exhibit this cautious pattern. Economic policy at the state level aims to lure branch plants of large, multistate manufacturing firms to a state through infrastructure development, tax breaks, and preferential financing techniques. Such activity had been considered “industrial development,” but now is often derisively labelled smokestack chasing.” Recent state government attempts to attract the General Motors’ Saturn plant show that such approaches are by no means moribund. The same approach can be seen in employment issues. State and federal policies have focused on education and training to prepare workers for the labor market, rather than focusing directly on job creation or other more interventionist policies.

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