Chapter 11 - The State Competitive Environment: Integration and Convergence

Abstract

The discussion presented here suggests two types of equilibrium conditions. One is the overall equilibrium for the mobile factors. Although determined by the sum of the demand and supply in each of the individual localities, mobility insures that the price is the same in each and every locality and thus has the same qualitative output response. The disturbances to the mobile factor equilibrium conditions induce a common effect across the different economies. This is truly a case analogous to the rising tide lifting all boats and an ebb tide lowering them. Hence, the collective actions of the individual economies matter a great deal as far as the mobile factor goes. In contrast, local effects are specifically related to the immobile factors of production. Increases in local demand and supply conditions will determine the pricing of immobile factor and thus the income of the immobile factor in each area. Those areas for which the demand exceeds the supply, the price and income will rise, and these economies will outperform their counterpart that did not experience an increase in demand for the immobile factor. When all is said and done, we know that mobility insures the convergence of the income and factor returns of the mobile factor. The astute investor needs to keep track of the sum of the individual states’ actions, because they make up the global demand and supply conditions that determine the equilibriums price of the mobile factor. It behooves the investor to correctly identify the global trend if they are to anticipate the global rates of return and global output. Now when it comes to the individual economies, in addition to recognizing the global trends, one must be aware of the effect of local demand and supply conditions on factors that cannot move across state lines, for it is the returns to these factors that determine the differential rates of returns across the different states’ economies. We contend that focusing on the differences in fiscal policies is a good start. Some of the evidence presented here supports this contention.