Economic development is a process that never ends.
Once-vibrant regions across the United States are struggling with population decline, the collapse of industry, and shrinking tax bases. Meanwhile, cities have failed to properly absorb newcomers in search of opportunity, driving up rents and exacerbating local inequality.
The Struggling Regions Initiative is a project of the Niskanen Center. With generous support from the Rockefeller Foundation, we intend to push the frontier of research into the issues facing struggling regions across America, with the goal of developing new ideas for broadly shared economic growth.
Research & Reform
Firm-specific development tax incentives are a double-edged sword. On the one hand, they can help attract major businesses and create jobs for the region. On the the other, they can force jurisdictions into a zero-sum competition that tends to favor companies with political connections and those places that are already prospering. For poorer states and cities to compete, development incentives can come at the expense of investments in human capital and public services, jeopardizing development in the longer run.
The world is awash in cheap capital and yet total productivity growth has stagnated. Modern financial markets excel at creating returns for investors, yet technologies new and old, from the Internet and GPS to machine tooling, only emerged thanks to public investments in ideas whose returns were hard-to-impossible for private actors to capture. Strategic public investments can help spur the creation of new markets, mobilizing private capital to an even higher valued use.
Economic development policy cannot be divorced from issues of public finance. When a state or region starts doing well, tax revenues pour in. This enables the provision of new incentives for firms and public services for residents, making the region all the more attractive. The resulting feedback loop can turn a local economy around, but it can also work in reverse. Regions that are doing poorly may have to raise taxes or cut programs to maintain balanced budgets, creating further reasons for businesses and residents to leave. When these virtuous and vicious cycles work in tandem, the gap between haves and have-nots pulls farther apart.
New business formation is at historic lows. At the same time, the Small Business Administration — the main federal program for small business support and development — is infamously risk-averse, favoring low-risk, low-reward enterprises over the fast-growing firms that drive innovation and dynamism. Updating the SBA for the 21st century requires empowering its core programs, from federally guaranteed loans to leveraged venture capital investment, to track performance, evaluate progress, and target the business activities with the greatest social impact.
Understanding Opportunity Zones
Established by the Tax Cuts and Jobs Act of 2017, the Opportunity Zones program represents a promising new method for channeling financial capital into distressed communities, both urban and rural. Whether it will work as intended remains to be seen.
Toward an Office for Struggling Regions
Coordination Is Key.
The role of the federal government in fostering economic development has been a point of contention since nation’s founding. Henry Clay’s concept of an “American System,” whatever its particular failings, was at least right to emphasize the need for national investment and tax policies that work with state and local authorities toward a coherent goal. Today, however, U.S. economic development policy largely lacks coordination. We’re exploring ways a new Office of Struggling Regions could fill that gap, helping our myriad development programs and agencies work together rather than at odds.