Thank You for an Overwhelming Response!

By Anne Li on 04/09/2009 @ 05:48 PM

Thanks to many of you, our Innovators-in-Residence and Innovative Ideas programs received an overwhelmingly positive response. We received more than 200 applications, submissions and nominations. Our team truly appreciates the high level of participation and interest in these exciting programs.

We are reviewing all applications and are thrilled to see innovations of great diversity, both in the problems and opportunities addressed and their creative approaches. Many of these innovations will be featured on our Web site, this blog and at our 2009 Innovation Summit, October 29 in Washington, DC. Mark your calendars now and plan to be there!

During the coming weeks, we will share with the innovation@cfed community more information about the innovative people who responded to our online opportunities and their creative solutions. Sign up now to become part of the community, if you haven't already!

We'd love to hear your thoughts on the application and nomination processes. Please leave a comment below or contact us at innovation@cfed.org.

We are excited to work with so many enthusiastic innovators. One community member wrote in to say thank you to our innovation@cfed team "for opening a door of opportunity giving birth to the dreams and visions of many Americans!" We thank you for sharing those dreams and visions.

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Managing Those Pesky Little Nonprofits: 5 Books You Should Read

By Bill Schweke on 04/09/2009 @ 04:42 PM

Tags: Ideas in Development, Recommended Reading

It may be true that nonprofits attract executive directors and staff who find something lacking in working for a firm in the private sector. And it is also generally the case that the management side of running a nonprofit is not beloved by most who aspire to make a difference in the not-for-profit world. It's the content that attracts them, not the administration.

However the nonprofit must be managed and will not be effective unless it's doing the right thing in the right way...and that's management in a nutshell.

Fortunately, this issue is getting more attention by writers and thinkers and doers. The literature on how to manage nonprofit organizations is growing. In addition, there is an increasingly relevant library of volumes on knowledge-based firms and consultancy in the private sector that is being published.

I confess to being one of those who loves the substance of my work and is more than a tad ambivalent sitting down for another meeting about aligning our culture and structure with our mission, or whatever.

I also find a lot of the management "brew" a little lite. It is faddish and delivers maxims often equivalent to "buy low and sell high." But I admit there is a great deal of good stuff to read out there. Some is quite creative and clever, while other books could be regarded as delivering uncommon common sense. (Uncommon to the typical nonprofit, that is.)

This reading list includes both recent books and those that have been available for a few years. But I find them worth study and rereading. Here's a short list of helpful works:

• Peter Drucker with Jim Collins, Philip Kotler, James Kouzes, Judith Rodin, V. Kasturi Rangan, and Frances Hesselbein, The Five Most Important Questions You Will Ever Ask About Your Organization (2009). This posthumous book really delivers in a little more than 100 pages. The format has the late Peter Drucker's initial thoughts, followed by comments made by leaders in the management field. Relevant to those in the private, public and nonprofit sectors, it includes lots of useful insights that can be especially applied by the manager in civil society. The book is motivated by the idea that wisdom is all in the questions and in the honesty and thoroughness in which they are answered. ($14.95)

• Ethan Rasiel and Paul Friga, The McKinsky Mind: Understanding and Implementing the Problem-Solving Tools and Management Techniques of the World's Top Strategic Consulting Firm (2001). Not since the publication of Peter Block's Flawless Consulting has there been a work that lays out a broadly applicable, step-by-step problem identification and solving process so clearly, while also offering insights into the psychology of the person or group that may decide to hire your services. Nonprofits that do lots of research as well as consulting should have it on their bookshelves. ($29.95)

• Allen Weiss, Getting Started in Consulting: Third Edition (2009). This is another gold mine. Well-written and wise, the book is primarily focused on establishing your very own consulting firm, but it is not hard to translate most of its advice into making a consulting organization work like a charm. It is very good on marketing and includes a variety of amazing lists of questions - most notably ones that are designed to clarify what sort of financial resources that the client possess and what are they "really" looking for in a partner. ($19.95)

• Charles Hecksher, The Collaborative Enterprise: Managing Speed and Complexity in Knowledge-Based Businesses (2007). This is a more academic product than the works above. Based on the author's own research and case studies, Hecksher tries to illuminate best practice in this sector of the economy. He even speculates on whether they constitute the organizational models of the future. In its conclusions, the author examines what sort of economy is producing these kinds of firms and what are their pros and cons as places to be employed for today's knowledge worker. ($38.00)

• Jack Covert and Todd Sattersten, The 100 Best Business Books of All Time: What They Say, Why They Matter, and How They Can Help You (2009). Ever been overwhelmed by the sheer number of management books available? Ever wonder which private sector-focused works that nonprofit types could benefit from a close read? Here are 100 possible answers. The authors do a superb job of tackling "what they say, why they matter, and how they can help you." Sounds good, doesn't it? It also "reads well." ($29.95)

This will keep you busy.

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Recession remedies

Posted on 04/09/2009 @ 04:10 PM

Tags: Ideas in Development, North Carolina

By Rob Schofield

An expert explains why, now more than ever, we need a new approach to job creation and retention

Here at NC Policy Watch, we've reported on many occasions about the flaws and foibles of the state's traditional approach to "economic development." To a distressingly large extent, state efforts in this area have been dominated by large, unfocused tax breaks like the wasteful and ineffective Bill Lee Act (now known as "Article 3J credits") and large giveaways to individual companies (like Dell or Goodyear).

Both of these approaches are premised on the idea that the key to attracting and keeping good employers is simply to hand them cash or tax breaks (or both). Though perhaps well-intended, neither has worked particularly well - except at draining public coffers of hundreds of millions of dollars.

Now in 2009, with the state's economy in dire straits and public revenues running on "E," it's clearer than ever that North Carolina must find new, smarter, and less expensive ways to create and retain private sector employment. With unemployment exceeding 10% and rising, state leaders simply have no choice.

Turning to the expert

Fortunately for North Carolina, the state is home to one of the nation's most creative and pragmatic experts in the field of economic development, Bill Schweke of the national think tank, CFED. Schweke (pronounced Shweh-kee), who serves as a Senior Fellow for the organization out of its Durham office, has written and studied extensively in the economic development field for decades.

Recently, Schweke sat down with NC Policy Watch to discuss the challenges North Carolina faces and to explain what kind of new and different steps state leaders might realistically undertake in this area. Here are some of the highlights from that conversation:

PW: So, how would you describe our current situation in North Carolina?

Schweke: "Obviously, the current recession is a problem that's bigger and deeper than anything one could reasonably have expected economic development policy to have handled on its own. Even the best and most effective state and local policies can't insulate us from the effects of a global crisis of this magnitude.

Having said this, it's clear that North Carolina could and should have been doing much more to soften the blow and to expedite recovery. For years, I and my colleagues have been explaining that the state could get much greater bang for its development buck by investing more in business retention, expansion and modernization for average, homegrown companies - particularly in less prosperous areas. Right now, way too much of our money and attention goes to expensive credits that benefit companies in our most prosperous counties and high profile recruiting efforts in which we tend to overbid in order to attract big, out-of-state corporations."

PW: Say more about how and why the current programs are flawed.

Schweke: "Last December, my colleagues Frank DiSilvestro, Brian Taylor and I presented to the General Assembly's Joint Select Committee on Economic Development Incentives on how North Carolina's current business incentives strategy has impacted our poorest counties - what are commonly referred to as ‘Tier One' counties. We reported that only a tiny fragment of the state's spending on its three main development programs (the Bill Lee program, the Job Development Investment Grant program and the Once North Carolina Fund) ever actually gets to the areas that need help the most. In fact, more than half of the Lee tax credits have gone to businesses located in our wealthiest, ‘Tier Five' counties - places like Wake and Mecklenburg. This is clearly a huge misallocation of resources that has, if anything, worsened the gap between wealthy and poor areas."

PW: So how can we do it better? Is this the "business retention and expansion" idea you mentioned?

Schweke: "Yes. The idea behind business retention and expansion programs (what we sometimes call ‘BR&E'), is that you focus your attention and resources on keeping, growing and modernizing what you already have. The vast majority of jobs in North Carolina are provided by homegrown companies. With a BR&E approach to development, you acknowledge this fact. You say ‘What can we do to help the businesses in our various communities? How can we keep them and help them to improve and grow?' In short, the idea is that it's better and healthier (and probably fairer) to help ten small-to-mid-size, local businesses add a couple of dozen jobs each than to obsess about landing that one big new employer that will supposedly solve all your problems."

PW: So what does BR&E really mean? Is it really doable?

Schweke: "Well, it's not rocket science at all. The idea, in essence, is that you begin to treat employers as important community resources that deserve support and partnership. In practice, what this means is that you give locally-based professionals the task of improving the flow of communication between local businesses and the larger community - particularly local economic development organization, governments and other service providers. The message to local companies is: ‘What can we do to bring community resources to bear in order to help make your business successful?'"

PW: But this seems so obvious. It must already be happening in lots of places.

Schweke: "Not as many as you might think. While there are good examples from around the country, it seldom just happens naturally. It takes work to break old habits. Businesses are too often conditioned to treat government and other community enterprises as adversaries and predisposed against being frank and honest about their needs - much less their plans for the future. And because most BR&E efforts are usually under-resourced, they don't have the time and staff to build up relationships of trust."

PW: So what are we really talking about here? What does BR&E look like on the ground?

Schweke: "There are various models, but the basic idea is that you set up and fund a group - a nonprofit, a quasi-public authority, a university, a branch of the Department of Commerce itself (hopefully several of them) - and give it the job of communicating on a regular basis with a wide variety of employers in its area or region.

Ideally, there is a uniform survey tool and software that the BR&E group uses to check in with businesses at prescribed intervals. ‘What is your situation? What are your needs? What are your problems?' These are the kinds of questions that it asks. The idea is to identify and help save businesses in danger and to help those with potential to grow. This can mean connecting them to financing, addressing transportation or other infrastructure issues, helping boost efforts at a local community college, or even identifying new production techniques - the list is endless.

For companies confronting hard times and a possible shutdown, a BR&E group should also provide an early warning to the community and help to make the process as painless as possible. Naturally, you need to have adequate and appropriate protections in place to protect the confidentiality of the information that's gathered."

PW: Can such a group really help a business to avoid closing? Isn't that ultimately just a matter of economics?

Schweke: "You'd be surprised at how often firms shut down or relocate that weren't in hopeless scenarios. It's a widespread myth that all of these bad results are pre-ordained and rational. There are many occasions in which proactive and coordinated BR&E efforts can actually rescue and preserve a lot of good jobs from downsizing, outsourcing or even a failure to plan for succession when a company owner retires. But in most places, we don't even try."

PW: Has this really worked?

Schweke: "Absolutely. There are some excellent examples in Pennsylvania and Ohio. It works here too, but we devote so few resources and make it such a small part of our overall economic development effort that it never gets the attention or resources it deserves. This is particularly sad in that it costs a whole lot less than tax incentives."

PW: So what should state lawmakers do in 2009?

Schweke: "Well, there's no magic, quick fix. We should learn that from the limitations of our current approach. But, it's clear that we can and should repeal some of the failed tax credits (like Article 3J) and then take a small fraction of the money we save to do two things: 1) Boost our Department of Commerce by significantly increasing its BR&E efforts, and 2) Establish an adequately resourced and coordinated network of BR&E programs in selected areas around the state. It won't stem all the bleeding in our economy, but it can make a real difference - especially if we provide these folks with the kinds of software and training that will enable them to collect and share standardized, confidential data."

PW: Thanks, Bill. How can policymakers and other interested folks get in touch with you if they'd like to learn more about making BR&E efforts work?

Schweke: They can contact me at CFED at 919-688-6444 or bschweke@cfed.org.

Editor: Folks can also check out an article entitled "Making the Most of Statewide Business Retention, Expansion, and Modernization Efforts" by Schweke and his colleague Will Lambe that appeared in the journal Economic Development America.

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Community Development Innovations April 22-24 in St. Louis

By Anne Li on 03/30/2009 @ 05:50 PM

Tags: Innovation, Events, Economic Development

Even as many Americans continue to feel discouraged and powerless amid the current economic downturn, innovators among community development leaders are growing increasingly energized and inspired to help bring about real and lasting positive change.

CFED is working with the Federal Reserve Bank of St. Louis to plan and host Innovation in Changing Times, a conference on community development. The event, held in St. Louis April 22-24, brings together leaders from across to country to discuss and illustrate how innovation can positively impact communities. The conference aims to offer a comprehensive view of community development with a focus on resiliency, sustainability and innovations that will help organizations and communities thrive during challenging times.

CFED's Michael Torrens and Kim Pate will present at the conference, and Michael also serves on the event's planning committee. They will share their reflections on the conference, so check back with innovation@cfed and its blog for their observations.

You can visit www.exploringinnovation.org to learn more about the Federal Reserve Bank of St. Louis's conference and to register. We also encourage you to reflect on the conference's charge: to think beyond how communities can survive tough times and imagine how they can grow and shape the future.

We'd love to hear your thoughts here.

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Cyndi says: "I'll Be Watching"

By Anne Li on 01/19/2009 @ 04:53 PM

Tags: Innovation, Entrepreneurship

innovation@cfed

We'd like your reactions to an unsolicited e-mail we recently received from a budding entrepreneur. And let us know if you are an entrepreneur, too!

HELLO innovation@cfed,

I just want to thank your organization for sending me the "light bulb"postcard in the mail.

My curiosity about the website piqued my interest, so I decided to check it out and certainly found it encouraging that you are doing this.

I, myself am in the beginning stages of trying to launch a business that would make a difference not only in my own community, but far beyond that. While I would not be interested in applying at this time, I am very interested in staying involved by watching how everything takes place, from selection of the Innovators-in-Residence to a discussion forum on different ideas.

Your organization hits the "nail on the head" of the economy, exactly where we need it most. We need great ideas to stimulate this economy and encourage entrepreneurs to start new businesses. While I am working on ironing out the details in launching my own business, my main goal at the moment is to find full time work to help support our family while I get things going on the side. (I've been looking for over a year so that gives you an idea of exactly how tough the economy is out there.) That is why I really applaud your efforts. My goal is to eventually have a small company that can sustain itself, show a good profit, but most of all, make a difference. I want to know in some way that I was able to help this tough economy as well.

As an American, I appreciate your innovation in coming up with this idea in the first place, and am really excited that you're doing this.

God bless, best wishes to you, and I hope that you have many successes!

I'll be watching.

(Signed) Cyndi G.
Cornelius, Oregon

PS. Whoever came up with the light bulb postcard was a marketing genius. Good job! :)

Thanks for writing, Cyndi. Please continue to share your observations with innovation@cfed as you launch your business in our "new economy."

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CFED testifies to NC panel on shortcomings of Economic Incentives

By Bill Schweke on 12/16/2008 @ 12:12 PM

Tags: Ideas in Development, North Carolina, Business Incentives

December 16, 2008, Raleigh, NC -- Bill Schweke, CFED’s Vice President for Learning and Innovation today presented the results of two CFED economic studies at a meeting of the North Carolina General Assembly’s Joint Select Committee on Economic Development Incentives. Schweke, along with CFED researchers Frank DiSilvestro, and Brian Turner raise a number of serious new questions about the wisdom and efficacy of North Carolina’s costly commitment to state and local business incentives.

Among the findings of the CFED research team was that in some cases, towns, cities and counties are coming up with more subsidies than the state. Yet, these jurisdictions have a less developed “infrastructure” for holding the firms accountable and for coming up with rational bids. They also are often less savvy when it comes to negotiating with firms. Additionally, a study of the effectiveness of inducing increased private investment in economically struggling rural economies finds that they have not made much of a difference in North Carolina. Schweke recommended that would be better if the state redirected some subsidy dollars to community development and capacity building, entrepreneurship, business retention/expansion/modernization, and upgrading workforce skills.

Testimony was based on two 2008 CFED reports:

The first report, Local Economic Development Incentives in North Carolina , explores the often underreported area of local business incentives. The authors looked at 338 deals between 2001 and 2008 in which businesses received local incentives in addition to state assistance from either the state Job Development Assistance Grant (JDIG) program or the One North Carolina Fund. According to the report:

“All companies that received state incentives from the One NC Fund and or JDIG program also received incentives from county and or municipal governments. These incentives came in the form of cash grants, building and land purchases, infrastructure assistance, reduced fees, low interest loans, etc…. This study estimates that these local incentive packages had a median value of at least $200,000; the average incentive package was much higher at almost $2 million…. Even when accounting for the number of jobs connected with each incentive deal, there were over 50 cases in which local governments paid more than $10,000 per job. The most costly incentives, in terms of dollars per job, were also local incentives. While the most expensive JDIG award had a maximum cost of $37,000 per job, the study found 6 instances in which local governments offered more than $40,000 per job in incentives.”

A power point of Schweke’s presentation to the panel on this report is included here.

The second report, Business Incentives and North Carolina’s Tier 1 Counties : Have they Worked? makes a strong case that North Carolina’s state-level business incentives are not having their intended effect on the state’s poorest and most development-starved counties. According to the report:

“The three primary incentive tools North Carolina has relied on in recent years are Bill Lee Tax Credits (now called Article 3J Credits), the Job Development Investment Grant Program (JDIG), and the One North Carolina Fund. These tools may have helped the state increase investment and generate new employment opportunities. However, their effect on the most distressed areas of the state has been disappointing. The very counties that most need incentive programs to stimulate growth have been left behind in these programs. Over half of Bill Lee credits have been generated in Tier 5 counties in recent years, while only 13% of credits have come from Tier 1 counties. The One North Carolina Fund has awarded funding to distressed areas in similarly low proportions, and the JDIG program has awarded a majority of its funds to Tier 4 and 5 counties.”

A power point of Schweke’s presentation to the panel on this report is included here.

Schweke is a veteran economic policy expert and a specialist in development finance, plant closings, small and community business initiatives, local development planning, environmentally compatible development, and urban neighborhood development initiatives.

This research was made possible by a grant from the Z. Smith Reynolds Foundation.

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New reports raise additional questions about state and local business incentives

Posted on 12/15/2008 @ 03:01 PM

Tags: Ideas in Development, North Carolina, Business Incentives

By Rob Schofield

NC Policy Watch is delighted to make available two new and special reports today from our friends at the North Carolina office of the national policy think tank CFED. Together, the reports raise a number of serious new questions about the wisdom and efficacy of North Carolina’s costly commitment to state and local business incentives.

The first report, Local Economic Development Incentives in North Carolina, explores the often underreported area of local business incentives. The authors looked at 338 deals between 2001 and 2008 in which businesses received local incentives in addition to state assistance from either the state Job Development Assistance Grant (JDIG) program or the One North Carolina Fund.

According to the report:

The lead author for both of the new reports is William Schweke, CFED’s Vice President for Learning and Innovation. Schweke is a veteran economic policy expert and a specialist in development finance, plant closings, small and community business initiatives, local development planning, environmentally compatible development, and urban neighborhood development initiatives. He was assisted in preparation of the two reports by CFED researchers Brian Taylor and Frank DiSilvestro. This work was made possible by a grant from the Z. Smith Reynolds Foundation.

Tomorrow, December 16, 2008, Schweke, Taylor and DiSilvestro will present the details of their findings at a meeting of the General Assembly’s Joint Select Committee on Economic Development Incentives. The meeting will take place at 10:00 a.m. in Room 414 of the Legislative Office Building in Raleigh.

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Dell’s factory sell-off and North Carolina

By Bill Schweke on 10/03/2008 @ 04:07 PM

Tags: Ideas in Development, North Carolina, Business Incentives

The recent announcement by the Dell Corporation that it was planning to sell its factories to cut costs should have come as no surprise. Today’s new global economy is characterized by a frantic effort by business in thousands of market niches to offer the cheapest, fastest, and/or best product available. Any competitive advantage is short-lived. Even keeping up requires you to stay ahead.

This fast-paced change, however, makes things hard on state government recruiters who seek to lure new businesses to North Carolina. Just a couple of years ago, our state was showering all kinds of goodies on Dell. Now, we’re left to wonder whether Dell will even be there to receive them.

Here are a few things we should know about the latest Dell developments and some lessons we should carry into the future.

The first thing to know is that Dell is making money. The problem is that it’s not enough to please stockholders. Add to this the fact that the company is being beaten in the notebook computer market (in part, because it was so focused on selling to other businesses rather than the household that wants an easy and fast retail product in a close-by mall) and you understand some of the company’s problems.

Getting rid of the $2.6 billion in property, plant, and machinery that Dell currently owns will not raise their profits very much. The real improvement of its margins would occur over time by out-sourcing the product and completely eliminating the approach often taken by Dell to build its computer product in two steps, using two separate factories.

So, the best scenario for North Carolina would be for United States-based firms to buy the site, plant, and equipment and continue producing computers for Dell. This includes the much discussed and debated Dell site in Winston-Salem.

This may not, however, be that easy. There are “contract” manufacturing firms that specialize in producing almost anything and wringing the costs out. But a North Carolina address means higher labor costs than a manufacturer would pay in China, let’s say. The contract firm also has its own targeted return on investment.

Compete, compete, compete is the imperative.

So, given the large incentive package that the state of North Carolina provided to Dell, what lessons should we learn from these developments as we contemplate future state economic development policy?

First, the state needs to get its “return on investment” in a hurry. In general, we should plan on requiring that the return to taxpayers (i.e. the new growth and added tax revenue that will ideally materialize as the result of the new business) take less than a decade. This is particularly true in light of how accelerated the product cycle has become, as well as the time frame for depreciation of the machinery and equipment.

Second, economic development policymakers and professionals must recognize that we live in a different era from that of the “branch plant period” or the “conglomerates era.” Today’s cutting-edge business model (not just Dell’s) no longer features the massive and vertically integrated company that does it all – for example, provided parts, arranged business financing, and built the cars.

Given today’s competitive conditions, each part of the production process is performed by the company (usually smaller) that’s the very best in its niche – whether it’s janitorial and security tasks, or creating a key part for a jet engine. In this brave new world, companies seek to stay close to their “core competencies” and the production process can become a “nexus of contracts” or a kind of “virtual corporation.” The process has even a name – it’s called, “modularization” or the “fragmentation” of production. Off-shoring and out-sourcing are just elements in this revolution.

In light of the rapid pace of change, the bottom line for policymakers and economic developers is clear: the always tricky and assumption-driven calculations that have gone into the practice of providing large publicly funded incentive packages to new and relocating businesses are rapidly getting a lot more complicated.

As a result, economic developers will have to be on their toes. Not only must they seek more diversity and balance in the kinds of facilities they woo, they must also find out about the state of each targeted industry and the nature of its corporate strategy and business model.

In short, as they go forward, state leaders must drive harder bargains than ever before if they want to retain the economic incentives tool as a viable practice.

William Schweke is Vice President of Learning and Innovation at the economic policy think tank, CFED.

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Inequality in the United States: What's Been Happening?

By Bill Schweke on 09/09/2008 @ 05:13 PM

Tags: Ideas in Development, Economic Development, Recommended Reading

Some Book Reviews

Don't get your hopes up - this is not the definitive article. It's actually a series of book reviews that have been cobbled together. In sifting through these works, I have been selective, if not arbitrary in what I will discuss. And I must warn you that not all these works are hot-off-the-press. They were lying around and I just got a hankering to read them in whole or part during the past month.

Overviews

John Iceland's Poverty in America: A Handbook (Berkeley: University of California Press: 2003) does a fine job in acquainting the first time reader with the basic facts regarding: early American views of poverty, methods of measuring poverty, characteristics of the poverty population, causes of poverty, why poverty remains high, and poverty policy issues. A few findings:

The U.S. stands out relative to its wealthy peers as a country with a uniquely high rate of poverty.
The majority of the poor do not stay poor for long. However, many families cycle in-and-out, while some families and individuals get stuck in poverty's clutches.
Declines in poverty have been stalled since the 1970s, although some progress was made during the Clinton full employment years.
Increasing inequality has decreased the impact that economic growth has in inducing falls in the rate of poverty.
Poverty rates vary a lot from state-to-state.
The less educated make up a vast proportion of poverty's rolls. Single-parent female-headed households are much likelier to be snared. Changes in family structure among African Americans accounted for being poor more than it did for other ethnic groups.
Welfare reform in the U.S. has reduced dependency, but not poverty much.
Drawing on an original study, Iceland found that the rate of economic growth was a larger influence on poverty rates in the U.S. than changing family structure.
Productivity needs to be high and its gains must be more broadly shared if further progress is to be made.

For more than three decades, anti-poverty wonks have utilized many editions of the book authored by the late Sar Levitan, Programs in Aid to the Poor. Economists Garth Mangum, Stephen Mangum, and Andrew Sum have continued to produce this book, but in a two-volume format.

The first book, The Persistence of Poverty in the United States (Baltimore: Johns Hopkins Press: 2003), examines in detail today's key poverty facts in a series of short, clear chapters - the rediscovery of poverty, a demographic profile, changing geography, the causes, approaches to and consequences to redefining poverty, and the potential for the War on Poverty to be won in the US. The second volume provides an excellent overview of all the relevant Federal programs.

I will address only the persistent poverty volume: The authors contend that the U.S. has only waged a skirmish and not a full-scale campaign to end poverty. What are the results to date?

On the negative side, the income of today's poor tends to fall further below the poverty threshold than in the past. So, although the numbers of poor have dropped, the "poverty gap" has grown. If one just handed out money to get them above the poverty line, three to four times the money needed in the 1960s would be required now.

The poverty rate in non-metro areas is higher than in metropolitan areas. Close-in suburbs are seeing their poverty rates rise as well.

Their recipes for winning this struggle are: a full employment economy, an increase in the employability of the poor (that is, stronger work skills - both cognitive and social, and serious investments in early childhood development).

Women and Children First, Not Last

The bestseller, The Price of Motherhood: Why the Most Important Job in the World is the Least Valued, is not a "poverty book." But it possesses great relevance to the subject. It makes the case that the analysis of the institutions and forces of change that hinder greater gender equity also threaten mothers with downward mobility in today's fast changing global economy.

The book addresses the inequalities in law and culture that exploit women, sacrifice their income, and so forth. More precisely, in this society, Ann Crittenden contends that "women have been liberated, but not mothers." The author's work was published in paperback by Owl Books: in 2002. It covers the causes of continued inequities in a rich historical depth, and in excellent prose.

Here is her some options within her action agenda:

Give every parent the right to a year's paid leave
Shorten the workweek
Equal pay and benefits for equal part-time work
Prohibit parental discrimination at work
Universal pre-school for the three and four year olds
Stop taxing mothers more than everyone else
Equalize social security for spouses
Add unpaid household labor to GNP

This work documents the subtle links between how mothers are treated and landing in poverty. It also packages its anti-poverty prescriptions within a broader mainstream women's rights "platform".

Sharon Hays book, Flat Broke with Children: Women in the Age of Welfare Reform (Oxford: 2003), tells the inside story about the results of ending welfare as we know it. This is a book that goes into the homes, the government offices, and the workplaces where women are trying to escape poverty and dependency. One reviewer says the author "punctures myths on all sides," as it argues that there has to be a better way for women previously on welfare to combine work with raising a family and making enough to get by decently.

Indeed, welfare reform should be leading to lasting escapes from poverty, and not confining many women to membership among the working poor - stressed out, without career prospects, and with too little time to nurture one's children.

Economic Development and Poverty

The Geography of American Poverty: Is There a Need for Place-based Policies, written by Mark Partridge and Dan Rickman, persuasively argues the case that placed-based efforts should not be replaced by people-based programs (training, EITC, etc.). Most mainstream economists believe that if employment prospects are lousy in your town, you should just move. The authors cover the literature in a well-organized and scholarly fashion.

Their major findings and proposals include:

Economic development has modest impacts on poverty in general, but important effects on central cities and remote rural areas.
Programs must target the neediest. Trickle down growth only goes so far. Moreover, without such a focus, probably most of the jobs fostered by economic development would go to commuters and new residents, not the need locals.
Geographically speaking, high poverty and unemployment rates can persist for a quite long time. Many places look about the same today as they did in the 1950s.
The writers outline a promising job creation and wage subsidy program.
They support first source hiring programs.
Person-based policies are needed as well - such as training and work supports like childhood assistance.

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Deals drive jobs to area

Posted on 06/03/2008 @ 04:25 PM

Tags: Ideas in Development, Business Incentives, North Carolina

By Clay Barbour

In exchange for 219 new jobs and millions of dollars in private investment, the city of Charlotte and Mecklenburg County agreed in April to give two companies a total of $1.7 million in tax breaks.

The government contributions to Speed Channel and Tessera Technologies, which makes industrial optical parts, are contingent on the companies' performance. The incentives are designed to keep those businesses in the region.

Through the business investment grant program, the city and the county together have approved more than $11 million in incentives since 2004. The city portion must be approved by the City Council and the county part by the county commissioners.

Though not every vote is unanimous, no city-county project has been turned down since the program began in 1998, said Brad Richardson, who runs the city side of the program.

That money is earmarked for companies that do everything from build solar panels to provide cable TV. It's given to the companies as a rebate on property taxes. To city and county officials, the most important thing such companies do is invest in the region.

Business incentives have become common across the country. Typically, unless the money goes toward something like a major sports stadium, such incentives never make headlines.

Critics say incentives subsidize shareholders, foster unfair competition and divert leaders from focusing on other, more important issues.

But advocates say that incentives are the cost of doing business these days and that if done right, they offer big returns for a relatively small investment.

“Almost all of the cities we compete with use incentives,” Richardson said. “It's a useful tool.”

For its money, Charlotte-Mecklenburg's business investment program should garner more than $300 million in private investments and more than 3,500 new jobs.

The two most recent grants were $1.03 million for the solar panel manufacturer Sencera and $107,000 for the German manufacturer Mias. Both have been approved by city leaders but are awaiting county approval.

Bill Schweke, a vice president with the Washington-based economic think tank Corporation for Enterprise Development, said local leaders have to be careful with incentives.

“They can easily end up overbidding for something they would have gotten anyway,” he said. “Not to mention, it can be considered an unfair advantage to other businesses in the area.”

Representatives from Speed Channel and Tessera could not be reached for comment.

Recent estimates place the price tag for state-driven incentives nationally at about $16billion a year. Some believe local incentives are equally high. The cost has been going up, too.

For example, in 1980, Tennessee offered Nissan $11,000 per job created. Thirteen years later, Alabama offered between $150,000 and $200,000 per job for a new Mercedes-Benz plant.

Richardson agreed that cities and counties must be careful when choosing to invest public money to help land a company.

For this reason, the program has some strict standards. For one, Charlotte and Mecklenburg do not poach businesses from nearby counties. Critics have said this approach rarely helps an area and often hurts it.

Also, the city-county program requires a minimum investment of $3 million from companies, along with the creation of at least 20 new jobs that pay at least the average wage in the region.

A company can create fewer than 20 jobs but must add at least 10 new jobs and invest at least $6 million.

Companies that are approved have to meet all the requirements before public money is made available to them.

For example, Charlotte and Mecklenburg approved a $140,000 grant for restaurant supplier Sygma in 2005. The company was supposed to invest $4.9 million into its Charlotte operation and add 80 new jobs.

Richardson said the company made the investment but failed to add enough jobs, so it received nothing.

“Incentives have to be performance-based,” Richardson said.

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North Carolina needs more sunshine on its business subsidy programs

By Bill Schweke on 05/21/2008 @ 03:48 PM

Tags: Ideas in Development, Economic Development, Business Incentives, North Carolina

The first thing any personal finance expert will tell you is that before you make any decisions on how you budget your money, you first figure out how much you are spending and where it is going. Although many of us don’t heed that advice for our own purposes, we might expect the people minding our government budgets to have a good handle on that information.

Yet, few states, including North Carolina, have budgeting, data collection and reporting procedures in place to measure what they are getting in return for their funds or even to make an informed guess at the total fiscal out-go.

In the ongoing controversy over North Carolina’s economic development decisions and business subsidy programs, this lack of accurate information has fueled disagreements over what paths the state should be pursuing.

Happily, a recent study by research staff at the North Carolina’s General Assembly has just filled this gap by projecting what the state spends annually on all types of economic development programs, whether they are subsidies in the form of tax incentives or direct spending on programs, such as Job Development Investment Grants or SmallBusinessTechnologyDevelopmentCenters. The figure was a whopping $1.29 billion per year!

This is a significant amount of investment by the state, which in itself validates the attention that has been paid to these development efforts.

This “Economic Development Inventory” (or “EDI”) report is an important first step, but more can be done to improve transparency and accountability in economic development. Analysis that looks at the state’s economic development programs by trends, priorities and impact would be a welcome addition for future reports.

My colleagues and I at the Corporation for Enterprise Development conducted a preliminary reexamination of the EDI report’s data. Our analysis revealed trends that are critical to understanding the substance of North Carolina’s economic development strategy. Chief among these trends is that tax-based subsidies are the fastest growing piece of the economic development pie. Tax incentives currently represent 90% of the state’s economic development spending in 2006-2007, up from approximately 77% in 1995-1996.

Economic development is a growing state priority, since its “budget” for tax-based measures and General Fund expenditures roughly doubled since 1996. Comparing tax incentives for economic development against other state expenditures such as Smart Start ($200 million) and the Earned Income Tax Credit ($50 million) also shows the relative importance of this policy area.

If you break out the varied strategies that constitute the state’s development tool kit, industrial development (largely business attraction) is the largest on-budget expenditure category. Agriculture and community economic development spending categories appear to receive the least funds.

And, in a comparison of spending by functional categories across the last 10 years, “on-budget” programs for regional assistance and industrial development appear to have grown, while programs for technology development and industrial training seem to have shrunk.

By making this Inventory a regular biannual event, North Carolina has an opportunity to step to the forefront and become a national leader in best fiscal accountability practices for economic development expenditures. The Inventory could also be improved to look at spending by strategic area, such as agricultural development versus entrepreneurship versus training. Analysis that looks at recruitment/attraction efforts compared to retention/expansion activities would also be useful for future reports.

A full commitment to measurement and evaluation would lead to an upgrade of the state’s current oversight of economic development programs by providing attention to improving the fit between purpose and clear, measurable goals and by instituting a quality Management Information Systems (MIS) that would allow deeper and more rigorous sunset reviews and evaluations.

There are many promising tactics for improving our business incentive efforts (local hiring preferences, better investments in worker skills, for instance), but before the state can improve the system it needs a much clearer idea of what is happening now.

But from the data we do have it is obvious that tax-based subsidies are a major development tool, and that is a situation that is primed for complexity, unfairness and preferential treatment. State policymakers and the citizenry should explore getting rid of all these tax loopholes in exchange for a cut in the business tax rates for all firms. This would create a much more level playing field for all types of business enterprises. Plus, you would now have to bring these “hidden,” long-forgotten tax “entitlements” into the sunshine of good government.

William Schweke is Vice President of Learning and Innovation at the economic policy think tank, CFED. “At What Cost?” CFED’s review of the General Assembly report, is available at www.cfed.org.

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Opinion: North Carolina needs more sunshine on its business subsidy programs

By Bill Schweke on 05/20/2008 @ 04:27 PM

Tags: Ideas in Development, North Carolina , Business Incentives

This is a significant amount of investment by the state, which in itself validates the attention that has been paid to these development efforts.

William Schweke is Vice President of Learning and Innovation at the economic policy think tank, CFED. “At What Cost?” CFED’s review of the General Assembly report, is available at www.cfed.org.

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New ways to stimulate hiring in North Carolina

By Bill Schweke on 05/18/2008 @ 04:29 PM

Tags: Ideas in Development, Business Incentives, North Carolina

With the General Assembly's "short session" already under way, there is very little time to advance new ideas that could help North Carolina's economy. Even if economists cannot yet officially declare a recession, many people in the state are experiencing hard times and few expect the situation to improve in coming months.

North Carolinians are feeling the squeeze of rising gas prices along with the rest of the country. We're also dealing with plant closings (16,000 manufacturing jobs lost in the past year) and rising unemployment (up from 4.5 percent last March to 5.2 percent this March).

Given national and global economic trends and uncertainties, how can a state really help mitigate the pain and woe? The state can't, nor should it, indulge in the deficit spending of the federal government. Nor do we have the monetary and fiscal tools powerful enough to move the economy as whole.

However, North Carolina is running a budget surplus. This expands the state's potential options and suggests that more could be done to aid dislocated workers and their communities.

The normal reaction to an economic downturn is to pursue policies to ease the pain -- helping the jobless avoid housing foreclosure, upgrading vocational skills and helping families meet basic needs.

Such actions will save many workers from the worst. But the state might do better by taking a different tack to experiment with proactive policies to stem the tide of a recession.

Using hiring subsidies in a counter-cyclical fashion might help encourage business expansion at the very time the rest of the economy is contracting.

Two innovative policies that could hold potential for assisting struggling counties are job growth credits and direct hiring subsidies for unemployed jobseekers. Both these policies could provide a stronger stimulus for hiring new employees and be more cost-effective than current incentives while offering more to smaller firms.

In addition, they could foster development in urban and rural areas across the state and aid directly those workers and communities that are suffering the most economic distress.

The first idea could be set up rapidly and would be attractive to a fairly wide spectrum of different-sized firms. This proposed Job Growth Tax Credit would provide a 30 percent tax credit on the first $14,700 of wages paid for each additional employee over a baseline of employment (perhaps 102 percent).

This would mean that lower-wage jobs are subsidized at a higher rate and more such jobs will be generated. By tying the credits to an indicator, such as a high unemployment rate, the program would automatically end when unemployment rates drop to an acceptable level.

Current programs take a less direct approach, by subsidizing capital investment to increase production and hoping for increased job creation. A Job Growth Tax Credit would be a more direct and cost-effective approach to job creation and would lower the cost of labor for employers and hopefully spur a substitution of labor for capital.

The second idea is a targeted Job Creation Grant program, which would offer small existing businesses direct wage and benefit subsidies for hiring workers who are currently unemployed.

Although more complex to administer, the program could target the 15 most disadvantaged Tier 1 counties (essentially the state's poorest) on a pilot basis. Subsidies could be provided from six to 18 months. The state would pay roughly $6.75 per hour for wages and $1.75 for benefits. This design provides more opportunities than the Job Growth Tax Credit for those most deeply in need of a break.

Discretionary wage subsidy programs have been tried in the past and have shown promising results. One successful example of an employment subsidy program was the Minnesota Emergency Employment Development program. It was started in the 1980s to help address that state's unemployment during a severe economic downturn. The program offered employers wage and benefit subsidies to hire state residents who were unemployed and ineligible for unemployment insurance or workers' compensation. The program enrolled over 42,000 employees and created over 18,000 permanent jobs at a cost of $3,100 per job.

Because such a program utilizes grants, not tax credits, these subsidies would be ideal for new, young and/or small firms. Its funding can be used immediately, not just when the firms have profits or when they file taxes. Moreover, the upfront nature of a grant also means that it could improve a firm's financial position for obtaining bank loans.

We do have some high-potential anti-recessionary options and the time to succeed. We only have to seize it.

(William Schweke is vice president of learning and innovation at the Corporation for Enterprise Development's Durham office. Frank DiSilvestro is a graduate student in public policy at Duke University and a research assistant at CFED.)

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CFED Reports NC Tax-based Subsidies are Increasing

By Bill Schweke on 05/09/2008 @ 04:31 PM

Tags: Ideas in Development, Business Incentives, North Carolina

North Carolina needs further accountability on economic development spending

A new report examining North Carolina’s economic development spending says that while state spending is rising sharply, tax breaks are growing to represent nearly all of the state’s economic development stimulus. The report, released today by the national nonprofit Corporation for Enterprise Development (CFED) was previewed yesterday in testimony before the North Carolina Joint Select Committee on Economic Development Incentives by authors Bill Schweke and Frank DiSilvestro.

The report, At What Cost?: North Carolina’s “Budget” for Economic Development is a preliminary reexamination of the North Carolina’s Fiscal Research Division’s recent “Economic Development Inventory.” The analysis revealed trends that are critical to understanding the substance of North Carolina’s economic development strategy. Chief among these trends is that tax-based subsidies are the fastest growing piece of the economic development pie. Tax incentives currently represent 90% of the state’s economic development spending in 2006-2007, up from approximately 77% in 1995-1996.

“The ‘Economic Development Indicator’ report is an important first step for improving our business incentive efforts, but before the state can improve the system it needs a much clearer idea of what is happening now,” said CFED’s Bill Schweke, the report’s author. “By making the system transparent, North Carolina has an opportunity to step to the forefront of this issue and become a national leader in fiscal accountability around incentives.”

CFED’s recommendations to the Joint Select Committee included making the “Economic Development Inventory” a regular biannual event, improving it to look at spending by strategic area, such as agricultural development versus entrepreneurship versus training, and developing evaluation measures to understand what purpose subsidies have played in terms of bringing a business to the state or generating economic growth.

To download a copy of At What Cost, please visit http://www.cfed.org/imageManager/_documents/nc/at_what_cost.pdf

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Are we really one North Carolina?

By Bill Schweke on 04/17/2008 @ 04:04 PM

Tags: Ideas in Development, North Carolina, Economic Development

North Carolina is a perplexing state. When one looks at its key economic, technological and workforce indicators, you would expect them to be stronger. While the state enjoys lots of good numbers regarding higher education, employment generation, innovation assets, and other similar measures, it features very troubling indicators when it comes to inequality (between households and different regions) and a workforce that is losing ground with respect to pay and required skills.

Add these all up, and a discernable gap between North Carolina’s image and its reality appears. Indeed, on many scorecards, the state has only a middling economy and is far from the success story we’ve all heard so much about. Instead, the state is held back by its divisions.

In the frequently used phrase, “One North Carolina,” we have an exciting, easily understandable, and relevant vision of where we want to get. Governor Easley has used the phrase as the name for one of his signature economic development programs. The term even has potential as a slogan for the bumper sticker.

But do we have a real commitment to what it will take to get there? I don’t think so.

When a public policy choice is posed, do policymakers decide, in large part, on the basis of whether it will get us closer to this vision? Not often enough.

Despite its considerable virtues in some regions as a prime and successful example of the “New Economy,” much of North Carolina continues to languish in the “Old Economy,” knowing and watching its old sources of wealth disappear. In these areas, our state is clearly dividing up into two North Carolinas – a state of haves and have nots.

So what is to be done? Merely talking about and hoping for the emergence of “one North Carolina” will not change or arrest the challenging economic patterns that we confront. Especially in light of the growing signs of a national recession and the continued unraveling of our state’s traditional economic base, there are actions that should not be postponed.

1. Here is a “to do” list that North Carolina leaders must undertake if we are going to break out of our current pattern:

2. Use the increasing pressure on the state’ current fiscal base to make necessary, but long put off, tax policy reforms that would modernize the North Carolina’s revenue system

3. Establish an overall cap on total business incentive spending.

4. Experiment during the recession with job creating tax credits for mid-sized and larger enterprises and hiring subsidies for small existing firms.

5. Rethink the current economic development strategy for struggling “tier one” counties of mainly relying on incentives to attract firms and, instead, develop new approaches that focus more on homegrown economy, regional efforts, and upgrading social and human capital Make entrepreneurship and the retention, expansion, and modernization of existing industry a higher priority.

6. Set and keep a goal for the financial accessibility of post secondary schooling and retraining for the state.

7. Recognize the importance of growth management and a sustained high quality of life in the state’s future.

8. Make the construction “One North Carolina” the touchstone for all major decisions.

9. Act, like we mean it, regarding the proposition; that we rise or fall together.

10. Dedicate ourselves to the goal of good governance – a more efficient, right sized, professional, transparent, and respected state government

Of course, none of these steps will be easy. Each will take visionary leadership and a commitment to long-term thinking, rather than politically expedient “quick fixes.” Each will also require some modest short-term sacrifice – especially from people and regions that seem to be doing okay in the present. To build “one North Carolina” in which all succeed, all must contribute in a direct and intentional way. In the long run, however, all will benefit if we muster the discipline and commitment to save and invest in our people and their future.

Let’s get started.

William Schweke is Vice President of Learning and Innovation at the economic policy think tank, CFED

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We need an accurate picture of North Carolina’s business incentives budget

By Bill Schweke on 02/13/2008 @ 03:33 PM

Tags: Ideas in Development, North Carolina, Business Incentives

Few government expenditures are more controversial these days than “business incentives.” With incentives, of course, government provides direct cash payments and/or tax breaks to a private business in order to get it to move to (or stay in) a particular community. Some see incentives as little more than corporate welfare for favored companies. Others see them as a necessary evil and a critical part of any modern economic development program. And indeed, there are occasional cases in which incentives can lure foreign investors who likely would not have relocated otherwise.

Recently, the controversy has been reignited by a new draft report from the Fiscal Research Division staff of the North Carolina General Assembly that attempts to take stock of the state’s incentive programs. While some have even criticized the report’s very title (“North Carolina Economic Development Inventory”) as indicative of a bias in favor of incentives, most of the harshest criticism has come from defenders of the current system who charge that the report’s calculation of $1.2 billion a year was overstated and misleading.

If North Carolina is to make the most of the report and the hard work that went into producing it, it is essential that we not get bogged down in a philosophical debate. What is needed now is to make the purpose of the research more transparent. The report was not an exercise to support or call into question the state’s business incentive strategies, but an effort to get the facts on the fiscal “out-go” – something on which nobody in or out of state government had any reliable data.

The report is an inventory of all economic development spending, direct expenditures and tax-based measures. Thus, the report’s goal is to count money, not to criticize programmatic use. If the program makes this list, it does not mean that it is unworthy. The legislature and the study staff wanted to come up with a ball park estimate of total development spending, view the trends over time, and determine what the implicit funding priorities are (or have been) in recent history.

Critics have attacked the report as being over-inclusive. They claim the report counts a number of long ago adopted tax exemptions and other well-accepted measures and lumps them in with more controversial modern programs like the so-called William S. Lee Act and the recent subsidies to Dell and Goodyear.

While the critics have a point – there are important differences in the various programs – this is no reason not to count them all. All the programs – cash grants, tax measures, free land, low interest loans, loan guarantees, management and business planning advice, etc. – constitute subsidies. In return for the government assistance, the private sector is supposed to provide a good, service, or investment as either a quid pro quo or part of a commercial transaction and exchange relationship.

So, for the purpose of clarity, let’s better define our terms. Use the term “business incentive” only to designate a subsidy whose chief intent is to affect the location of a business. Such location incentives include a broad spectrum of fiscal aid. Other subsidies (whether it’s the so-called “double weighted sales tax” that benefits manufacturing interests or long ago established tax breaks for farmers or insurance companies) may not have been adopted in order to impact the location of a particular business, but they are still used as economic development tools to improve “business climate.” As such, they should still be counted.

The report should address this confusion by simply disaggregating its “tax incentive” category and its “general spending” line and distinguishing between location subsidies and other economic development programs and goals.

Defenders of incentives have also attacked the report on the grounds that incentives can “pay for themselves” by raising new tax revenues from new businesses. Unfortunately, this is not always the case. While some incentives deals make fairly tough performance demands from businesses, (the so-called Job Development Investment Grant program, for instance), many do not.

In many instances, it’s clear that the state has miscalculated the benefits of a particular business and “overbid” in bringing it to North Carolina. In some instances, the business would have come without the incentives. In others, the state might well have generated a larger “return on its investment” if it had spent the money in another way. In short, despite the claims of some defenders, incentives are rarely costless.

It is due to the controversial nature of incentives that greater transparency of the kind provided by the new legislative report (especially if it is improved) is so needed. There are many promising tactics for improving our business incentives efforts (local hiring preferences, better investments in worker training and other business preservation tactics, for example), but before the state can improve the system, it needs to have a much clearer idea of what it is doing now. Let’s hope all sides of the incentives debate can come together on this critical point.

William Schweke works in the Durham office of the national policy think tank, CFED

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Major Questions about Economic Development, Part III

By Bill Schweke on 12/19/2007 @ 12:27 AM

Tags: Ideas in Development, Economic Development

What are the Policy Levers for Creating a Positive Business Climate?

Fresh thinking is required about the way economic development is heading in the United States. We have to move the debate about business climate away from simplistic notions of tax competitiveness or “getting the government off our backs” to focus on the real disincentives to economic competitiveness and opportunity. We explore six critical policy “levers” for creating a better business climate: education, physical infrastructure, regulation, taxation, development incentives and modernization.

Education

Many argue that we have reached the stage where global competitive advantage is based primarily on the education and skills of the labor force. Other factors such as natural resources and proximity to markets and suppliers are clearly important, but the next leaps forward in productivity and innovation will require more flexible, articulate, thinking workers.

Wise investment in public education is an absolute must for creating a positive business climate. This is not about just throwing more money at education — in the recent past we spent 7.4% of GDP (2005) and 18% of total tax collections on primary, secondary and higher education. There has to be a greater concern over outcomes. We have to improve educational attainment at high school and college levels. There need to be higher standards for graduation so that colleges and employers do not have to provide remedial education. Disparity in attainment levels between rich and poor communities and neighborhoods has to be reduced. States should compete on the basis of the quality of their education rather than on the number of dollars they can divert from education to give away as development incentives.

Physical Infrastructure

Often neglected in the anti-tax debate is the importance of basic services, efficiently and cost effectively delivered, to the creation of a positive business climate. The repair and maintenance of highways and sidewalks, the management and operation of schools, the prevention of crime, the safeguarding of public health, the care of public parks, and so on, are all essential to a community’s quality of life. If tax revenues drop to the point where these services can no longer be adequately provided, an area’s competitiveness declines.

It is government’s responsibility to plan and secure the implementation of new and reconstructed physical infrastructure. Water supply and sewers, roads, public transit, and airports are all critical components of an area’s development capacity and long-term competitiveness.

Regulation

Employment and environmental regulations are the main targets of those wishing to deregulate industry. These are the result of decades of struggle to constrain the more unacceptable aspects of the free market. Regulators often have brought much of the present hostility on themselves. They use overly bureaucratic procedures; focus on compliance rather than finding workable preventive solutions; apply uniform standards regardless of circumstances, cost and size of business; and have created legislative frameworks that encourage duplication and inconsistencies. Business focus groups say it is not the regulations themselves that cause them grief, but the way they are administered. A positive business climate is created by regulators who seek to work with business to achieve acceptable standards, whether in the workplace or in the environment. However, government must do so in a fashion that does not compromise its abilities to enforce the law on behalf of other stakeholders.

Taxation

There has been overwhelming emphasis in recent years on tax competitiveness and tax rates. This diverts attention from the fact that our state tax systems are outmoded, and no longer able to meet acceptable standards of adequacy, efficiency and equity. Revenue systems are increasingly out of step with changes in technology, the economy and demography. The burden of taxation is being shouldered by an increasingly narrow slice of economic activity. States are facing structural deficits that force them to make un-strategic changes in tax levels and bases to make ends meet.

The hallmarks of a competitive system should be reliability, stable and certain revenue generation and consistent rates; balance, a spread across a range of tax sources without over-reliance on any one; equity, a fair system that shields subsistence income from taxation, is progressive, and imposes the same tax burden on households earning the same income; efficiency, easy to understand, minimal compliance costs, simple administration; and accountability, public information on sources and uses of tax revenues, including tax expenditures.

Development Incentives

Given what we have said about the overuse and limited impact of development incentives, why don't we argue for their abolition? The reality is that there is no obvious way to stop the bidding wars. The best we can do is try to curb the excesses and ensure that incentives used are cost-effective. Our advice to economic developers and legislators is twofold. First, act like an investor. Incentives should be treated as venture capital investments in private development projects—sharing risk and returns in a mutually supportive partnership. Second, set clear goals and desired rates of return. Goals will vary from area to area, but might include more jobs, better jobs, changing the industry mix, reducing intrastate inequities, or jobs for the economically disadvantaged. Fiscal responsibility dictates that the investment should be fiscally neutral—the incentive should not be larger than the eventual tax payments accruing from the project. There should be other performance criteria relating to the goals—and these should be enforceable, with all the penalties and recessions that would apply in a venture capital investment.

Modernization and Entrepreneurship

For years, much of economic development has also focused on the “homegrown economy” by providing financial support in the form of grants or low interest loans and advisory services to businesses. The focus tends to be on retaining businesses in a particular area or on encouraging successful entrepreneurial initiative. Millions of dollars of public money have been used in this way, even though the evidence of the real effectiveness of many of these programs may be somewhat thin. Questionable and invariably over-optimistic figures are traded about jobs created and jobs saved. Many initiatives have worked well, but are still under-funded. What is certain is that many states have complicated and confusing arrays of financing and advisory programs. The policy landscape is all the more bewildering because year after year governors and legislators add new programs to respond to yet another perceived problem or gap.

The challenge is to turn these programs into effective delivery systems. These must include public and private providers and address the pressing need for businesses to modernize and to upgrade their technologies so they can be more competitive. What is needed are economic development efforts that pursue the high-road of greater skills, higher productivity, and better wages, and that deliver these development services with greater quality, customer-friendliness, accountability and cost-effectiveness.

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Incentives at $1.2 billion a year

Posted on 12/07/2007 @ 03:35 PM

Tags: Ideas in Development, Business Incentives, North Carolina

By Jonathan B. Cox

Tax breaks make up most of state enticements to businesses, analysis finds

The state has spent $3.7 billion in the past three years on incentives to attract businesses, according to a draft report released Tuesday.

The majority of that assistance -- almost 90 percent -- comes as tax breaks, the 56-page study said. It was written by the General Assembly's Fiscal Research Division at the request of a legislative panel that is evaluating the perks.

The report is among the most comprehensive efforts to quantify enticements used to get business to expand in North Carolina. While cash grants are usually easy to tally, it's harder to account for other expenditures such as those for worker training.

"Until this was put together, the state has had no idea how much it is spending on and off budget or what the trends are," said Bill Schweke, an incentives critic and a vice president with the Corporation for Enterprise Development in Durham.

Complete figures aren't yet available for this fiscal year, but the state will spend at least $1.2 billion on incentives, the report said. In the last fiscal year, which ended in June, the total was almost $1.3 billion. And in the fiscal year that ended in June 2006, the state spent $1.2 billion.

"That's a lot of money," said Sen. David Hoyle, a Gaston County Democrat and co-chairman of the committee. It was established after the state came under fire for large incentives to companies including Dell and Google.

"Are we getting $1.2 billion of benefit from it?" he asked. "I probably doubt it."

The report doesn't assess whether the benefits outweigh the costs. Nor does it include incentives that local governments offer.

The authors' calculations do include money spent by state universities and community colleges for economic development and cash put toward roads and other transportation.

While tax breaks accounted for the biggest chunk of the spending, only about a quarter of the $4.9 billion in tax reductions approved by lawmakers this fiscal year had an economic development purpose, the report said.

Officials who award incentives often say tax breaks are best. That's because they have no value unless a company acts. A company promised a tax break on power, for instance, gets no benefit unless it uses electricity. Even then, it's funny money, supporters say, because the state isn't cutting the company a check.

But tax breaks mean the state is missing out on revenue it could put toward other uses.

Even as North Carolina has increased the amount of tax breaks it offers, it has increased the money allocated for incentives in the state budget. Between June 2002 and June 2007, appropriations from the general fund increased 180 percent to $117.4 million.

The committee wants more information on whether that spending is worth it, how North Carolina compares with rivals and whether officials need to make changes. At a meeting Tuesday, they heard from a representative of the UNC Center for Competitive Economies. He proposed an 18-month, $350,000 study.

"Don't we already know what the answer is going to be? That, 'It depends.' Doesn't it really depend on what the economy is doing, what China has done?" said Rep. Pryor Gibson, a Democrat from Anson County. "I'm positive it's in our best interest to keep XYZ company with 1,000 jobs, even if they're making buggy whips."

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Major Questions About Economic Development, Part IV

By Bill Schweke on 11/19/2007 @ 12:27 AM

Tags: Ideas in Development, Economic Development

Major Questions about Economic Development: Why Business Recruitment?

Today, we are examining the nature and popularity of business incentives and attraction strategies.

Is Economic Development The Same As Business Recruitment?

What about business attraction efforts? Why did our discussion about policy levers leave them out of the mix? Isn’t economic development the same as business recruitment?

No. Business recruitment is simply a critical and extremely common strategy for promoting economic development. We regard them as tool or strategy, not policy lever, for the purposes of this article.

But economic development, as we have already noted, can be fostered by other initiatives and investments, ranging from improving the local amenities (e.g., building a museum and an aquarium) to reforming the K-12 educational system, from retaining existing businesses to fostering greater minority ownership of business enterprises. And we believe that, in most cases, recruitment is less important than many of these other approaches.

What Is Business Recruitment and Why Is It Still So Popular?

A business recruitment program works to attract new firms to a community by offering incentives, by making appropriate investments in the area’s workforce and physical infrastructure, and by marketing an area’s strengths. It typically consists of five key components: (1) marketing the location, (2) identifying prospects, (3) prospect tracking, (4) managing the visits of high priority and promising prospects and (5) closing the deal.

An effective business recruitment effort creates jobs, increases tax revenues and can help to diversify a local or state economy. It is virtually synonymous in the public’s mind with economic development (“attract jobs”) and will always remain a major development strategy.

What accounts for this appeal?

It is “tradition” and what most development professionals know how to do, whether they operate at the city, county or state level.
It is “fast-in”—once the decision is made, jobs come quickly. Indeed, it is often the best way to create significant numbers of jobs over a short time. And even if the odds are long, the payoff can be big. This contrasts with many other approaches, where the risk may be low and the actions are almost always appropriate (e.g., improving workforce skills), but the returns are longer term and more invisible.
Successful prospecting is a great way to boost city and state morale and visibly make a statement about the apparent healthiness of the area’s business climate. This high visibility can also generate strong political and public support for economic development: it assures the citizenry that “something is being done.”
It is easy to explain to the populace.
A strong, well-endowed recruitment strategy may be very appropriate investments for some jurisdictions.
It can be a means of making changes in the business climate that also aid existing businesses and increase support for other types of economic development strategies, such as supporting small business development or improving labor force skills. And recruitment approaches can be meshed creatively with other strategies, such as promoting a new industrial sector. Indigenous development efforts and business attraction can work hand-in-hand.
Everyone thinks that they can aspire to mounting a business recruitment effort, while a number of other approaches hinge on the quality of educational institutions, its natural and cultural amenities, its proximity to growing areas and larger retail markets, and so forth. Elected officials and many development professionals believe this is a game in which they can win, even if their assets are not super strong. Indeed, an effective strategy, targeting companies with modest workforce skill requirements, may neither be that costly nor require much improvement in sites or infrastructure.
Additional expertise in marketing and other relevant development help is typically available from other public and private actors, like the state government, investor-owned utilities and banks.
Tackling other development strategies requires greater time in building new partnerships and requires knowledge of a range of institutions (e.g., schools, community colleges, etc.) and areas of expertise (e.g., development finance, international marketing, political skills, etc.) that most development professionals do not possess. These other development approaches are often much complicated and much more difficult to pull off.
And financial incentives are often available from a variety of federal, state and local sources.

In summary, business recruitment is not anywhere close to becoming extinct and when suitably used, it should remain a key element in an economic development portfolio.

What Are The Limits Of This Traditional Approach?

But these arguments do not imply that all is rosy with business recruitment. The number one limit of this strategy is that it is largely zero-sum, when viewed nationally. In the vast majority of cases, these efforts are only determining where the facility will locate: they do not create any net new jobs in the United States as a whole.

There are other large pitfalls and dangers to watch out for. The odds are long, because there are not that many footloose projects. In addition, the number of prize projects, like the large automotive or computer facilities, is actually quite rare. So, most jobs are created by new and old indigenous companies. And without a good customized strategy and some exemplary development assets, many jurisdictions are not really prime candidates for the trophy projects.

Second, existing companies may feel neglected, thinking leaders are only interested in new firms.

Third, there is a terrible tendency, in today’s incentives’ “arms race” atmosphere to “give away the store” through providing overly generous financial subsidies. This can lead to a pyrrhic victory where the project does not even cover its full costs and taxes and fees are shifted to other businesses and the larger populace. And sometimes the project does not link with the local and regional economy as well as it was predicted and the knock-on job effects and the opportunities for local businesses to contract with this new facility were grossly exaggerated.

Fourth, focusing too much energy on attraction efforts has its “opportunity costs.” It may discourage policymakers and development professionals from giving sufficient quality time and adequate resources to other more promising development activities.

Fifth, the expectations of recruitment efforts are almost always too high. In fact, most companies that make initial inquiries about alternative business sites do not even decide to relocate or expand from where they are currently operating. Moreover, resentment and political fallout can result from projects that do not materialize at the eleventh hour or from suffering a low batting average when comes to bagging these prospects.

Lastly, policymakers often set inappropriate targets, for example, expecting a Japanese investor to locate in their area. And in other cases, their recruitment effort does not target the types of jobs that their citizenry really need and have a chance to get.

For all these reasons, state (and local) policymakers need to take a more strategic, cost-effective and balanced approach to business recruitment. Do not put all your eggs in this basket. And try to educate the citizenry that economic development involves more than chasing computer chips or smokestacks.

How Can Incentives Be Used By States and Localities?

The competition between states to recruit new companies or to retain existing ones has never been more intense. Billions are spent nationwide via a variety of tax incentives and spending programs that have fueled a new “economic war among the states.”

To simplify some, these incentives take two forms: tax incentives and non-tax incentives.

Tax Incentives.The traditional workhorse of business climate policy is the tax incentive. Tax incentives include various kinds of abatements, exemptions, reductions and moratoria (such as corporate income tax exemptions, sales/use tax exemptions on new equipment, and tax exemptions or moratoriums on equipment and machinery), along with other tax-related investment incentives (investment and jobs tax credits, research and development tax incentives, and accelerated depreciation of industrial and equipment).
Non-tax Incentives.Non-tax incentives, a growing form of inducement, include grants, creative financing subsidies and customized worker training. One particular mainstay is the Industrial Development Bond, which almost every state uses to offer low-interest loans to firms.

Why Are They So Popular?

Five reasons lie behind this increased use of development incentives.

Competition between states is an integral part of the federal system. The power of state and local governments to deliver services and raise revenues is much greater than in most other nations. The major cuts in federal development programs by recent administrations and the increased use of block grants have fueled additional competition among states, as each jurisdiction tries to attract and retain jobs.
The impact of plant closures, work layoffs and economic restructuring, sparked off and reinforced by global competition and new technologies, has dramatically affected the economic health of states. Elected officials are under immense pressure to “do something” about economic development. While they have little power to influence these larger macro-economic forces, they are able to change the tax code or create new non-tax incentive programs.
Corporate lobbyists, state officials and legislators often work in tandem to provide more incentives. Their actions are fueled by the fear that they will fail to compete effectively with other states and promoted by explicit efforts to help particular and powerful corporations. Others wish to seek a general drop in taxes on business and private investors. Providing incentives is a veiled way to answer this request. And some within these alliances believe this is just sound economic development.
The “incentives” for taking this approach to economic development are stronger than the “disincentives.” For instance, public officials and staff are more rewarded for making any deal happen, not just the good deals. It is easier to explain to political constituencies about industrial recruitment and the use of development incentives than it is to justify alternative approaches. The successes of landing the occasional trophy project are more visible than the scores of jobs created invisibly by providing good public services. The benefits of success can happen during an elected official’s term, while the additional costs and downside risks may occur later during another political administration.
Finally, there is an “arms race” mentality that requires policymakers to match any development incentive a competitor offers, regardless of its utility and effectiveness. This is fueled by a host of governments that are constantly striving to strike first in offering a particular inducement.

How Does Uncertainty Affect The Use Of Incentives?

It is worthwhile at this point to talk briefly about the uncertain situation that most policymakers face when it comes to playing the business incentive game.

First, when it comes to pursuing development strategies, most officials are not sure what works other than the use of incentives. And even if “homegrown” economy approaches do work, the payoff for these alternatives is often long-term. Furthermore, both game theory and psychological research suggests that participants faced with this complexity will go with a typical “solution set,” an almost formalistic response. They will do what everyone else is doing.

Second, policymakers also recognize that these development incentives have some effects on location decisions, but they are not sure how much incentive is needed or in which situations they are most appropriate.

Third, only companies know if they are really serious about locating in a particular jurisdiction and what incentive maybe required to close the deal.

Fourth, playing the incentive and recruitment game is widely understood and it is much harder to explain to the electorate why you are not doing it or why you are doing it differently (with lots of accountability measures, for instance) than to simply go with the flow.

Fifth, there is often tremendous political and corporate pressure to offer something of consequence. Not anteing up or coming up with too little will be typically seen as a sign of a bad business climate. Above all, the officials must avoid looking like they are just standing by when an important prospect is courting the community or a pivotal company is making signs that it might leave.

Sixth, even if the odds in landing the plant with an incentive are not great, if the fiscal costs are long term, not too big, borne by other levels of government, and/or largely invisible, then the official will almost certainly provide an incentive.

Lastly, politics has a lot to do with credit claiming and taking symbolic actions. Providing incentives, especially successfully, and playing on the recruitment stage with a lot of aplomb is a good way to do both.

These all represent challenges that will be difficult to overcome. And probably no state can let their biggest corporate citizens relocate without doing all they can to stop it. But the rest of this series will describe some promising ways to decrease uncertainties and increase the benefits of using incentives in these situations. ¹

¹ For a great review of the literature on the “psychology” and “politics” of incentives, see Harold Wolman and David Spitzley, “The Politics of Local Development,” Economic Development Quarterly, May 1996.

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Major Questions about Economic Development, Part II

By Bill Schweke on 11/16/2007 @ 09:58 AM

Tags: Ideas in Development, Economic Development

What Principles Should Guide Effective Economic Development?

The pressures associated with the bidding wars and the “cut-taxes-and-deregulate” lobby lead to policy “on the fly.” Decisions are made in an un-strategic fashion and long-term consequences are rarely considered. Recruitment efforts focus on doing the deal and tax adjustments are made on the basis of political calculus. It is time to set out some basic principles that should inform economic development policies and programs.

We offer seven for starters.

Strong economies compete on the basis of high value, not low cost.

Conventional wisdom suggests that low-cost states and localities are automatically pro-business. Costs are not unimportant, but value for money is at least as critical. A state with low levels of educational attainment, poorly maintained and inadequate infrastructure, and a degraded environment is not attractive even if it has the lowest wages or the most lax regulations in the region. Conversely, a state that offers a skilled labor force, modern infrastructure and a high quality of life, but has relatively high taxes, can hardly be said to be anti-business. The task of economic development should be to identify and work to enhance those assets that add value to the business environment and give better returns on the taxpayer’s dollar.

Investments in development capacity provide the basis of future economic health.

For a couple of decades through the annual Development Report Card for the States, the Corporation for Enterprise Development has argued that strong development capacity is the key to business vitality and economic performance. By this we mean that states ensure that the necessary human technological, financial and physical infrastructures are in place to enable economies to grow and to withstand the impacts of business troughs and recessions. Business consultant Rosabeth Kanter’s important earlier book, World Class: Thriving Locally in the Global Economy, highlights Spartanburg and Greenville, South Carolina, where successful business recruitment has developed a new, globally competitive economy. However, she observes that essential success factors include customized training and continued upgrading of workers’ skills, visionary leaders with a clear agenda for development, and successful collaboration within the business community and with government to improve company quality and performance.

Government is an indispensable partner in the process.

As a provider of essential services, as a conveyor of the broad range of interests within a community, and as the custodian of an area’s assets, not to mention the democratic expression of the public will, government plays a vital role in economic development. There is much support around the country for reducing the size and scope of government, but business also needs government to provide the basic infrastructure within which it can operate. The challenge is to make government work better and to find ways in which the public, private and nonprofit sectors can create complementary and reinforcing roles.

The concept of government-as-usual is bankrupt.

New attention to reorganizing economic development program delivery for greater quality and impact is essential. Development initiatives, like all areas of government, must meet higher standards for accountability, for cost-effectiveness and customer-friendliness. In many cases, the public sector must seek to do more with less. Those that deny these trends, that do not innovate and that do little to educate constituencies and political leadership about the rationale and benefits of their programs, inevitably will face budget cuts and possible elimination. “Reinventing government” is not a fad: it is standard operating procedure.

Economic development is for everyone, not just businesspersons.

Although profitability and returns on investment are the driving forces in any economy, they are not the primary concern of economic development—they are means to other ends. The measure of how well an economy is doing is its ability to provide people with real opportunities for a richer and fuller life. Are there enough jobs to go around? If jobs exist, do people have the skills to qualify for them? Does everyone have a fair chance of obtaining a job if he or she is qualified? Do the jobs pay enough to provide an acceptable standard of living? Failure to address these concerns means that economic development is not serving the broader public interest.

Competitiveness and equity are two sides of the same coin.

The growing disparity in our society cannot continue. There is already evidence that even where suburban and edge city economies are doing well, their regional economies are lagging because of the drag exerted by a struggling metropolitan core. Conversely, where disparities between the core and suburbs are much smaller, the whole regional economy moves ahead. Henry Ford realized that unless his workers were adequately paid, they would not be able to buy his mass production motor cars. Today, as families struggle to makes ends meet and are no longer able to save, they put a brake on overall economic growth.

Economic development has to encourage and enable businesses to be more competitive in the world marketplace and thus expand the economic cake at national and local levels. It also requires opening opportunities for everyone to participate in the economy.

Quality leadership can turn economies around.

Economic success depends on effective leadership, in the business community and in government, education institutions, and the non-profit sector. This works at two levels. At the strategic level, leaders need a vision for their state or local community that encompasses the principles of value-added competitiveness, partnership, inclusiveness, opportunity and development capacity. At the operational level, citizens should expect the highest standards of accountability, openness and integrity. A few critical “spark plugs” can galvanize broad community support and can maintain new development partnerships through good times and bad.

State governments too must exercise leadership. They should promote a culture of performance and accountability in both the public and private sectors; acquaint businesses and workers with the new challenges and opportunities posed by today’s economy; and develop a strategic vision for the state’s development future, as well as incentives that fit this vision.

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