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• Are Place-Based Policies a Boon for Everyone?

Transcript

Tim Sablik: My guest today is Santiago Pinto, a senior economist and policy advisor at the Richmond Fed. His research includes the study of urban and regional economics, which is the topic of our conversation today.

Santiago, welcome back to the show.

Santiago Pinto: Hey, Tim, how are you? Thank you for having me.

Sablik: You recently wrote an Economic Brief examining place-based policies, which, as always, we'll include a link to in the show notes. Communities struggling with population loss and economic decline are naturally looking for policies that might help improve their fortunes. What are some examples of commonly used place-based economic development initiatives?

Pinto: Place-based economic development policies include a wide range of economic incentives, which ultimately direct financial benefits to incentivize a firm's opening, expansion or retention in a certain geographical area. The idea is that these policies selectively offer incentives to businesses and they stimulate investments that would have not taken place otherwise.

In general, when we think about place-based policies, we typically do not think about direct monetary transfers to households. They typically rely on instruments like subsidies or infrastructure investment to revitalize economic activity in a recipient area.

One of the most commonly known place-based economic development initiatives are the zone-based programs. These programs are in certain areas which are typically characterized by high unemployment or poverty or going through other economic struggles. These designated zones are used to channel resources, including workforce training, business support or other infrastructure improvements. These are designated by either the state or local governments. Some of those programs that exist and have been developed in the U.S. throughout the years include enterprise zones or, more recently, opportunity zones.

There are also initiatives that may qualify as place-based policy that provide tax incentives to real estate developers and other businesses. Some of those have been in place for a while, for instance, the Low-Income Housing Tax Credit. This is a federal program that gives tax credits to developers that construct affordable housing.

There are also other initiatives that try to promote economic development or redevelopment at the very local level. For instance, there's one typically known as tax increment financing or TIF.

Sablik: There is certainly a wide variety of these types of economic development programs, and they're quite popular. What are the economic arguments in favor of doing place-based interventions?

Pinto: Imagine that you live in an economy where all the factors of production can freely move across locations. In this environment, you would not expect to see systematic economic disparities across space — people will move and factors of production will move and allocate at their best resources. However, we don't see that happening in the U.S. and many countries. We see systematic difference across regions, cities and even across neighborhoods. And, we see that these differences tend to persist over time.

So, in this context, policymakers at both the state or local level, and even at the federal level, rely on place-based interventions. They are sound economic reasons to do so. For instance, place-based policy can help address and overcome specific market imperfections or correct for externalities that typically we observe along geographic dimensions.

For instance, consider the case of agglomeration economies. These are benefits that business derive from being located next to each other in the same industry. Place-based policy will address those agglomeration economies and make sure that everybody will be able to benefit.

There are also many activities where the benefits spill over to the rest of the economy, not to the targeted community but to the surrounding economies. This is what we call regional spillovers. For instance, consider the case of educational training. A person being educated has their own private benefit, but they also benefit the rest of the community.

Some households, particularly those that face economic hardship, tend to be less mobile, constrained to live in a specific location. Place-based policies can provide some targeted support to these households and help them overcome these economic and financial barriers and may allow them to be more mobile as well.

Sablik: Yes, so plenty of potential benefits from these more targeted interventions. Are there negative or unintended consequences of place-based policies that economists have identified?

Pinto: It is important to acknowledge the fact that place-based policies may have unintended consequences.

For instance, place-based interventions may have positive spillover effects that may not be the intended beneficiaries of that policy. Think of a place-based policy that attracts a large number of workers and firms to the local area. That increases demand for housing [and] demand for land. That eventually increases housing prices [and] land prices. So, a lot of the benefits of the place-based policy will be capitalized into higher land prices and housing prices, benefiting existing landowners. That's fine, but were those people the intended beneficiaries of the policy or not?

At the same time, these place-based policies may have negative spillovers for neighboring areas. When you subsidize businesses in one particular community, then they can lead to a decline in economic activity in the other surrounding communities because the businesses are moving to these new localities,

Sablik: Right, so a business may locate in one area and not in another.

Pinto: Exactly.

Also, to the extent that place-based policy attracts activity, there's also agglomeration diseconomies associated with higher densities, including higher congestion, higher pollution, higher crime.

One issue about implementing place-based policy is that it may also trigger some kind of competition across communities. With the goal of attracting activities to my community, I'm competing with other alternative destinations. In the past that has led to bidding wars between communities for tax rates and other incentives, which can drive up the costs of implementing those policies.

And, at the same time, if you artificially increase the attractiveness of a place, you might be distorting migration decisions. People may not be flowing to the places that they should be going.

Sablik: Yeah, so these interventions can have a lot of different effects, some we might consider good, some we might consider bad. How do economists go about weighing all these different effects and evaluating the overall effectiveness of a place-based policy?

Pinto: First, the policy needs to set clearly the goals and objectives. Then, we can see and check whether they are accomplished later on.

The challenge is to identify the causal effect of the policy. You should be able to identify that the change in local economic conditions can be attributed to the policy. People use very fancy econometric techniques to try to address this issue. But there are many things happening, so it's hard to identify that this is attributed to the particular policy.

Also, you need to take into account the spillover effects that we were talking about before. It's necessary to determine that the extent to which the policy affects neighboring areas. Maybe the financing of this place-based policy should go beyond the locality.

Another important thing that is relevant to consider is the time horizon that you take to evaluate the benefits of the policy — the short-run effects versus the long-run effects. Suppose you look at the benefits of the program in two years and you see the program decrease poverty [and] increase employment [and] income locally. Does it mean that local residents were benefited by the program or were they replaced by other people that came into the region and the local residents were displaced and gentrified?

Sablik: Weighing all the empirical evidence that we have, what can we conclude about the effectiveness of place-based economic development policies?

Pinto: My general assessment is that the effectiveness, according to the empirical literature, does seem to be quite mixed.

For instance, some studies found that geographically targeted incentives affects where firms like to locate, where they like to expand, or even retain operations in a specific area. But it happens in, at most, 25 percent of the cases. This looks like a small number, right? But it might happen that this increases employment a lot. So, the benefit-cost calculation depends on how many jobs are really created by those people that decide to invest that would have otherwise have not invested.

The empirical work has found that how place-based policies are designed and financed really matters, the details matter. So, if you look at the benefits of the program, overall, they may be a zero-sum game where the benefits are partially offset by the costs elsewhere.

Sablik: So, how would you advise local policymakers that are looking to improve the economic conditions of their community? That's a big question [laughs].

Pinto: [Laughs] The easy question for the end. That's great.

What I was trying to give here was a sense of caution. Pay attention to how you are designing the policy, how it is implemented. Those are very important.

Place-based policies have the potential of being very beneficial, not only at the local level but also for the nation as a whole. But, as I mentioned, the details make a difference if the policies vary across locations. You need to look at the specific needs and characteristics of the target area, that's important. You need to consider the potential negative spillover effects of the policy.

Place-based policy can be effective at jumpstarting local economies by leveraging agglomeration economies, as I mentioned. But it is important to carefully design and implement this policy to try to minimize those negative consequences, such as the one that I mentioned, especially gentrification and displacement.

It's also important to exploit the available local competitive advantages. I think you need to take advantage of the benefits that you have in your local areas. Then, target investments that generate long-term payoffs for productivity and output growth and those activities that generate future gains or economic value that would have otherwise not taken place without those investments.

Sablik: Santiago, thank you so much for joining me today.

Pinto: Appreciate it. Thank you.