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Friday, July 22, 2011

Why is economic development a “middle-class” issue?

Some of you may have found it odd that a blog devoted to the situation of the middle-class has had so many articles on economic development. “How does that affect the middle class?” you may ask. That's a fair question, and today I'll take a whack at it.

My academic work has had a fairly straightforward development from considering business-government bargaining (and the profound impact rising business mobility has had on that) to considering the economic development subsidies that play such a big role in that bargaining – and in ways of controlling those subsidies. See in particular my books Competing for Capital and Investment Incentives and the Global Competition for Capital. What those books show is that the unregulated competition, job-poaching approach of the U.S., is not the only possible one. The European Union has imposed rules specifically limiting the subsidies given to large mobile companies. And, overall, the EU regulatory rules (sharply limiting subsidies in rich areas, allowing higher subsidies in poorer regions such as the East European new member states) work in holding down the size of the incentives given to companies. Hyundai got $115,000 per job from Alabama, but only about $75,000 per job from the Czech Republic, even though Alabama is much more prosperous than the Czech Republic and shouldn't have to give away as much, all other things equal. The EU's “regional aid guidelines,” as they are called, really have teeth.

Without further ado, then, let me address why the middle class should care about economic development subsidies.

  1. Economic development subsidies represent a transfer from the average middle-class taxpayer to business owners, who on the whole are much wealthier. In other words, investment incentives exacerbate income inequality within the country. Companies using their mobility to extract subsidies are often busy reducing their wage bill or regulations as well through the site location process.
  1. Governments justify all sorts of middle-class unfriendly policies through the need to compete for investment. Whether it's proposing “right-to-work” laws in Missouri and New Hampshire, cutting business taxes in (your Republican state here), slashing government jobs, or gutting regulations to coddle the “job creators” who are actually sitting on trillions of dollars of cash already, competition for investment is the means by which races to the bottom (in taxes, wages, environmental and social protection) are usually thought to occur. By the way, I like Dale Murphy's Oxford University Press book The Structure of Regulatory Competition as an antidote to those who think that races to the bottom are some kind of urban myth.

  2. Tying these two factors together, investment subsidies drain money from other government spending programs, increase debt, or require a higher tax burden on someone else, or some combination of the three.

For me, then, my commitment to reducing inequality is what fueled my interest in economic development subsidies. As my dissertation adviser Charles Lipson always says, people become interested in political science because they care about politics, and I'm certainly no exception. Economic development is obviously not the only issue that affect the middle class, but I hope I've convinced you that it is actually quite significant. I'd be pleased to hear your thoughts.

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