State politics is an often overlooked area of promise. In almost half of all states, Republicans control both the governorship and both houses of the legislature. This internal cohesion allows deep red and deep blue states to move with a nimbleness that the federal government can’t match, for good (as in Florida) or for ill (as in California).
For this reason, as I’ve written elsewhere, America’s states should become more ambitious in addressing key domestic problems. One obstacle is that many of the public officials who control these states lack imagination. Given enough imagination, we could rebuild this country, or some meaningful part of it, one state at a time.
There may be value in considering a few policy approaches that could comprise a more proactive federalism than we’ve seen in the past. None of this is to argue that we should stop contesting federal elections or self-select out of federal policymaking. The point is just that the efficient frontier may be closer to home.
Influencing Other Institutions
In recent years, certain banks have moved to deny financing to the energy industry, sometimes under the auspices of efforts like the UN Net-Zero Banking Alliance. Late last month, West Virginia State Treasurer Riley Moore unveiled a plan to protect West Virginia’s energy industry from these ideologically-motivated banks.
“Our industries are losing access to capital. It’s a real thing that is happening, to shut down coal, gas, oil,” Moore told me via Twitter direct message.
West Virginia, along with 15 other states, plans to place new conditions on private banks that hold state funds. Banks that adopted anti-energy policies would miss out on managing approximately $600 billion in capital. Presumably, at least some banks will respond to these new incentives.
Public money is an important lever that hasn’t been exploited to its full potential. State Treasurer Moore has found a way to use this lever to advance the economic interests of his state, and other state officials should learn from this.
Another state official who has been quite effective in influencing corporate interests in his state is Governor Ron Desantis. Desantis has signed legislation to forbid companies from discriminating against their employees on the basis of vaccination status. Even the Walt Disney Company has amended its policies to exempt Florida-based employees from its vaccination requirements.
This is especially notable given the political influence Disney holds in the state. Tho Bishop, an assistant editor at the Mises Institute, commented, “DeSantis made the mouse bend the knee. In Florida. This is not normal. They have owned this state for a very long time.”
State officials, especially Republicans, are reflexively reluctant to take on corporate interests for fear that companies will shop around for more pliant jurisdictions. In truth, whether or not this is feasible depends on the nature of the business in question.
The businesses that are most easily outsourced are manufacturing and certain types of customer support that can be done remotely. You can move a factory to Missouri or a call center to India, but you can’t easily move an iconic theme park. In all likelihood, Disney always had less leverage than state officials have traditionally supposed. The more location-dependent the business, the less it’s to be feared.
This phenomenon isn’t an unadulterated good. California in general, and San Francisco specifically, get away with horrifyingly bad governance because the businesses that drive the economy there are surprisingly location-dependent. Tech companies benefit from proximity to other tech companies. This proximity grants them preferential access to capital, the b2b market, and a particular pool of specialized labor. There’s a reason Amazon is headquartered in Seattle: Microsoft was there first, and with it, a large engineering workforce. Thinking ahead, Bezos knew that he would someday want to hire some of those engineers.
This presents a collective action problem: you can found or relocate your company elsewhere, but talent, customers, and investors won’t follow you. You can invest in companies elsewhere, but for the reasons just stated, they won’t fare as well as SF-based companies on average. Software engineers can move, but they won’t find quite as many job opportunities in other places. This is an example of a network effect.
These dynamics, combined with the one-party political climate of California, mean that government at all levels is subject to neither the accountability of elections nor the pressures of markets. Dysfunction goes unpunished, and problems go unsolved. None of this is good, but limits on the power of corporations to shop for more favorable jurisdictions can actually enhance the power of states to impose political accountability on them, as in the Desantis example.
And it isn’t just corporations. Every state is home to at least a few universities, which are core to America’s social and economic dysfunction. Earlier this year, the state of Georgia moved to eliminate tenure for faculty at state universities. It’s not clear whether this move will do much to improve the quality of the faculty at these universities, but it does seem to worry the right people, and the arguments against it are quite weak. The macro observation here is that state legislatures have the power to restructure universities in dramatic ways.
Economic Development
Joshua Steinman, a former member of Trump’s National Security Council, wrote an interesting Twitter thread about the possibility of a single state creating a “manufacturing hub to rival those in Asia.” His prescriptions include finding a location with easy access to key infrastructure and a suitable labor force, providing deep and “unorthodox” regulatory relief, starting with one industry, and executing on a multi-phase plan to bring other industries in over time.
Though U.S. states lack the ability to impose tariffs to bolster and protect their domestic industries, they have access to other policy tools that can be used to help domestic industries attain dominance and scale. A Palladium article titled Lessons from the East Asian Economic Miracle describes a pattern of development followed by fast-growing economies in East Asia. In the two countries the author looks at most closely, Japan and South Korea, the government selectively invested in manufacturing firms and subsidized exports until these firms achieved the economies of scale needed to make their goods competitive on price.
Let’s consider a hypothetical scenario where a U.S. state pursues a deliberate industrial policy:
Florida has flourished relative to other states since the beginning of the pandemic, but these relative gains are likely to recede as other states (hopefully) roll back their lockdown measures. This overperformance relative to other states is most pronounced in the service industry, but service businesses don’t enjoy such steep economies of scale as other sorts of businesses. Again, location-dependence is relevant here. A successful restaurant in Orlando isn’t competing directly with a restaurant in New York City. Simple geography insulates the underperforming New York restaurant from competition.
Other industries aren’t like this. Returning to manufacturing and software, because firms in these industries aren’t restricted to single geographical markets, each firm has to compete directly with other firms in different places. Consequently, relative performance and economies of scale matter a lot.
Software engineering is extremely winner-take-all because the marginal cost of every additional unit is zero. There’s no reason not to purchase the best software on the market, and there's no trophy for developing the second best software in a particular category. In the case of manufacturing, the marginal cost of each unit isn’t quite zero, but fixed costs are still a large driver of total costs. It also costs money to ship physical goods, but the general trend is towards a few highly concentrated centers of production
It’s easy to imagine how Florida might try to leverage its advantage in the service industry to attract more scale-sensitive and winner-take-all businesses. Companies that make scheduling software for restaurants and hotels could benefit from proximity to potential customers, as could food and beverage manufacturers.
I use this hypothetical only because the nature of a state-specific industrial policy would depend heavily on the existing comparative advantages of the state in question. There may be ways that Texas or the Dakotas could leverage their oil industries to spur the development of Steinman’s imagined manufacturing hub. What policymakers should be thinking about is how to build on existing economic activity in their states until the network effects and economies of scale take on a life of their own.
Coordinating to Solve National Problems
Texas recently started building a border wall on state lands, with state funds, because the federal government has failed to act. Governor Desantis has likewise taken executive action to mitigate illegal immigration in his state. Just a handful of coordinated states could do a great deal to address either problems of regional interest, as the West Virginia-led energy coalition is doing, or even national problems, as Texas and Florida are doing on the immigration issue.
This is one advantage to politics becoming more national and ideologically driven. Voters will immediately recognize a state-level investment in something like stopping illegal immigration as good, even if their own state must shoulder a disproportionate share of the burden. In the case of the energy coalition, several states are united by clear regional and economic interests.
As discussed earlier, we should seek to use our advantage at the state level to erode the power of elite institutions wherever we can, such as by regulating woke companies and restructuring universities. One thing that left-wing institutions have done well is establishing a high degree of coordination around their vision of the future. By and large, this is a horrible vision, but they do have one, and they’ve worked steadfastly to make it a reality. This vision has never hinged on a single election. Instead, they make consistent gains wherever they see an opportunity. That’s why they’re winning.
We must learn to think in the same way. Whenever a run-of-the-mill state university loses power and prestige, this is a victory. Whenever anti-American companies capitulate to leaders like Ron Desantis, this is a victory. And small gains embolden imitators. White pills are vital to the health of our movement, and they’re most readily dispensed at the state level.
Conclusion
U.S. States are hugely important power centers. They rival sovereign nations in wealth and economic pull. They haven’t been leveraged to their full potential, and that’s something we need to remedy right now. Stop complaining about institutional representation. Start using the institutions we have.