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Economic Development

Last Updated: 2006

“Economic development policy” refers to government actions that are intended to affect growth in the economy, either through development (a structural change in production) or growth (an increase in output based on existing production). The role of economic development policy in the development of American federalism has always been inextricably linked to the process of urbanization and industrialization. In the early republic, the Founding Fathers had significant disagreement over the role of government in the economy. The most famous illustration of the two primary schools of thought can be found in the competing letters from members of President Washington’s cabinet debating the proposed Bank of the United States.

Thomas Jefferson argues the Anti-Federalist position that the Bank would be unconstitutional, and that such policy devices would undermine the long-term stability of the republic by unbalancing federalism toward nationalist designs. Alexander Hamilton argues the prevailing Federalist position that the Constitution must be interpreted with flexibility and that implied powers existed with the regulation of commerce that made the Bank constitutional, and ultimately, that this nation-directed economic policy was necessary to maintain the republic in the long term. Hamiltonian thinking ultimately prevailed, but not without significant periods of conflict during the period of dual federalism. The fundamental differences between Jeffersonians and Hamiltonians were over the degree of constitutional responsibility for the national government and, more generally, over the proper role of government in the economic development process. The constitutional question centered around the issues of states’ rights and property rights. Business interests and urban centers sought government intervention for a variety of economic development needs, among them to provide investment capital, to stabilize currency and markets, to subsidize production costs, and to control competition through tariffs. The goal of the Hamiltonians was to create a national economy by reducing state barriers to competition and utilizing national policy to build domestic industry. Ultimately, the consolidation of regional, state, and substate economies into a national economy was desired by the Hamiltonians, whereas the Jeffersonians sought a self-sufficient economy based primarily on agriculture.

Future debates between Henry Clay and other proponents of the American System advocated by the Whigs, on one hand, and “strict constructionist” Democrats like John C. Calhoun, on the other, would center on the same basic issue of economic development; was it a fundamentally state and local issue, or was it one that was inherently national? Among the most famous presidential vetoes of the first 100 years of U.S. political history centered around these “internal improvements,” such as those by James Madison and Andrew Jackson. These “internal improvements” were, and in many instances still remain, the fundamental building blocks of economic development policy at all levels of government. Whether the government had the authority to engage in “internal improvements” by building bridges, roads, utilities, transportation, and general infrastructure was the central question of the period of dual federalism. After the Civil War, the question of national authority for economic development was settled in the Hamiltonian style, and major national involvement in education, railroads and transportation, housing, and infrastructure followed.

In the period following World War II, economic development policy was transformed following the passage of New Deal programs that gave the government responsibility for a range of economic policies (from public works to retirement to a broad range of business regulation). The establishment of the last iteration of the National Bank, the Federal Reserve System, remains a cornerstone of economic development policy today. Cooperative federalism and creative federalism provided new intergovernmental paradigms for the delivery of nationally determined policies in economic development, and new national agencies established an enduring national policy role (examples include the U.S. Department of Housing and Urban Development, the Economic Development Administration, the Rural Electrification Service within the USDA, the Tennessee Valley Authority, and the Appalachian Regional Commission). The New Federalism paradigm developed by Reagan (building on the earlier Nixon New Federalism) sought to return to dual federalism and repudiated the constitutional foundation of the prior nationalist periods of cooperative and creative federalism. Reagan retained a strong responsibility for national government to support and encourage economic development policy, but the means of exercising this power was redirected toward devolution of policy authority to the states.

It is in this period of New Federalism, established by Reagan, that we examine current trends and policy debates in economic development. Major questions in economic development policy today are concerned with the most effective ways for state and local governments to conduct economic development with or without federal assistance. Should states continue to compete individually, or should they develop interstate partnerships? Should states continue traditional incentive programs or develop tertiary quality-of-life programs? Should states target the development of a workforce or recruitment of industries? Should state and local governments control growth through planning and zoning or through market-based incentives? Scholars in the field are divided over the answers to these questions, and no consensus seems likely in the near future. In fact, some have even raised questions over the effectiveness of government doing anything at all to affect the perceived efficient operation of private sector markets. Government has even come to question whether it can effectively manage programs over which it has authority, and the outsourcing of government services to the private sector has risen dramatically in recent years. The erosion of hierarchy, and with it accountability, has witnessed the exponential expansion of what Thomas Anton (1989) called Third Party Federalism. The nongovernmental or pseudo-governmental organizations (private, nonprofit, foundation, special district, and pseudo-public corporations) that constitute the expanding web of intergovernmental organizations in American federalism make the present era one of high complexity, dispersed interdependence, and fragmented conflict.

There are two common types of ranking systems: one looks at typological definitions (the substance of the policies), and the other looks at relative performance (the outcomes of the policies). Martin Saiz (2001) has developed a typological state index of infrastructure programs that measures the commitment of states to various economic development policy types. This measure of economic development policy type utilizes a policy index that takes the policy type as a function of overall state economic development spending. These policy types further reflect the heterogeneity of economic policy making at the state level and underscore the importance of policy leadership and authority relationships distinct from actual policy outcomes or fiscal flows. Saiz’s three types are locational, entrepreneurial, and infrastructural. Locational policy is an approach with the dominant resources placed in factors that improve relative competition. Infrastructural policy making is a static, low-innovation approach that expresses the more traditional importance for “internal improvements” such as utilities and transportation. Entrepreneurial policy emphasizes the development of intellectual capital and innovation capacity.

While Saiz’s work represents the typological ranking, a number of organizations and researchers, including the Southern Growth Policies Board, the Milken Institute, the Progressive Policy Institute, and the Corporation for Enterprise Development, have developed relative state performance rankings tied in particular to new economy development or innovation capacity. These ranking systems attempt to assess which states have been most successful at “new economy” development. Though these performance ratings differ substantially, most aggregate a series of variables to create a single composite index representing state performance. Not particularly useful at informing policy, these indices have recently been improved by the categorization of variables by type of capacity and by separating capacity measures from outcome measures. These indices reflect the ongoing interstate competition for economic growth and development in a changing and uncertain economy, and further highlight the intergovernmental aspects of funding and implementing programs to further economic growth at the local, state, and national level. Despite the increased importance for economic development policy and the growing diversity of approaches and programs, there remain persistent pockets of poverty in urban inner cities as well as in rural areas.

Economic development rankings have become a popular way for media, policy, and academic gatekeepers to communicate the effectiveness of economic development policies. But the quality of the measures that constitute these indices remains highly questionable. The uncertain reliability of ranking indices leaves descriptive statistics (number of jobs or businesses created, average wages, etc.) as objective measures to which politicians at all levels of government continue to perform. The facile association of these measures with traditional “smokestack chasing” economic development strategies leaves advocates of “new economy” or high-tech, science-based business development with a challenging and complex task. The management of intellectual capital at a range of places such as universities, research laboratories, and nonprofits is a complex task and one that requires sophisticated policy tools and effective long-range planning. Thus, the current landscape of economic development policy continues to reflect high complexity, dispersed interdependence, and fragmented conflict, just as does the intergovernmental system that manages it.

SEE ALSO: American SystemCooperative FederalismCreative FederalismDual FederalismFiscal FederalismHamilton, AlexanderInternal ImprovementsJefferson, ThomasNew Federalism (Nixon)New Federalism (Reagan)Reagan, RonaldRoosevelt, Franklin D.


Thomas J. Anton, American Federalism and Public Policy (Philadelphia: Temple University Press, 1989); David R. Beam, “Washington’s Regulation of States and Localities: Origins and Issues,” Intergovernmental Perspective 7, no. 10 (Summer 1981); Timothy Conlan, New Federalism (Washington, DC: Brookings Institution, 1988); Marian Lief Palley and Howard Palley, Urban America and Public Policies (Lexington, MA: D. C. Heath, 1977); Martin Saiz, “Politics and Economic Development: Why Governments Adopt Different Strategies to Induce Economic Growth,” Policy Studies Journal 29, no. 2 (2001): 203–14; Martin Saiz and Susan E. Clark, “Economic Development and Infrastructure Policy,” in Politics in the American States: A Comparative Analysis, ed. Virginia Gray, Russell L. Hanson, and Herbert Jacob (Washington, DC: CQ Press, 1999); and Stephen Skowronek, Building A New American State: The Expansion of State Administrative Capacities, 1877–1920 (Cambridge: Cambridge University Press, 1982).