Labor and Employment

Read Edward Alden's accompanying blog post. Each year, U.S. state and local governments spend tens of billions of dollars to lure or retain business investment. The subsidies waste scarce taxpayer dollars that could better be used to strengthen public services such as education and infrastructure or to lower overall tax burdens to create a more favorable investment climate. No state wants to dole out such subsidies, but most fear losing jobs to competing states if they refuse. States should take steps to curb subsidies, beginning with greater disclosure and cost-benefit analyses, and building up to a multistate agreement that creates strong disincentives for continuing subsidies. Existing international arrangements provide models and tools for achieving this. The Problem State and local governments use targeted subsidies to attract or retain specific businesses. The subsidies can be in the form of tax breaks, cash payments, generous loan terms, or discounted public services. There is no formal accounting of these subsidies in government budgets. The best data so far, compiled by the New York Times, puts the national total at more than $80 billion annually, which is equal to 7 percent of state and local tax revenues. The number of subsidy packages has fallen since the 2008 recession, but the number of new "megadeals" signed per year costing at least $75 million has doubled. In 2013, Washington State granted a subsidy package to Boeing worth $8.7 billion—by far the largest to a single company in U.S. history. Surprisingly few states make serious estimates of the potential cost of these incentives, and few cap the total benefits, potentially leaving state and local governments exposed to large losses. Rarely do the benefits of these subsidies exceed the costs. In highly mobile industries, like film production, the subsidies do lure business from other states, but any job creation is short-term and film crews are usually imported. In many other industries, subsidies have less influence on location decisions; manufacturers, in particular, require local networks of suppliers and employees with specialized training. Local governments usually lack the sophistication to negotiate successfully with big companies, so they end up subsidizing businesses that would have invested in the state regardless. Public money is wasted that could have gone to lower the overall corporate tax rate or to more productive investments like education and infrastructure—assets that matter more for most business location decisions than one-off tax breaks. Although many states dislike the subsidy wars, efforts to curb them have usually failed. After an especially cutthroat subsidy fight for a Boeing plant in the early 1990s, for example, Illinois governor Jim Edgar led an unsuccessful campaign to persuade states to call a truce. Governors in the New York City metro region agreed to a "nonaggression pact" in 1991 to refrain from running ads aimed at luring away businesses from each other. Within months, however, New Jersey violated the terms and the deal collapsed. Some counties in metro areas, like Dayton and Denver, are cooperating to limit subsidy competition. Kansas and Missouri are considering a halt within Kansas City, which straddles both states. These are exceptions, yet there is also clear understanding of the folly of subsidy wars; forty states have restrictions on local municipalities using state funds to entice jobs away from another part of the state. The U.S. Congress could curtail the subsidy war, but has chosen not to do so. Historically, Congress has been reluctant to interfere in what are seen as state-level prerogatives. International Models for Controlling Subsidies The federal government's refusal to intervene in controlling state subsidies is ironic because the United States has led international efforts to get all countries to reduce subsidies that distort business location decisions. The 1994 agreement that created the World Trade Organization (WTO) restricts most "specific" subsidies, or those available only to particular enterprises or industries, and requires signatories to report all subsidies. The language distinguishes targeted subsidies for certain companies or industries, which can be challenged by other countries, from broad tax cuts or other forms of government support like research-and-development spending, which are permitted. The WTO has a dispute settlement mechanism for resolving complaints that allows for trade sanctions against violators. The United States has launched disputes in several cases, such as European subsidies to the Airbus consortium. The U.S. Trade Representative has declined to dispute other subsidies, however, such as Canadian incentives that have lured filmmakers from California. Other countries have also challenged U.S. subsidies. In a 2011 case brought by the European Union (EU), the WTO ruled that some state tax breaks for Boeing were illegal trade subsidies, though they have yet to be repealed. The executive branch has the power to require state and local governments to enforce such WTO rulings, but it has been cautious about exercising it. The United States also led negotiations through the Organization for Economic Cooperation and Development (OECD) dating back to the 1970s that produced agreements to limit government subsidies to exporters through official export credits, such as those offered by the U.S. Export-Import Bank. There was no formal enforcement mechanism, but in practice if one country violated the OECD rules and offered financing on overly generous terms, the United States or other countries would match those offers in an effort to discourage violations. Europe is well ahead of the United States in controlling such subsidies. The European Union tightly regulates business subsidies by member states with its "state aid" law. Member states can only give individual businesses a subsidy under certain conditions—for example, if the subsidy benefits a region that is economically depressed or if it serves an environmental purpose. Most subsidies are preapproved by the European Commission (EC), which carries out a cost-benefit analysis on a case-by-case basis. The EC regularly tallies and reviews existing subsidies, and localities have to list subsidies online, along with the companies that are significant beneficiaries. Member states found in violation of the state aid law can face fines and other penalties. None of these systems is perfect. The WTO and EU state aid rules still permit a wide range of subsidies, and the dispute settlement process in the WTO is excruciatingly slow. The OECD arrangement on export credits has been weakened because big emerging countries like China and India have refused to participate. Despite the problems, each of these systems has established clear expectations that such subsidies should be discouraged and instituted rules for enforcement. Recommendations Reducing wasteful state subsidies to businesses will require a series of steps, starting with greater transparency and moving incrementally toward more enforceable rules. These measures would reverse a growing competition spiral in which states try to outbid each other for investments, and could provide a modest boost to state revenues. The Obama administration should require state and local governments to report all subsidies to a federal data warehouse, and make that data publicly available. The United States is already required to report these subsidies to the WTO, but administrations have done little to press the states for greater disclosure, even while demanding greater transparency by foreign governments. Such disclosure would make subsequent steps easier by highlighting subsidies for public scrutiny. An office in the Commerce Department that already collects some subsidy information to report to the WTO should be directed to collect and publish the data. States should require regular cost-benefit analyses of all business subsidies above a certain threshold. A new law enacted last year in Rhode Island, for example, requires the state to regularly reassess each of its tax incentive programs to determine whether such investments would have occurred regardless and how much of the economic benefit accrued to the state. The federal Commerce Department should also do its own independent analyses of the costs and benefits of state subsidies. States should revisit the idea of a compact to limit subsidies targeted at specific companies or industries. The place to start is with regional cooperative agreements since it is within a regional economy where subsidy competition can be most intense and destructive. The enforcement mechanism should initially be informal and modeled after the OECD export credit arrangement. If one state violates the pact's terms, others would be free to match (though not exceed) the subsidy offer. And in the case of nonparticipating states, or other countries offering subsidies to attract investment, member states would also be free to match any subsidy offers. This avoids the competition escalation spiral and gives other states little reason to cheat because they will gain no advantage. The federal government should challenge more foreign business subsidies through existing WTO rules to prevent other countries from taking advantage of greater restraint by U.S. states. The United States should press for new, tighter subsidy rules in the WTO, building on a 2007 U.S. proposal in the Doha Round. U.S. efforts to curb its own state-level subsidies would add credibility to that proposal. The federal government should also require states to comply with WTO rulings on subsidies, enforcing through the courts if necessary. A successful voluntary system could create an appetite for a more robust federal role. The government, for example, could reward states by increasing federal development aid to those that adhere to subsidy rules, or restricting aid to those that do not, much in the way it uses federal dollars to encourage education reforms. The politics will not be easy because of corporate opposition, but there are potential gains for both parties. Democrats should favor reducing corporate subsidies that rob state governments of revenue. Republicans should support ending government interference that distorts competition in the market; most subsidies go to big businesses, for example, rather than smaller ones, and the savings could be used for broader tax breaks that benefit all businesses. Restricting subsidies through state-to-state agreements also means that each state can decide voluntarily whether to participate. At a time when governments at all levels are straining to stretch every dollar out of tight budgets, there are strong incentives for such cooperation.

The United States has made economic development a central tenet of its national security policy, alongside defense and diplomacy. One of the best and most cost-effective avenues for furthering economic development is investing in locally owned businesses, and yet the United States currently has no means for effectively and efficiently doing so. Small and medium enterprises (SMEs) have shown great potential in spurring economies, but their owners—especially women—are often unable to acquire the skills, resources, and support necessary to grow and sustain their businesses. Promoting local programs and global initiatives that encourage investments in SMEs and women entrepreneurs in lower-income countries will strengthen growth engines, diversify economies, improve communal well-being, stabilize societies, and accelerate progress toward international development goals. All of these results are in the interest of the United States, and could be achieved more quickly with the creation of an American development bank that aims to invest in and direct technical assistance to entrepreneurs in lower-income nations—the next-generation emerging markets. This can be done by expanding on the work already under way at the Overseas Private Investment Corporation (OPIC). Though several multilateral organizations have tackled pieces of this work, the United States has a unique role to play: investing in entrepreneurialism that creates jobs, bolsters the middle class, and spurs economic growth. Global Economic Progress: Falling in the Missing Middle Initiatives that advance economic development in lower-income countries have been shown to promote stability and are therefore vital to U.S. security interests. Small and growing businesses rank high among these untapped sources of growth in the world's developing economies. The International Finance Corporation (IFC) estimates that SMEs contribute about 29 percent of formal GDP in low-income countries. SMEs also boost a country's economic strength by spurring innovation and competition across a wide range of sectors, and reduce a country's economic vulnerability by diversifying economies, which in turn helps to prevent domestic and international conflict. Many SME-owners continue to struggle with growth challenges, such as a lack of capital, insufficient technical skills, inadequate risk sharing and mitigation, lack of access to export markets, and underdeveloped networks. Entrepreneurs, including those outgrowing microfinance, are often unable to compete with larger enterprises for resources that would help them to grow. Thus, smaller enterprises are left behind while large firms advance, resulting in the "missing middle." American development dollars could be deployed to help fill this gap and attract capital currently sitting on the sidelines. The U.S. Approach to the Missing Middle In the first-ever Presidential Policy Directive on Global Development, President Barack Obama pledged to "foster the next generation of emerging markets by enhancing our focus on broad-based economic growth and democratic governance." Yet the pathways for directing resources to private-sector actors remain sclerotic at best and nonexistent at worst. Currently, OPIC leads the United States' private-sector development efforts. Rules that constrain its investments and the nature of its assistance, however, are outdated. It cannot provide technical assistance or make equity investments. It also must have a U.S. bank involved in any deal in which it invests. Smaller efforts to spur SME lending operate through the U.S. Agency for International Aid (USAID), the Millennium Challenge Corporation, and the State Department, among others. But there are gaps in these programs. USAID's core skill set is better designed for grant-making than loan-offering, and traditional development aid was not designed to offer tools needed to support small- and medium-sized businesses. Some regional development banks focus on SME growth, but the United States has lagged behind in supporting emerging entrepreneurs with a full array of financial tools, especially in areas critical to U.S. interests. Women Entrepreneurs and Their Economic Potential Women are a significant driving force in developing economies, running much of the SME sector in lower-income countries. Yet women entrepreneurs face daunting challenges in growing their businesses, including the same limited skills, constrained access to markets, and shortage of avenues for accessing finance that constrain male entrepreneurs, but that are exacerbated by gender-specific issues. A recent report by the IFC argued that women entrepreneurs who run SMEs "drive job creation and economic growth, but are stuck in the middle: too big for microfinance, too small for commercial banks." Many women who want to access bank capital have neither an established business record of accomplishment nor land registered in their names, making already risk-averse banks less willing to lend to women. Women frequently do not have access to networks of other entrepreneurs, and investors are less likely to support women-owned enterprises, which they view as less profitable than those of their male counterparts. Such a lack of support for women entrepreneurs widens the gender gap, slows development, and misses an opportunity to stabilize communities. This is especially noticeable in conflict zones, where women are often left to rebuild communities. Creating an American development bank that is inclusive and supports women-owned SMEs capitalizes on the mounting evidence showing that prioritizing female workforce participation and entrepreneurship halts the poverty cycle. The United Nations estimates that the Asia-Pacific economy would earn an additional $89 billion annually if women were able to achieve their full economic potential. Similarly, the World Bank estimates that empowering women could increase labor productivity by up to 25 percent in some countries. Including women as a priority would also advance other international development goals—such as eliminating global poverty; closing the gender gap; and improving the health and well-being of women and their communities—which fulfill broader objectives in U.S. policy. Building Bridges for Economic Development An American development bank could provide loans and make equity investments in SMEs overseas, and would help to achieve the president's goals of supporting emerging and frontier-market economic growth. In the process, such an institution would attract the additional local capital critical to SME growth, build on the United States' entrepreneurial skill, and free critical foreign-aid dollars for deployment to the poor countries most in need. Expanding OPIC's abilities and expertise would allow an American development bank to bolster the investment gains OPIC has already achieved. OPIC is best positioned to take on this role given its investment history and private sector knowledge. Critics of this approach will argue that current U.S. efforts are sufficient, but the United States has talked about entrepreneurship's power without fully delivering on its potential. The new dollar cost would be negligible as this American development bank could be created in a budget-neutral way simply by unleashing some of the $30 billion in capital to which OPIC already has access—$15 billion in assets today—and an additional $14 billion it can access under the law. If OPIC were able to retain some of the $200-plus million it returned to the Treasury in 2011, it could also invest in additional technical assistance and investment talent. To advance SME growth, promote female entrepreneurship, and eliminate the missing middle, the U.S. government should do the following: Invest in and create a new American development bank that would provide a "one-stop shop" solution for entrepreneurs in some of the world's most challenging economies. This bank would expand on OPIC's framework and rules. It would allow for more equity investments and other structures, and provide skills that would help entrepreneurs best use the money they receive. Encourage the American development bank to invest in locally owned small businesses. This investment would help attract other private-sector actors, both local and international, to the "risky" SME lending sector. It also would allow entrepreneurs to tap into one of the United States' core exports in regions where those skills would be most valuable. Finally, it would show the United States' commitment to supporting entrepreneurs, particularly women, creating change through business in their own societies. Combine development bank efforts with those already promoting SME creation. Members of government, civil society, the private sector, and international entities should work together to promote SMEs, including women-owned businesses, and combine their efforts for maximum effect. This would include local ministries of commerce, along with local funding facilities, nongovernmental organizations, private efforts, and multilaterals such as the World Bank and International Monetary Fund. Conclusion Creating an American development bank to invest in local businesses in least-developed economies furthers U.S. foreign policy aims and is beneficial for individual entrepreneurs, their families, and their societies. Additionally, such an institution would yield gains in U.S. aid efficiency during a period of constrained budgets in which the private sector is becoming an increasingly valued partner in government efforts to address critical development issues. Women would be a central part of this small- and medium-enterprise investment strategy. Investing in women-owned businesses would spur growth, and has the potential to produce dividends for educational access and maternal and child health. This step would mark the United States' first foray into SME lending to local businesses in least-developed countries with a full arsenal of financial instruments and a focus on local businesses. The United States' entrance into this field could also have a ripple effect, attracting additional capital, both local and foreign, into the sector. Some will say that this is not the United States' business, but the reality is that business is among the most powerful forces shaping realities on the ground across the globe; as government aid budgets grow slimmer, the role of small- and growing-enterprise development becomes more crucial. The United States has unique expertise in the entrepreneurial sector. Investing in small and growing businesses in some of the poorest countries would provide economic, security, and diplomatic gains for the home country, and the United States.

Overview There has never been greater urgency for expanding and improving U.S. workforce training programs. To an unprecedented extent, employers now need and expect applicants with "middle skills" qualifications: a level of education and training beyond a high school diploma, but less than a bachelor's degree. But the supply of middle-skilled jobseekers lags behind. The federal government should corral the country's siloed and disjointed workforce-development programs in line with a common national strategy. It can start by developing performance measures as well as data warehouses that link workforce services with employment outcomes. Federal funding, which has been scaled back in recent decades, should be restored. The training programs themselves should also be better targeted at low-income and disadvantaged workers, provide more longer-term services, and engage more directly with employers for stable job placements.