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February 18, 2013 10:10 AM The Simple Economics of “Promise Zones”

By Matthew Kahn

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. 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. 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: Land prices will rise within the Promise Zone and at the fringe of land just outside the Zone.

Prediction #2: Home owners will experience a windfall (and prices should rise at the announcement date of the location of the zone). As home prices rise, some will cash out and will sell their homes to “yuppies”. Gentrification will take place.

Prediction #3 : Many renters will move out as rents rise. Those renters who believe they can get a job at the new firms will have an incentive to stay. Older renters will be more likely to move out as rents rise.

Prediction #4 : Promise Zones will attract more employers in Right to Work states than in Union States.

Prediction#5: Economists have found that when new factories open that migrants (rather than unemployed people) are the main gainers of the new jobs. 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; 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.

For some empirical literature on the economics of enterprise zones take a look at this.

Prediction #7: The existence of the PZ will shape who moves into the community. More “role models” will move in seeking the jobs and opportunities. 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. Read this paper for evidence.

Proposition #8: Those PZ residents who obtain one of the new jobs will certainly benefit. The extent of their benefits depends on the duration dependence parameter. Keep in mind that these individuals were unemployed. 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.


[Cross-posted at The Reality-based Community]

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Matthew Kahn is a professor at the University of California, Los Angeles's Institute of the Environment. He specializes in the environmental consequences of urban growth and related quality-of-life issues.
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