Overview of State and Local Economic Development Policies and Practice in the United States

The United States is a diverse economy of more than 290 million people residing within 3.8 million square miles. Its $11 trillion GDP is distributed among 50 states, 362 metropolitan areas, 3,034 counties, and nearly 20,000 municipal governments. Employment growth across these jurisdictions varies widely. For instance, during the past decade the Mountain region of the country grew 3.7 times faster than the Middle Atlantic region. Employment in the Mountain region has expanded nearly 38 percent over the 10-year period while the Middle Atlantic region has grown only 10 percent. A 12 percent decline in the goods-producing sector contributed to the laggard growth in the Middle Atlantic region, compared with a 25 percent increase for the Mountain state. Metropolitan areas exhibit even sharper contrasts between the faster growing and slower growing and even declining areas. During the past four years, the US economy overall has lost 451,000 jobs, with 2 million jobs (-12.5%) disappearing from the manufacturing sector. During that time, the national unemployment rate peaked at about 6.3 percent and currently stands at 5.4 percent. Unlike some countries, the United States does not pursue a concerted national industrial policy. Rather, the country engages in more than 5,000 separate economic development policies, as each state and local jurisdiction pursue efforts to attract and retain existing businesses or nurture new ones. State and local governments use their resources and powers to reduce the risks and costs that could impede private investment within their jurisdiction. In addition, a significant number of local (substate) economic development efforts are carried out under the leadership of non-governmental agencies, such as chambers of commerce or partnerships among businesses, government, local employment agencies, and non-government organizations. Estimates of the amount of funds (direct and indirect) spent on economic development efforts are elusive. Yet, some studies place that amount as high as $30 billion a year, which translates to around $103 per person or $213 per worker in the United States (Bartik, 2003). This figure includes all state and local tax and other financial incentives, plus job training and infrastructure incentives. Still, this amount is not much more than 0.2 percent of US GDP. However, when one considers that most of these incentives and other economic development activities are targeted at manufacturing firms, the ratio of funds to targeted jobs increases significantly to over $2,000. Why are economic development initiatives necessary to achieve these outcomes? The primary justification for government to intervene in a market economy, in addition to protecting property rights and providing a workable regulatory environment, is to counter market failures. Bartik (2003) notes several possibilities of market failures that prevent regional economies from realizing their full potential: 1) information on how to improve business productivity may not be adequately supplied; 2) research and development in business may be under-produced, 3) business capital may be insufficiently supplied, 4) businesses may not train employees sufficiently for fear of losing workers to other employers, 5) public infrastructure may be insufficiently provided to businesses, and 6) business regulation and taxes may need to be more flexible. Therefore, economic development programs should be designed to address these issues. This paper provides an overview of state and local Overview of State and Local Economic Development Policies and Practice in the United States