Shermer on the War Between the States

13 02 2012

Bloomberg’s Echoes blog recently featured a post by Elizabeth Tandy Shermer on competition between American states for business. Today, we take it for granted that US states will engage in bidding wars to encourage companies to locate factories and call centres in their states: tax abatements, subsidized electricity, and weak workers’ rights are among the incentives state governments dangle in front of firms.  Many critics worry that this practice will lead to a race to the regulatory bottom. Shermer, who recently completed a PhD on the economic history of Phoenix, Arizona, explores the historical roots of this practice, which she trace back to a policy started by Mississippi in 1936. In the postwar period, other predominantly agricultural states adopted similar policies with the aim of luring factories from the north-east and the Midwest. Shermer suggests that the poorer American states, which were stunningly successful in attracting manufacturing in the post-war era, have recently become victims of globalisation. Today, the “right-to-work” sunbelt states have to compete not just with unionized states such as Michigan but also with jurisdictions in the developing world, which typically offer an even more attractive package of incentives to manufacturers.

Shermer concludes the post as follows:

Arizonans and Tar Heels really just won the battle, not the war. Southern and Western metropolises struggled to hold on to and attract more investment during the 1980s and 1990s. Now, rivals come from the cash-starved Midwest and Global South, where executives can find a ready supply of workers, an advantageous tax code and little regulation. Unemployment is actually higher now in the once-dynamic South and West, a shock to the states that were once national leaders in population, recruitment and production.


Shermer’s post got me thinking about the history of jurisdictional arbitrage and competition for mobile businesses. There is a fair bit of secondary literature on the history of competition between US states. For a good bibliography of works on this subject, see here.  Competition between Chinese provinces and cities for factories is a major theme of the political economy literature on that country, see here. As in the US, there has been a similar race to the regulatory bottom.  However, I’m left wondering whether similar work has been done on the history of competition between jurisdictions within non-US federations (e.g., Australia, Mexico, Canada, Germany, Switzerland). It seems to me that the existence of jurisdictional arbitrage of this sort would bias investment towards industries that are very mobile (e.g., call centres) and the expense of things like mines. Comparing investment patterns in federations that permit this sort of jurisdictional arbitrage with those that do not might allow us to determine the extent to which competition between sub-national jurisdictions distorts investment decisions.



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