How to Get Growth in the Places That Need It Most

(Bloomberg Opinion) -- President Donald Trump was a real-estate developer before he was a president. As a real-estate developer, your goal is to build properties that then go up in price. Whether that happens because you picked a location that was becoming popular and acquired the land cheap, or because the property you built actually created economic value isn't so important to your bottom line.

Thus perhaps it’s no surprise that Trump’s Opportunity Zone program, enacted in late 2017 in his tax reform bill, seems tailor-made for real-estate developers. The program’s stated intent is to stimulate investment in poor neighborhoods, but in practice it mainly acts as a tax break. Unlike the Empowerment Zone program enacted in the 1990s under Bill Clinton, the Opportunity Zones don’t give investors incentives to employ people within the zones, or block grants for investing in local infrastructure and other public goods. Instead, Trump’s program simply allows developers to defer or avoid capital gains taxes on their investments in the zones.

The way the Opportunity Zones are selected may also make them less effective at reducing poverty. States were allowed to pick their own zones, and some didn’t select the neediest places. Whereas Empowerment Zones were truly distressed places, with poverty rates averaging 48 percent in the first round, Opportunity Zones have an average poverty rate of only 29 percent. And some of Trump’s zones are college towns filled with students who only classify as poor on a technicality.

In general, there is the suspicion that at least some of the Opportunity Zones were selected not because they were in need, but because they were expected to experience gentrification in the near future. The site of Amazon.Com Inc.’s new offices is Long Island City, New York, a neighborhood on the rebound that happens to be in an Opportunity Zone. Gentrifying areas would have experienced growth without Trump’s program, so they didn’t really need the help.

This isn't the optimal way to run a program designed to help the poor. Future policies aimed at alleviating urban poverty would do better to follow the tried-and-true example of Clinton’s Empowerment Zones. In a 2008 paper, economists Matias Busso and Patrick Kline evaluated the program very carefully, and found substantial positive effects on the employment prospects of local residents. They estimate that the first round of Clinton’s program boosted employment in the zones by about 30,000 and lifted 50,000 people out of poverty. Local property values also rose, and the zones had fewer vacant homes, while rent went up by only a small amount.

That’s a success worth emulating. The Empowerment Zone program, which expired at the end of 2016, should be reinstated. If not, there should be a new program that uses employment subsidies -- a feature notably absent from Trump’s program -- and designates only truly impoverished areas. That will yield much better results than simply throwing money at real-estate developers in up-and-coming neighborhoods.

But that doesn’t mean that there’s no place for a policy to encourage development in college towns. In fact, there’s good reason to put these towns at the center of a second, very different type of economic initiative -- one aimed not just at alleviating local poverty, but at turning declining regions into healthy, growing ones.

In an age when economic activity is moving relentlessly into big cities and technology hubs, college towns stand out as a bright spot. There’s good reason to encourage this trend with federal policy. More research money for second- and third-tier universities is part of the equation. But there’s also room for tax breaks for businesses that partner with these universities, and for developers who turn nearby land into research facilities.

This second kind of policy would be aimed not at direct poverty alleviation, but at boosting entire regions. It would effectively be an American version of China’s Special Economic Zones, which used tax incentives and various subsidies for business to attract multinational investment and learn foreign technology. Instead of learning from foreigners, the goal of an American SEZ program would be creating new technologies from scratch. But the goal of creating local growth -- which China’s SEZs almost certainly did -- would be the same. It’s even possible that encouraging investment in college towns would lead to the creation of new technology clusters, like Columbus, Ohio, and North Carolina’s Research Triangle.

Trump’s Opportunity Zone program is an uncomfortable, inefficient mashup of the two types of local development policies the U.S. needs. Future programs should differentiate between the goals of alleviating deep urban poverty on the one hand, and reviving stagnant regions on the other. And both types of programs should avoid simply handing cash to real-estate developers, and instead focus on incentives for businesses -- to either employ poor people, or invest in the creation of new technologies. Policy to help down-trodden neighborhoods and regions has a bright future, but it will require going far beyond what Trump has given us.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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