5. The federal role in state and local economic development
This chapter starts Part II of the text, which concerns the supply-side tradition.
He says that the "intensity and variety" of state and local programs shouldn't obscure the "rich history of federal policy in this domain."
Federal programs have provided assistance and guidance to subnational efforts, at least since the depression. He cites stats that show that economic development-related grants to state and local government dwarf state and local own-source spending. He also notes that the federal figure includes spending that isn't strictly development related and doesn't include spending that only indirectly supports development, like aid to universities.
He classifies federal economic development programs in two groups: place-oriented, those that provide aid to governments or businesses in targeted (presumably distressed) areas, and sector-oriented, those that provide aid to businesses of certain types regardless of location.
There are also many federal programs that don't have as their primary purpose strengthening subnational economies, but that effect them anyway. In this category are military bases, highway and transportation programs, federal research facilities, etc.
He claims that most federal economic development aid has supported supply-side policies by enabling communities to offer business subsidies. He also notes that some programs were not originally intended to be economic development programs, but that their flexibility allowed state and local govts to make them into economic development programs. CDBGs are one example.
Pre-WWII federal aid
From the Revolution onward there are many examples of federal aid aimed at subnational economic development. Tariffs to boost local manufacturing economies in New England, railroad and homesteading land grants, the land grant college system, the 1916 Highway Act, depression era public works programs, etc.
Pre-war federal aid had two main features that distiguishes it from post-war aid: First, it was episodic; policies were a response to particular events in particular locations. Second, much of the federal aid was in response to projects initiated at the state or local level, such as highway or canal projects.
There are two more features that exist in federal programs today. Assistance for building public infrastructure to facilitate commercial and industrial growth and decentralized participation, allowing subnational governments to make many of the implementation decisions.
Next, Eisinger surveys several key postwar federal programs.
Urban renewal: 1949-1974
The main goal of this program was to redevelop "slum areas." The federal government would provide 2/3 of the cost to acquire and clear the property, which would then be turned over to private developers for implementation of the local redevelopment plan.
The subsidy came in the form of the reduced costs of the land to the developers. According the the rules of the program, it was supposed to be sold at market value but it was typically sold for less than the cost of acquisition and clearing. It also allowed the developers to get land they couldn't get otherwise, since the local government could acquire land through exercise of eminent domain. [Does this sound familiar?]
The program was also part of the federal response to the postwar housing shortage. Slum clearance was supposed to limited to areas that were "predominantly residential," but didn't make clear whether that referred to before or after redevelopment. Consequently, a lot of predominantly residential land got cleared and turned into commerical development. Eventually the program was amended to allow commercial areas to be cleared for new commerical development. The reasoning in both situations, residential-to-commerical and commercial-to-commerical, was to replace low-tax value property with high-tax value property. [Deja vu!]
The program was terminated in 1974 when it was rolled into the CDBG program. Eisinger cites stats that claim the program in total saw the demolition of 100,000 more housing units than it developed. [Some housing program.]
He cites as benefits of the program the large amount of provate investment compared to government funds and a large increase in property tax revenue, even as it decreased total taxable land in the redevelopment areas. No statistics exist measuring employment effects.
Small Business Adminstration programs
The SBA provides assistance directly to businesses, not governments, mostly in the form of loan guarantees, but also through direct loans, technical assistance, and venture-capital funding.
These locations aren't place-oriented, but are rather location-neutral. Since most SBA programs don't aid subnational government in competing for business, they really aren't a part of federal aid for state and local economic development.
There are some exceptions. He list three SBA place-oriented programs: Small Business Development Centers, Certified Development Company Program, and Office of Private Sector Intitiatives. But these programs are much smaller in terms of funding than the loan programs.
He notes that the SBA also aids subnational governments by serving as an information clearinghouse.
Economic Development Administration
This was established by the Public Works and Economic Development Act of 1965 (PWEDA). It targeted distressed areas of the country, i.e. those with lagging growth rates and high levels of structural unemployment. It provided funds to local governments for public works construction, local economic development planning, and provided capital subsidies to industry.
The EDA was very much in the supply-side tradition in that it aimed to help local governments to attract industry.
In the 1970s the definition of "distress" was expanded to allow distress to be measured along several different dimensions. By the peak years of the Carter administration 84.5% of the nation's population lived in a distressed area.
Four main EDA programs (from largest to smallest):
Title I - Public works loans and grants
Title II - Business loans and loan guarantees
Title III - Technical planning and assistance grants
Title IX - Special Adjustment Assistance; to help communities respond to sudden changes, i.e. plant or military facility closing, natural disaster, etc.
Community Development Block Grants
Not originally intended as an economic development program, but discretion built in to the program and certain statutory changes led to rapid growth in the portion used for economic development purposes.
This was part of Nixon's "new federalism." CDBGs were a consolidation of several categorical grants into a more flexible block grant. The goal was to grant state and local officials more responsibility for program design and implementation.
The funds were granted as an entitlement according to a formula that took demographic variables such as poverty into account. In 1977, a second formula was authorized to correct a "bias" in favor of southern and western cities. [Cobb mentions this. It was part of the struggle between Sun Belt and northern polticians.]
Eisinger notes that the program is generally, but not totally, targeted toward needy cities. Some affluent cities get aid also.
Economic development was not originally one of the purposes for CDBGs, but the inherent flexibility allowed them to serve economic development ends through infrastructure construction aqnd the like.
In 1977, economic development was added as a specific purpose. This allowed cities to make grants out of CDBG funds. They were allowed to give the money to non-profit development corps that could, in turn, make loans, buy property, make site improvements, or other actions to attract business.
In 1981, the law was changed to allow direct aid to for-profit entities.
The 1977 changes also allowed cities to use their grant to capitalize a revolving loan fund for economic development purposes.
He has figures demonstrating that the 1981 changes produced a sharp upturn in the use of CDBGs for economic development.
Urban Development Action Grant
This was added as a part of the CDBG program in 1977. It was like a super CDBG. Much larger grants for much larger projects. It was awarded competitively to "severely distressed cities and urban counties."
A lot of these funds were used for downtown development, convention centers, hotels and the like. HUD classifies expenditures in two groups: infrastructure development and direct incentives to private firms. Both are classic supply-side type policies.
But Eisinger claims that the program was "shaped in its implementation by emerging entrepreneurial impulses..." These were exemplified by the use of UDAG funds to establish revolving loan funds [I don't really get how that is entrepreneurial where the use of CDBGs for the same purpose was not] and the establishment of public-sector equity positions in UDAG funded projects (i.e. partnering).
He notes that the job creating features of UDAG projects were probably overstated and that the jobs they did create (hotel workers, etc.) were often part-time, temporary, and/or low-paid. Furthermore, as with all incentive programs, there is no guarantee that the investment wouldn't have happened anyway.
Conclusions
All this federal activity doesn't add up to a coherent national policy on subnational development.
Different programs have different goals; some acquired an economic development purpose only after passage.
Job creation, through capital subsidies, is the primary goal of federal programs.
While some programs have the goal of targeting distressed areas, in actuality, most programs are wide spread.
Most federal programs have been supply-side in nature.
He notes that in the 1980s federal intervention and business subsidies fell out of favor. The Reagan administration proposed the use of enterprise zones, where taxes and regulations would be reduced in distressed areas to stimulate investment. This didn't get anywhere at the federal level (for Reagan anyway) but states took up the idea and established EZs on their own.
He says the EZ story is a sign of the times. The only new idea to originate at the federal level was taken up by the states.
Eisinger, P.K. (1988). The Rise of the Entrepreneurial State: State and Local Economic Development Policy in the United States. Madison, WI: University of Wisconsin Press.
Posted by Chip on July 18, 2004 at 11:35 AM | TrackBack