COMPETING AMONG THE STATES

I have one son and no daughters. That is, as a parent, I have not had the experience of my off-spring vying for my attention or favor. My poor son got all the attention and whatever benefits my lame favors could provide. But I am led to believe that in families with multiple off-springs that competition is usually one of those conditions that constitute the basis of many family stories. I do know of friends and relatives where, sure enough, sibling competition has been a source of family tales ranging from the humorous to the near tragic. Which brings to mind the question: what is the function of competition and how does that function change or vary when the competitors are situated in a basically, non competitive arrangement? Can it be dysfunctional to a family? Should parents concern themselves with the eventuality of such interactions and can the parents affect the nature and severity of such competition?

Federalist thought relates to this area of concern in that, ideally, families are federated arrangements of the highest order. That is, if there is any relationship in which the members should see the interests of one being the interests of all, that should be in a family.

This whole concern came to mind as I read a recent New York Times article, “Empty Words, Empty Workplaces,” by Louise Story.¹ The article outlines, in some detail, how the separate states of the United States have found themselves in competition to lure corporations to open or maintain business facilities within their respective borders. Of course, the aim is to lure business activity that will strengthen their economies and with that activity the promise of jobs, either in maintaining existing ones or creating new ones. Jobs not only benefit the workers who are hired, but their wages and salaries are then spent in local businesses which results in more jobs, salaries, wages, and savings. In short, economic activity begets economic activity. And by the way, all this means increased tax revenues.

So how do these states compete? First of all, by states, I really mean state governments. And by governments, I mean politicians who feel pressure to attract or maintain as many business activities in their respective states or local jurisdictions – like cities and counties – as possible. Those politicians most apt to engage in this type of competition usually find themselves in elected office as a result of support by certain constituencies such as business associations and the like. There are different forms of this competition. For example, a long standing basis by which states compete is the manner in which they treat labor unions. Some states try to discourage or otherwise make union membership unappealing.² On the other hand, in terms of presenting a united front in these competitions, these politicians and constituents might engage others who would benefit from capturing sought-after business facilities including labor unions.

More recently, the main strategy in attracting or maintaining businesses is to offer corporate entities, who have expressed plans to move or expand their activities to new sites, financial favors. Just imagine a large corporation lets it be known that it is planning to expand and is looking for a place to do so. The simplest type of business to visualize is a manufacturing business that needs a physical site to put a factory or other productive facility, but there are also examples in oil, coal, technology, entertainment, banks, and big-box retail chains. In order to attract or maintain businesses, states find it necessary to offer incentives in the form of tax breaks – abatement, tax credits, lower assessments, or lower rates – and/or loan guarantees. The article describes how corporations who are seeking to expand or move may set up at some site, such as a large enough hotel, and let states or smaller jurisdictions know that they are in the market to select a site. Responding, state agents come in and, with written proposals, detail the “gifts” the states or local governments are willing to offer.

If the deal is made, the prize is secured. That means the corporation will either stay where it is or expand into another state. For the winning jurisdiction, this can be very good, but this is true only so long as the facility remains. A lot can happen to make the deal go sour. First, the incentives, in a time of stringent state and local government budgets, can mean, initially at least, short-changing other government services such as local schooling. In addition, if the fate of the corporation changes, as has been the case within the auto industry, state and local jurisdictions can find that the presence of the newer business or facility can be short-lived. Depending on the cost of the incentive, a particular commitment can then be very expensive indeed. Once a large business enterprise enters an area, a lot of re-locations can take place and a new business environment can take time to be established. The same can be said when a business folds or moves away. The only difference in this latter case is that local economies might never again find an acceptable equilibrium.

For those of you who might be interested in the nuts and bolts of this process, I recommend the Story article (apparently, this article is the first of three pieces which appeared on subsequent days). My concern here is with the whole state of affairs which pits states against each other. As with parents or, perhaps at a less intimate level, partners, what level of competition is appropriate? Competition, no doubt, spurs us to do better. We seem to have, as a part of our nature, the need to compete. We engage in races or other sports, we play games, we simply like to match our skills against others and win. But winning, for some, also means losing for others. It is one thing to compete in games when losing, at worse, generates only embarrassment, but it is something else to lose when the consequences can mean material deprivation and/or a loss of spirit.

As parents, we would not allow our children to engage in such competition. Partners in a business arrangement would be on very treacherous grounds if they competed among themselves for such stakes. After all, the whole notion of a partnership is to align with others in order to pool resources and arrange, in return, a relationship in which benefits to one partner will be benefits to all partners. The same goes for the costs that a partnership incurs. I agree that competition motivates us to upgrade our efforts, but with partners or children, the level of competition should be gauged appropriately so that the purpose of a partnership or family does not become compromised or threatened.

While states and their local jurisdictions are not families, they are in a partnership and that arrangement is formulated through a very sacred agreement. The agreement is the US Constitution. The founding document is an agreement between two sets of entities, the people of the United States and the states of the United States. Within each of these agreements, competition is permitted, but within boundaries. The boundaries within each type of entity are different. Among the people, the boundaries are looser and each individual is given great leeway so that each can express his or her liberty to seek the opportunity to better his/her happiness. This is so because experience has demonstrated that only under conditions of freedom does the individual have the incentives to fulfill his/her capacities. This, in the words of Thomas Jefferson, is self-evident. But states are another matter.

Jurisdictions represent collectives. We have collectives comprised of local or regional populations – states, cities, townships, etc. – and a national population. In the US we decided to form a federated union in order, among several reasons, “to form a more perfect union.” Hundreds of thousands of lives have been sacrificed in order to establish and maintain that union – hence, its sacredness is well established. So, do states have a right to engage in competition where the stakes can be so high; that is, where losing in such competition has such dire consequences to their economies? Should the states, in determining how productive resources are distributed, rely on a competitive format? We should remember that because many states either do not have the resources to compete or, if they do compete, have no chance of winning, they are, in effect, deprived of a reasonable share of the wealth producing activities of the nation. Or, there is the case where a state or local jurisdiction has a chance of winning but has to invest a level of resources which deprives it of the ability to meet highly prized values. All this leads to the question: What's actually at stake?

Here are a couple of quotes from the article:

A Times investigation has examined and tallied thousands of local incentives granted nationwide and has found that states, counties and cities are giving up more than $80 billion each year to companies. The beneficiaries come from virtually every corner of the corporate world … .³

Nationwide, billions of dollars in incentives are being awarded as state governments face steep deficits. Last year alone, states cut public services and raised taxes by a collective $156 billion … .⁴

Of course, these incentives can be viewed as investments and, if successful, can parlay into economic gains. But the article describes the competition as zero sum; a win for one state is a loss for the others. Such competition needs to be judged in terms of how it affects the total union.

If the total union experiences a net benefit, then the competition is functional and in accordance with the demands of a functional partnership – a benefit for one is a benefit for all. But the article, in its description of what is going on, documents how the competition is causing real hardships and, in most cases, does not result in greater wealth or income for the whole. In most cases, competition is simply shifting production and business resources from one locality to another – in one case the process resulted in a production facility moving across a state line; the same workers are employed only now they have a longer commute. And, in the interim, the costs to varied government services, which can also be considered investments, are sacrificed for the benefit of corporate shareholders. Often, accrued lower levels of production costs which are secured by this competition and their resulting higher profits do not offset the total costs the polity absorbs. Among these costs might be some that are difficult to measure but are real nonetheless. For example, if a jurisdiction sacrifices its efforts in environmental protections in order to garner the resources for an incentive package, the resulting damages to the environment, while they might be hard to monetize, are still costs to everyone. Yet many of these added costs are not taken into account.

But undermining all of this is the harm done to the legitimacy of the union. Are we in this together or not and if not, why sacrifice for it? I find it interesting that a number of states had to make changes to their constitutions in order to engage in this type of competition. Also, incentives, especially in the form of differentiated taxes among taxpayers, have been challenged in the courts. The claim on the part of non-privileged taxpayers has been that by granting tax breaks to some, the rights to equal protection of others have been transgressed. Unless, as I suggested above, a tax break to one does not demonstrably accrue benefits to all, then the unequal tax policy does not provide equal protection.

In a 2006 Supreme Court case, Cuno vs. Daimler-Chrysler, involving tax incentives given by the states of Ohio and Michigan, the Court did not even consider the extent to which the incentives worked to benefit the whole citizenry. In other words, the Court didn't address the question of total benefit. Instead, it ruled that the non-advantaged taxpayers did not even have standing to bring their challenges. Since this competition between states and jurisdictions is a recent trend, at least to the degree it is being practiced today, this judicial decision can be considered an early attempt at interpreting whether it is constitutional. I believe the Cuno case to be an early one in what will eventually be an evolving jurisprudence and that this issue will make its way through the court system again.

Corporate incentives offered by state and local jurisdictions is an issue that gets at the very meaning of what it means to be in a federated union. It is an issue that secondary students can understand and can relate to because it affects the amount of entry jobs available to them. I suspect, as the years go by and its occurrence and significance become more pervasive, the citizenry will become more sophisticated about it and more demanding in terms of its effects. When this happens, there will either be pressure to pass legislation to ameliorate the effects of competition or there will be cases in the courts that will further challenge its constitutionality.

1Story, L. (2012). Empty Words, Empty Workplaces. New York Times, December 2, Front page section, pp. 1 & 30-31. By and large, the factual information of this posting is derived from this article.

2There are “right to work” states and non “right to work” states. These designations refer to laws in some states, the non “right to work” states, which mandate that all workers who work in a business that has union representation have to pay union dues or some administrative fee to cover the expenses involved with union costs. “Of course, whether a worker is forced to pay dues or fees or not will go a long way in determining whether he or she will belong to a union. Why join a union if you get the benefits of membership one way or the other? “Right to work” states, on the other hand, have no such mandates. “Right to work” states have a competitive advantage in attracting businesses since they generally have lower union membership and, consequently, have lower wage levels. 

 

3Op cit., Story, pp. 1 & 30.

4Ibid., p. 30.