THERE was great joy in Mudville when Pennsylvania Gov. Milton Shapp announced in August 1976 that Volkswagen would locate its first major U.S. assembly plant in his state. There was joy, first, because the VW decision bucked a trend of industrial exodus from pennsylvania and the whole Graybelt (the declining Northeast corridor), an exodus brought on by the antiquation of the area's facilities, physical constraints on expansion, the relatively high tax load and union wages. There was joy, second, because Pennsylvania had beaten out Ohio in the VW selection process.

The poker game between the two states had been escalating for a year. Ohio offered to buy up the site VW was considering--an old World War 2 tank factory--and lease it back to the company at low rates. Pennsylvania matched that bid for its New Stanton site--a factory shell built by Chrysler in the early '70s but never occupied--and threw in a 95 per cent cut in local taxes raised by offering to build rail and highway links to its site. Pennsylvania matched that, and as a clincher, persuaded two state pension funds to put up a $135 million loan to help VW set up shop in New Stanton.

Well, VW bought the pennsylvania package, the $135 million loan, $40 million for the buy up-lease back, $30 million for the transportation links, and untold millions in abated taxes. Milton Shapp looked like a financial wizard, and the Rabbits and Dashers came rolling off the line in New Stanton. No one picked up on the Cleveland Plain Dealer interview with the president of volkswagen America: He said that VW had never really considered the Ohio site, because the tank factory was simply too antiquated for their purposes, and that the company had always intended to go to New Stanton where the factory was already built for modern auto assembly.

The moral of this story: Shapp's financial package was less of an inducement in VW's decosopm-making process than it was a bonanza once the decision was made. Nowhere was this more true than in tax abatements Shapp offered. Two years ago in Working Papers, MIT economist Bennett Harrison published a study of corporate decision-making on plant location. Harrison concluded that tax incentives were so far down the corporate priority list--much less important than factors such as site access and condition, workforce composition and education, union presence--that they served primarily as windfall profits. But meanwhile, states and localities are racing each other to prostitute their tax bases, to see who can give away the most to the large corporations. One state's success in luring business actually vicitmizes another state. The only winers of such a race are big business and the bankers and brokers who control investment decisions.

THE MOST innovative part of the pennsylvania package was Shapp's use of state pension fund money to help finance the VW plant. By persuading the funds' directors to make the loan, Shapp recognized that states should use the vast capital pool of public employee pension funds to advance their own economic well-being, just as workers and communities should use their pension funds not only to asure future incomed but present income, jobs, growth as well. The problem with Shapp's package was that it only subsidized Volkswagen, and increased Pensylvania's dependence on the private sector. That $135 million loan, II spread out to community development groups in the state, could produce many more jobs than the 4,000 VW is providing in New Stanton. Plus, the money could then be directed to localities on the basis of need.

The glue in the works is that control of most pension funds resides with the bankers and bromkers, the corporate management fiduciaries--the same individuals who opt for expanding investments in the Sunbelt, in Taiwan, in South Africa, and the desertion of the northeastern and central states. These managers claim their pattern of investment is necessary to produce the highest return, so that future retirees are guaranteed pensions. In boththe shourt and long-term, however, this profit motive works to the disadvantage of the beneficiaries of the funds.

A major example is new York City. When the fiscal crisis came crashing down three years ago, the city had to plead with its employees' pension funds for a bail-out. Basically, the city was penalized for providing more social services than anyone else: tuition-free colleges, welfare payments above rock-bottom poverty level and so forth. Blatant mismanagement gratly contributed to the city's problems. But the main feature of the crisis was New York's scuba-diving tax base, resulting from the flight of industrial capital. Companies fled for many reasons, ranging from the ones which relocated in Stamford, Connecticut to be nearer their chief executives' homes, to the ones that went to Texas to avoid unions. But the tone was set by the bankers and brokers, who in effect redlined the Graybelt.

IF the New York pension funds had been reinvested in the city to create jobs, along the lines of community development efforts now taking place in harlem and Bedford-Stuyvesant, the city's tax base could have supported a high level of social services. But the choice for the Graybelt is no longer just more or fewer social services, but whether or not regional depression will set in. The choice is between a stable, job-providing economy and an economy that pushes us down, down, down, until we're just like Taiwan.

The battle to free up pension funds for social capital is just beginning. As a first volley, Rifkin and Barber's The North Will Rise Again makes a convincing case for alternative uses of pension capital. It also serves as a timely antidote to peter Drucker's 1976 apologia for the status quo, The Unseen Revolution: How Pension Fund Socialism came to America. Drucker's notion that "the United States is the first truly 'Socialist' country" is so much sheepdip. The fact that public and private pension funds "own" more than one-third of America's equity capital means nothing, as long as the people these funds represent have no say in their investment.

The first step in establishing alternative uses of pension funds may be decided in a Supreme Court ruling this year on the Daniels case. A retired Teamster named John Daniels unexpectedly found himself bereft of pension benefits because of a three-and-a-half month layoff in his 20 years employment. Daniels sued, maintaining that the pension was an investment, and that he had been defrauded. District and circuit courts have upheld Daniels against theTeamsters. The Labor Department lined up the the Teamsters, while the securities and Exchange Commission sided with Daniels. If the Supreme Court rules that, indeed, a pension is an investment for the participant, then the next logical step will be that the individual pension beneficiary should have a measure of control over the investment as well. And that step could do wonders for Mudville.