One of the disturbing trends in the American economy is the competition among states, cities, and smaller communities to win new companies.

We see frequent stories of how one town has won a manufacturing company with thousands of jobs by giving it tax abatement for years, low-cost power, financial aid, and exemption from onerous regulations that other employers must cope with.

The feeling is, of course, that this is worth it. The new employees become tax-paying citizens of the community, and in the long run the town or state is far richer than it would be were the concessions not made.

From a national standpoint, though, this is a dangerous procedure. For what it shows is that a company that would better off economically elsewhere is tempted to move into a less-beneficial location by tax and other incentives. This may on balance be good for the company, but also make our entire industrial plant less efficient than it would be were the locational decisions to be made on economic efficiency alone.

And from even a local standpoint this can be dangerous.

For the tax concessions that attract a company must be made up by higher taxation on the companies already there to offset the benefits the new employer is given.

And if the new employers do any long-range thinking, they will realize that the next time the town wants to attract another new employer, they will be part of the established employer base who must subsidize the next "new girl in town."

On top of this, some towns have found that the concessions are so expensive that the community is in deep trouble trying to cope with the cost of educating and otherwise serving the new people the community was so anxious to attract.

A good example was provided by The Wall Street Journal recently: Rio Rancho Estates in New Mexico gave away so many tax benefits to attract industry that it does not have enough money to provide adequate schools for the new arrivals.

But there is another question, too: Does the economic growth really serve the community well?

I remember giving a talk in a midsize Missouri city that had pushed for economic growth, only to find that when it had grown, the citizens were far less happy than before.

"With the growth," I was told, "came congestion, parking problems, housing shortages, crime, and all the other attendant ills of urban America that we had avoided up to then."

As we talked about this at a bull session after my lecture, the other guests indicated that after it was too late, they went back to see who had pushed for this economic expansion. And it turned out that the real proponents were two: the electric utility and the banks!

In sum, there was a feeling that what the banks and utilities had pushed for was their own well-being rather than that of the community, and these city fathers felt free to express these views, even though our host at that bull session was one of the town's banks.

So, as with so many other developments, it seems that the bankers are damned if they do and damned if they don't.

If they push for economic development, they are blamed for the byproducts that turn out to be unpleasant. And if they don't, they are blamed for being conservative and robbing the community of jobs and economic growth.

How, then, can a bank carry water on both shoulders, helping a community grow without being blamed for its fiscal problems, environmental pollution, and the decay of its way of life?

There must be answers, and certainly many of our readers have successfully balanced the goals of community growth and community preservation.


This, then is the topic for our next Weekly Adviser contest. Please send your own experiences, good or bad, to the address in the box at the bottom of this page, or fax your response to me at 908-273-7309.

As always, the writer of the best response will become president for a day at Schmidlap National Bank and get a certificate proving attainment of this high station in American banking.

The certificat is suitable for framing. You can use it to cover that hole on your office wall where a nail or an expansion bolt left an ugly scar.

Mr. Nadler is a contributing editor of the American Banker and professor of finance at the Rutgers University Graduate School of Management.

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