Skills over Subsidies, Human Capital over Tax Credits
America’s economy is gaining traction, but you wouldn’t know it in hundreds of distressed communities. From coast-to-coast, elected officials are tempted to offer ready fixes to blunt decline in America’s Rust Belt and other former industrial regions, whether it’s tariffs on imports, state and local subsidies, or tax credits to lure businesses. There’s one problem: It doesn’t work.
The policies we count on to save distressed communities have it backwards by putting place before people. We must empower individuals rather than points on a map, by helping people to build up their skills, innovate, and acquire social, human, and financial capital.
The Rise and Fall of Company Towns
In the mid-20th century, few could have envisioned remote Seattle as the center of a tech boom or a leader in aerospace engineering. Detroit was booming, and few anticipated the harsh aftermath of a restructured auto industry with ripple effects across the Midwest.
The disparity between vibrant and distressed communities is stark. Deep poverty, pervasive joblessness, and low educational attainment are widespread in areas that lack economic opportunities. New jobs, new businesses and educated workers are abundant and attracted to areas experiencing economic growth. Residents of prosperous areas can even expect to live five years longer than their neighbors in distressed areas.
The Benefits of Business Incentives are Fleeting
According to Timothy Bartik at the W.E. Upjohn Institute for Employment Research, state and local governments spent $45 billion in business incentives in 2015 to attract industry to their locales. The Lincoln Institute of Land Policy estimates that state and local governments forgo between $5 and $10 billion in property tax incentives annually.
The New Markets Tax Credit (NMTC) Program, administered by the Treasury Department but allocated by local community development entities throughout the United States, is intended to incentivize business and real estate investments in low-income communities. A federal audit of the program was unable to conclude that it effectively boosts local growth — but it did find it to be overly complex and duplicative. Still, each year private investors claim more than $1 billion in similar tax credits.
A comprehensive review of targeted incentives by the Upjohn Institute found fleeting or no effects on employment and growth. The effects (if any) were temporary and limited. Beyond lost revenues, the sheer complexity of these programs distorts tax systems and encourages lobbying and gamesmanship.
Invest in People, But Be Willing to Let Them Go
In “The Death and Life of Cities,” renowned economist Ed Glaeser documents how the rise and fall of industries affect the cities in which those industries are rooted. Two key lessons emerge: Place-based policies meant to resurrect declining areas are futile. Instead, leaders must not only invest in the people in their communities — they must recognize that policies to promote mobility will pay off.
52 million Americans live in highly distressed areas. They span thousands of zip codes across thousands of miles — far too dispersed to target with place-based policies. Policies focusing on the individual will have far greater returns. Lawmakers, for example, can streamline state occupational licensing requirements and allow state-to-state reciprocity. Making work certifications portable increases their value to workers and employers, and promotes worker mobility. Greater mobility helps workers with less education to stay in the labor force.
A Skilled Workforce is the Strongest Asset
Job training is also important, though we should recognize the limits of federal job training. We have 47 of these programs with no clear evidence of their effectiveness. Why not take a fresh approach and redirect the $18 billion currently spent here toward no-strings-attached vouchers for community college, vocational training, apprenticeships, and education, even for current workers? This could enable people to stay competitive in their field or make a necessary move to a new one.
It’s a cliché, but it’s true — progress, innovation, and change are inevitable. While New York, Los Angeles, and other megacities are likely to remain magnets for talent and capital, small and midsize cities are more vulnerable. Communities are ultimately collections of individuals. Invest in people, and the businesses will come.
Christine McDaniel a former senior economist with the White House Council of Economic Advisers and deputy assistant Treasury secretary for economic policy, is a senior research fellow with the Mercatus Center at George Mason University.