Regional cooperation, not job poaching, is recipe for rebound

Anyone who is suffering withdrawal pangs from “Shark Week” on Discovery Channel (who me?) can turn to the feeding frenzy in the Midwest for a fix. Racked by the recession that exposed a severely underfunded state pension and a multibillion-dollar deficit, the state of Illinois threw the equivalent of chum overboard and raised its corporate tax rate to 7% from 4.8%. The governors of Indiana, Wisconsin, and even South Dakota came to feed, offering incentives to lure Illinois businesses to relocate. But is pitting one state against another productive in a global economy like ours?

As Stateline reported today, “a smiling South Dakota Gov. Dennis Daugaard has joined the dogpile, asking via direct-mail postcards sent to businesses in Illinois, Minnesota and California, “Tired of taxes? Call me.”"

Some have taken the bait. The most recent business to pick up stakes is Modern Forge Cos., which is moving its 275 employees 35 miles east to Indiana.  Other businesses have threatened to leave, in a regional tug and pull that threatens more harm than good to a regional economy. (Illinois is not alone–see our blog post on the perennial “job poaching” in Kansas City, which straddles the border between Missouri and Kansas).

Rather than poaching jobs across state lines, states should be working together to form regional alliances to prepare for and weather the inevitable downturns. As we have argued here, regional efforts can create value-added bonuses for everyone. As Network member Bill Barnes of the National League of Cities put it in his July column, “Any local jurisdiction is only one part of the larger, inter-related region and regional economy. When leaders or citizens fail to acknowledge and act upon that fact — a regional disconnect — their own municipal governance is less effective and the region is diminished.”

As Illinois Governor Quinn told “Stateline,” “We’re a regional economy in the Midwest and I think it’s very important to understand that Illinois is the capital of the Midwest and always will be, and we are the biggest economy.”

Illinois Chamber of Commerce President Doug Whitley, in that same interview with Stateline, agreed. Whitley has been a harsh critic of the income tax increase, but he said “regional cooperation makes far more sense than the scrambling states are doing now to lure jobs from each other. It’s an argument many economists make, too, saying that working to draw companies from one location to another doesn’t create new jobs.”

That’s not to say getting everyone to the table is ever easy. As Barnes at the National League of Cities pointed out in his July column, regionalism is not always easy or pretty, but it is necessary:

“We should recognize that regional governance is not about making nice. It’s about politics: about working through competing interests and values and about dealing with agreements and disagreements on matters of mutual concern.”

The key word is governance. Coming together rather than poaching from each other is more likely to leave a state, and a region, resilient in the face of sudden change, whether that be a recession as deep as today’s or a hurricane or a collapse of a major industry.

Of course, it’s always better to prevent the shock if possible in the first place, which also takes regional governance. In a BRR working paper, “Economic Shocks and Regional Economic Resilience,” Edward Hill and coauthors find that the elements that make a region or metro area able to ward off shocks include, foremost, a diversified economic base. An economy that is focused on health care and social services is particularly resistant. An economy focused solely on durable goods, on the other hand, is much more vulnerable to a downturn. A population with higher levels of education is also a good prevention, as is less income inequality. Past research has also found that areas with newer public/private infrastructure are more resilient to shocks.

Once the shock hits, though, bouncing back is another story–and rather surprising on the surface. For example, economies built around durable goods (manufacturing, for example) and with populations with less education are quicker to rebound in employment (although not in broader productivity gains). While certainly not meant to discount either education or diversified economies, the findings underscore the point that when rebounding from an employment drain like the current recession, economies that are cyclical, such as manufacturing, tend to rebound after a dip (that’s why they’re considered cyclical). And they tend to employ those with lower skills. The problem is, those very traits make a region more vulnerable to downturns in the first place.

While these larger forces are important, the key to success is often more personal. Based on a series of in-depth case studies, Hill and coauthors find that, “The strategic decisions of individual firms and their leaders, as well as decisions by entrepreneurs in the area, were the key actions within the region that affected the region’s economy and determined whether or not it proved resilient. ” The paper’s case studies of Charlotte and Seattle are quite revealing in this case.

One thing is clear. The stew of elements that make a place resilient either before or after a shock require many players at the table, cooperating for the larger good. We’re all in this together, should be the mantra, rather than the current attempts to “poach” businesses from suffering or vulnerable states. In the case of Illinois and states in the Midwest, they would do better to focus on joining forces, playing to the area’s strengths, while seeking innovative solutions rather than resorting to the old formulas. As Hill and coauthors learned from their case studies,

What effect did these explicit efforts to promote economic growth [by regional civic groups, businesses, and foundations]  have?  First, while policymakers in all of the six regions engaged in traditional economic planning and development activities (marketing and promotion, tax subsidies, job training programs), there is no reason to believe that these activities played a major role in determining whether the region was shock resistant or resilient ….  This is not to say that these programs were ineffective or that they were not better in some places than in others; however, virtually no one we interviewed thought that they played a major role in the region’s resilience, and we find no reason to quarrel with that assessment.

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