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The Inclusive Economy
Comparing “Red State” and “Blue State” Economies
By Bill Schweke on 02/08/2007 @ 02:35 PM
Among the most interesting things to come out of a recent article entitled “The Promise of Progressive Federalism” by Richard B. Freeman and Joel Rogers are data regarding the comparative economic performances of “red states” and “blue states” over the past 35 years. These data expose the weaknesses in the anti-government version of business climate that argues that the best environment for private enterprise is one characterized by low wages, lax regulation, no unions, and low taxes.
As generally used, “business climate” refers to the extent to which the political and policy environments of a particular state or locality, compared with other jurisdictions, are seen to be supportive or burdensome to business. The implication is that any area whose business climate is not “competitive” will be shunned by the corporate sector and find it difficult to attract or grow new firms and the jobs they provide.
This common view has brought about a fierce pressure on many public officials to reduce taxes, roll back regulations, and become more compliant with and friendly to business. As a result, many states and communities have in recent years slashed spending on safety net programs and public investments in education, training, research and development, and physical infrastructure; eliminated employment, consumer protection, and environmental regulations that serve valid purposes; and given away hundreds of millions of public dollars in tax incentives and other so-called “development” subsidies which they assume will make them more attractive to industry.
However, if the real challenge is to discover and implement creative ways to combine increased competitiveness with better jobs and a higher quality of life, why focus only on promoting the cheapest site for doing business, rather than the most profitable and highest value-added settings?
The latter approach appears to be validated by the findings of Freeman and Rogers. The authors looked at median household incomes in eight U.S. regions from 1969 to 2004 According to their findings long disparaged regions like New England, the Great Lakes and the Mideast remained on top, while the Southeast remained near the bottom.
Moreover, Freeman and Rogers point out, the absolute real income gap has widened across the regions. According to the authors, “[Between] 1969-2004, per capita income in Mississippi increased by 128 percent, from $10,770 to $24,650 – a gain of $13,880. Per capita income in Connecticut increased by 108 percent, from $21,793 to $45,398 – a gain of $24,605. Expressed as the ratio of their respective incomes, Connecticut’s position declined, but in real dollar terms, the gap between the states’ per capita income has nearly doubled.”
In other words, despite its gains, the “business-friendly” Sunbelt is falling further behind. If states like Mississippi are to catch up, they need a much more “high road”, productivity-based and innovation-driven development strategy in place. New product and service ideas, increased entrepreneurship, and enhanced human and social capital must be even bigger priorities than they are now. And this means its economy must become not just more dynamic, but also more inclusive of all its people and places.
The authors note that such economic diversity raises a number of issues. First, a “one-size-fits-all” national development policy hardly seems appropriate. Devolution should characterize US economic development policies (which it does, up to a point).
Second, the “race to the bottom” scenario is more threat than reality so far. For example, using a list of seven “pro-labor” laws such as “state minimum wages higher than federal” and “Medicaid eligibility at or above federal poverty line”, the authors find a wide variation. Disproportionately southern and lower income states have few such laws, while disproportionately northern and coastal states with higher income have half or more of these enacted. Freeman and Rogers state: “In the political jargon, most in the first set are Red states while most in the second set are Blue States.”
I don’t want to conclude that government-influenced costs don’t matter. But it seems safe to conclude that simplistic “cut-and-deregulate” strategies – get rid of government rather than reinvent it – are not the best ways to achieve economic progress in the 21st century.
Lastly, states can get away with being pro-worker and pro-business and still have a flourishing economy. The trick, according to Joel Rogers is “paving the high road, closing the low” – innovation-based economic strategies deserve carrots, while exploitation-based management strategies need sticks, in the form of standards that set a floor for better business practices.
William Schweke is a Vice President at CFED’s Durham, NC office
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