Clinton poverty plan: Let them eat tax breaks

Clinton's New Markets Initiative is just another attempt to rebuild the inner city through tax incentives for business, and it won't work.

Published July 6, 1999 10:00AM (EDT)

Summer isn't a fun time to visit East St. Louis, Ill., but then again, neither is fall, winter or spring. So President Clinton deserves credit for braving the Midwest's daunting heat and humidity on Tuesday to call attention to the plight of one of America's most degraded urban landscapes, where a spiritually as well as financially bankrupt city administration auctioned off its City Hall a few years back to pay bills.

Tuesday's visit is part of a four-day trip designed to call attention to the administration's New Markets Initiative, its fledgling effort to jump-start economic development efforts in areas of the country that have been bypassed by the now 8-year-old economic expansion. The president began his tour in Appalachia, and later in the week he will visit a rundown section of Phoenix and finish his tour in the Watts neighborhood of Los Angeles.

Clinton's trip is designed to make a political and social point: Nationwide unemployment may be down to 4.3 percent, but in the rubble-strewn lots of America's older inner cities, and even in the downtrodden parts of its fast-growing Sunbelt ones, too many neighborhoods continue to suffer from substandard housing, high unemployment and the growing concentration of the nation's dwindling but hardest-to-employ welfare population.

The president has dragged along high-powered executives like Richard Huber of Aetna Insurance and former budget chief Franklin Raines, now at Fannie Mae, to highlight the central motif of the tour: that the most impoverished areas of America's cities should really be seen as emerging markets, a kind of Indonesia within our own borders. With a few well-chosen tax breaks and government help programs (they've even dubbed one the American Private Investment Corp., modeled on the Overseas Private Investment Corp.), townhouses, warehouses and shopping malls will soon be blooming on urban plots that now contain only the graffiti-scarred walls of abandoned factories.

It's an enticing vision, and there is no shortage of recent anecdotes to back up its proponents' claims. New townhouses are sprouting in downtown Chicago, and there's a flowering of small businesses and single-family homes in the South Bronx. And then there's the comeback of downtowns across America as entertainment destinations for bored suburbanites looking for something beyond the thrill of another day at the mall.

Those signs of urban life have led many politicians and inner-city advocates to embrace the ideas of Harvard Business School professor Michael Porter, whose Initiative for a Competitive Inner City has tried to get the nation to think of poor neighborhoods as big, untapped markets, rather than as cesspools of dysfunction best served by social service agencies. Porter's ideas, combined with the signs of urban revival evident around the country, have convinced Clinton that the best hope for inner-city renewal lies with the private sector.

That would be nice, but it isn't true.

First of all, the nation's celebrated urban turnaround is uneven at best. True, Sunbelt sprawl cities -- those with expanding borders or vast tracts of undeveloped land on their peripheries -- are posting large population gains. But between 1990 and 1998, geographically constricted Philadelphia saw its population decline by 9.4 percent; Baltimore lost 12.3 percent of its people; Detroit had a 5.6 percent population decline; and Milwaukee watched 7.9 percent of its people depart.

New York, Chicago and Los Angeles bucked the trend, with small population increases near the decade's end after a downturn earlier in the '90s. But the nation's three largest cities have been the entry points for hundreds of thousands of new immigrants. Without that influx, these cities, too, would have posted population declines.

And in both Sunbelt and Rust Belt cities, many blighted urban neighborhoods have refused to revive. Even healthy cities have seen their populations polarize, with a wealthy elite on top, pockets of concentrated poverty on the bottom and almost no middle or working class.

What will the New Markets Initiative do about that? Sadly, very little. The new program will give a 25-percent income-tax credit to businesses that invest in cities. It will also provide more technical assistance to would-be inner city entrepreneurs, and offer matching equity capital for start-up businesses.

But this is providing more of the same tax incentives that have failed to reverse decline over the past three decades. Given the failure of enterprise zone tax breaks, outright tax abatements and tax-increment financing to make much difference, there's no reason to believe these new goodies will be the "incentives" that finally convince major corporations to relocate in the inner city.

To be fair, the New Markets Initiative should be viewed as part of a package with the administration's "Smart Growth" plan to curb suburban sprawl, introduced in January. In recent years, an intriguing coalition of environmentalists, traffic-weary suburban politicians and inner-city advocates have joined to discourage sprawl by creating incentives for businesses to locate in or near the inner city, instead of in the outer suburbs.

Unfortunately, the Clinton administration's anti-sprawl program, rolled out in various budget proposals over the past several months, doesn't pose a serious challenge to the sprawl lobby, and it certainly doesn't offer a realistic program to reverse decades of urban decline. The centerpiece is a $10 billion bond program to help local communities save open land from the relentless tracks of developer bulldozers, plus $50 million for "smart growth" planning. It also offers more shopworn tax breaks for attracting business to the city, although these have not been successful in the past because the same incentives -- and then some -- have always been available in the suburbs.

Like most of the smart growth initiatives around the country, the Clinton plan is doomed to fail because it doesn't reckon with the powerful development interests that have a stake in sprawl -- most notably the home builders and road construction lobbies, which dominate every state capital and are already mobilizing to oppose smart growth plans.

Where there are powerful and long-standing anti-sprawl forces, like Portland, Ore., there's hope for turning back sprawl and directing investment to the inner city. But in states like Maryland, where Democratic Gov. Parris Glendening sought to salve suburban voters frustrated by sprawl with a smart growth law, the movement will accomplish little. Maryland's law allows developer-beholden county executives, for instance, to designate almost any area for "smart" development -- but government-funded greenbelt creation in the suburbs isn't going to create jobs downtown.

What's the alternative? David Rusk -- the former mayor of Albuquerque, N.M., who is now a traveling salesman for metropolitan solutions to urban problems -- thinks Clinton and Vice President Al Gore will have to be much more courageous about discouraging growth in the suburbs, steering it to cities and helping the inner-city poor move out into other neighborhoods.

To Rusk, one of the biggest barriers to urban revival is the fact that families with children are continuing to flee cities, leaving only the nation's hard-core impoverished families living there. "Even where there is gentrification and housing is getting built in cities, it's not for people who are putting kids in the schools," said Rusk, whose new book is called "Inside Game, Outside Game: Winning Strategies for Saving Urban America." "It's for empty nesters and singles."

Rusk says federal, state and regional authorities have to be more aggressive about channeling investment back into the city and inner-ring suburbs. At the same time, he adds, officials must develop incentives to help the urban poor move out from the inner city. That will not only spread the social-service burden more equitably, but bring the last frontier of the nation's jobless pool nearer employers who are increasingly desperate for people who want to work.

But there's little evidence Clinton and Gore are serious about such an agenda. For one thing, suburban sprawl and urban disinvestment are supported by massive government subsidies at the federal, state and local level. If they wanted to curb sprawl and foster urban development, they would cut off EPA subsidies for sewer plants in far-off suburban housing developments. Then they'd go after Pennsylvania Republican Bud Shuster's Transportation and Infrastructure Committee in Congress, which doles out endless pots of federal gas-tax money to build highways whose sole purpose is to open up land for development.

They might even move to impose federal taxes on the massive state subsidies for suburban development, especially those that go to lure factories and office towers away from urban sites. Alabama just gave Honda Motor Co. hundreds of millions in subsidies for a new assembly plant, just as it did Mercedes-Benz a few years ago. Both plants are in rural areas, far from the inner-city poor. A decade ago, Illinois showered Sears Roebuck & Co. with $60 million in state and local tax breaks to build a suburban campus far from its easily accessible downtown tower. Every state has similar examples that dwarf the new subsidies now being offered to cities.

The administration cites its "brownfields" initiative -- which helps cities clean up environmentally hazardous abandoned industrial sites and offers incentives for new development there -- as a crucial piece of its urban strategy. But again, "incentives" aren't enough to encourage businesses to take the plunge, especially when they have readily available "greenfield" sites in the suburbs. In this era of budget surpluses, why not offer cities a $10 billion grant program to clean up the scars of deindustrialization, so they will have what the suburbs and ex-urbs have in abundance: vacant, clean land?

Finally, Clinton and Gore are even less ready to take on the issue of dispersing the urban poor -- which is a critical step in breaking up concentrated urban poverty and economically reintegrating the city. Rusk and others argue that the middle class will never return to cities in sizable numbers until urban schools are at least as good as suburban schools, and that won't happen as long as city schools remain disproportionately filled with children of poverty. Studies have shown that dispersing poor kids helps them educationally, too.

But white suburbanites -- actually, NIMBYs of every race -- oppose proposals to build low-income housing in the suburbs. Many minority political leaders aren't much friendlier to the idea, since they don't want to see their constituencies dispersed. So as Clinton travels around the country this week, don't expect to see him visiting the well-to-do suburbs to encourage them to accept their fair share of poor kids into their school systems.

Seven years into a presidential term notably lacking in bold initiatives to deal with America's enduring poverty pockets, it's fair to ask: Why now? It's easy to interpret the New Markets Initiative as a pre-election-year gambit designed to appeal to what remains of a core, if shrinking, Democratic Party constituency. Al Gore has to come up with something for inner-city inhabitants, who still represent major voting blocs in big states with key primaries like California, New York, Illinois and Ohio.

But the administration's commitment to linking urban poverty to suburban sprawl, and fighting both with more tax incentives, is destined to fail. "What's fueling anti-sprawl sentiment is that life out in paradise is feeling less convenient and more harried," says David Rusk. "Linking that to urban problems isn't going to be a winning argument for anyone in the 2000 election."

By Merrill Goozner

Merrill Goozner is chief economics correspondent in the Chicago Tribune's Washington bureau.

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