Combatting the geographic divide between rich and poor

Editor’s note: This post was republished with permission from the Ewing Marion Kauffman Foundation’s Policy Dialogue blog.

From presidential candidates to pundits, a lot of people are talking these days about income inequality. What gets much less attention, however, is the geographic manifestation of the divide between rich and poor.

Earlier this year, the Economic Innovation Group, a new research and policy organization in D.C., released a comprehensive report detailing the economic conditions in more than 25,000 ZIP codes across the United States.

The 2016 Distressed Communities Index analyzes how places and the people who live there are faring according to seven measures:

  • Education
  • Housing vacancy
  • Employment
  • Poverty
  • Median income relative to the state
  • Employment trends
  • Business establishment trends

The finding? More than 50 million Americans live in economically distressed communities.


Turning Distressed Communities into Prosperous Ones

For more than three decades, policymakers have been trying to tackle the problem of geographically uneven prosperity by designating poor or distressed neighborhoods or counties as special zones eligible for government perks.

This place-based approach to government assistance, rather than an approach that targets government aid based on personal characteristics (e.g., food stamps), was first proposed in 1978 by Sir Geoffrey Howe, a member of the British Parliament.

Howe called for the government to provide regulatory and tax relief in designated economically distressed areas as “means for entrepreneurs to ‘pursue profit with minimum government restrictions.’”

Two years later, U.S. Representative Jack Kemp, who would later be Secretary of Housing and Urban Development, introduced the Urban Jobs and Enterprise Zone Act—the first bill to create place-based economic zones in the United States.

State legislatures soon followed suit and government assistance began flowing to poor, blighted and distressed communities throughout the country.

A Short Case Study: HUBZones

The Historically Underutilized Business Zone program, known as HUBZones, is one of these place-based programs. Run by the U.S. Small Business Administration, the program’s stated aim is to increase job creation and economic development in distressed communities.

Since 1999, qualifying small businesses that locate in a HUBZone receive preference in obtaining federal government contracts. In fiscal year 2014, the federal government awarded $6.67 billion through 74,812 contracts to HUBZone-certified businesses.

More than 13,000 Census tracts, over 500 rural counties, sites of former military bases and Indian lands are classified as HUBZones. Yet, despite the prevalence of HUBZones, a comparatively small number of businesses—just over 5,000—are certified and eligible to participate. This translates to about one participating small business in every three HUBZones.

For those firms that do participate, there may be surprising benefits. Amol Joshi, a researcher at Oregon State University, found that technology entrepreneurs located in a HUBZone may have a competitive advantage when seeking Small Business Technology Transfer (STTR) funding. HUBZone firms that obtained a STTR Phase I award had 169 percent higher odds of obtaining a STTR Phase II award compared to non-HUBZone businesses.

Yet, other evaluations of HUBZones are not as rosy. U.S. Government Accountability Office investigations have found fraud in the program, leading some members of Congress to call for an end to HUBZones.

A New Approach

On April 27 of this year, new legislation was introduced with bipartisan support in both the U.S. House of Representatives and U.S. Senate to create another place-based economic development and poverty relief program. But this time, instead of public money or government contracting benefits, private dollars would be the source of renewal.

The Investing in Opportunity Act would establish new “Opportunity Zones” within each state and create an incentive for private investors to deploy their capital to projects in these zones.

According to the bills’ sponsors, U.S. investors currently hold an estimated $2.3 trillion in unrealized capital gains from stocks and mutual funds. If some of this money could be reinvested into projects in blighted areas, the sponsors believe some of those red areas on the Distressed Communities Index might turn to green.

According to USA Today,

“In exchange for temporarily avoiding the capital gains tax, investors could roll the profits on investment sales into “opportunity funds.” The funds’ professional managers would then invest the money in qualified “opportunity zones,” where it could help finance small businesses, new construction, development of blighted properties or local infrastructure projects.”

Does the Place-Based Approach Work?

Like most policies, judging whether place-based development zones are successful or not depends on how success is measured.

Joshi’s finding that firms in HUBZones are much more likely to win STTR awards may be an indicator of success if the goal is to help small firms that do business with the federal government innovate and commercialize new technologies. If the goal is “graduating” neighborhoods out of the HUBZone program, maybe not.

But what if the goal is economic growth and job creation?

According to Good Jobs First, a non-profit that promotes corporate and government accountability in economic development, place-based policies like HUBZones don’t have much impact. They “induce little new economic activity” and when employment increases in one of these areas, the gains for residents are “quite modest.”

These zones may also incentivize firms to move to a designated area just to obtain the benefit—without producing any net new benefit to the economy. This shifting of economic activity is a problem the Kauffman Foundation has highlighted with economic development tax incentives.

It’s too early to tell what impact a program that leverages private dollars, like that created by the Investing in Opportunity Act, would have. But private capital is certain to demand results, as investors are less likely to tolerate loss than the government.

Moreover, under the Investing in Opportunity Act, a variety of projects in distressed areas would qualify for investment. A diversity of investments, ranging from infrastructure to new firms, may contribute to a density of activity that together could turn a neighborhood around.

From personal experience and data, we know that some neighborhoods and areas of the country are worse off than others. Figuring out how to bring opportunities for economic independence to the residents of these communities will remain an objective of policymakers for the foreseeable future.

Jason Wiens | Courtesy of the Kauffman Foundation
Jason Wiens

Jason Wiens is the lead policy engagement manager in Research and Policy for the Ewing Marion Kauffman Foundation. His responsibilities include making federal, state, and local policymakers aware of the work done by the Kauffman Foundation in addition to writing policy briefs and developing policy engagement strategies.

Find Wiens on Twitter: @JWIENZ.



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