Mainstream Economic Development

Mainstream ED and Community Development are separate and distinct approaches to American State and Local Economic Development. Each devolved from its particular political culture. Privatism begets Mainstream ED, and Progressivism’s many offspring aggregated into Community Development (CD).  Both have been around since the founding of our American Republic in 1789–actually before. In this module we consider MED, which as its name implies has been the most visible, and most used approach by state and local communities and governments.

The Background–The Early Republic Era Ain’t What You Think It Is

Here’s John Adams, 2nd President of the United States–Again

In 1824, when Massachusetts John Adams wrote his last letters to Virginia’s Thomas Jefferson, both would have looked out their respective windows and seen hugely different economies and ways of life. Any MED that evolved from these two economic, social, and political systems was going in different directions. In this module, while we focus on the MED that developed in northern Big Cities, the reader, might keep in mind she/he is getting half the story.

In 1800, there were sixteen states in the Republic. Only two of them (Kentucky and Tennessee) were not derivatives of the thirteen seacoast colonies. The Midwest had yet to be settled; the South and the North were the only existing regions at the Early Republic starting block.  Both North and South in 1790 were overwhelmingly agricultural–almost no industrialism evident in either–but by 1824 the North had already started down the industrial path–the South remained prepondently agricultural.

After 1800, the South “moved into its interior”, compelling chained slaves to move by foot from the coast into what became known as the “cotton belt”in the southeast interior. The southern urbanization that followed, to the extent it occurred at all, was small town. The South did not develop Big Cities; it remained overwhelmingly rural, relying on river and coastal water transport to move stuff around. Southern policy systems bordered on medieval-serf/yeoman authority hierarchies. Northern urban electoral politics, far from perfect, embraced a competitive two-party system.

Thomas Jefferson

King Cotton, export, plantations, cotton towns, and agricultural innovation like the cotton gin cemented a southern economy anchored around cotton, tobacco, indigo, and raw minerals–much of which exported to other nations and the North. Despite the Civil War, this economy persisted through the entire 19th century–and did not meaningfully change nature until the 1920’s. Southern capitalism, left to its own devices was an agricultural capitalism, capitalism somewhat comparable to a developing nation.

The North, however, caught a disease called industrialism. Industrialism in short order led to urbanization. Growing northern cities–As Two Ships and our online history calls them “Big Cities”–offered employment opportunity, and after the 1840’s they attracted an immigrant workforce. The North incrementally over the next half-century evolved an industrial manufacturing capitalism that bore little resemblance to the goings on in the South. Canals, than railroads transported people and goods. Political life, deeply affected by the American Revolution, moved away from elites, into a mass-based two political party competition, vastly different from the South’s politics of deference..

MED is Janus-Headed

MED is inescapably tied to its particular jurisdictional-community economic base which co-exists with other urban economic bases–these are entitled “competitive hierarchies”. During the Early Republic, the salient competitive hierarchies were “regional-hinterland”, and given the non-existent transportation “global”. It almost took as much time to travel from Boston to London, as it did to Charleston South Carolina. Instinctively, communities recognized they were not “an island unto itself”. The business community in particular was attuned to the competitive dynamics among communities, regions, nations, and economic markets.

This concern with the outside competitive world will lead to the development of particular MED strategies, tools and programs designed to cope with its threats and seize upon its opportunities. We call these strategies, et al., External-MED.

MED also draws its meaning and purposes from the needs of its own economic base (composed of whatever businesses and industries which dwell within its jurisdictional boundaries). At its most basic level local MED serves, reflects, and changes along along with its community-jurisdictional economic base. Firms in each community’s economic base inherently rely on geographical market areas for sale of goods and services. In the Early Republic nearby markets intruded upon each other and local competition approached zero-sum–there is only so much that can be sold locally. This basic limitation inherent in a small market area gave rise to a distinction between “exporters” who sold to other market areas, and “service” which remained dependent on the local “hinterland” market area. Economic growth, absent export to external markets, could only occur if the local community itself “grew”, and “expanded”.

Detroit and Suburbs

This need to “grow and expand” the local community and establish dominance over its hinterland led to another distinctive set of MED strategies, tools, and programs centered around (1) the physical environment of urban life (regional transportation, housing, public health, water and what came to be known as “utilities”, and even recreation); and (2) the needs of firms and businesses in its economic base to remain competitive in their internal processes so they could resist threats from innovative cutting edge external competitive hierarchies. With changes in logistics and transportation/communication modes, for example, firms in other communities could “eat their local lunch”. Accordingly each community had to encourage its firms to “keep up with the Jones”, innovate, and resist obsolescence, and in general had to avoid a “business climate” which was hostile to its residents firms and businesses.

This second focus–on a community’s own economic base and the need for community growth–is called Inward-MED. Concern for the viability of the community economic base/community growth is the heart and soul of the Inward-MED. Given that the jurisdiction’s economic base, and indeed capitalism itself, has always been in considerable historical flux, that is quite a responsibility–a responsibility that requires considerable flexibility over time, and an ever-present need to multitask or pursue several MED strategies simultaneously.

MED, then, is inherently Janus-faced; it looks inward to its own economic base, and outward toward competing jurisdictional economic bases. Historically, those EDOs and strategies which deal with the internal or inward realities of a community have generated the most controversy, understandably so. External strategies, attraction for instance, tap into civic patriotism and defense of one’s home. External strategies/EDOs operate under a different set of rules and demands/expectations from the policy system. External-MED, however, has always been viewed negatively by those who perceive S&L ED from “the top down”–from a national perspective. Intra-national system competition to them is wasteful and inefficient, with a certain tendency toward “corruption”.

Change, Competition, Policy/Strategy/Tool Innovation–And Diffusion

Community policy systems that “make” and implement MED policy irregularly change. Policy systems collapse, new ones replace them. There are many reasons for policy system change, but certainly the strengths and disadvantages of their particular location, changing economic conditions, a hostile external environment, and disruptive population dynamics/demographics are important factors. As policy systems change, or encounter changing dynamics MED policy (EDO strategies, tools, and programs) needs be must change also. MED “lives and breathes”, and as a community endures, it accumulates its distinctive history of policy systems, and MED legacy. In this world of constant change, MED is tasked to fight a series of wars, and this expectedly results in fabricating a number of strategies, discarding or shelving others, and even taking older strategies out of the closet.

Because MED tasks and its constituencies are constant, chronic and enduring, each community instead of periodically “pruning” its past vestiges, each community frequently accumulates over time the variety of EDOs, programs, strategies, and tools. Since MED in different time periods must respond to different concerns, troubles, and a constantly changing economic base–and external competition, new programs, strategies and tools are added to the past aggregation. This wasn’t a major issue in the Early Republic, but in our present-day Contemporary Era each community’s jurisdictional policy system has both accumulated a heritage of EDOs, programs, strategies and tools–and their Deborah Stone-ish stories that justify and explain the survival–and probably “institutionalized” them in an informal “this is the way we handle MED in our community”.

In that a community and its EDOs never know what they might need in the future, they are very open to adopting new innovations, approving programs, tools, and strategies from elsewhere. I call this the “arrow-in-the-quiver” effect. You can always use another arrow in your quiver–you never know! So MED tends to accumulate strategies/tools, and even different types of EDOs to keep up with the Jones, because the State tells them to do it, because you “never know”, or because local decision-makers think such innovations “cool” and useful to their purposes–like winning elections.

All this has combined to create a rather interesting, durable, and very obvious “mode” of MED policy diffusion after a policy innovation has occurred. That “mode” bears close resemblance to a herd stampeding from city to city, state to state across the nation. That I find it is 1800, and two hundred years later, suggests that this herd stampede is characteristic of American MED. So it started with “industrial startups”, creating finance intermediaries, to canals, railroads, and the various venture capital to finance them, to EDO-types and on, and on, and on. MED tools and programs (like tax-exempt bonds, film incentives, sanctuary cities, bike paths and Uber) and major MED strategies like “community beautiful”, urban renewal, waterfront revitalization, TIF, EDZ, sports stadia, and electric streetcars, and CBD renewal and refunctioning are typically found in some form in every reasonably-sized urban ED policy system. Appearances are not always what they seem to be, however.

 

As herds of communities adopt the ‘latest and greatest” innovation, placing it “in their policy/strategy/ tool/program quiver” something magical seems to occur. The innovation is altered to fit in the that community’s policy quiver and commonly redefined to suit local tastes and purposes. If used (and many times the innovation is seldom used), the innovation “arrow” may be “shot at different targets”, serve tasks and goals widely different from those of the “innovating community”. Tax increment financing, for example, diffused through the nation in several “waves”, and today all but one or two states has it in their policy quiver. But although each TIF arrow looks somewhat the same, their processes, eligibility, targets and constituencies vary widely across regions and the nation. Many states do not use TIF at all.

In evaluating a community MED system, one must not simply look at what’s in the quiver, but focus rather on what is in the bow.

Oligopoly, Agglomerations, and the Sector/Industry Profit Life-Cycle

Capitalism is a “living” economic system. Indeed, the factor that has prevented it many opponents from killing it, is that it constantly changes, and has over the long haul an unpleasing propensity to “grow”, to get bigger, and depending on one’s perspective, “get better or worse”. The engine(s) behind that growth in thas usually be an increase in “market area” scale (geography where its goods and services are sold), innovation, and its ability to “scale up/down” production in response to short/intermediate pressures and opportunities to make a profit.

These ever-constant changes continually “reshape” and reconfigure the firms and businesses found in our community economic bases. Firms increase scale and size to produce goods cheaper, or to sell more volume. They become “horizontally or vertically integrated”; they merge with other firms. In many case firms don’t make it and closedown. The capitalist system tends over time to produce a “concentrated”, or oligopolistic set of dominant firms in each sector and industry. At the same time, new sectors and industries are “innovated”, and they form a ton of new, young startups. Obviously, MED must respond.

So capitalism can “concentrate” production in a few firms (oligopoly) to achieve mass, productivity and scale, or conversely to deconcentrate into small business and even one person entrepreneurs–at the same time, but in different sectors and industries. As the reader might suspect. all this makes the job of a MED economic developer very complex, and it invites a great number of speciality EDOs to deal with different issues/dynamics. Given that these issues/dynamics are usually constant or chronic, MED policy systems typically include a surprisingly huge number of EDOs and EDO-types, often from different levels of government. Over two hundred years the economic base has become quite complex and complicated.

Add to this, one discovers a seeming “natural” tendency of American capitalism to “agglomerate”. As new sectors arise, and older ones mature they tend to “cluster” in one or several geographic locations. There are a variety of reasons for this–but for the moment, let’s simply assert that most jurisdictional economic bases have formed an agglomeration, sometimes several. (Please do equate agglomeration with today’s “cluster”). Not infrequently the agglomeration is so dominant and powerful, it “identifies” the jurisdiction itself–Pittsburgh steel, Detroit, and Silicon Valley. Most sizeable community economic bases include “agglomerations” of  sector/industry.

Although the Policy World and economists tend to talk about “smush” industries like manufacturing, or technology, or service sector/FIRE, they are composed of a variety of “sectors’). A city can manufacture cars, or chemicals, or computers, or refrigerators–or shoes. Cut through smush industry classifications and we see the individual jurisdictional economic base is varied and quite distinctive.

It is not unreasonable to assert that community economic bases are similar to human fingerprint (or snowflakes)–no two are exactly alike. Market areas vary by sectors/industries and firm. New firms constantly form, and older ones die, move away, or stagnate/downsize. There is nothing “static” about community economic bases. As local and state economic bases and its component firms, sectors/market areas evolve, so too must the various MED programs and strategies. Enter arguably one of the most important dynamics that puzzles and traumatizes Inward-MED (in particular): the sector profit life-cycle.

Dr. Ann Markusen

As Two Ships–and this online history depends heavily on the Profit-Life Cycle, Oligopoly of sectors and industries developed decades ago by Ann Markusen (Profit Cycles, Oligopoly, and Regional Development, 1986). The application of this profit life-cycle to community-jurisdictional economic bases alerts us that each economic base usually revolves around one or several sector/industry agglomerations, and includes a variety of other sectors as well. To some extent every economic base is “diversified”, but some are quite dependent on a few large employers and/or sectors/industries. These sectors follow a profit life-cycle that over time changes every firm, in every sector, from a young “gazelle”, to a doting, old dinosaur. In between they add and reduce jobs, utilize investment to create productivity to produce more or better quality, or cheaper products, form into oligopolies, and then decline in the face of obsolescence.

As Markusan observes each in their own time, and for their own reasons (technology, innovation, supply and demand) “commoditize” their production to maintain profits. Employment expands and contracts according to stage in the life cycle, and industry/sector dynamics. As with all life cycles there is birth–and death. Young Google-like gazelle-firms mature into an oligopolistic Microsoft (leaving in their wake a cemetary of merged branches or firm roadkill). The last phases of the life cycle are very hard on MED and communities.

Joseph Schumpeter

When manufacturing industries did this en masse in the 1980’s, they called it deindustrialization, but this was not the first time the life cycle hit American jurisdictional economic bases. In past years, CD adherents called attention to the mobility of capital, in the 1950’s they called it the southern branch attraction strategy, and in the 1920’s the Carolina-New England textile war. Lehigh Valley wondered why people stopped buying their coal–as did whalers whale oil. Thank god, the Silicon Valley is immune to this! Whatever it is called, and wherever it hits, the MED jurisdictional economic developer is tasked with stopping it. The life cycle does not apply only to manufacturing, it has proven itself real to all sectors. One can see already the effects of the life cycle on the Silicon Valley. Trees do not grow to the sky, and firms lose their ability to innovate.

The MED economic developer is also tasked with finding replacement sectors, excuse me cluster-building. Lehigh Valley (PA) economic developers tried that back in the 1920’s. A decade earlier so did Boston’s chamber as it tried to capture the newly emerging 1910 airplane sector–only to lose it in the 1920’s to places like Seattle, Omaha, Wichita, and Dallas. Small business and entrepreneurism calls for an entirely different set of strategies, tools and programs, and the realities of a state (and local) business climate broadly-defined create distinctive barriers and opportunities depending on a huge variety of factors. Mature sector profit life cycles are a major element of MED in the Contemporary Era.

The Birth of Mainstream ED and Big Cities

Industrialization and urbanization are the midwifes of Contemporary Era American MED. Accordingly, we do not trace MED’s path from southern MED’s agricultural bent, but concentrate on northern and mid-Atlantic states.

As Two Ships presents the case that manufacturing and other industrial industries prospered, entrepreneurism more endemic and urbanization more established. While it took better than a half-century to achieve a critical mass, the Civil War provided federal support for manufactured products and technology/profitability achieved takeoff capacity. In the Gilded Age (1870 to 1890’s) the North and by then, the Midwest enjoyed/suffered through what arguably was the world’s greatest industrial leap. By the early 1900’s American manufacturing equaled production of both UK and Germany combined. The geographic milieu for this first industrial revolution were the “Big Cities” of these states.

The economic and political power amassed by these states during and after the Civil War cemented into place, what I call the northern/Midwest industrial Big City hegemony. These Big Cities are the birthplace of our Contemporary Era Mainstream ED (and CD for that matter). In subsequent generations, MED diffused into West and South through the filter/prism of being a “market area” or location of resources for hegemonic Big City firms. It didn’t hurt that considerable numbers of western migrants came from the hegemony. Hegemonic Big City finance/banking sectors were, for all practical purposes, the nation’s finance/banking system. The same could be said for the railroad (and hence, steel) industry.

EXTERNAL MED– The Early Republic years before the Civil War was when MED disjointedly and incrementally took its initial form. Cities were small, many were nonexistent, and the obvious initial required was “to connect the urban dots” by linking new, small cities in the interior to the growing Big Cities. Each Big City saw the opportunity to carve out an economic empire by connecting its city to interior cities. Big Cities embraced canals, and then railroads (the feds built the national highway–a very contentious affair). New York City won, Boston and New England were somewhat isolated and sufficiently powerful to resist intruders, but Philadelphia and Baltimore engaged in a great contest to be the first on the Ohio block. Baltimore *B&O) eventually won after a half-century. From this competitive race into the interior drew the profile for MED’s external Janus “face”.

The competition was entrepreneurism at its core, and railroads in these years (1820’s) were like rocket ships today–technological wonders and a gazelle innovation. Financing was the key to its unleashing, and that required private expertise/resources, risk-taking entrepreneurs, and capacity to manage/operate routes after construction which itself required public funds and powers (bond issuance and eminent domain) to happen–all had to be somehow combined in a single EDO. The state approved “corporate charter” was the EDO that built canals and railroads–as well as the vehicle that established state banks, insurance firms, and even early manufacturing companies.

Because foreign (British and German) FDI was risk-averse, early stage financing, which consumed enormous sums with little return on investment, meant that venture equity capital was also required. This took the form of municipal subscriptions in which citizens in civic campaigns bought small denomination stock in the chartered corporation. Cities also bought stock, and direct grants/loans from public funds were pivotal. Cities took seats on the board of directors. All of this was common and well-accepted by the mid-1830’s. Thus by that time, key MED tools, a hybrid public/private EDO-type, and state and local approvals had laid for MED.

It’s a long story, covered in Theme 2, but the state-chartered corporation did not fare well and came to considerable grief in the 1840’s. States (and some localities) reacted by passing today’s “gift and loan” state constitutional amendments/legislation (this was the “first wave” of such legislation–more followed later). These amendments, legislation, and subsequent judicial decisions laid the cornerstone for the public-private relationship, and set criteria and parameters of public-private partnerships. The state-chartered corporation was tossed out, and over the next decade or so replaced by a new EDO–the publically empowered railroad corporation.

The corporation, an 1850’s legal/business innovation, was directly empowered to conduct eminent domain, extensive rights-of-way, enjoyed extensive tax abatements, and permitted to issue tax-advantaged bonds to finance construction and operation of new railroad lines. Cities on routes, in return “bought” access to the railroads by building stations, and in various forms directly funding construction to their new city. Personified by the several transcontinental railroads, the railroad became the chief EDO-type used in external MED city-building and transportation/communication infrastructure. It was the railroad corporation that innovated and popularized what today we call “the attraction strategy”.

The Online History in Theme 2 presents an 1850’s case study of the originator of modern ED attraction: the Illinois Central Railroad, employer of Abraham Lincoln, Stephen Douglas, and General George McClellan. In the 1870’s and 1880’s, another module presents a case study of Minnesota’s railroads and the attraction for immigrants from abroad, and their establishment of railroad cities and the first industrial parks. In the same years, railroad corporations set up the first nation-wide tourism attraction programs–to places like Atlantic City–and then in 1870s extending to conventions in Indianapolis. In the 1890’s a railroad owner founded a string of cities in Florida to exploit recreational opportunities–Miami was one. Another module will describe railroad attraction that “created”, from essentially nowhere and nothing, the city of Los Angeles. Trifling matters like the Credit Mobilier Scandal, the Populist Movement, the Pullman Strike, Muckrakers–and pissing off the entire American capitalist system–spelled the end of the railroad as a public/private EDO.

By way of transition, Big Cities had matured greatly by the mid-1870’s and they developed their own EDOs capable of playing a role in External MED. Business attraction, in its own peculiar way, linked itself with what would today be called “cluster-development”. Wrapping both in a civic patriotism package, Big Cities entered into the “Exposition Movement”, starting with Philadelphia in 1876. Over the years, expositions were called many things, World Fair is probably the best known. Expositions centered around creating a forum for its new dynamic industries (including nonprofits), and its darling technological sector gazelles. The telephone was introduced at a world’s fair, and so was kudzu. Cities across the nation organized world’s fairs, or sector expositions (Atlanta ran several Cotton States and International Exposition). They were immense tourism events; even smaller expositions attracted vacationers, conventions and families in droves. Railroads loved them. From these expositions, one can begin to trace the evolution of a urban competitive strategy that today includes professional and amateur sports, as well as the Olympics et al.

INWARD MED–The tale of inward-MED is more complicated, but incredibly interesting. In this module we are contented to simply sketch its broad outline. First, external MED above of necessity was a partnership with city-builders to establish a host of cities in the American interior–which BTW runs to the Pacific Coast. City-building fuses both MED faces into a single strategy, which is outlined in a Theme 2 module. Chicago is a great example of that.

City-building besides attraction and zero-sum competition with competitors, also is a growth strategy that pours the city’s first economic base, and sets up the municipality with its system of embedded values in charters and urban governance legislation. City-building also meant forging a strategy on how to deal with the hegemonic industrial Big City corporations. The typical EDO that takes over from the entrepreneurial city-builders, is the Chamber of Commerce.

Modern chambers are a post-Civil War innovation. Typically, Boards of Trade came first, as they were creatures of an emerging municipal economic base, and reflected its initial agglomerations. Nineteenth century chambers were not like today’s chambers (which developed in the early 1900’s). The 19th century Chamber was house and home of the municipal one percenters–not the professionals or business class. To them, most Big Cities and small cities as well, devolved much of the policy coordination and formulation that served the Gilded Age metro area.

Because municipalities encountered serious fiscal stress, associated with providing a “water infrastructure”, and then an “gas and electric” infrastructure, they set up a new hybrid public–private EDO to handle the internal transportation system: the franchise. Because Big Cities were growing in leaps and bounds, mostly from immigration, physical distress, the pathologies associated with huge inequality, and the sheer need to build housing for immigrant and middle class in a pre-elevator age meant new neighborhoods–subdivisions by another name.

Not only did this spawn the modern CD, but it also it also meant the rapid explosion of the FIRE industry–which itself created a major Big City EDO, the real estate exchange. It was the chamber that served as the central coordinator, the referee for these competing and very narrow EDOs. It was home base to the first growth coalition–which at that time delegated from its membership selected municipal leaders who became “businessmen mayors”. Big Cities effectively contracted with the chamber to operate and coordinate its MED initiatives, including deal-making, tax incentives, industrial parks, and business financing. Most of these strategies in the Gilded Age were retention focused, designed to accommodate existing business and to minimize disruption incurred by new entrants into the community. Chambers led the municipality’s fight against railroads, and were key to the establishment of the federal Interstate Commerce Commision in 1887.

The Gilded Age was a fascinating and important period in American S&L ED history. Inward MED was not keyed to job creation–that occurred almost naturally in a period of economic growth–but rather focused on providing the physical infrastructure (water and public health, utilities, housing, and transportation) and served as the policy intermediary in urban governance. In Theme 3 we study the South and West. Theme 4 will detail how Big Cities conducted Inward and External MED and CD.

 

So it is now to Community Development that we turn our attention.

The Wings of Community Development