Job Creation Vexes States in a Weak Economy

State government not private industry was the biggest creator of new jobs in the the country last month, a development that could explain why states are putting so much energy into keeping and growing new businesses within their borders.

Of the meager 21,000 new jobs created across the country in February, state government accounted for 20,000, primarily in education, according to the most recent government figures. The unemployment rate remained at 5.6 percent last month.

The nation’s jobless recovery has governors and state policymakers trying to jump-start the job machine this election year with an array of strategies that range from banning state contractors from taking work overseas, to providing seed money to new high-tech startups.

After a couple of embarrassing incidents of state-contracting jobs going to India, state lawmakers are hopping on the anti-outsourcing bandwagon to show they are doing something to stem the rush of jobs going abroad.

The most recent action comes from Michigan and Massachusetts. Michigan Gov. Jennifer M. Granholm (D) signed two executive directives on March 22 designed to keep state contract jobs from going abroad. “The state of Michigan must extend legal preferences for Michigan-produced goods and services over those of other states and countries,” Granholm said in a statement. Granholm said 24 other states provide for some form of “legal preference” for in-state bidders.

In Massachusetts, Gov. Mitt Romney (R) March 22 outlined a three-part plan that includes giving $8 million in loans to Bay State companies looking to stay or expand; providing $10 million in grants to cutting-edge companies that create at least 250 jobs; and awarding $11 million, in grants of $2,000, to companies that hire laid-off workers. “The reality of today’s business climate is that a growing number of companies are sending their best jobs out of state,” Romney said in a statement.

Legislation to curb outsourcing of state contracts to foreign firms is in the hopper in 31 states, but no measures yet have passed, said Justin Marks, a labor expert at the National Conference of State Legislatures.

The high-tech industry said the urge to protect state jobs is understandable, but in the long-run, can run up state costs and drive away state business. “The U.S. has always been a leader in open markets … and closing markets sends the wrong message to both foreign trading partners as well as companies that wish to seek state business,” said Michael Kerr of the Information Technology Association of America, an industry trade group.

The outsourcing debate isn’t going away anytime soon and likely will pick up steam as the November elections draw closer. State contract work that ended up in India is a key issue in governor’s races in both Indiana and North Carolina, where Democratic Govs. Joe Kernan and Mike Easley each face tight races and have made moves to bring the state jobs home. Jobs and the economy are the dominant issue in both races.

Tax breaks have been a popular way for states to attract businesses and jobs, but a report issued March 23 suggests state tax incentives may not be the best bait. The Economic Policy Institute, based in Washington, D.C., said several factors outweigh taxes when businesses consider where to locate: the availability of workers, proximity to customers and the quality of public services.

“The real lesson here for legislators and local policymakers is that what makes a community a good place to do business looks a lot like what makes a community a good place to live. That means good schools, good police and fire protection, a modern and well-maintained transportation infrastructure and good all-around public services,” said the EPI report’s author, Robert G. Lynch, associate professor and chairman of the economics department at Washington College in Chestertown, Md.

A new 37-page report from the National Governors Association suggests that state leaders need to go beyond traditional means of keeping businesses such as improving a state’s tax and education climate. While these programs are important, states also need to nurture “entrepreneurship” to create new jobs, particularly high-tech, cutting-edge jobs, NGA said.

NGA says that instead of focusing on large firms and small businesses, states need to target startup companies that use new technologies. Among NGA’s key recommendations:

• Provide office space to connect startup businesses with expertise and money. Illinois, for example, has created eight centers to help high-tech researchers figure out how to market their new technology and start new companies. Maryland’s “incubation” projects focus on homeland security. 
• Give seed money or tax credits to new firms and private investors who back companies in the early stages. Iowa, Maine, Ohio, Oklahoma, Virginia, and West Virginia are among states that have such programs.
• Get rid of paperwork and regulatory hoops. New York eliminated more than 700 regulations, while Michigan, Washington and Wisconsin have one-stop systems that allow companies to fill out various registration and licensing procedures at once, including online versions.