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Economic development: Why Minnesota needs a course change

As the economy sours, prosperity-era practices in economic development will fail us.

As the economy sours, prosperity-era practices in economic development will fail us. Competing for mobile enterprises, cutting business taxes, retraining for high-wage jobs, and investing in science-based innovation will not reverse business retrenchment and deep job cuts over the coming months. The state must redeploy its resources to retain as many existing jobs and markets as possible, encourage entrepreneurship, and help companies and workers preserve expertise for a recovery that appears to be many months off.

This won’t be easy. The Minnesota economy has grown more slowly than the nation’s since 2001, largely because the high risk-taking and cheating that drove the financial bubble was less prominent here. That’s good news. But financial stasis and asset evaporation have cut deeply into consumer and business spending everywhere, which will mean continuing layoffs, negative profits and escalating demands on the public sector pitted against plummeting state and local revenues.

Best practices for hard times
What are realistic goals for this period? From the de-industrialization of the 1980s and the defense industry implosion of the 1990s, there are important lessons in best practices for times like these. Here are several steps Minnesota should take:

• First, revitalize our business extension services, bringing them back into the Department of Employment and Economic Development. Few small and medium-sized businesses know how to cope with plummeting sales or have techniques for preserving capabilities while accepting the inevitable cuts. Some Minnesota companies are doing brave new things to keep their teams intact, such as moving to a four-day workweek  for everyone from the CEO to blue-collar workers, or initiating progressive pay cuts, where managers take higher percent pay cuts than professionals, with no cuts for blue-collar workers.     

• Second, ramp up entrepreneurship programs. Modest amounts of coaching and shared workspace and business services, as in the many incubators that have sprung up across the country, go a long way toward helping a laid-off professional or blue-collar worker start a business that addresses an unmet need, perhaps even one borne of the downturn. Reflecting on the Great Depression, Joseph Schumpeter observed that fundamentally new innovations are born in times of deep crisis, when businesses cannot simply tweak their product line or market more creatively to survive.

• Third, face the burgeoning layoffs by beefing up services for displaced workers. In the 1990s, some defense companies and labor unions set up workers’ centers, often on former employers’ premises. Here workers formed peer groups that met weekly or more often, helping each other understand their marketable skills and entrepreneurship potential and encouraging each other through grueling, often humiliating job searches. Instead of standing in line at an employment center surrounded by other unhappy strangers, these workers were much better able to cope with the psychological and material challenges they faced.

• Fourth, move beyond the belief that only companies whose products or services leave the region are worth economic development investment. Local consumption activities — such as nursing homes, health-care clinics and cultural centers — offer communities, especially those in rural areas or inner cities, opportunities to capture higher shares of their residents’ incomes and create sustainable jobs locally. Twenty dollars spent at a live theater performance will cycle through the local economy at higher rates than the same amount spent at Mall of America or a big-box retailer on the edge of town.

Take a look at our tax incentives
Minnesota also could use this opportunity to put in place better economic-development practices. For instance, adopting a Unified Development Budget would place tax incentives (or tax expenditures, as economists more accurately call them) side by side with annual spending on economic development. This would allow legislators and citizens to see the deep and ongoing opportunity costs of tax incentives that are incurred for many years into the future, restricting resources available for new challenges. Tax-incentives practices should be overhauled and targeted more precisely to job creation, requiring that jobs be created before the tax break is activated, or restricting them to the start-up period only and insisting on transparency and ongoing evaluation of their effectiveness.

In these efforts, Minnesota could be a leader rather than a follower. The governor and the Legislature should insist that DEED and local economic-development agencies abandon business-as-usual frameworks and think and act out of the box.

And let’s not expect the public sector to do it all. We’re all in this together. Those business leaders who have survived prior retrenchments creatively could mentor those who have never faced times like these. Professional associations, unions, nonprofit organizations, and colleges and universities — even high schools and churches — could re-orient their space and staff as conveners for problem-solving and new experiments in how to survive on less and re-imagine our joint economic future.

Ann Markusen is a professor and director of the Project on Regional and Industrial Economics at the Humphrey Institute of Public Affairs, University of Minnesota, and the author of “Reining in the Competition for Capital.”