Governors as Economic Problem Solvers

Prior Studies of the Gubernatorial Role in Economic Development

Existing quantitative analyses of state economic development policy have largely ignored the gubernatorial role in economic development policymaking. The lone exception is a study in which Boeckelman (1996) analyzes governors’ policy statements and finds that party affiliation influences their economic development policy preferences. He finds that Republican governors favor locational policies and Democratic governors favor entrepreneurial policies.

A large body of case study literature, however, documents the key role that governors have played in state economic development policy. J. C. Cobb’s (1993) case study of the industrial expansion efforts of Southern states from 1936 to 1990 highlights the role of governors in making economic development policy a state governmental responsibility, not only in the Southern states but eventually also in the rest of the country. Several other case studies recount the leading role played by governors in initiating entrepreneurial economic development policies in the late 1970s and early 1980s (Eisinger, 1988; Ferguson & Ladd, 1988; Fosler, 1988; Jackson, 1988; Landry, 1988; Osborne, 1988). Hart’s (2008) case studies of state economic development policymaking confirm that governors continue to play an active role in promoting both locational and entrepreneurial economic development policies.

These case studies document that governors have been instrumental in the definition and redefinition of the role of state governments in the process of economic development. Clearly, the governor’s proposed economic development program is an important input into a state’s economic development policymaking process. In the next section, I outline a theory of gubernatorial policy development that describes how governors respond to state economic performance, business climate, and the availability of entrepreneurial resources when formulating their economic development agendas.

Theory and Hypotheses

My theory assumes that governors are self-interested and choose actions that enable them to achieve their personal and political goals. Achieving their goals, however, requires them to expend scarce resources such as time, effort, or money. Consequently, governors will use their resources strategically and will attempt to maximize the difference between benefits they obtain and the resources they expend (Buchanan & Tullock, 1962; Downs, 1957, 1967).

Governors, as chief executives, pursue goals similar to those of presidents: achieving reelection, making good policy, and building a reputation of historical achievement (Light, 1999). When they formulate their legislative agendas, tthey do so with an eye toward achieving these goals. Governors must first decide whether to include economic development as an issue on their legislative agendas. Neither governors nor legislatures can address every possible issue during a given legislative session because their time and other policymaking resources are limited (R. W. Cobb & Elder, 1983; Light, 1999; Walker, 1977). This limit on agenda size means that governors will tend to restrict their agendas to the issues that provide them with the greatest net benefits.

Economic development policy provides a governor the greatest potential benefit when economic conditions in a state are poor. These poor conditions can be caused by either a cyclical downturn in the economy or structural deficiencies in the state’s underlying economic base. Under either of these conditions, attending to the state’s economy contributes to a governor’s electoral success because voters are less likely to vote for an incumbent governor if the state is experiencing poor economic performance (Atkeson & Partin, 1995; Niemi, Stanley, & Vogel, 1995; Partin, 1995). Poor economic performance also leads to lower gubernatorial job approval, harming the governor’s prospects for reelection (Hansen, 1999; Howell & Vanderleeuw, 1990). Furthermore, economic distress in a state provides a governor with opportunities to build a reputation of historical achievement. When a state is suffering poor economic performance, a governor has the opportunity to identify deficiencies contributing to the poor performance and propose the policies believed will correct them. If the governor’s proposals are enacted by the legislature, then the governor will be in a good position to claim credit for any subsequent improvement in the state’s economic condition. For these reasons, governors are more likely to include economic development on their agendas during times of poor economic performance.

Once a governor has decided to place economic development on a legislative agenda, then the governor must decide whether to recommend an expansive or limited program. At this point, it is necessary to decide how to measure the extent of the governor’s economic development program. One approach might be to measure the cost of each policy in relation to the total state budget. The primary drawback to this approach is that for some economic development policies, the budgetary cost is not a relevant measure of the policy’s potential impact. For example, a substantial portion of governors’ locational policies focuses on creating business-friendly regulatory environments. The budget costs of enacting tort reform or enforcing less stringent environmental regulations are not only low, but may actually reduce state expenditures. This difference in the nature of their budgets’ impacts makes them difficult to aggregate with costly policies, such as tax cuts or direct financial subsidies.

I argue that a count of the number of policies a governor proposes is a relevant measure of the size of a governor’s agenda. Again, agenda space is limited, so a governor will recommend more policy proposals in issue areas that promise great benefits in terms of goal achievement and few proposals in areas where the potential benefit is small. I offer two reasons that governors will benefit by recommending larger numbers of economic development policies during times of poor economic performance in a state.

First, making good economic development policy during times of poor economic performance may require a governor to propose a greater number of economic development policies. A state that is experiencing extremely poor economic performance may have multiple deficiencies requiring multiple policy recommendations.

Second, a governor may propose more economic development policies during times of economic distress to demonstrate concern about the economy. When a state is in extreme economic distress, a governor who puts forward only a minimal economic development program will risk being seen by voters as not taking the state’s economic problems seriously and will be punished for this neglect at the next election. These considerations about the impact of a poor economy lead to my first hypothesis:

Once a governor has placed economic development on the agenda and determined whether it is an issue that requires a high or low commitment of legislative resources, then the governor must select specific policies to propose to the legislature. Locational and entrepreneurial economic development policies are intended to address different shortcomings in a state’s economic climate. Locational policies are intended to address the problem of a high-cost business climate, whereas entrepreneurial policies are intended to spur innovation and lower barriers to business creation and expansion. Consequently, a governor’s choices with respect to the two policy types will depend, in part, on the governor’s diagnosis of the state’s economic problems.

Identifying and Classifying Gubernatorial Economic Development Proposals

I obtained data about gubernatorial economic development proposals by content analyzing 550 major legislative addresses delivered by governors of all 50 states during the 12-year period from 1995 to 2006. ¹ My first step when analyzing gubernatorial addresses was to identify those policy proposals that were related to economic development. I define a governor’s policy proposal as an economic development policy if it is primarily intended to influence the investment and location decisions made by business firms or entrepreneurs (Eisinger, 1988; Fisher & Peters, 1998). My second step was to then classify each proposal as either a locational or entrepreneurial policy. The types of proposals included in each of these categories are described below.

Entrepreneurial Policies

Entrepreneurial economic development policies stimulate economic growth by encouraging innovation and the creation and expansion of local firms. These policies include programs to stimulate the creation of new businesses, such as state-run venture capital funds or business incubators; marketing assistance to help businesses sell their products in other states or overseas; technical assistance to help existing firms enhance their productivity; and research and development resources to produce new and innovative products. I classified a gubernatorial economic development proposal as an entrepreneurial policy if it provided one of these types of resources to stimulate business creation or expansion.

Table 1 summarizes the economic development policies proposed by governors during the years 1995 through 2006. During this period, governors included 1,440 economic development proposals in their major legislative addresses. Of these proposals, 1,021 concerned locational economic development policies, with 713 of those policies targeted specifically at business. The remaining 419 proposals were for new or expanded entrepreneurial policies. ³

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Table 1.

Number of Gubernatorial Economic Development Proposals by Type and Category, 1995-2006

	Locational
	Business targeted	Broadly targeted	Entrepreneurial
Tax	313	287	Productivity/innovation	257
Regulatory	203	18	Business creation and Expansion	85
Unspecific	86	—	Market expansion	77
Nonfinancial subsidy	81	—
Financial subsidy	30	3
Total	713	308		419

Measuring State Economic Conditions

In selecting measures of state economic conditions, I used criteria that governors mentioned in their legislative addresses. The most frequently mentioned measures of state economic conditions were those referring to jobs or employment, business creation or investment, and income or wages. When governors mentioned these statistics, they typically compared their states’ performances with one of two types or benchmarks: other states’ performances or their own state’s prior economic performance.

Based on this analysis of governors’ stated criteria, I derived measures of economic conditions from the unemployment rates, business creation rates, and average wages for each state. For each of the three categories, I developed two measures: one that compared a state’s current performance with the current performance of the nation as a whole and one that compared the state’s current performance with its own performance during the prior year. ⁴

Measuring State Business Climate

A state’s business climate is a “composite measure of the attitudes of a state’s population and government officials toward business” (Eisinger, 1988, p. 130). There are numerous indexes that purport to measure and rank states’ business climates. Fisher (2007) provides a thorough critique of the shortcomings of several commonly cited business climate indexes. Among the frequent shortcomings are indexes that include irrelevant measures, mix performance measures with causal factors, or combine multiple disparate measures without a sensible method of weighting them. He summarizes his critique by noting that 34 of 50 states can claim to have a top-10 business climate. Because of these shortcomings, I choose not to use any extant business climate index but rather to include variables directly measuring factors thought to affect state business climates. Eisinger (1988) suggests that important indicators of business climate include tax burdens and regulatory provisions. I include two variables measuring state business climates in my model: per capita state and local tax burden and workers’ compensation benefits per job. ⁵

Measuring Entrepreneurial Resources

Stimulating business creation and innovation requires different resources than for engaging in industrial recruitment (Hall, 2007). As with business climate, there are several indexes that purport to measure and rank states according to these resource levels. Some of the shortcomings of these indexes include inappropriate mixing of capacity and performance measures or altering the composition of the indexes, making comparisons over time problematic (Hall, 2007). These entrepreneurial resources may be classified into three categories: human resources for innovation, financial resources for innovation, and financial resources for commercialization (Hall, 2007). Following Hall’s categorization, I account for the influence of a state’s entrepreneurial resources with variables measuring each of these three types of resources.

I measure human resources for innovation using each state’s high-tech employment (as defined by Hecker, 1999, 2005). This measure represents the percentage of a state’s workers who are employed in industries with a high proportion of engineers, scientists, technicians, and computer scientists. States with relatively high numbers of workers employed in these occupations have a labor force that can support the creation of indigenous high-tech businesses. I measure financial resources for innovation using private venture capital funding. This measure represents the availability of startup capital available to entrepreneurs for high-risk business enterprises. I measure financial resources for commercialization using academic research and development expenditures. This measure represents the level of state effort to support research into new technologies that can be commercialized and thus stimulate business creation. ⁶

Data Analysis

To test my hypotheses, I estimate three models predicting the number of economic development proposals included in gubernatorial legislative addresses. The outcome variable in each model is the number of economic development proposals included in a governor’s annual legislative address. Two of the three models predict the number of locational economic development proposals, with one model predicting proposals strictly targeted to business firms and the other predicting total locational proposals—that is, the business-targeted proposals plus those that are more broadly targeted. The other model predicts the number of entrepreneurial proposals. In addition to my variables measuring state economic performance, business climate, and entrepreneurial resources, both models include as controls other economic and political variables that might affect governors’ economic development proposals, including gubernatorial and legislative partisanship, existing economic development policy content of states and their neighbors, citizen liberalism, and state fiscal resources. ⁷ Because my outcome variables are counts of proposals in each legislative address, I estimate my models using negative binomial regression. The regression results for the three models are presented in Table 2.

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Table 2.

Negative Binomial Regression Results Predicting the Number of Gubernatorial Economic Development Proposals per Legislative Address, 1995-2006

	Locational policies
	All		Business target		Entrepreneurial policies
	Coefficient	SE	Coefficient	SE	Coefficient	SE
Economic conditions
Relative unemployment rate	3.71 × 10−2	4.90 × 10−2	3.91 × 10−2	5.72 × 10−2	−2.85 × 10−2	7.62 × 10−2
Relative average wage	−8.54 × 10−3	6.09 × 10−3	4.77 × 10−3	7.53 × 10−3	−5.45 × 10−3	9.32 × 10−3
Relative firm creation rate	−2.99 × 10−2	1.94 × 10−2	−2.75 × 10−2	2.30 × 10−2	−5.14 × 10−2†	3.09 × 10−2
Annual change in unemployment rate	−1.77 × 10−1 **	6.44 × 10−2	−1.26 × 10−1†	7.39 × 10−2	6.94 × 10−2	9.87 × 10−2
Annual change in average wage	−5.98 × 10−3	3.60 × 10−2	−9.89 × 10−2 *	4.35 × 10−2	4.93 × 10−2	5.76 × 10−2
Annual change in firm creation rate	6.26 × 10−2 *	2.87 × 10−2	7.42 × 10−2 *	3.25 × 10−2	9.06 × 10−2†	5.03 × 10−2
Business climate
State and local tax burden	1.60 × 10−4	1.37 × 10−4	−9.10 × 10−5	1.73 × 10−4	−2.91 × 10−4	2.11 × 10−4
Workers’ compensation expenditures	8.61 × 10−4 **	3.32 × 10−4	1.55 × 10−3 ***	3.63 × 10−4	−2.14 × 10−5	5.50 × 10−4
Entrepreneurial resources
High-tech employment	4.14 × 10−2	3.29 × 10−2	6.93 × 10−2†	3.99 × 10−2	−1.05 × 10−1†	5.53 × 10−2
Private venture capital funding	−6.81 × 10−4 **	2.58 × 10−4	−1.14 × 10−3 **	3.93 × 10−4	−4.63 × 10−4	3.82 × 10−4
Academic research and development expenditures	7.54 × 10−4	5.94 × 10−4	1.24 × 10−3†	6.94 × 10−4	6.13 × 10−4	9.08 × 10−4
Existing state economic development policies
Locational policy index	9.43 × 10−2	1.45 × 10−1	5.10 × 10−2	1.77 × 10−1	NA
Locational policy index of neighboring states	2.63 × 10−1	2.85 × 10−1	3.36 × 10−1	3.44 × 10−1	NA
Entrepreneurial policy index	NA		NA		5.68 × 10−1 ***	1.64 × 10−1
Entrepreneurial policy index of neighboring states	NA		NA		9.13 × 10−1 ***	2.64 × 10−1
Political partisanship
Republican governor	−4.71 × 10−1	3.89 × 10−1	−1.11 × 10−0 *	4.43 × 10−1	5.32 × 10−1	7.24 × 10−1
Democratic governor	−9.30 × 10−1 *	3.98 × 10−1	−1.34 × 10−0 **	4.48 × 10−1	−3.78 × 10−1	7.43 × 10−1
Republican legislature	−2.62 × 10−1	2.23 × 10−1	−2.77 × 10−1	2.70 × 10−1	5.72 × 10−1	3.18 × 10−1
Democratic legislature	−8.35 × 10−1	5.95 × 10−1	−9.87 × 10−1	6.99 × 10−1	−5.64 × 10−1	1.00 × 10−0
Republican governor × Republican legislature	1.43 × 10−1	2.71 × 10−1	4.06 × 10−1	3.35 × 10−1	−6.28 × 10−1	3.94 × 10−1
Republican governor × Democratic legislature	6.75 × 10−1	6.25 × 10−1	1.06 × 10−0	7.39 × 10−1	−6.96 × 10−2	1.04 × 10−0
Democratic governor × Democratic legislature	9.02 × 10−1	6.31 × 10−1	1.19 × 10−0	7.40 × 10−1	9.77 × 10−1	1.05 × 10−0
Other constraints
Projected change in general fund revenue	4.01 × 10−2 ***	1.08 × 10−2	1.39 × 10−2	1.30 × 10−2	2.58 × 10−2	1.62 × 10−2
Citizen liberalism	8.31 × 10−3	8.93 × 10−3	−3.94 × 10−3	1.09 × 10−2	4.20 × 10−2 **	1.36 × 10−2
Intercept	−5.12 × 10−1	8.68 × 10−1	−2.17 × 10−1	1.05 × 10−0	−9.75 × 10−1	1.17 × 10−0
Null deviance	642.2 on 513 df		591.7 on 513 df		532.7 on 513 df
Residual deviance	560.9 on 491 df		509.4 on 491 df		445.2 on 491 df
2 × log likelihood	−1618.2		−1273.3		−1173.0

Note. df = degrees of freedom. Estimates are unstandardized maximum likelihood coefficients.

†

p < .1. *p < .05. **p < .01, all two-tailed tests.

Conclusion

These findings reveal that gubernatorial economic development policymaking is only partially an attempt to solve a state’s economic problems. My findings indicate that governors propose locational policies to lower the cost of doing business in states with high-cost business climates, and propose entrepreneurial policies to increase lagging rates of business firm creation and to increase the level of high-tech employment. In other words, governors propose policies to solve problems that the policies are largely designed to solve. I find, however, that governors apparently do not view locational economic development policies as an antidote for lagging economic performance compared with other states. Whether a state is in better economic condition than the nation as a whole, or worse, there is no significant difference in the number of locational policy proposals by the governor.

The more interesting, if unexpected, finding concerns the impact of economic growth on gubernatorial economic development proposals. I had expected that governors of states in which economic conditions were declining over time would propose greater numbers of economic development policies in an attempt to turn their states around. Instead, the findings indicate that governors propose more locational policies when unemployment rates are improving and business firm creation rates are increasing. The number of entrepreneurial policies also increases with increasing business firm creation rates. In other words, economic policy-making by governors appears to be driven largely by a desire to capture a larger share of new business investment during periods of economic expansion rather than solely a desire to correct economic problems.

This finding provides a new insight into a potential cause of the 1990s resurgence of locational economic development policymaking. Brace (2002) has suggested that it was the recession of the early 1990s that caused a revival of locational incentive competition among the states. He claims that the recession caused a decline in state budgets and the resulting fiscal crisis led states to enact locational policies as symbolic measures to demonstrate concern about economic conditions. These initial locational incentives then sparked a round of incentive competition that lasted throughout the rest of the decade (Brace, 2002).

The results of this study indicate, however, that it was not the early 1990s recession, but rather the subsequent recovery and expansion that caused the resurgence of locational policymaking. State revenue growth was strong during the mid- to late 1990s. Many states experienced unbudgeted surpluses, leading to successive rounds of tax cutting (Boyd, 2000). During the same period, the nation experienced brisk business expansion and growth with many new businesses forming (U. S. Small Business Administration, 2004). In this environment, governors were motivated to compete for these new businesses and proposed new locational policies in an attempt to obtain market share for their states.

In summary, the results presented in this research commentary indicate that economic development is an issue of concern to governors no matter the economic problems faced by their states. If a governor’s state is doing poorly compared with other states, then that governor will propose policies to catch up. If the governor’s state is doing better, on the other hand, then the governor will propose policies to maintain the state’s competitive advantage. When the nation enters an expansionary phase, the governor will propose new economic development policies so that the state can capture a portion of the resulting growth and, perhaps, to enable the govenor to claim a share of the credit for growth.

This description, however, merely sketches a broad outline of the factors influencing gubernatorial decisions about economic development policy. The data used in this commentary will permit more in-depth future analysis of gubernatorial economic development policymaking. In this study, I have grouped a fairly wide range of policies into two general categories, locational and entrepreneurial. The locational category includes general reductions in tax rates, creation of tax credits or financial subsidies targeted at specific qualifying businesses, and policies to relax the regulatory environment. The entrepreneurial category includes policies that aid business start-ups directly, such as business incubators, and policies that aim to increase the level of technological innovation within a state, such as university-based research programs. Future research efforts can examine the factors that influence gubernatorial support for individual policy types, rather than broad categories.