Opportunity zones: The last great neoliberal experiment

The opportunity zones created by the federal tax reform of 2017 have all been set up, and the money has started to flow. When will we know if they’re working as promised to bring new growth and prosperity to distressed communities all over the U.S.? Well, maybe never – the opportunity zone is the latest refinement of a development approach previously known in the U.S. as the enterprise zone and the empowerment zone, and attempts to suss out the economic impacts of those have delivered notoriously muddled results.

Still, we can at the very least say that the opportunity zones – 8,762 economically disadvantaged census tracts where investors receive favored capital gains tax treatment – are getting some investment. Real Capital Analytics, which tracks commercial real estate transactions, just released data comparing activity in opportunity zones and in census tracts that met the criteria for inclusion but weren’t chosen by their states’ governments.

Transaction volume hasn’t just been rising faster lately in opportunity zones than in also-ran tracts; it’s been rising faster there [at least until the first quarter of this year] than in the rest of the country, too.

Then again, the opportunity zone census tracts were already outperforming everyplace else before they were designated, too. A recent report from Reonomy, another commercial real estate data provider, indicates that they were laggards for most of the past two decades, which is perhaps a sign that the states have mostly picked places that were just starting to rebound. Disentangling cause and effect here is hard, as it has been throughout the history of enterprise/empowerment/opportunity zones, although the design of the opportunity zone program may lend itself better to measurement than some of its predecessors.

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The concept is usually credited to Peter Hall, a British geography professor who after a visit to East Asia in 1977 proposed in a speech that the U.K. establish, as he paraphrased it a few years later, “a genuine mini Hong Kong in some derelict corner of the London or Liverpool docklands, representing an experimental alternative to the mainstream British economy.” Hall, who died in 2014, was a Labour Party-supporting expert on urban planning, but his idea quickly caught on with planning-averse conservative/libertarian politicians in the U.K. and U.S.

Opportunity zone census tracts were already outperforming … before they were designated.

In the U.S., President Ronald Reagan tried but never succeeded in creating an enterprise zone program on the national level, but 40 states started their own and, in 1993, President Bill Clinton succeeded in getting Congress to approve the Empowerment Zones and Enterprise Communities Act.

Unfortunately, research into the effects of these enterprise zone programs in the U.S. has found at best mixed results, with little consensus in the literature as to whether they are beneficial.

Previous programs left many potential sources of investment untapped. There was no structure in place to encourage investors to exit existing investments, for example, and bring their realized gains into enterprise zones. There also was not a structured way to involve intermediary groups, such as banks, private equity, and venture funds, in investing in enterprise zones.

The House version of the 2017 tax bill didn’t include opportunity zones but the Senate one did, and it survived in conference committee, too.

More than half of all U.S. census tracts qualified for inclusion, but governors of states and territories, and the mayor of Washington, were charged with winnowing that list down.

According to an Urban Institute analysis, the median 2012-2016 household income in the selected opportunity zones was $33,345, compared with $44,446 in the eligible-but-not-chosen tracts and $58,810 in the country as a whole. Mayors and other local officials have been deeply involved in picking opportunity zones in some states.

Still, some of the opportunity zones that have investors and developers most excited are in places like far-from-struggling downtown Portland, Ore.; an already-under-development “live, work, play paradise” just north of Miami; and the booming neighborhood in the New York City borough of Queens where Amazon.com Inc. was going to locate a new headquarters before backing out in the face of local opposition.

There is of course a balance that must be struck between investment viability and giving help to areas that truly need it. There’s also a risk that investments in poor neighborhoods will drive current residents out rather than enriching them.

Opportunity zone idea man Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, says he’s been mostly encouraged by the states’ opportunity zone choices, and by the level of investor interest so far. Still, as he put it in a Washington Post op-ed early this year:

“If OZs turn out to largely subsidize gentrification, if their funds just go to places where investments would have flowed even without the tax break, or if their benefits fail to reach struggling families and workers in the zones, they will be a failure.”

Bernstein also wrote that, in fighting poverty, he preferred “direct hits” such as government-financed infrastructure investment and guaranteed health care and housing to market-dependent “bank shots” such as opportunity zones. We may not see anything else like opportunity zones come along for quite a while. Unless, that is, they turn out to be so successful that the evidence isn’t inconclusive this time around.

Justin Fox is a Bloomberg Opinion columnist.