Bloomberg op-ed says: Bush Gulf rebuild idea-Enterprise-Zones -don't work

[papau]

Bloomberg's Brendan Murray writes that President Bush's enterprise-zone plan seems to have previously failed to deliver and that its main effect appears to have been to reward developers who would have made certain investments anyway. She even noticed that in the past the tax credits that employers in the zones got for wages paid phased out at 150 percent of the minimum wage, creating a strong incentive to limit wages to that level. I wonder if mainstream media will say something?



Bush's Gulf Enterprise-Zone Plan Has Failed to Deliver Before
By Brendan Murray

Sept. 26 (Bloomberg) -- President George W. Bush's main proposal for reviving the storm-stricken Gulf Coast has a history of failing to deliver on the promise of prosperity.

The Gulf Opportunity Zone that Bush outlined in a national address from New Orleans on Sept. 15 is the latest version of a Reagan-era idea for using tax breaks and other incentives to revitalize blighted urban areas. Backers of enterprise zones -- mainly Republicans, though they were also supported by Democratic President Bill Clinton -- argue that jobs and economic growth will flow into such areas.

In the two decades since such initiatives have come into widespread use, researchers have found little evidence they work very well. Critics say the main beneficiaries often aren't the people the zones are designed to aid, but businesses that end up with tax incentives for investments they would have made anyway. <snip>

Bush's plan for the 90,000 square miles of Louisiana, Mississippi and Alabama declared a disaster area from Hurricane Katrina would double to $200,000 the amount businesses can deduct from their taxes for investments in new equipment. It also would provide a 50 percent bonus depreciation and make loan guarantees available. The benefits expire at the end of 2007. <snip>

The White House wants to model the Gulf zone after the $6.1 billion New York Liberty Zone, created after the Sept. 11 terrorist attacks to help rebuild Manhattan. It let businesses reduce 30 percent of an investment's cost for depreciation and extended $15 billion in tax-exempt bonds for construction. <snip>

The Los Angeles zone, covering downtown and the South Central neighborhood as well as parts of Long Beach, offered tax credits or deductions for hiring, sales, business expenses and interest from 1992 until it ended in 1998. <snip>

The program ``did not have a noticeable effect on total private sector investment when compared to the region as a whole,'' Spencer concluded in a research paper published in the November 2004 edition of Economic Development Quarterly. One reason was that six years was too short a span for new businesses to migrate into the area, the report said.

A broader 2001 study of California's 39 enterprise zones found that while they helped boost job creation, they also ``produced notably lower incomes than jobs in other areas.'' That's because while employers in the zones got tax credits for wages paid, the credits phased out at 150 percent of the minimum wage, creating a strong incentive to limit wages to that level.

`Padding Investor Pockets'

[moc]

1. I've always wondered what happened to enterprise zones. Thanks for the

post.

I worked in Baltimore during the 1990s with programs trying to improve health status of residents in some of the poorest areas of that city. There was also an enterprise zone in the same neighborhood.

I don't live in Baltimore anymore, but I return occasionally for business and family reasons. I hadn't noticed any appreciable changes to those poor Baltimore neighborhoods.

Is that the whole article, or do they give more specifics on the 2001 study mentioned? I'd like to find the documentation for my work.

Thanks again.

[jobycom]

2. There's a difference between the Coast and the rest of the places

it has been tried.

The idea in Los Angeles was to lure new businesses to inner cities. The biggest problem is that the infrastructure and educational resources of the neighborhoods weren't improved, though. Republican mentality is to assume business can fix everything, but businesses won't even move into an area if the basics they need to make a prophet aren't there. No tax cuts can educate a work force, or create consumers out of poverty, or immediately reduce crime so that employees and customers and property will be safe. Thus, the only businesses who move in are the businesses that had already found a market in the area. Since these are some of the poorest places in the country, businesses already had the economic incentives of low property cost to move in.

The Gulf Coast, especially New Orleans, is a little different, in that there is already a population that either lives there (in Mississippi) or wants to move back (in New Orleans) if they have a job. An enterprise zone won't bring a lot of new industry in, but it might help to make rebuilding more affordable, and thus quicker, for businesses that were there before. And in cases where businesses have been lost, other businesses that provide the same services will find it easier to move their.

Enterprise zones aren't good for creating new industry in a region, since businesses use a lot of criteria other than tax rates to decide where and when to open. They have to have a market, first of all. They have to have a work force educated and trained enough to work in that area. They have to have the infrastucture. Reaganomics--supply sided economics which is the basic heart of enterprise zone mentality--never understands that. Businesses will only build in a region that is already set up for them. They can't change the region to fit their business.

In Los Angeles, Harlem (where EZs have had some success), and other inner city regions, an EZ could work if it were accompanied by massive infrastructure spending, combined with training and education programs for the local residents. But it takes a shift to an FDR mentality, or even a Clinton mentality, to make them work, and Repubs can't handle thoughts that complex.

They could work on the Gulf Coast, though, if they are limited in duration, and are seen as a basic welfare hand-up program to help local businesses get back on their feet. Also, they need to reward businesses more for higher wages instead of building in incentives to lower wages--lower wages would be the worst thing possible to fight poverty in New Orleans and Mississippi (and the poverty there has been ignored). If EZs are seen as a way to reward outsiders from relocating to the region, thus encouraging outside businesses to compete against already established businesses in the region, then they will have a negative effect.

Not that I expect Bush to do anything right. We'd be better off if he went back on vacation and ignored the region, than with his neocon version of social engineering.

[papau]

3. Great info - thanks :-)

:-)

[jobycom]

4. Undergrad class on urban planning by socialist professor pays off

sometimes. :-)

[orwell]

5. Thanks...

...for your informative, thoughtful post. It has always struck me as odd that those so disparaging of "welfare queens" are so fond of corporate welfare. I guess the idea is that one benefits "useless consumption" while another benefits "noble production."

In the end, it is simply an outside agent changing the free market economics/incentives of an investment, something the so-called Cons should abhor. Of course, the playing field never has and never will be level. Lobbyists and crony capitalists see to that. But that they continue to spout such "free market" platitudes while encouraging the exact opposite is particularly galling to those of us not born with a silver spoon in our mouths.

I guess its Horatio Alger for you and me, and Trump Towers for the "lucky" few.

[jobycom]

6. Welfare queens versus corporate cronies

People on government assistance spend everything they get on the US economy, buying food, clothes, even vices like cigarettes and alcohol. They pay taxes, they stimulate spending. Corporate cronies who get tax cuts don't create more business, they only take business away from someone else who is also trying to get it.

Repubs believe that tax cuts stimulate spending in new industries. Tax cuts can do that, if they are targetted towards the poor and middle classes, but when they are targetted to big business, they don't stimulate anything. Big business doesn't look for new markets, they only invest in markets already lucrative. The first thing they do before investing is a market study. When they find a market people are already buying in, they move into that market. Instead of creating new industry, they simply use their wealth to take over an existing industry, forcing smaller businesses out of it. Picture Walmart versus the local hardware store. This isn't always bad--Walmart can bring new merchandise into an area, making quality of life better, and they can offer lower prices, making items more affordable to many. But the downside is the smaller businesses vanish, and the owners of those businesses go to work for Walmart at a lower wage.

There has to be a balance between that type of progress, and the desire to protect wages and small businesses. Many argue that Walmart breaks that balance. But worse is when a company breaks that balance because they were given tax cuts to destroy smaller, local business.

In short, welfare to the poor helps the economy, whereas croney capitalist tax favors harm it.