More and more, American leaders are realizing that economic policies must be designed with a specific region in mind. Usually, the context is discussion of how to revitalize regions in decline, such as rural Appalachia or the post-industrial Midwest. That’s important, because when many people leave these areas, those who remain – for family reasons, or because it’s costly to move – are stuck with half-abandoned neighborhoods and infrastructure that’s too expensive to maintain. Revitalizing declining regions can help promote economic efficiency, as well as giving aid to those unable to relocate.
But there’s another important reason to focus on struggling places – equality. It’s not just declining regions that need help but poor neighborhoods within big cities.
Cities have always had slums and poor areas. But in the mid-20th century, things went from bad to worse for many impoverished city residents.
In the late 20th century, several states tried to revive their most blighted urban areas, with programs called enterprise zones. These programs, however, were not very effective. Several studies by economists in the late 1990s and early 2000s showed little or no improvement from state enterprise zones on local employment.
Then the federal government stepped in. In 1993, Congress created empowerment zones in the poor neighborhoods of six cities – Atlanta, Baltimore, Chicago, Detroit, New York and Philadelphia-Camden, N.J.
Unlike the state-level programs, the federal empowerment zones were effective in improving blighted areas. A 2013 paper by economists Matias Busso, Jesse Gregory and Patrick Kline carefully compared the zones to similar areas that didn’t receive federal assistance and concluded that the impact on the local economies of these neighborhoods was substantial and enduring.
Policies aimed at revitalizing blighted urban areas can really work.
Busso et al. focused on three main indicators of economic success – wages, employment and rents. Comparing the years 1990 (well before the program was implemented) and 2000, they found that the federal empowerment zones boosted employment of local residents by about 18 percent, and wages by 8-13 percent. Housing costs, meanwhile, may have increased slightly over the long term, but in the short term the authors couldn’t detect an increase.
The authors estimate that the increased income created by the programs, when added up over the years, totaled around $700 million – a good deal more than the cost of the program.
In other words, policies aimed at revitalizing blighted urban areas can really work. They don’t produce miracles, and they require some outlays of money but the rewards to society’s most disadvantaged people and places can be significant.
Now, President Donald Trump’s new tax reform aims to repeat the success of the empowerment zones with a new program called opportunity zones. Instead of investing in companies and paying them to hire workers, the opportunity zones offer tax credits for investment in poor areas.
Will the opportunity zones work as well as the empowerment zones? It seems unlikely. This is because much of the investment money lured into the zones may flow into real estate. In empowerment zones, money was targeted toward businesses, but the new program may direct the money into houses.
That wouldn’t create many jobs in blighted areas. But it could easily push up housing costs.
Poor areas don’t need wealthy investors to plow money into houses and buildings. They need investment in businesses that will give them jobs and better wages. Let’s hope the new opportunity zones result in increased business investment, like the empowerment zones did.
Noah Smith is a Bloomberg Opinion columnist.
