The Wars Between the States

It would seem impossible for Midwestern states to get any sillier and more irrelevant, but they're trying. In a time of continuing recession and joblessness, with crunching budget problems, failing schools, crumbling infrastructure and no real future in sight, these states have decided to solve their problems by stealing jobs from each other.

The most recent example is the so-called "border war" between Kansas and Missouri, as the two states compete to see how much money they can throw at businesses to move from one state to the other. The focus of this war is Kansas City -- both the Kansas one and the Missouri one, basically a single urban area divided not only by an invisible line down the middle of a street but by a mindless hostility that keeps its two parts from working together.

This competition is not new, but it seems to have heated up since 2009, when Kansas passed a law that lets companies relocating to the state keep 95 percent of their employee withholding tax for up to 10 years. This has lured several companies to move from Kansas City, Missouri, to Kansas City, Kansas (known locally as KCK) and its suburbs, bringing several hundred jobs with them. Stung by the moves, the Missouri KC has offered multi-million-dollar packages to keep firms, like the National Association of Insurance Commissioners and AMC Entertainment, from decamping to the Kansas side.

Top Corporate Leaders Urge Governors to Stop Poaching Neighbors’ Businesses, Kansas City Star, April 11, 2011
Businesses Stand to Gain Most in Rivalry of States, New York Times, April 7, 2011

Kansas and Missouri aren't the only Midwestern states raiding each other's watermelon patches. The governors of Wisconsin, Illinois and Indiana, which would seem to share a common economy, have been squabbling over which state has the lowest taxes, to the point that Indiana and Wisconsin have posted billboards on their state lines urging Illinois companies to flee north or east, as the case may be (presumably passing en route all those Democratic legislators from Indiana and Wisconsin who hid out in Illinois to avoid having to vote for objectionable legislation back home.) 

In Kansas and Missouri, all this has reached the point that even businesses in the two KCs, which presumably could benefit from these bribes, have told their two states to grow up. Seventeen leading businessmen from both sides of the border sent an open letter to Kansas Gov. Sam Brownback and Missouri Gov. Jay Nixon, urging them to voluntarily "agree to a bilateral halt" in this "economic border war."

Nixon responded positively. Brownback basically told the businessmen to go jump in the Missouri River. This probably has something to do with the fact that, so far, Kansas has been winning most of these battles. Whatever the reason, Brownback's press secretary said Kansas would keep on poaching, because the state "needs to compete and win against 49 other states plus Europe, India, China and the rest of the world."

Well, no argument there. Except competition with "Europe, India, China and the rest of the world" has nothing to do with this juvenile job-raiding. In fact, this "border war" keeps Missouri and Kansas from competing globally -- indeed, robs them of the tools they need to compete globally.

Some rational thought shows why. It's precisely these states' inability to compete globally that causes them to declare war on the folks next door.

In a global economy, Kansas and Missouri aren't competing with each other, any more than Illinois, Indiana and Wisconsin are competing with each other. The real competition is 10,000 miles away and all Midwesterners know that we're losing it. The region -- not just the individual cities and states but the entire region -- is losing companies, manufacturing, jobs, people, congressional seats and college grads, which means they're losing the resources needed to compete in a global economy.

Clearly, what the Midwestern states are doing isn't working. You'd think they'd do what the Europeans, Indians, Chinese and other competitors are doing, which is to form regional alliances to leverage all their strengths, to maximize their economies of scale, to merge their assets in to a single world-beating economy. On a global scale, Midwestern states are tiny: there are more than 30 Chinese cities with more people than there are in all of Kansas. But as a region, the Midwest has more than 60 million people which, even on a global scale, counts for something.

But this involves political initiative. It also involves spending on education. It requires the sort of imagination necessary to recognize that the old ways don't work and a new approach -- to economic development and job creation -- is needed.

But governors seemingly don't get paid for imagination and, these days, they're avoiding all the spending they can. Especially, they don't get paid for anything that benefits the states next door. By mandate, they are geography-bound, forced to limit all thinking and action within their state lines. Any business they can steal from next door looks good to their voters, whether it makes sense or not. Their economic development people, who know from hard experience that this is insane, go along, because the governor signs their paychecks and, as one official told me, "governors just love to cut ribbons."

One reason this doesn't work is that poaching businesses involves giving tax breaks to the poachee. Right now, states aren't spending on the future because they're broke, and one reason they're broke is that they're giving away badly-needed tax money. The letter from the Kansas City businessmen made this point clearly:

"At a time of severe fiscal constraint, the effect to the states is that one state loses tax revenue while the other forgives it. The states are being pitted against each other and the only real winner is the business who is 'incentive shopping' to reduce costs. The losers are the taxpayers who must provide services to those who are not paying for them." 

Neither does this poaching usually create new jobs. Most of these cross-border raids, in Kansas-Missouri and in other states, involve companies just moving a few miles away across the state line -- usually so close that their workforce changes not at all. People just commute in different directions. The overall impact on job totals, incomes and economic gain in the region itself is absolutely nil.

Only one person gains if a business crosses the state line, and that's the "winning" governor, who gets to claim short-term job growth on his turf during his tenure. This, of course, is why this practice continues. The payoff to the governor is immediate and gives him a boost in his next campaign. Really creating jobs in the region and restoring genuine economic growth is a long-term project that spans many gubernatorial terms and, hence, holds no charm for the incumbent of the day.

The state governments and governors, like Brownback, claim that these tax lures are necessary to draw in companies not from next door but from far-away states. If so, they aren't working. A University of Illinois study showed that there are some 300 significant corporate relocations in the United States every year, and about 15,000 different economic development organizations -- state, county and local -- competing for them. In other words, the odds against success are fifty-to-one. No wonder states go for a quick and dirty kidnapping across the state line.

Even when truly new investment takes place, such as the building of a Japanese car factory in the United States, the states let themselves be played for suckers. State economic development officials tell me that the company, such as Honda or BMW, simply announces that it intends to set up a new assembly plant somewhere in the Midwest. Then the company just sits back and watches the states throw money at them, trying to outbid each other with tax holidays, free land, training subsidies and other lavish gifts.

All the states know this goes on. All know they could stop it in an instant by banding together and refusing to play the game. But all are so jealous of each other, and all governors are so anxious to cut that ribbon, that they just can't help themselves.

Mark Drabenstott, in his Heartland Paper for the Global Midwest Initiative, Past Silos and Smokestacks, wrote that these recruiting incentives and other bribes account for no less than 80 percent of economic development budgets in the twelve Midwestern states. That leaves virtually no money left over for approaches that might really work.

Every economic development professional knows that this adds nothing to the Midwest's long-term growth or its ability to compete globally with China and other rising nations. The only true solution is to create truly  new companies and industries by building them from the ground up  -- by investing in local education, encouraging local entrepreneurs, setting up incubators, growing business services, increasing venture capital.

This is called economic gardening, and it works. It means working regionally. It means spending money, not giving it away in tax breaks. It means planting seeds now, knowing they won't sprout until some other governor is in office.

Right now, Midwestern governors are competing not with China but with each other to see how much they can slash spending in the next few months while stealing jobs from the next state. It's easier. It makes a better headline. And it's useless. 

Comments

[tax payer]

This is a fantastic story, but please know that this is 99% Kansas poaching off of Kansas City, MO. Missouri does not aggressively go after companies based in the Kansas suburbs of KCMO. They know such practice make zero sense to tax payers. Missouri is not even trying to match what Kansas is offering MO companies because it would less harmful to the state to let the companies move across the border (and stay in the KC area) than to try to keep them. Every company in the state will just threaten to move to receive a free tax ride.

The state of Kansas has declared economic war on the city of Kansas City, MO and the state of Missouri refuses to play hardball because they actually know the ramifications of opening such a can of worms.

Kansas is slowly destroying the economy of the very city and state that has put Kansas on the map in the first place. The largest county in the state of Kansas is a mere suburb of Kansas City, MO and has grown mostly at the expanse of Kansas City, MO.

Kansas need to stop and the residents of Kansas should be just as angry about this as the leaders of KCMO and Missouri are. What Kansas is doing to KCMO is helping nobody and only making them look like fools and while creating a lot of enemies and burning a lot of bridges.

[Jason Pelker]

Any thoughts on alternative bureaucratic structures? I love the thesis of this post, btw.

Recently, I've begun to realize our society isn't so much divided between conservative and liberal ideologies as much as it is divided amongst urban and non-urban priorities.

It's also no coincidence that a) more of the country's population is now urban for the first time in our history and b) our president is the first from a major city (Chicago) in a very long time.