Do Place-Based Policies Work?

By David Neumark ·

University of California, Irvine

The Issue:

Increasing globalization, automation, and declining industries have affected some areas more than others. Can policies help reverse this decline?

The Facts:

Place-based policies are government efforts to enhance the economic performance of specific areas. The most prominent place-based policy in the United States is federal and state enterprise zones. For example, the federal Empowerment Zone program, authorized in 1993, targeted relatively poor areas with high unemployment by offering business tax credits for hiring residents of those zones, as well as block grants for business assistance, infrastructure investment and training programs. A different type of place-based policy is one that attempts to promote economic development through infrastructure investment, such as the Tennessee Valley Authority (TVA) that, beginning in 1933, provided electric generation to most of Tennessee and parts of Kentucky, Alabama and Mississippi, aiding industrialization and improving the quality of life in that region.

The most prominent place-based policy in the United States is federal and state enterprise zones. For example, the federal Empowerment Zone program, authorized in 1993, targeted relatively poor areas with high unemployment by offering business tax credits for hiring residents of those zones, as well as block grants for business assistance, infrastructure investment and training programs. A different type of place-based policy is one that attempts to promote economic development through infrastructure investment, such as the Tennessee Valley Authority (TVA) that, beginning in 1933, provided electric generation to most of Tennessee and parts of Kentucky, Alabama and Mississippi, aiding industrialization and improving the quality of life in that region. One economic rationale for place-based policies is the possible efficiencies coming from having industries in close proximity, which could foster learning-by-doing and a better matching of people with jobs for which they are well suited. These so-called agglomeration economies could be a result of better vertical linkages where inputs are more readily available, arise from knowledge spillovers from one company to another that foster innovation and the spread of new ideas, or be due to better job matches when there are many companies and a large pool of skilled workers. Place-based policies can also represent an effort to bring jobs to areas where they are relatively scarce because of a changing industrial landscape or segregation that arises from, for example, discrimination in housing markets. However, high-skilled workers drawn to one area could benefit that area but to the detriment of the area they left behind. There may be an equity consideration that makes this trade-off acceptable — policy may be aimed towards raising productivity and creating jobs in poor urban areas. But this could have unintended consequences as well, such as by raising living costs in those areas, or by benefitting workers who live outside these places but take some of the jobs created in targeted areas.

These so-called agglomeration economies could be a result of better vertical linkages where inputs are more readily available, arise from knowledge spillovers from one company to another that foster innovation and the spread of new ideas, or be due to better job matches when there are many companies and a large pool of skilled workers. Place-based policies can also represent an effort to bring jobs to areas where they are relatively scarce because of a changing industrial landscape or segregation that arises from, for example, discrimination in housing markets. However, high-skilled workers drawn to one area could benefit that area but to the detriment of the area they left behind. There may be an equity consideration that makes this trade-off acceptable — policy may be aimed towards raising productivity and creating jobs in poor urban areas. But this could have unintended consequences as well, such as by raising living costs in those areas, or by benefitting workers who live outside these places but take some of the jobs created in targeted areas. It is challenging to convincingly estimate the benefits from place-based policies. The difficulty in gauging the effect of policies like enterprise zones is that typically there is not a good counterfactual, such as similar areas close to a zone that did not benefit from these policies. Another difficulty arises because a particular place-based policy may cover an area affected by other place-based policies as well, sometimes run by a different level of government. There is also the possibility that a place-based policy benefits one area but at the expense of another – which may not be inconsistent with the policy’s goal, if it is meant to address inequities, but nonetheless should be considered as an important consequence of the policy.

The difficulty in gauging the effect of policies like enterprise zones is that typically there is not a good counterfactual, such as similar areas close to a zone that did not benefit from these policies. Another difficulty arises because a particular place-based policy may cover an area affected by other place-based policies as well, sometimes run by a different level of government. There is also the possibility that a place-based policy benefits one area but at the expense of another – which may not be inconsistent with the policy’s goal, if it is meant to address inequities, but nonetheless should be considered as an important consequence of the policy. The general thrust of the evidence does not point to enterprise zones creating jobs or reducing poverty. Notwithstanding the difficulties mentioned above, careful analysis has found mixed results of place-based policies (as discussed in my research note). Studies generally do not find increasing employment in response to these policies. There is even less evidence of reduced poverty in these zones and there is also some evidence of rising housing prices which could hurt those who rent and live in those areas, as opposed to property owners who may not reside in the Enterprise Zone. And there is also some evidence that benefits to Enterprise Zones come at the expense of economic performance in other areas.

Notwithstanding the difficulties mentioned above, careful analysis has found mixed results of place-based policies (as discussed in my research note). Studies generally do not find increasing employment in response to these policies. There is even less evidence of reduced poverty in these zones and there is also some evidence of rising housing prices which could hurt those who rent and live in those areas, as opposed to property owners who may not reside in the Enterprise Zone. And there is also some evidence that benefits to Enterprise Zones come at the expense of economic performance in other areas. The types of place-based policies that may be more effective support infrastructure investment or higher-education institutions. The Tennessee Valley Authority emphasized the construction of hydroelectric dams to bring power generation to the region it covered. This was a classic case where a place-based policy fostered economic growth, in this case through industrialization. More recently, there is evidence that university research facilities attract high-tech, innovative firms which, in turn, can form industry clusters that benefit from agglomeration economies. But these benefits may be quite localized and limited to technologically sophisticated firms. The success of Enterprise Zones may also depend upon particular features in that region. The analysis of Enterprise Zones in California by Jed Kolko and me suggests that, in that case, there were more favorable effects in zones that had a lower share of manufacturing and in zones where managers did more marketing and outreach activities.

What this Means: There are many sources of economic dislocations, such as international trade and automation, which have vastly different effects across cities and regions. There are also cities and regions which have long-standing and persistent levels of high unemployment and poverty. Some well-designed place-based policies may be able to address these issues, especially if these policies build needed infrastructure or target subsidies where they will do the most good and hold recipients accountable. But policies that subsidize businesses based solely on their location (such as the Foxconn deal in Wisconsin, discussed in this EconoFact memo) have a poor track record. Successful place-based policies are likely to become more important as economic divergence across regions and cities continues to rise, and research into the characteristics that make such policies successful is vitally important.

People’s economic fortunes are often tied to where they live. This is clearly true at the international level, with people in rich countries enjoying incomes twice or more that of people in middle income countries. But this is also true within countries , with persistent low levels of income in cities like Flint, Michigan , and in rural areas like much of Appalachia and Aroostook County in Northern Maine . Incomes in poorer states in the U.S. had been catching up with those in richer states for most of the 20th century , but this rate of convergence was reduced by half between 1990 and 2010 and since then has fallen close to zero . What policies can address this inequality? Telling people to move to high-income areas in the hopes of raising their economic fortunes downplays the costs and uncertainties of relocating, and also ignores the fact that people are tied to where they live by social and family connections, not just by their jobs. Given long-standing difficulties in certain locales, as well as more recent downturns caused by economic dislocations, can government programs targeting particular areas succeed in raising the standard of living of people in those areas?