In this recent speech, President Obama announced that he will soon implement incentives for promoting “Promise Zones”. These are intended to improve quality of life in distressed communities.
“Here he offered new details about an initiative to select 20 communities nationwide as laboratories for better coordinated federal, local, nonprofit and private-sector investments to revitalize long-distressed areas. The communities would be selected over the next several years, administration officials said, from urban and rural applicants that show persistent woes like high joblessness and crime rates, low rates of high school graduation and college attendance and health concerns among residents. Â For these so-called Promise Zones, Mr. Obama is seeking tax breaks for those who make capital investments in the zones and for employers who hire unemployed residents.”
Below the fold, I discuss the economic incidence (i.e the intended and unintended consequences) of these place based subsidies.
To guarantee that the 20 “lucky” communities are chosen independent of political considerations (i.e who is the Representative for the area), a random number generator should be used. Â Once this treatment group is selected, the Obama Administration will make its investments and equilibrium forces will come into play. Permit me to make some predictions.
Prediction #1: Â Land prices will rise within the Promise Zone and at the fringe of land just outside the Zone.
Prediction #2:Â Â Home owners will experience a windfall (and prices should rise at the announcement date of the location of the zone). Â As home prices rise, some will cash out and will sell their homes to “yuppies”. Â Gentrification will take place.
Prediction #3 :Â Â Many renters will move out as rents rise. Â Â Those renters who believe they can get a job at the new firms will have an incentive to stay. Â Older renters will be more likely to move out as rents rise.
Prediction #4 : Â Promise Zones will attract more employers in Right to Work states than in Union States.
Prediction#5: Â Â Economists have found that when new factories open that migrants (rather than unemployed people) are the main gainers of the new jobs. Â There is an awkward issue of how the Obama Administration will track whether local residents who were unemployed are obtaining the new jobs.
Prediction #6; Â Â 10 years after the opening of the Promise Zones (PZ), some Chicago economist will write a paper documenting that the Zones did not create new employment but simply shifted the spatial distribution of this employment within the County as the same activity would have located elsewhere in the same county had the PZ incentives not been implemented. Â The economist will use the words “zero sum game” in her paper.
For some empirical literature on the economics of enterprise zones take a look at this.
Prediction #7:Â The existence of the PZ will shape who moves into the community. More “role models” will move in seeking the jobs and opportunities. Â How this shapes the peer effects and social interactions in the community will be an interesting experiment. In my own work in Philly, we found that when middle class people move into a tough neighborhood that they choose to have little to do with their spatial neighbors. Â Read this paper for evidence.
Proposition #8: Â Those PZ residents who obtain one of the new jobs will certainly benefit. The extent of their benefits depends on the duration dependence parameter. Â Keep in mind that these individuals were unemployed. Â If the cumulative time spent unemployed has a causal effect in lowering your probability of becoming employed (because your skills atrophy) then a case can be made for Keynesian local stimulus and this experiment should yield new estimates of the size of these effects.
If you are interested in technical econometrics work on duration dependence and unemployment read Jim Heckman’s work.
Heckman, James J., and George J. Borjas. “Does unemployment cause future unemployment? Definitions, questions and answers from a continuous time model of heterogeneity and state dependence.” Economica 47, no. 187 (1980): 247-283.
when new factories open that migrants (rather than unemployed people) are the main gainers of the new jobs.
Are these unemployed migrants? Why do they displace local residents?
10 years after the opening of the Promise Zones (PZ), some Chicago economist will write a paper documenting that the Zones did not create new employment but simply shifted the spatial distribution of this employment within the County as the same activity would have located elsewhere in the same county had the PZ incentives not been implemented. The economist will use the words “zero sum game†in her paper.
It is safe to say that ten years after the initiation of any government program some Chicago economist will write a paper showing that it accomplished nothing, perhaps at great cost.
byomtov isn’t cynical enough. The Chicago economist will write a paper showing that the program was harmful. Sam Peltzman’s “SEATBELTS KILL!!!!!” opus is a model for the tribe.
On the same citation: the redistribution is worth having once you accept that great inequality of situation and opportunity is a social evil, even if there’s no net gain in output and employment.
However, since deprivation has negative and non-linear externalities such as crime, my prediction is that the equalisation will on the whole raise income and wider measures of welfare, though not by much.
The policy is tokenism. It’s no substitute for actually tackling multiple deprivation everywhere by systematic, and very expensive, policy. At best it will show that such policies could work and what they would cost.
“…To guarantee that the 20 “lucky†communities are chosen independent of political considerations (i.e who is the Representative for the area), a random number generator should be used. …”
And you think there will be an effort to choose independent of political considerations why?
In re Prediction #6:
There are far too many folks out there claiming to be economists.
When some of our states/counties/cities lower business taxes and offer special incentives to get existing businesses to relocate into their jurisdictions, it is well recognized that the relocation is, in essence, a zero sum game. One state’s loss is another’s gain.
But what President Obama has proposed is the very essence of “non-zero-sum games.” In that sort of game, “nature” is the unseen extra player, and the net sum of gains of all the seen players can be positive (greater than zero) because “gains” can be made by taking advantage of nature. In a depressed area, “nature” is limiting the returns of the players. When we improve nature, we enable her to contribute additional gains to the game.
Economists who overlook that distinction should properly be considered bookkeepers, not economists.
In re Prediction #7:
Kahn wrote “In my own work in Philly, we found that when middle class people move into a tough neighborhood that they choose to have little to do with their spatial neighbors. Read this paper for evidence.”
Last first-I believe the statement, but I was nevertheless interested in reading the paper, since it sounded like something worthwhile investigating. Unfortunately, the link didn’t get me a copy of the paper; simply a site that provides files to its subscribers. Nice, Matthew.
More importantly, addressing the findings, which I believe-It sound to me like it might be a middle class motivation problem, which might have been local or widespread, or it might be a Philadelphia problem, or it might be a sample selection problem, or it might be a measurement problem. When I was a young man, in order to be close to my work, I moved from a comfortable middle class suburban neighborhood in Baltimore to a tough inner city neighborhood in Washington. Based on my personal experience, I would guess that all the foregoing factors contributed to the stated conclusion in Matthew’s paper.
Unfortunately, the link didn’t get me a copy of the paper; simply a site that provides files to its subscribers.
Yes. $42 is a bit much.
I wonder how many downloads they sell at that price?
Hmm. I am not sure what I think, except that it sounds a lot like redevelopment, which = shenanigans. And planning malpractice. And other ills.
It goes on anyway in Developer/City Council Land, just under the name Tax Increment Financing (TIF) districts.
Cranky
San Diego’s enterprise zones are bizzare. They include some areas that have been fully gentrified for 20 years full of $700,000 and million dollar homes.
My business is in one of them, despite being on a suburban street lined with BMW X5s used to transport kids to the local private school, and I seem to qualify for about $1000 in tax credits based on my hiring, but am not willing to deal with the massive paperwork involved. And as a lawyer I am well equipped to fill out red tape.
What would encourage me to hire at the margin are lower payroll taxes. They are regressive in the sense it is much cheaper for me to hire one person at 60,000 than 2 for 30,000.
Another thing that would encourage me to expand is a better office market. We are at capacity with our current space, but there are very few options nearby to our liking that are bigger. Direct investment in amnesties businesses actually use strike me as much more efficient than tax credits.
Two businesses that are expanding rapidly in San Diego are Thomas Jefferson and California Western law schools. They charge about $160,000 in fees and tuition over three years and a third of their graduates never pass the bar exam, and most of the rest don’t get jobs as attorneys. In fact I rarely encounter their graduates in court. But the federal government guarantees their students’ loans, so they both sport sparkling new buildings in prime locations.
In summary, I pay about 42% of my income in federal taxes, and the federal government charges me thousands of dollars for the privilege of hiring new employees, not to mention the taxes the employees themselves must pay. These law schools, meanwhile, suck up millions of dollars of those funds training people who mostly will never be lawyers and 95% of whom will never repay the full amount of the money they borrow. Providing services that people are willing to pay for seems to be a suckers’ game compared to ripping of the government education racket.
Will you please explain how payroll taxes make it much cheaper to hire one $60K employee than two $30K employees? I could see what you were saying if you referred to one $200K employee and two $100K employees. I could see what you’re saying if you were referring to health insurance, or workers comp, or generic overhead. But I just can’t get my head around your example.
You pay 42% in federal taxes and you make comments on blog posts and track the doings of bottom feeding law skools? Really?
They charge about $160,000 in fees and tuition over three years and a third of their graduates never pass the bar exam…
Dear Real World,
Wikipedia is often useful. But, you have to keep in mind that anyone can post anything on it. Even, say, law school PR folks. As, for example the rather silly claims made in your quote. The National Jurist is basically an advertising mag for bar review courses aimed at law students. “Respected”? IMHO, maybe by the advertisers. Its recent rating of law schools put Alabama above Harvard and Yale. http://abovethelaw.com/tag/national-jurist/
Is unemployment insurance still on a per-employee basis? That might be misconstrued as a payroll tax. Ditto insurance and other fringes, of course.
I think that anyone who refers to a zero-sum game should be challenged to explain what they’re summing. Usually it’s dollars (sometimes it’s jobs), and around here we’re pretty clear on the fact that non-adjust dollars are really bad for measuring utility.