Issue #20, Spring 2011

Metro Connection

With Washington paralyzed by gridlock, states—and the metropolitan areas that power them—need to take the lead in rebuilding the economy.

How can states nurture and capitalize on their varying metro advantages while struggling to close budget gaps in the hundreds of millions or even billions of dollars? They will not be able to make big, ambitious investments this year to advance the next economy in their metros. But they can do a few things that will make their metros stronger, and states like Michigan, New York, Colorado, and Tennessee are likely candidates to make these moves, given their newly elected, intensely pragmatic governors. First, they can take a bottom-up, “at your service” approach to their metropolitan areas, delivering investments and adjusting rules so that metros can use state resources more easily in pursuit of their own visions. Second, states can help metros get better at exporting, including making more things for the world market and improving infrastructure to speed the flow of those goods around the globe. Finally, states can pass new bond issues or even targeted taxes to invest in innovation in metropolitan areas.

Make Metros Central

State leaders need to understand and embrace what it means to have a metropolitan-led economy. Specifically, they need to align state resources in the service of metropolitan priorities. Any successful corporation rewards departments that are strategic in focus and disciplined in execution. States must do the same.

No U.S. state has $4 billion to replicate what Bavaria did for Munich. But states can examine the money that already goes to their metros—through transportation agencies, economic development programs, workforce training, and the like—and make sure the money can be used for what metros have identified as their top priorities.

A few ambitious metros are working with the Brookings Institution and RW Ventures, a regional economic development consulting firm, to create business plans to assess the market position of the regional economy, and propose strategies to improve performance. Minneapolis-St. Paul’s business plan aims to create an entrepreneurship accelerator to address the region’s troublingly slow growth rates for productivity, wages, and employment, and reform a business culture too oriented toward old-fashioned large companies rather than smaller, more nimble start-ups. But to be most effective, the region also needs the state to better align its workforce-development programs to the needs of growing industries so that new businesses have a ready supply of workers. To that end, the region’s business plan calls for focusing the efforts of the BioBusiness Alliance of Minnesota and the state’s FastTrac training, resources, and credentialing initiative on optimizing the work- and entrepreneurship-readiness of the region’s workforce.

Another regional business plan, Puget Sound’s, focuses on amplifying the region’s growing expertise in cutting-edge energy-efficiency technologies and systems. The region needs the state of Washington to provide some funding to construct a testing and demonstration center, to connect the Puget Sound initiative to other statewide energy-efficiency programs, and to allow state buildings to be energy-efficiency demonstration sites.

States also have to help individual local governments act in concert and behave more like single metropolitan economic units than they are now. Having lots of local governments means lots of duplicative services—and lots of opportunities for real-estate developers and companies to play municipalities against one another as they bargain for tax abatements—and less traction in the global economy. At the very least, states should change their tax laws so that companies making in-state moves can’t get local tax abatements. This will keep individual municipalities from ruinous competition that just moves economic assets around, rather than actually making the metropolitan economy larger.

Spend Smarter, Make More

International exports are a powerful source of job growth in metros. Between 2003 and 2008, the exporting industries in the seven large metropolitan areas in Ohio increased their employment by 32 percent, while overall net employment growth in these metros was almost zero. In 2010, exports grew faster than the economy as a whole.

Yet states have invested little in expanding exports. Instead, they have spent tens, even hundreds, of millions of dollars a year in tax abatements and subsidies to lure businesses into their states. In fiscal year 2009-2010, Tennessee spent more than $55 million on recruitment; in 2009, Michigan gave the movie industry $117 million in motion picture tax credits. But according to research by economist Jed Kolko, more than 95 percent of new jobs in states come from expansion of existing businesses or the growth of new ones. Thus the best way to create new jobs is to grow them at home rather than poaching them from elsewhere.

States should take some of their business incentive funds and shift them to supporting exporting companies through simple steps like funding trade missions and competitive grants for groups (trade associations, university centers, local governments) that want to provide training, marketing, and other services to bolster firms’ export capacity. At the very least, states can leverage the resources of other organizations, from nonprofits to the federal government, involved in export promotion. Our colleague Emilia Istrate has found that for a state investment of $5 million in 2009, Pennsylvania’s Center for Trade Development has been able to help generate (and verify) more than $450 million in export sales, supporting 6,500 Pennsylvania jobs, and producing approximately $25 million in local and state tax receipts.

Supporting manufacturing is another way to bolster exports, job growth, and metro-led innovation. True, manufacturing as a share of U.S. employment and the U.S. economy has dropped dramatically from where it once was, but even so, most of our exports are manufactured goods, and metropolitan areas with a big share of manufacturing jobs tend to have higher patent rates than other metros. Manufacturing industries also have higher rates of product and process innovations than non-patenting companies and conduct some 70 percent of all of the nation’s industrial R&D.

Susan Helper, an economics professor at Case Western Reserve, and Howard Wial, an economist at Brookings, have proposed that states create manufacturing centers in key metros that will conduct research into new manufacturing technologies and educate businesses about technology-driven management and organizational changes. Small and mid-sized businesses that make up so much of the manufacturing supply chain are in desperate need of this kind of help because they don’t generally conduct their own R&D. If U.S. manufacturing is to be more innovative and more competitive, it has to start with these businesses. These centers can get started with a state investment of $9 million a year, or less than 10 percent of what Michigan spent last year to cajole the film industry into the state.

Governors and state leaders can boost exports and near-term job creation by overhauling their state infrastructure banks or establishing new ones. State infrastructure banks are revolving funds for transportation projects, capitalized with state and federal funds. They offer loans and other forms of credit assistance to public and private entities developing highway and transit capital projects. Infrastructure banks could be critical for putting together the complicated financing for modern ports and gateways, but many of the 33 states that have these institutions use them as piggy banks for regular transportation projects. Instead, states should use their banks for the kinds of projects that will speed the flow of their goods abroad, connect workers to jobs, and create the infrastructure for new, green vehicles. These projects should be chosen on the basis of return on investment, not political log-rolling.

California offers a good model for an infrastructure bank. With an initial state investment of $181 million in 1999, California’s Infrastructure and Economic Development Bank has relied on interest earnings, loan repayments, and other fees—not the state treasury—and has supported more than $400 million in loans.

New Money for New Ideas

It sounds like heresy in the current environment, but state leaders should also consider going to voters in 2012 (when the economy has lifted a bit and the costs of budget cuts have been made clear) to ask for bond issues or dedicated tax sources to support big, bold initiatives. Voters understand the need for smart, targeted investments to promote their future prosperity.

In Ohio, for example, voters last spring approved, 62 percent to 38 percent, a $700 million bond issue to preserve the Third Frontier, the state’s premier technology-based economic development initiative. The Third Frontier program makes small investments in start-up companies at critical points in their development. Third Frontier and similar initiatives in other states were designed to address a basic failing of venture-capital (VC) markets, which is that VCs rely on shortcuts and familiarity and other efficiencies to maximize returns while minimizing their expenditures of time and effort. Compounding this problem of limited horizons, VCs are less and less venturesome these days, which leads them to invest in companies that have solved many of the problems that bedevil very early stage endeavors and have established a bit of a track record. Third Frontier and sister programs correct for these flaws in the venture-capital market by providing capital to local start-ups in their formative stages. An independent analysis found that the state’s $681 million expenditure so far has yielded $6.6 billion in economic activity, including 41,300 jobs, since 2002.

At a time when 42 percent of Ohio voters expressed sympathy for the Tea Party’s goals, the state’s Democratic-led House and Republican-controlled Senate voted in favor of putting the measure on the ballot. The Ohio Business Roundtable was a critical force in backing the initiative. There are opportunities at the state level to subvert the partisanship that has practically immobilized Washington.

Every state should offer its voters an opportunity to support market-shaping investments tailored to its metro strengths: perhaps clean energy in Colorado, transformative infrastructure in California, advanced manufacturing in Michigan. There are projects and ideas everywhere that private capital can’t identify because of inadequate information. This is where states can step in.

The Next Federalism

American federalism is a political system, an economic arrangement, and a powerful narrative about how a vast, diverse country should work. Sometimes the federal government is the protagonist, as in times of war or acute economic crisis. Sometimes states are at the forefront of the story we tell about the nation.

But metros have been conspicuously missing from that narrative. They don’t have a place in federal or state constitutions. They are not governed by a single executive, but are loosely knit together by overlapping networks of business, civic, philanthropic, nonprofit, and elected leaders. They are less powerful politically but more powerful economically than states. Simply put, we need a new way of thinking about governance and the economy that accounts for the economic power, informal structure, and diversity of America’s metros.

In this new story, states are still formal partners with the federal government. But states are also partners with their metropolitan areas, and welcome the force of metropolitan innovation and economic might. Communities not within the metro orbit would also likely benefit from state attention to the intertwined needs of places, rather than adherence to particular program boundaries.

This is a very different way of thinking about the relationship between the state and its subdivisions. This is home rule turned on its head, with metros driving state priorities and investments, rather than states deigning to grant localities some independent powers. Most state legislatures are legendarily hostile to the state’s major metros—see Albany, New York, or Springfield, Illinois. Why would governors and state legislators ever want to put themselves in the service of metros?

Frankly, they might soon find they have little choice. Metros are poised to lead in growing export sectors like computers, pharmaceuticals, and services; in innovation and the scientific breakthroughs that move us to a low-carbon economy; and in the new, diverse workforce. Skeptics will say that rural legislators will never countenance the primacy of metropolitan areas. But given the decentralization of population and jobs, the towns and counties many rural legislators represent are now included within defined metropolitan boundaries. Fifty percent of America’s rural population now lives within metropolitan areas. Even those rural areas beyond metropolitan space can benefit from metropolitan strength, given the spatial geography of economic and energy supply chains (think rural solar farms serving metropolitan energy grids)— they’ll see that a rising metro tide gives a fiscal lift to rural boats. In addition, budget gaps in the billions of dollars may concentrate the mind of state lawmakers, prodding them to put fiscal health above party or cultural or racial divisions.

Between 1787 and 1790, states decided, for a variety of reasons including significant economic benefits, that they should cede some of their sovereignty to the federal government—which, at that time, was itself kind of a creature of the states, like municipalities are today. In 2011, states face a version of the same choice. The wise ones will embrace their metro-led future.

 

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Jim Richman:

America's states are the outcome of our historical development. As political and economic institutions, they made sense back then. Do they still make in today's world? Is it time to consider replacing our current 'states' with new political and economic entities centered on today's political and economic drivers, the largest metropolitan centers?

Mar 17, 2011, 2:57 PM

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