Stay Informed!

By Bill Schweke on 12/20/2010 @ 08:49 AM

Tags: Ideas in Development, Economic Development

Economic development policymakers and practitioners generally do not focus much on macroeconomic policy. This is understandable, given the obvious fact that such policy is the province of the Federal Reserve and the federal government.

But the subject should get more of their attention for a number of reasons.

1. It matters. National monetary and fiscal policies are the “big guns.” Their positive and negative effects dwarf even the largest state development policy efforts. (The Great Recession has underscored this point.)
2. The internet, the dot.com firm start-ups, and the broad spread of information technologies throughout the economy, and other such mega-trends did not abolish the business cycle. (The major asset bubbles of the past few decades make this idea almost self-evident.)
3. States need to develop their own counter-cyclical strategy and stop thinking that it is not their job. States can craft their own fiscal policy. In their better years, they can set more money aside for their Rainy Day Funds. State policy staff should look at their tax structure and judge whether it is overly responsive to business cycles (relative to their peers), identify when in the cycle they are hit the hardest, and alter their tax mix if need be. (However, there are limits. States, at best, can smooth out their fiscal flows, not eliminate a recession’s impact. Likewise, we cannot orchestrate full employment in a particular state or locality.)
4. Upfront planning of state-based counter-cyclical efforts would help. Having so-called “shovel-ready” public works projects make sense. Private sector hiring subsidies and public service employment could be triggered by the achievement of a certain unemployment rate. (In fact, since recessions do not hit all 50 state economies at the same time, state fiscal policies can be in theory, more well-timed.)
5. A steep downturn is hard on “mature” firms. Fortunately, not all of these business enterprises are doomed to fail. Well-run business retention efforts can turn around some troubled, but still viable firms. Ideally, professional business visitation programs can do most of the firm or sector identification activities, in a proactive fashion.
6. Wise economic development investments at the state and local levels can make for a more efficient and innovative economy, encouraging a more reliable and higher level of growth. The boom times can be more steady, broad-based and less dependent on a single factor (e.g., housing, new financial instruments, the auto industry, etc.).
7. We need to put our economic development work in context. This means encouraging a place-based development dynamic that meets our scale concerns. And it means doing so smartly. We get more “bang for buck” with good government practices: a moderate but adequate tax system, thoughtful but needed approaches to regulation, exemplary pre-K through high school institutions, world class universities and colleges, solid and market-sensitive technical institutes and community colleges, modern public infrastructure, professional and customer friendly public services. Obviously, these move much more money and have greater effects on the private sector’s bottom line than even the most well-endowed state economic development program.
8. Improving government efficiency and effectiveness helps as well. Indeed, it is often said that policymakers should never miss a chance to transform a difficult challenge into an opportunity for a needed and long-awaited reform.
9. There will be a severe revenue squeeze in state and local government for much of this decade, economic development programs must meet a harder ROI standard, or risk termination. And we cannot expect that we will be rescued by another twist or turn in macroeconomic policy. Economic development policymakers and professionals must become much more persuasive and evidence-based.
10. It would not hurt for the field to become more conversant with the three main elements of national macro policy: assistance to those hurting (e.g., unemployment compensation, etc.); recovery (getting the economy growing again, giving it an initial boost via appropriate monetary and fiscal actions); and regulatory restructuring of financial services. Here, I recognize that this suggestion is outside the developer’s comfort zone and daily work. But greater macro literacy would be a good thing.

Despite the “foreign” quality of macroeconomic policy and the central role of microeconomics in the field of economic development, there are lessons to be learned and applied from the former.

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