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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.