Northwest Arkansas? Economy is Key to State?s Vitality (Market Forcast)

In July, I gave a talk to a group of SCORE counselors and their clients. During the Q & A period, I made several comments that were subsequently reported in an article published by a daily newspaper. Since then, I have had people I don’t know come up to me, shake my hand and thank me for being courageous. Others have chastised me for being impolitic and perpetuating regional divides.

At least one person called my boss and suggested I be fired. What is amazing to me is the number of people who have been inspired to speak out and the passion with which they have spoken. I clearly struck a nerve.

While those comments were not intended for the general public, and the phrases I chose were indeed ill-chosen and regrettable, I believe the essence of what I said is worth discussing.

So what did I say?

Specifically, I stated that Northwest Arkansas is treated like a “cash cow” by other parts of the state (as are other economically vibrant places in Arkansas).

For those who don’t know, a cash cow is a business that generates revenues that are in turn invested in other businesses.

Does anyone really doubt that Northwest Arkansas generates more in tax revenues than it receives in state expenditures? Further, does anyone think that those revenues are not used to shore up the economies either directly or indirectly of other regions? Finally, does anyone believe that without increased investment in the infrastructure of Northwest Arkansas, growth rates will decline?

What concerns me about the current degree of subsidization is that it is a short-run strategy that props up standards of living at the expense of long-run growth. Arkansans have for the last three decades earned around 75 percent of the national average of per capita personal income despite many efforts to improve the state’s economy.

What is more troubling is the ongoing decline in the manufacturing sector, a sector that has been responsible for most of the high-wage employment in the state implies that rather than improving relative to the nation, Arkansans are likely to lose ground.

The declining manufacturing sector also implies that our window of opportunity to make the needed critical investments in ourselves to compete on a global scale is closing rapidly. Meanwhile, our competitors across the U.S. and in places like Mexico, India and China are making concentrated investments in themselves. They are building their ability to not only compete in manufacturing but also in research and development of new products and processes.

It is research and development that provides the innovation necessary for a dynamic robust economy – an economy capable of weathering the ebb and flow of macroeconomic fluctuations.

Simply, failure to find a way to make critical investments in ourselves, in the human capital on which the economy of the state increasingly depends is sentencing generations of Arkansans to an economic future of perpetual poverty. We will be ranked 48th, 49th and 50th with no hope of overcoming the deficit.

Moreover, it is real investments that grow the economy of the state and provide opportunity for people no matter where they live. I am not pretending to know what the best real investment the state should make is, but I know that the system by which those decisions are made is tragically flawed. That it is more political than it should be.

The world is increasingly a meritocracy and yet we seem to live by patronage.

I further stated that Little Rock (and by this I meant state government and specifically some in the state legislature) don’t seem to care to hear about the needs of folks in Northwest Arkansas. I have heard the term “arrogant” more than once to describe the attitude of Northwest Arkansans.

Unfortunately, this has from time to time been an appropriate descriptor. However, without the rapid job creation in the region there would be very little economic growth in the state and therefore, few new tax dollars. That is, to generate new jobs and the expanding tax base that comes with those jobs, the state needs Northwest Arkansas.

The statistics are stark.

From 1996 to 2006, Northwest Arkansas accounted for roughly 49 percent of the net new jobs created in the state. Add Central Arkansas, which was responsible for 22 percent, and Fort Smith with 11 percent and that is 82 percent of all net new jobs created in the state. This implies roughly 18 percent of net new job creation resulted from economic activity in the rest of the state.

The last of my reported comments, which has elicited feedback, concerned the delegation from Northwest Arkansas and its success, or lack of success, at doing all sorts of things that might benefit the region—like forming alliances with other regions.

I have been told by senior state officials that our delegation is its own worst enemy. Indeed, there is a heavy focus by some members of the delegation on divisive social issues that alienate potential partners.

As I recall at the beginning of the year an Arkansas newspaper listed the ten best and ten worst legislators in the state. Several prominent Northwest Arkansas legislators were among the latter.

Further, we hear anecdotal evidence that the Northwest Arkansas delegation can be counted on to be divided and to fail to build effective coalitions. Most importantly, my purpose for making these comments was to rally people who I thought should be involved in the process.

Finally, I am an economist.

My concern is not with securing the funds necessary to grow Northwest Arkansas at the expense of the rest of the state. My concern is that without the growth of Northwest Arkansas, the whole state will be poorer tomorrow than it should have been.

I know that the state has almost unlimited needs and very scarce resources to satisfy those needs. I have watched the process by which decisions are made concerning the disposition of those scarce resources. It is my opinion that the process for deciding how to spend the tax dollars needs to be significantly improved.

There are several factors that contribute the difficulties we find ourselves in. In my opinion, term limits have significantly eroded the efficacy of the state legislature. The incentives encourage short-run over long-run policy (to say nothing or increasing the power of lobbyists and bureaucrats).

In a state undergoing massive demographic change, political power and therefore policy is more reflective of where the state was than where it is going. These challenges coupled with the level of poverty and destructive regionalism creates almost insurmountable barriers to forming good policy.

In the end, my fear is that petty jealousies and rampant self-interests are keeping us from asking the fundamental question, “What is best for Arkansas?”

I know that my comments to SCORE failed to articulate that this is my fundamental concern as well … for that, please forgive me.