Finding Real Solutions to State Economic and Fiscal Problems

This article offers some ideas about how the states can approach a solution to their current fiscal and economic problems. It was prompted by the less than creative or effective thinking we are seeing right now about how to fix state budgets and put state and local economies back on a realistic path to recovery.

This is not an article just about Pennsylvania and Ohio, but it uses some recent developments in each state as a way to illustrate the problem all state leaders are having in coping with their very serious fiscal and economic problems.

Remember the 1980's TV commercial that asks "Where's the beef?" That very question popped into my mind as I read about the latest leg of Pennsylvania's new economic development strategy, which basically says that all technology and entrepreneurship-focused groups in the Commonwealth should work together to get Federal money. Go here to read more.

Don't get me wrong. Pennsylvania and other states should go after Federal money that helps achieve their economic development goals, but there isn't much new in this idea. This idea hardly constitutes the central focus of an innovative state economic development plan.

As I look across the economic development landscape nationally, it reminds me that economic development boils down to two things: 1) political economy, with a greater emphasis on the first of the two words; and 2) drama, or at least that is how things appear as you watch our political, business, educational and community leaders dance in circles during this time of great risk and uncertainty.

Every state is trying to do two things right now: 1) make financial ends meet in the short term; and 2) determine whether to make major structural changes in their tax and fiscal policies to solve their current financial problems. Many ideas in the second category are being disguised as economic development proposals, which they are not. Folks, this is sheer political drama. I want to know where's the beef, or the economics, in our thinking? Economic development must be about more than political survival! All governors and state legislatures need to understand this point.

Running state governments has never been easy. This job became exponentially harder in the past three years. Public policy today is all about "taking away" from everyone you can, including other levels of government, to survive in the short term. More and more, it is about less and less. The merry-go-round had to stop at some point. It started to slow down in March 2000, was slowed even more by the events of 9/11, and has now come to a screeching halt with the War in Iraq, forcing everyone to get off the merry-go-round.

Our nation and its member states face enormous challenges at this moment. These are challenges that test the stuff we are really made of. We are pretty good at "easy street economics," that is getting along when times are good. Do we have the stuff to survive a real major crisis? I think we do, but we are not showing our best stuff right now. Economic development was boosted by easy street economics throughout most of the 1990's. We could afford to worry less about risk, work in a fragmented way, and fly by the seat of our pants. The current environment does not permit us this luxury. We need knowledge-based plans that are flexible and allow us to adjust to future change.

So, what should the states be doing at this time? I offer the following action plan to those state leaders who are willing to listen:

1. Adopt an integrated framework for thinking through your current challenges, which allows us to examine possible future scenarios and adopt short, intermediate and long-term plans. Create an "economic leadership team" that is able to think flexibility about a wide-range of solutions. At all cost, avoid short-term political expediency. This is not the time for another mammoth economic study, rather it is a time to shift our style of thinking from "one-way political strategy" to "multiple-path network strategy." Economic development occurs in and through local, state, national and global networks. We need to make local and state fiscal and economic decisions with this understanding in mind. If we don't, we will continue to be blind-sided by surrounding events and developments.

2. Make no sudden moves or sweeping changes in tax or fiscal policies until we shake-out more risk and uncertainty from the economic skies. This is a bad time to make risky policy decisions. Nor is this the time for backroom political schemes to "shift and shaft" constituencies through budget politics. This is exactly what is happening in most states, including Ohio, where a proposal has been forwarded to make dramatic changes in state tax policies and axe various economic development programs. We do not know enough about Ohio House Bill 58 to act upon it. Issues of this magnitude should not be dealt with in the context of a biennial budget vote. By the way, this bill does contain some worthwhile proposals, such as doing away with the state's tangible personal property tax, which could help Ohio economic development over the long term. The bill's proposal to haphazardly dismantle Ohio's economic development incentives is not a welcome thought, given the state's weak competitive position and the current economic environment. Changes to the state's economic development strategy should occur in the context of an overall planning and decision-making context and not during an eleventh hour budget decision.

3. Remind yourself that you are about service to the public. People need service, especially those that depend the most on government for assistance. We have a tough economy out there and lots of people are getting hurt. Even the rich are feeling lots of pain right now. Decide how your state is going to ensure acceptable service quality outcomes during these meager times and beyond. Innovate with new models of service delivery that allow the business and nonprofit sectors to play greater roles.

4. Work on building people's confidence that they can survive and they can do the tough job they must perform. The public is afraid, angry and frustrated with the way the world is and the impact it is having on their lives. Help them to see that we are all in the same boat and all of us need to do our fair share of rowing.

5. Once acceptable short-term economic survival plans are in hand, go to work on bolder solutions that can realistically improve your state's long-term competitive advantages for economic development. Many states are waving around schemes they call economic stimulus plans. In my review, none deserve this name. In most cases, they are a hodge podge of proposals and ideas without any real analytic foundation or central strategy ideas. Cutting taxes is a popular idea, but everyone knows that every tax cut relieves pressure on one group and adds a greater burden on others. This will always be the case since government budgets are designed to grow larger and not smaller.

Once all of us are safely on the other side of the Iraqi War, I recommend that the Federal Government, the states and a representative sample of local governments go to work on a coordinated inter-governmental plan to address our major public financial problems, which will include paying for the Iraqi war, balancing budgets, and creating a better approach to financing government in the future. The intergovernmental finance system that we have now is not sustainable. Our current crisis has proved this point.

Businesses and industries reorganize themselves everyday to adjust to market and public policy shifts. Government must be prepared to do the same. I cannot help but think that a significant consolidation and re-alignment of governmental entities will be necessary as we move forward. Also, significant changes in where government gets its money and how it spends it will be needed. This means that: 1) local governments within states should be exploring how they will work together to solve their problems; 2) how states and local governments will work more effectively; 3) how states will collaborate with each other to achieve their interrelated goals; 4) how states and local governments will work better with the Federal Government in future; and 5) how all levels of government will work in closer cooperation with the business and the private nonprofit sector.

If we truly use our collaborative advantage, we can create "win-win" solutions for both government and economic development in the future.