The Business Climate

In the eyes of the political partisan, the world is made up of (1) the enemy, (2) crusaders against the enemy, and (3) compromisers, middle-of-the-roaders, and weak-kneed trimmers who defer to the powers-that-be. This is not a bad formulation, as far as it goes, and politics would not be politics without it. But it does leave something out.

When it comes to setting government policy, it’s not possible to side entirely with one partisan or the other. At least in this country, at this point in history, we cannot expect to see a government that follows a comprehensive program mapped out by the left or that satisfies all the free-market, small government dreams of the right. So public policy is forged in the center. No doubt there is a good deal of muddled thinking and half-measures and killing compromises that result from the quest for centrism and bipartisanship. It’s true that progress is a better goal than consensus. But the problem with polarized political warfare is that it can keep two sides from listening to each other. The opportunity presented by the need to “govern from the middle,” as Massachusetts House Speaker Tom Finneran likes to put it, is that, every once in a while at least, there can be a creative and useful synthesis of divergent ideas.

And synthesis seems to be more a part of our age than it used to be — maybe it’s due to the end of the Cold War. You see it, for example, in the environmental movement. A while ago, the left-wing magazine Mother Jones printed a piece by Paul Hawken arguing for a “natural capitalism” that holds up profit and conservation as twin goals. There are people in the labor movement, and in business, who are trying to imagine new structures of employee participation in corporations, or of a new style of “stakeholder capitalism.” And in politics there are those who see a role for strong, affirmative government, even in a time of balanced budgets and the loosening of federal government control.

Many questions about government’s proper role in economic development have been answered.
Take a look at what’s happened in Massachusetts over the last eight years, especially in economic development and the changing “business climate.” One of the great divides between liberals and conservatives in this state has been over the regulation and taxation of business. Though it’s doubtful that business here was ever as put-upon as it has claimed to be, its power has been checked by a strong conservation movement in both parties and by the labor/consumer/public-interest coalition that kept state government mostly in the control of Democrats for two generations. But in 1990, William Weld was elected governor and his Republican administration set out to change the balance of power.

And did. Now, two terms into a more “business friendly” Massachusetts, even the most doctrinaire Democrats probably would admit (it might take hypnotherapy for some) that they have learned something about managing the relationship between state government and business. At a minimum, the lesson is that government is not in the driver’s seat in this affair. Like it or not, the mobility of capital and the sudden rising and falling fortunes of some of the state’s largest employers require that state government weigh carefully what demands can be made on business and what advantages should be be provided.

Which is not to say that the unusual stripe of Republican that is found in Massachusetts has come easily to the prevailing approach, either. In fact, one of the most interesting spectacles of the recent era was to watch Gov. Weld the Libertarian jostle with Gov. Weld the Moderate Pragmatist. In speeches, the governor would extol “a government that does less with less.” He once went so far as to enumerate the three purposes of state government: public safety, providing for the helpless, and taking care of public assets such as parks, rivers, roads, and bridges. (Now that’s minimalism!)

But at the core of Weld’s administration was a much more interesting philosophy, one that synthesized ideas about limited government and activist government. In this view, policy-makers were not idle players in how the state’s economy developed. On the stump, Weld preferred to talk about cutting taxes and nixing regulations on business and then getting out of the way so the private sector engines could roar ahead. But there was more to it than that.

Choosing to Compete

A set of reasonable and pragmatic ideas about government’s role in the state economy guided the Weld administration from the start. At the center of this thinking was Harvard Business School Professor Michael Porter, author of The Competitive Advantage of Nations, among about a dozen other high-density tomes. Porter and his Cambridge-based consulting group, Monitor Co., produced a pro bono study for the state in 1991 entitled The Competitive Advantage of Massachusetts. The following year, Porter and Monitor reworked much of the same material and added new insights in a document called Toward a Shared Economic Vision for Massachusetts, which was released by the Challenge to Leadership group. And in 1993, the state published its official economic strategy, Choosing to Compete, a collaboration between the governor’s office of economic affairs and the University of Massachusetts. With the professor’s permission, Choosing to Compete drew substantially on the previous Porter studies.

It’s hard to imagine there are more than a couple other states in the union that have benefited from such comprehensive, sophisticated, and clear-headed studies of their state’s economy. Choosing to Compete assessed the competitive strengths and weaknesses of the Massachusetts economy as it began to emerge from recession, put forward economic development policies, and gave a detailed breakdown of the local economies of the state’s seven regions.

Good for Business
The 12 elements of a good business environment:

1. Reasonable and stable taxes.
2. Government-affected business costs (such as workers’ comp.) are kept low.
3. Faster regulatory decisions.
4. “Win-win” solutions in regulation.
5. Infrastructure improvements.
6. Good basic education.
7. Improved workforce training.
8. Management education available to small business.
9. Research that benefits entrepreneurialism.
10. Favorable incentives for investment and credit.
11. Expanded exports.
12. State, regional, and local cooperation in economic development.

— From Choosing to Compete
(Executive Office of Economic Affairs and UMass, 1993)

But perhaps more important than all that, it expressed a coherent (and decisively un-libertarian) view on the key question: What is the appropriate role of government in economic competitiveness? Answer: Competitiveness is primarily a private sector phenomenon but government has a clear role to play as one of four partners (the other three being: business, labor, and the academic and research communities). As Porter had suggested earlier, “Government’s proper role is creating the environment in which firms compete.” It’s not that policy-makers can be expected to direct private economic decisions. But, according to Choosing to Compete, “state government can have a substantial influence on the climate in which private decisions are made to invest, to modernize, to expand, to train workers, to create new companies, to commercialize new products, and to export. In turn, these decisions determine the economy’s ability to create and retain jobs.”

In other words, the state does not face a choice between a hands-on or a hands-off policy. Neither pure free-marketism nor increased government interventionism can be expected to carry the day, at least in Massachusetts. The rhetoric of politicians and other partisans may not acknowledge it, but this is the consensus in the actual world where business decisions and government decisions are made. Except for Milton Friedman disciples (which Weld sometimes pretended to be) and advocates of socialist economics (if there are any left), the matter is settled.

Constraining Growth

But that only gets us part of the way to a better understanding of the underpinnings of economic prosperity. A lot remains unresolved. As much as Michael Porter and others have told us about the workings of regional economies, there will always be a tension around how much public purpose we expect from private power. And to say that government is responsible for creating a good business climate does not define what, exactly, such a climate is. Certainly lowering government-imposed costs on business is a step forward — right up to the point where it cuts into the government’s ability to protect the general welfare, whatever that is decided to be, or to the point where the tax burden on ordinary citizens relative to business becomes unfair. Such points cannot be determined scientifically, only politically.

In recent years, the political system has responded to the business community’s view that Massachusetts offered a notably “hostile” business climate. Choosing to Compete acknowledged the problem, somewhat delicately, as follows: “The Massachusetts government has traditionally constrained the state’s economic growth because it has too often been unsupportive of business needs.” The sentiment is more explicit in a 1994 report by Craig Moore and Edward Moscovitch, economists then working with the UMass-Amherst School of Management. “Most high-tech executives feel that Massachusetts harbors a general hostility toward business and either takes it for granted or, worse, feels that business growth and development is bad for the future of the state,” they wrote in The New Economic Reality, which was sponsored by the Massachusetts Taxpayers Foundation.

The strongest complaints were with the state’s regulatory processes, especially in environmental areas. The critique put forward by Moore and Moscovitch was not that the state’s regulatory goals were amiss but that the state’s agencies bordered on the incompetent when it came to regulating in a clear and timely manner. In her book World Class, Harvard Business School Professor Rosabeth Moss Kanter found positive and negative views of Boston’s business climate. Based on a 1994 survey of 521 area companies, she found that the business climate was judged “exceptional due to a high degree of brain power and accompanying cultural attractions offered by the region. However, the perception is reversed with respect to political institutions and the press.”

But now we have had three more years of work by the Weld-Cellucci administration to streamline regulations, demand better performance of state agencies, and to push through tax cuts important to business. To hear those involved with the Weld-Cellucci administration tell it, the demons of hostility have been exorcised (although perhaps not entirely from the press). The Governor’s Council on Economic Growth and Technology put out a detailed scorecard in 1996 of the recommendations of 25 major studies done since 1991 and marked many missions as now accomplished.

Where’s the Rest of Us?

Still, even if we were to agree we have gotten closer to the magical balance between being “business friendly” and letting the public sector do its many jobs, there is something else — something vital to the economic development question — left unresolved. For the most part, in fact, it is not even addressed. Boston Globe columnist David Warsh touched on it in his assessment a while back on Professor Porter’s contributions to the Massachusetts debate. For all his detailed documentation of the major industry “clusters” that matter in this state, Porter left one out, according to Warsh. What he omitted was “the conscience industry” or, more broadly put, the cluster of activity that has to do with politics and the drive to make this part of the world better through political activity.

Porter has since launched an effort called the Initiative for a Competitive Inner City, a hard-headed effort to address the unevenness of our economic prosperity. (Synthesis again: Can sound business principles be harnessed to reduce inequality?) So he cannot be accused of being oblivious any longer, if he ever was, to the “conscience industry.”

What’s missing can be described in a different way. You can read through all of the above-mentioned reports, hundreds of pages of top-notch thinking about economic development, and never once come across a mention of the role of the ordinary citizen. The state’s residents are seen as a human resource — as a pool of workers that is well-educated at one end, and in need of better skills and training at the other. But never is the activism of citizens seen as either a positive or a negative on the economic development ledger.

This is an omission worth thinking about. For one thing, there is an undercurrent running through every political debate about “the business climate” that has to do with “too much democracy” getting in the way of the private sector’s need for speed and efficiency. In our conversation with Porter (“CONVERSATION“, CW, Fall 1998) he mentions the added burden on business of having to deal with a second “level of government” in the cities, i.e., active community organizations. Seen from the perspective of business, an activated gathering of citizens in an auditorium usually means trouble.

Meanwhile, there is an intriguing body of study emerging that suggests just the opposite. Robert Putnam has advanced the idea that regional differences in economic prosperity are not just a matter of investments of physical capital and human capital, but of “social capital,” as well. In a 15-year study of economic development in Italy, Putnam explored connections between high levels of civic engagement and prosperous economies. His theory is that in areas with active social networks, citizens develop a higher level of mutual trust and better communication — and both business and government benefit.

More recently, some have suggested that cultural differences, such as more extensive social networks, might explain different patterns of development in California’s high-tech region and ours in Massachusetts. Certainly one can find development issues in and around Boston that have gone nowhere due to long historical patterns of mistrust and miscommunication. If one thinks back to last year’s uprising in South Boston against siting a football stadium in the neighborhood, one has a good example of the worst of both worlds: an enraged but not truly engaged citizenry doing battle with a wealthy football team owner who somehow thought he could get what he wanted through (to improvise a phrase) the politics of snubbery.

At the same time, there is a vital civic culture especially among the business elite in this state, and vibrant civic traditions in most towns (much more so, in both cases, than in other regions of the country). And despite Boston’s history of deep wounds to the integrity of neighborhoods (the razing of the West End, to mention just one), community activism in some parts of the city is one of the key elements in dramatic reductions of crime. Obviously, reducing crime can only make economic development in the city more attractive.

Meet the Author

Dave Denison

Founding Editor, CommonWealth magazine
So here we have a perfect example of two traditions that have something to learn from each other. Community activists and public-interest advocates ought to become thoroughly familiar with Porter’s insights about how competitive advantage works in regional economies. It makes sense to learn to “think economically” about what business can and can’t provide.

But Professor Porter and the Weld administration put forward a strategy that rests on the idea of stronger, smarter government. Can we have smarter government decisions about economic development without addressing the networks of citizen activism that already exist, and even finding ways to foster more? Could it be that a better business climate involves better relationships between government and business and organized community groups, organized labor, networks of citizens in churches, taxpayer associations, and neighborhood watches? Thinking economically doesn’t answer all the questions. Thinking civicly is just as important. If we are looking for a truly promising area of synthesis, this is it: the idea that economic vitality goes hand in hand, and may even spring from, civic vitality. Why not combine the knowledge of Michael Porter with the wisdom of Robert Putnam?