Tuesday, March 08, 2005

Economic development and out-of-state ownership

Sorry for the blog delay. Been on the road (speech near Seattle at University of Puget Sound on future of American democracy) and the treo doesn't permit good responses to comments. Thanks for the discussion. If you start from the premise that as a state policy-maker, one only cares about economic activity in the state and the goal of policy is to maximize economic activity and wealth in thestate, I think the ATM or bounced check or other nickle and dime fees will be clearer. Take retail. There is a big difference between Wal-Mart and a locally-owned retailer. The former essentially exports profits to Arkansas and then ultimately to shareholders scattered around the globe. An Illinois retailer keeps profits in state which are then spent or otherwise invested in state. The local retailer is better for the state's economy, all else held equal. If Wal-Mart has cheaper prices or better selection, then there are competing arguments for which is better for the people of the state. But if all else is equal, then the locally-owned business is objectively better for the state economy than Wal-Mart. Same concept with financial institutions. It is better for our state's economy to keep the profits in our state and not as good to export those profits out of state. In banking, almost all the big banks are out-of-state owned. Some credit unions and smaller banks are not and those are better for our state's economy. But since most financial institutions are out of state, the higher the fees on their products, generally speaking, the worse off our state economy is. So what can or should the state government do? We should encourage lower fees. We should encourage in-state ownership. And we should look out for our own economy with the businesses we choose to support. Now, some say that all prices and fees are simply what the market will bear, so they must be 'correct' or at least efficient. I think that is more of an ideological statement than a pragmatic assessment of economic activity. Lots of things distort the 'natural' price including unequal bargaining power, undereducation among consumers and predatory practices (check out the payday loan shark industry for a prime example). So even if there is a market price for bounced checks or ATMs or credit card late fees or - how's this, an hour's worth of unskilled labor - that doesn't mean the market price is the best price for everyone in the state. If we can make more people better off with a different price through government regulation or softer policies, we absolutely should. And even my Marxist friend (though I don't really know what a Marxist is nowadays) will hopefully agree with that.

3 comments:

N. Y. Krause said...

Ultimately, this idea of state policy as "one state economy against another" is very destructive. Why do you think that we have free trade with the other states of the union? Because, if everybody is constantly putting up trade barriers in an effort to get more for themselves, it winds up screwing everybody. The other states are going to want to protect themselves against our Illinoisian businesses, too, which which makes the whole thing a big mess, even if these measures could successfully improve one state's economy, which they can't.

N. Y. Krause said...

Ultimately, this idea of state policy as "one state economy against another" is very destructive. Why do you think that we have free trade with the other states of the union? Because, if everybody is constantly putting up trade barriers in an effort to get more for themselves, it winds up screwing everybody. The other states are going to want to protect themselves against our Illinoisian businesses, too, which which makes the whole thing a big mess, even if these measures could successfully improve one state's economy, which they can't.

Dan Johnson-Weinberger said...

This isn't a tariff. This isn't destructive to the people in other states. This also isn't a mess. The state's got to do business with some banks. We should pick those banks that maximize wealth in Illinois. Seems like a fairly easy call to me.