Los Angeles Times COMMENTARY

Feds Are Feeding an Urban Money Pit

Spending taxes on community development only helps the politicians.

By Robert Krol and Shirley Svorny
Robert Krol is a professor of economics and Shirley Svorny is chairwoman of the department of economics at Cal State Northridge.

March 16, 2005

U.S. economic development policy has taken one shot after another at improving conditions in deteriorating urban areas. But even after all these years, run-down neighborhoods across the nation attest to the failure of government-directed programs to stimulate business and create jobs.

Now, President Bush has proposed consolidating 18 economic development programs into one — under the name "Strengthening America's Communities" — to be run by the Commerce Department. The proposal would create a $3.7-billion economic development fund, with the money directed specifically to "development-ready communities" — ones that have made a visible effort to reduce crime, improve schools and reduce regulatory barriers to commerce and housing construction.

The idea is that the administration would be rewarding governments for creating the conditions needed for economic growth.

Sounds good. But the problem is that the fund would be aimed toward traditional programs (job training, lending and subsidizing hotels and convention centers) that have proved to be ineffective in promoting broad-based community development. We suggest that the money be used instead to help make communities development-ready, rather than just to reward those communities that already have achieved that status on their own.

In Los Angeles, one need not look far to see examples of failed economic development programs. The Los Angeles Convention Center has required substantial ongoing public support — $20 million in 2004, according to the Los Angeles Business Journal. The federally funded Los Angeles Community Development Bank went belly-up last year, with losses of more than $40 million (a charge-off of an astonishing 40% of loans made — compared with 1% at commercial banks). In a country with the most highly developed financial system in the world, government should not be in the lending business.

Claims that jobs are created by economic development agencies overstate the net addition to employment. Most generally attract new workers rather than put local labor to work, or jobs are just moved from one community to another, further exaggerating claims of net job creation.

These failures are the result of public-sector decisions, influenced by special interests. Decisions reflect politics rather than hard financial evidence of project viability.

More often than not, federal subsidies to private economic development benefit only a small group of interested parties (such as the hotel industry when a convention center is subsidized) and fail to achieve the broader goals of economic development for the community at large.

So why have such programs continued? The answer is politics. Local officials leverage federal dollars for political support. A subsidy to a developer or a low-cost loan may pay off in terms of campaign contributions from that developer down the road. Perhaps the powerful public employee unions need to recognize that they can play a role in redirecting local spending away from politically motivated lending or subsidies and toward essential public services.

In a perfect world, we would dramatically scale back the federal government's role in state and local economic development. Without federal funds, every program a city proposed would have to be paid for in full by local or regional taxpayers. Cities and regional governments currently embark on expensive development programs they would never support if they had to pay for it themselves.

The second-best solution is to limit state and local spending of federal funds to public services and forbid state and local efforts to set up loan programs or development and employment efforts better handled by the private sector. The proper role of government in the economic development process is to create the conditions that allow private economic activity to flourish.