09/10/2012 09:48 am ET Updated Nov 10, 2012

Do Politicians Really Have Much to Do with Job Creation?

Reading Matt Bai's piece in the New York Times Magazine about the Ohio economy, and reflecting on many recent discussions and debates, I found myself pondering the question posed above.

It's a big, portentous question, especially in an election year where the economy's center stage.

It's central to the Bai piece as he talks to the current and former governors, the mayor of Columbus, and the White House. It's not like Ohio's soaring ahead of the rest of the nation, but there's been a notable recovery there, particularly in autos. Unemployment, which peaked at 10.6%, above the national rate, is now below it, at 7.2% (the nation is at 8.1%).

Predictably, everybody wants a piece of the action. Ohio's an interesting case study, because it's a swing state and an autos state so there's a lot for the pols to squabble about. Bai points out that Gov. John Kasich (R) talks about his great jobs record, giving Obama little credit, while the President is all over the state reminding folks of his actions, while at the same time Romney surrogate Sen. Rob Portman (R) reminds Ohioans of the very un-Kasich-like message that they're really not doing so well at all.

Is there any way of sorting out who's right here?

In normal economic times, meaning business cycle expansions as opposed to recessions, there's a virtuous cycle of income growth, demand growth, consumption and investment growth, job growth, back to income growth, etc. Politicians at all levels-especially governors and mayors-don't have to do much at these times other than take credit for job growth on their watch that they didn't have a lot to do with (though, as I'll stress in a moment, there are important nuances here).

The President and Congress can, of course, make a difference in expansions, mostly by not screwing things up and watching out for market failures. It helps if fiscal policy is structured such that budget deficits that grew in the recessions shrink in the expansion. And there's always work to be done ensuring export markets are open to our businesses, workers are adequately trained, financial bubbles aren't inflating, fiscal cliffs are avoided (...ahem).

But when the economic chips are down, that changes, and the federal government matters a lot more than the state and locals. For one, only the federal sector can run budget deficits, which means states are highly unlikely to engaged in any job-creating Keynesian stimulus. To the contrary, as recession-impacted state revenues take a hit, states often find themselves in pro-cyclical versus counter-cyclical mode (doing things that reinforce the negative trend in the economic cycle rather than things that might reverse it). States are more likely to raise taxes or cut services in recession than not, which is one reason they've shed so many jobs in recent years even as private sector employment has consistently expanded.

So there's no question that the top-level answer to the question of politicians and job creation is, "in recessions, yes, and it's President (and Congress) that matter most." In this regard, note that both Presidents Obama and GW Bush implemented stimulus, the auto rescue, and the TARP. It's obviously a whole different discussion as to how effective they were under whose watch, etc., but governors and mayors were recipients of any jobs benefits from these initiatives, not originators.

But what about in expansions? Do governors and mayors have more to do with job creation when the economy is growing? Not so much here either, but that doesn't mean these electeds are irrelevant to job growth. While the aggregate quantity of job growth in a nation is largely driven by macro and global trends, there's a lot sub-national officials can do to try to encourage the jobs that are created to locate in their states and cities. They affect less the number of jobs than where those jobs end up.

There's a large literature on this, much of it evaluating the costs and benefits of "stadium/factory chasing," i.e., offering businesses tax and other breaks to come your way versus somebody else's backyard (see the work of my old friend Greg LeRoy and his group, Good Jobs First). Summarizing, what I think we now know is that just giving tax breaks isn't enough to make this work for either communities or the larger nation. Instead, we've learned two important lessons.

First, what matters more to thriving businesses is the quality of public goods, including physical infrastructure and the quality of the workforce. Yes, the tax base matters, but the success stories are not the places that offered the most sugar in terms of tax cuts. It's the ones that offered solid communities with world class infrastructure--the roads, airports, schools, and skilled workforce that businesses need to succeed.

In fact, Bai talks about the role played by the very forward looking Mayor Coleman of Columbus, Ohio, who actually managed to pull off a small tax increase to help improve the local services that he believed made an important difference to business location decisions.

...when it came to the recovery in Columbus, Coleman credited the way local businesses had come together around the idea that raising revenue could stave off cuts and preserve investments. "They understand that part of selling a local economy is selling the quality of life in that local economy," he said. "So if you don't have good streets and good parks, if you don't have a strong safety force and a strong fire department, if you don't have the ability to grow the economy locally, businesses will not locate there. They'll shrink and go somewhere else, because the quality of life is so bad. There are a lot of Ohio cities where that has happened, and it hasn't happened in Columbus."

Bai emphasizes this point further, stressing the connections between investments in public goods and the economies major growth industries:

...banking and insurance and management consulting, state-of-the-art medical facilities, high-tech manufacturing and research. These industries thrive on the kinds of major investments in infrastructure and quality of life that only government can make, in schools and transportation and fiber optics and parkland. How politicians think about these kinds of investments, and how they intend to pay for them, would probably make for a more relevant debate this year than arguing over who created 1,000 new jobs in Canton last May.

The second thing I think we know about the role of sub-national politicians in job creation has to do with regional aggregation or clustering effects that are often very important to local job growth. Cities can develop as research hubs with a quality university at the core; a port city can develop transportation infrastructure that creates lots of new opportunities, and so on. These clusters can develop organically, like the old railroad and river-confluence cities, but these days such developments tend to be more strategic.

In sum, pols will always take credit for jobs on their watch -- and try to point elsewhere re job losses. But outside of recession, I wouldn't take it too seriously. In recession, the President is very important, and President Obama comes across as effectively stepping up to this plate in the Bai story re Ohio. In expansions, govs and mayors don't have much at all to do with the number of jobs the economy generates, but if they're smart in terms of investments in public goods, they can draw more of those jobs to their states and cities.

This post originally appeared at Jared Bernstein's On The Economy blog.