A New Effort to Help Places Mired in Poverty
Should people move to jobs or should jobs move to people? It’s a long-running debate. Lately the Biden administration has been tilting toward the latter. It’s directing $1 billion in Build Back Better money to strengthening clusters of employers in parts of the country where high-paying jobs are scarce.
The Economic Development Administration, an arm of the Department of Commerce, staged a competition for grants that attracted 529 entrants. The 21 winners, announced in September, include a project to build clean industries in former coal fields in West Virginia, a green hydrogen project in greater New Orleans, a revolving loan fund for Native American entrepreneurs in South Dakota, a robotics project in Nebraska and a future of food project in California’s Central Valley.
Now to see how well it works. The history of what’s known as place-based industrial policy is not encouraging. Appalachia is a case in point. After President Kennedy toured the poverty-stricken, 13-state region and found what he called “a hard core of depression and misery,” in 1963 he convened what became a regional commission to direct federal resources to invest in infrastructure and support local businesses. Nearly 60 years later, much of Appalachia remains poor, and “there is little robust evidence suggesting that this spending has been effective,” according to one academic study.
Tax preferences for the nearly 9,000 distressed areas that are designated as Opportunity Zones haven’t worked great, either. They “appear to be providing more opportunity for the wealthy to cut their tax bills than to the people who live in designated zones,” the journalist David Wessel wrote in a guest essay for The Times last year.
One problem is that it’s hard for government to target aid to the places it’s really needed, Josh Goodman, a senior officer at the Pew Charitable Trusts, told me. For example, college campuses can inadvertently be designated as poverty-stricken because students have low incomes (because they’re studying!). Even when the places are chosen accurately, job creation efforts can inadvertently benefit outsiders who come in and snatch the jobs away from less-skilled locals.
Edward Glaeser and Joshua Gottlieb of Harvard University wrote in a 100-page study in 2008 that, given the paucity of information about what works and what doesn’t, “any government spatial policy is as likely to reduce as to increase welfare.” They said it might be wiser for government to concentrate on making more housing available in places that are creating a lot of high-paying jobs to make it easier for people to move there from impoverished regions.
Yet the political impetus for place-based aid never went away, and has even strengthened under the Biden administration. The reason is simple: Giving up on place-based aid feels to a lot of people like giving up on whole swaths of America and those who have struck roots there.
And lately some influential economists have come around to the idea that maybe place-based aid isn’t so bad after all. One of them is Glaeser, one of the nation’s leading authorities on urban and regional economics. In 2018, just a decade after his skeptical article with Gottlieb, he wrote another article with his fellow Harvard economists Benjamin Austin and Lawrence Summers that asked: “Should more permanent economic divisions across space lead U.S. economists to rethink their traditional skepticism about place-based policies?” Their answer: to some extent, yes. Directing a ramped-up employment income tax credit to regions with chronically high unemployment, they wrote, “could plausibly reduce suffering and materially improve economic performance.”
The authors give three reasons for the reappraisal: First, America’s geographic divisions have hardened; convergence of incomes between rich and poor regions “has stalled or reversed in recent decades.” Second, it may be easier to subsidize job creation “at the place level than at the person level.” And third, one-size-fits-all employment subsidies are nonsensical. They should be applied in West Virginia, where they’re needed, but not in Silicon Valley, where they’re extraneous.
A 2021 study by three economists at the University of California at Berkeley — Cecile Gaubert, Patrick Kline and Danny Yagan — reached a similar conclusion: “We show that when poor households are spatially concentrated,” shifting resources to poor areas “can yield equity gains that outweigh their efficiency costs.”
Government could also help downtrodden areas by enforcing antitrust law, Stacy Mitchell, co-director of the Institute for Local Self-Reliance, told me in an email. “Antitrust enforcers used to review proposed mergers with an eye toward whether a deal would undermine the local economy of a particular region — by causing a plant to close, for example — or hurt the prospects of small and midsized businesses,” she wrote.
That brings us back to the Biden administration’s $1 billion experiment in place-based aid. The Brookings Institution was hired by the Economic Development Administration to evaluate its program and given free rein to be publicly critical. Mark Muro, a senior fellow at the Brookings Institution who oversaw the research, told me he was impressed overall. “It’s a sophisticated and deeply American solution to problems of rigidity in economic development,” he said, and added that it could be a role model for other big-budget investment legislation.
The emphasis on strengthening industrial clusters in the Build Back Better Regional Challenge is that businesses create more jobs and wealth when there’s an agglomeration of them doing the same or similar things. Clustering, as in tech in Silicon Valley, results in a deeper pool of workers and suppliers. A 2018 study by Brookings uncovered a wide range of clusters, from water technology in Milwaukee to drones in Syracuse, N.Y. To be sure, Muro said, some of the failed applicants engaged in wishful thinking: Having a hospital in town doesn’t make you into a biomedical hub.
Brookings did have one concern. Even though the government instructed applicants to put the highest priority on equity — in other words, helping the people who need it the most — “finalists had mixed success embedding equity in strategies, governance and metrics,” the evaluation concluded. It said: “Equity strategies were weakest when they relied on boilerplate arguments about inclusion.”
That’s an understandable failing, but a crucial one. If place-based aid doesn’t help the people in those places, what good is it? I interviewed Robert Lewis, who runs a very small Los Angeles-based program, the Black Cooperative Investment Fund, that gives microloans to Black entrepreneurs (and has given out $112,000 so far). One thing you can say for the fund, small as it is, is that it’s all about equity. Loans are based on character assessments, not credit reports. “We’re a source when they can’t get funding anywhere else,” Lewis said. On the other hand, the challenge — the same one faced by Build Back Better on a much larger scale — is that equity doesn’t always line up with returns. “The question we run into is, can they pay it back?” he said.
Gordon Hanson, a professor of urban policy at the Harvard Kennedy School, said sociologists were ahead of economists in documenting the damage from the neglect of places in America that lose jobs and hope. “There’s family breakdown. Young men doing self-destructive things. The interventions need to be of the right sort to counteract that. But the case for intervention is certainly there.”
The Readers Write
You wrote that autocratic chief executives are good for start-ups but not mature companies. In a start-up you have nothing to lose except the sunk cost of the initial investment, which you can’t get back anyway. It’s an all-or-nothing bet, and the only risk is in not succeeding.
For a mature company, the financial stake is in its brand. Risking your brand on the performance of any individual employee is unacceptable, so you put systems in place to keep them from failing too badly (which, all too often, also keeps them from succeeding spectacularly). Winning at the margin is OK; losing big is not.
That is, after all, the entire purpose of a bureaucracy — not to ensure success but to hedge against failure. The “hard-charging C.E.O.” can push a start-up over that initial hump of risk. But a hard-charging C.E.O. can also create risks to the corporate brand that prove catastrophic.
Augustus P. Lowell
Quote of the Day
“My interest in money is at an extremely low ebb at the moment — I am surrounded by hundreds of bottles of new crabapple jelly, and pears in jars, and ripening cranberries, and turkeys on the hoof, and ducks in the cove, and deer in the alders, and my own mackerel shining in airtight glory. I wouldn’t know what to do with a dollar even if I could remember which pants it was in.”
— E.B. White in a 1937 letter to his wife, Katharine S. White, collected in “Letters of E.B. White” (1976)
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