Place Based Initiatives

EconBuff Podcast #36 with Trey Dronyk-Trosper

Dr. Trey Dronyk-Trosper talks with me about place based initiatives. Dr. Dronyk-Trosper walks us through what place based initiatives are and what levels of government use them. We discuss the history of the use of place based initiatives, and why governments employ them. Dr. Dronyk-Trosper explains that the performance of place based initiatives in creating positive economic outcomes has been poor and lays out the reasons why this is. Dr. Dronyk-Trosper addresses push-pull mechanisms, where place based initiatives move economic activity around within a geographic area, rather than create new economic activity. Dr. Dronyk-Trosper lays out how agglomeration effects impact industries and potentially give governments a reason to use place based initiatives at all. We discuss the impacts of agglomeration economies on industries. Dr. Dronyk-Trosper argues place based initiatives natural cause malinvestment, lays out why this is problematic for local economies, and discusses how this creates a “race to the bottom” where governments compete to attract businesses but damage their economies more in the process. Finally, Dr. Dronyk-Trosper discusses various versions of place based initiatives, such as Tax Increment Financing, Business Improvement Districts, and Opportunity Zones.

Photo by Tim Mossholder on Unsplash

Transcript:

Stitzel: Welcome to the Econ Buff Podcast. I’m your host, Lee Stitzel. With me today is Dr. Trey Dronyk-Trosper. He's a senior economist at Amazon [and] has an impressive publication record including public choice, regional science, urban economics, and real estate economics; and maybe most importantly The Journal of Economic Analysis and Policy. Trey, welcome.

Dronyk-Trosper: Thank you for having me. It's great to be here.

Stitzel: It's good to have you back on the podcast. Always good to have a second round at this. So, today our topic is placed-based initiatives. So, tell us what those are because, I think, most of my listeners are not going to be familiar with this. What are place-based initiatives?

Dronyk-Trosper: Yeah. So, these are these are initiatives, programs, policies [and] so on that are basically constructed to target specific areas for development. You know, in this case we're talking about oftentimes this amorphous concept of economic development. It's not really necessarily like, oh we're going to go build, like, a specific thing. Oftentimes they're more like, O.K., we want to develop an area so we have, you know, this grassland area. There's no businesses. Nobody lives here. Let's see if we can find some way to encourage businesses to move in, or people to move in. Things like that. And so, the objective of place-based initiatives, and kind of what they are, is essentially a system for allocating funds to those areas for a variety of reasons. And there's a bunch of different kinds of programs, and they're all funded through different ways. Some are funded through collections of sales taxes or property taxes in those areas. Some are funded just out of general budgets. Things like that. But basically, the whole point is --- these are ways of investing money into very specific areas of cities, states, and municipalities.

Stitzel: So, what level of government are doing these kind of policies? Federal policy? State? Local? County? What are we looking at?

Dronyk-Trosper:  Yeah. So, that's a that's a good question. There are, so you know, we normally think of governments as basically, like, there's, kind of, three tiers. You've got, at the closest, you've got your cities, sometimes counties depending on what state you're in tend to take up a lot of that; but your city, your local, your county, then your state, [and] then you're federal. In the case of place-based initiatives, there's actually programs at all three levels. So, this is something that all levels of government tend to take place in. Most of them are at the local level. So, we spend --- we're not real certain about the specific numbers because these are hard to track at the end of the day, but we estimate (Bartik has estimated) --- about $60 billion dollars per year being spent on these every year, [and] about $50 billion of which is local. So, it's basically just cities, and some cases counties. So, the vast majority of this at the end of the day is local government making these decisions. There are some at the state level and, you know, more recently there's been some initiatives at the federal level as well like the new market tax credits [and] opportunity zones. Things like that. But those are kind of the minority, in terms of where our expenditures are coming from.

Stitzel: It makes sense to me that this would happen at a local level. If you're doing a place-based, [then] you're doing some kind of area rather than a specific project. So, it makes sense that that would be local. How could it be that a federal government could implement this program unless it's funneling money to a local government?

Dronyk-Trosper:  Yeah. So, some of it is funding to local governments. But a lot of times the federal government will set up the policy and then it'll be managed by a local government or by state government. So, for example in the case of opportunity zones --- those zones which are census tracts that have been designated as being low income or high poverty --- these zones were selected by governors. And oftentimes they had local municipalities that would help select those. But those were selected and then the mechanism behind that doesn't really require the federal government to make any decisions on what investments are being made. Instead, it's basically just a tax reduction for people that invest in those, and all that's done through the IRS. So, whenever you go to your tax forms, and you start doing your taxes, things like that, that's where the benefits come from. So, whenever you set them up --- whenever you set up these kinds of policies like that, [then] the federal government --- all the federal government has to do is decide where these zones are going to be located, or have some, sort of, mechanism for that decision. And then everything else kind of operates without the federal government, without some committee or group or department having to make decisions about what do we spend the money on. A lot of these that are going to be done at the state or the federal level try to devolve a lot of those decisions out of their control because they can't really sit in there. So, a lot of the decisions whenever we're talking about, like, what are we going to invest in, or what is going to be done --- is either going to be done by the private people that are investing in there, or by local governments who if they're going to be building something for people that want to invest in these areas.

Stitzel: So this makes some sense. You're saying the federal government wants to do one of these kind of programs [that] it's essentially providing the funding. And, I think, when listeners are hearing that they’re thinking, like: oh, we're going to take some federal budget, and send money, and then they're going to give money in order to build things. But that's not really how these place-based initiatives really work. So, you brought up opportunity zones and, kind of, how that works a little bit. So, give us an example, kind of, in that context. Talk a little bit about how the program is actually working, right? Because it's not writing checks to people.

Dronyk-Trosper: That's right. So, there's there are some. The new market tax credit is a good example of something where you could end up with checks being sent out. But again, a lot of this is going to be done through the IRS. In the case of opportunity zones, these are what we would call tax expenditures. And what that means is that instead of the government, the federal government spending money the federal government is choosing not to take in money they would have taken. This is actually tax expenditures are kind of an interesting component of thinking about how the federal government works; because a lot of times you might see something that's essentially we're going to forego taxes to do something. And that looks like an expenditure, but it doesn't always go on a lot of the budgeting items that you might normally see, because we're just not taking in money. It's not that we're taking in money and then turning around and spending it. So, in the case of opportunity zones, the way it works is once you invest in it --- so you have an opportunity zone fund that gets set up in one of these opportunity zones (which again are these census tracts) --- and private enterprises/people will invest money in these funds. Now depending upon how long they keep that money in these opportunity zone funds, they'll get certain basically tax breaks mainly all centered around capital gains. So, first they can have some deferment of capital gains if they reinvest. So, if they move the fund (move money) from one investment into the opportunity zone fund, [then] they can have a deferment --- which essentially saves money, because if you wait to get taxed on something, [then] generally it's more valuable be taxed down the road. But then you also have a reduction in what's called the step up basis. So, what that means is --- the amount that we would tax we actually reduce that by some percentage. In case of opportunity zones, if you keep the funds in there for five years, [then] we take 10% off. If you keep it for seven years or more, [then] we take 15% off.

Stitzel: 10% percent off the gain that we make in the interim? Or 10% off that initial investment that we moved from one vehicle to another?

Dronyk-Trosper: 10% off the gain. So, whatever would have been taxed. So, if we, let's say, we have a million dollars worth of capital gains that we've invested in here, then five years from now I would be taxed on only $900,000. Seven years I would be taxed at $850,000. So, if you imagine a 20% capital gains tax rate, you're basically saving, you know, $10,000-20,000 depending upon, you know, where you sit on that on that marginal tax rate. So, it's a, kind of, a nice little benefit whenever you invest in these areas. The key thing about opportunity zones is that they have a third component; which is if you keep your money in there for at least 10 years, then any capital gains that have accrued since you invested --- so note this is not the money that you originally invested, this is since then --- will not be taxed by capital gains. So, you basically that money tax free whatever gets in there. And the, kind of, the reason behind doing this is to ensure that we're not resulting in a situation where people throw their money in there, and then pull it out, and nothing's basically done with that money, right? They want to put the objective is to put money in there, and incentivize smart decisions with the money that's in these opportunity zone funds. Because any money you make could be potentially tax-free. And that's a huge gain --- compared to a lot of the other options that somebody may have --- whenever it comes to dealing with capital gains and how to reduce your tax burden there.

Stitzel: So, I think we have this idea the federal government is setting up this fund. Who is running the fund? Who’s administrating it? Who's running that fund?

Dronyk-Trosper: So, it's a good question. It depends upon --- so the opportunity zone funds are they can be run by private individuals. They don't have to be run by a member of the government. But they do have to be basically signed up for the IRS. So, you would have the opportunity zone fund would be associated with an account, and then everything would be done through that. So, the exact management of the account doesn't necessarily have to be like government or anything like that. It can be an individual. But in order to do that, you have to go through the IRS's process of setting up the opportunity zone fund [and] going through the formalities of it. It's enough of a process that we're now seeing businesses set up whose sole goal is to help people get their opportunity zone funds registered, make sure the funds are doing what they're supposed to be doing, [and] meeting all the IRS requirements. Things like that. And they're getting paid to do that.

Stitzel: Yeah. Markets and everything. That's good. So, the federal government says this is a project. The federal government says this is a project we want to do, and we wanted it this way, opportunity zones. We want to have these funds and dedicated census tracts. And, I think, you said the states are determining where those opportunity zones are, which census tracts those are? So, the, yeah, the governors were the ones that made those decisions. So, the funny part about this program (which may have some implications down the road) is that you could only nominate what we would call low-income census tract --- which is census tracts that have at least 20% poverty or whose median income is  80% percent or lower of the state's income/median income/family income. So, basically, you know, lower income/higher poverty areas. So, you had to select from amongst those. Of those, you couldn't select all of them. You could only select 25% percent of them that exist within your state. So, there were limited numbers of them. The governor makes the final decision. So, even though most states went through a process to bring in people to discuss this --- they took it [and] a lot of states had discussions and had, kind of, robust analyses, and things like that, to, kind of, decide where they want to do this --- they still had to make those selections. And the governor was the final arbiter of who gets this. And then they submitted that to the federal government. Now, the key thing about this is that this happened over the course of three months in early 2018. So, the law that created the opportunity zones was passed in December of 2017. And then all the opportunity zones had to be selected or at least nominated by March of 2018. And at that point, all the opportunity zones were set. There will be no more changes to the opportunity zones going forward unless lawmakers step in at the federal level.

Stitzel: What’s the motivation for this? What’s the motivation for this? Seems odd. Get a three-month window. Pick the opportunity zones those are fixed, you know, by this particular law unless we get some. Do you foresee those changes or additions happening in the future? Why three months? Why not give us a year to work on it?

Dronyk-Trosper: Yeah. So, I think a lot of it was that they just wanted to get things going, right? It's that stereotype that if you don't put a deadline on something, [then] when is it going to happen? So, they set a deadline since the decision was basically sole arbiter by governors. It might mean that it’s a faster decision to be made because you don't have to have, like, oh, the lawmakers in that state have to all make a decision; because that might take longer to get everybody to agree on something. But the governor just has to say yes [or] no on the census tract.

Stitzel: So, were governors pretty, they take this pretty seriously [or] they throw darts at a wall?

Dronyk-Trosper: No. They definitely took it seriously. There was a lot of efforts that went into this. It does vary from state to state. In some states they had very transparent process, where they had, you know, these are our timelines, this is when we're gonna have stuff done, [and] this is when the public can comment. I mean, others it was, you know, a little bit more --- I don’t want to say back roomy, but --- back roomy. There might not have been as much public discussion. Or the decision process was just, kind of, hand waved and said: yeah, we had some economic people look at it. We had some business leaders talk about it. But there might not be a whole lot of tracking of information about what happened.

Stitzel: So, all those processes on the up and up? Are there some political shenanigans happening there?

Dronyk-Trosper: That's a good question. I would say, on average, they were actually fairly technocratic given the nature of the situation. You know, there's a lot of evidence that suggests that there wasn't a lot of political, you know, activities going on. But there has been some papers, and some indications that there probably were on the margins, at least some. So, in particular if a state legislator had a potential opportunity zone (so low income zone) they may have been more likely to get one nominated in their  district if they match the same party as the governor. So, now that that likelihood isn't a large percentage of total likelihood. So again on the margin, it probably didn't have a big impact; but there is some evidence that that happened. And that cuts both ways. We found that for both Democratic and Republican. They basically --- wasn't really party-affiliated, [but] --- was just do you match the party regardless of what party we're talking about.

Stitzel: I’m interested. I don’t --- what I would have expected --- know if that's what I would have expected intuitively [that] a govern governor gets to be the sole arbiter. Like you said --- this seems ripe for opportunity to punish your enemies and benefit your friends.

Dronyk-Trosper: It might be, but there might also be, right? So, we're getting into the, kind of, political economy discussions. But this there might have been constraints, right? So, governors might have felt like they couldn't do this too much, because then you might have a lot of (there might be a lot of) pushback from the other side. You might have a lot of people that would be unhappy and that might make your life a lot harder. So, you know, there's no reason to go too far in that direction unless you really want to, but you could pick your battles sort of thing. So, you know, oh this one opportunity zone --- maybe I’ll think about it more, because --- I really need to reward this state legislator. Rather than saying: O.K. if you're all the same party, [then] you all get opportunity zones --- which would have been, you know, not only would that be very obvious that that's happening, but I’m sure --- [and] there would have been a lot of reports about that. And there'd be a lot of bad publicity that comes out from it.

Stitzel: I’m thinking people didn't hear much about this. So, it seems like it might have been a real prime opportunity if this is not especially high profile to, [then] it's a good way to do that. So, first the thing I’ll say is, of course, you know, this is an economics podcast. Political economy is very welcome here.

Dronyk-Trosper: [Laughs).

Stitzel: So anything you want to say about that we'd like to hear it. It makes me wonder, because one of the things that I’d like to talk about, as a broad overarching theme of this whole podcast is, you know, do place-based initiatives work? And if I’m a governor, [then] I’m not spending any political capital. I’m not working against this constraint you're talking about at all if I don’t think place-based initiatives are pretty powerful.

Dronyk-Trosper: Hmm mmm.

Stitzel: Right? So, it's like you're only trying to curry political favor only it becomes purely a political game, right? Because this might be something that my state legislator can take back to their district and say: look, I got opportunity zones for us. If those aren't, like, high profile, and if they don't (if they're not) working that well. What's your take on this? The governor's --- I mean, you’re not going to have any sense of whether governors really think they work or not. But evaluate that as a potential explanation.

Dronyk-Trosper: Yeah. It could be. I mean, we know something in the broader context of things [that] place-based initiatives from an economic perspective tend to have a lot of problems. They're not real. It's not real obvious that they work that well. There are some limited cases where we might see some evidence. So, Dave Newmark is a good example. He's written a lot about this (about these) and he tends to have, kind of, a pretty negative opinion. Tim Bartik is a another one who actually has a little bit more of a positive view on this. So, you can, kind of, get both sides views whenever you look at some of the research they’ve done. You know, Bartik's view is a little bit more like if we take the regional view of things, these maybe, these work a little bit better. But at the --- but if you take, like, more of a --- the more close [and] the more drill more you drill down, so like the neighborhood level, [then] the view is place-based issues don't work because there’s so much mobility. There's so much, you know, capital can move around. Businesses can move around. Labor can move around. People can commute. So, it's really hard to target a very specific small area for development, and have that be, like, the outcome essentially; whereas if you take a more regional view, you know, doing something like something along those lines, [then] you might actually see, kind of, more effects. So, to some extent depends upon how you look at it. But whenever you look at the research and look at the literature, it's mixed at best. So, some that's target some of the things that you might normally think of as being helpful for businesses. So things like building infrastructure. Whenever you have place-based initiatives that are built around that. [then] those tend to be valuable. They tend to be relatively low cost. And they tend to bring in job. Cleaning up pollution. So Brownfield Reclamation is another example. Oftentimes it's not too expensive, you know. We're not talking about superfund sites, which would be a different story, you know. These are areas that are, you know, smaller and fairly cheap to reclaim. And those tend to have relatively good benefits. On the flip side --- a lot of place-based initiatives will tend to result in, kind of, some potentially big problems. Because they're not really --- they're open to a lot of problems associated with things like push-pull mechanisms, mal-investment decisions, and, you know, weird incentivization, or even rent-seeking behavior. That's hard to, kind of, hard to deal with; because you're talking about large sums of money. And, you know, at the end of the day, local governments in particular just oftentimes don't have the funds or the inclination to be able to check up on this stuff. So, it's not uncommon for a government to, you know, city government might say: oh, you know, business wants to move in. We'll give them cash for example to move in. Trying to convince a business that wants to move in. Would that business have moved in otherwise? You know, if they would have moved in anyway, you're just giving away free money for no reason. If they wouldn't have moved in, why would they suddenly decide to move in whenever it's worth slightly less? Like, what other options did they have? Did you, in fact, add to, like, the sum total of economic activity in the United States, or did you just pull it from someplace else, right? Was that going to locate in the town next door? Well then, all you've done is just moved a business from one place to another which creates winners and losers. And so, like, maybe that's if you're the governor of the town that now has that new business, you might --- or the mayor of that town, you know, you might --- be pretty happy. Like, all right, we got this new business. But you got that new business at the cost of another town. And so, that's, kind of, where you get this problem of did that actually add to economic activity that's occurring? Probably not. And in fact, if there [or] if the initial idea was [if] they should go locate in this other town that might have been a better overall economic choice, right? This is the problem --- is that once you start incentivizing decisions, you might result in less efficient choices being made, because you've tried to get them to move someplace else. And so, that might have negative consequences down the road, and that we've basically, kind of, were more inefficiently placing businesses than we might think.

Stitzel: So, this --- you listed four things there that you (push-pull mechanisms) think are our reasons. And then you, kind of, also mentioned race to the bottom. So, that might be an interesting thing to talk about too.

Dronyk-Trosper: Hmm mmm.

Stitzel: But so, the first thing you mentioned there was push-pull mechanisms, which is, kind of, what you were describing. So, give us, like, something to hold on to as listeners. Like, what's a push-pull mechanism? And why would it make place-based initiatives not work very well?

Dronyk-Trosper: Yeah. So, the idea behind this is that it's you can almost think of it as cannibalization, right? So, if I encourage a business to locate some place --- if the choice was just to locate where they locate --- [then] what I’ve done is all I’ve moved the economic activity from one place to another. So, really good example is in Norman, Oklahoma. There's a TIF that is on the north side. And it's this nice thing. They're reinvesting this money to turn this green field into, kind of, a thriving shopping center. And it certainly has worked. If you go up there it’s a big place. Lots of buildings have moved in. A lot of businesses. It's very, very busy now. And so, you would say: oh well, the TIF worked, right? This is a place-based initiative. It worked fantastically. There's just so much activity. The problem is that for example one of the first businesses that moved in was Target, and people loved going there; however, there's a Kmart that closed not too long after that was in downtown Norman. What's going on? Well, what we actually see is this push-pull mechanism, where what we've done is we've pulled all the customers away from the downtown area, and now they're shopping at this other location. Have we added total economic activity in Norman? Probably not. Instead, all we've done is just shifted everybody to go someplace else. Now, you know, maybe that's a good thing for local residents on the north side of where they're close to this. But that also means that those people on the south side now have to travel further. They're actually --- they may actually be worse off. So, this is where we’re creating the winners and losers. And we're effectively taking a bunch of money that the city is foregoing to build all this stuff. They're basically reinvesting some of these sales taxes back into the construction of this area for what net effect? The net effect might be zero in this case.

Stitzel: Yeah. We got a new Target and got rid of an old Kmart. And we paid how much for that, right?

Dronyk-Trosper: Exactly.

Stitzel: All right. So, you mentioned a TIF. Tell us what a TIF is. We're inferring it's another type of place-based initiative.

Dronyk-Trosper: Yes. These are tax increment finance districts. These are probably the most --- outside of straight-up business incentives and cash give aways, it's probably the most --- commonly used place-based initiatives that we have. They're done at a local level. So, cities will generally set them up. And what they do is they don't cost anything. So, it's a very much like an opportunity zone. It's a tax expenditure rather than an outright payment. And what they do is [that] they take a portion of new taxes --- either sales or property in this area that they select aside. They take that and it gets reinvested into the area. So if you set up a TIF, you know, [and] you move in -- let's say, a business moves in, [then] it collects some amount of sales taxes that then get returned to the city. The city will take some portion of that that's agreed upon in the setup for the TIF and set that aside, [and] say: O.K., this will go toward building more roads in that same area. It has to go to reinvesting back into the TIF. It could be for building more services, you know, expanding potentially, like expanding other business opportunities in the area. Things like that. They initially were created actually in California back in 1952. But just to give you an idea of, you know, talking about, well, mixed, you know, mixed effectiveness on these --- California has actually removed their TIF now from their [programs]. You can no longer form a TIF if you're a city in California because of the mixed results that we've seen. TIFs don't seem to have a big impact. That's not to say they don't have necessarily an impact. They might lead a lot of growth, but on net, I think, there's a lot of question as to whether or not it's doing anything advantageous; particularly give the amount of money that cities sometimes have to give up.

Stitzel: So, you mentioned there that a business would give its sales tax or property tax back, and then the city would reinvest it into that area. It's not clear to me why that would incentivize me as a business to move into your TIF if I’m paying the same in sales taxes, and then I send you part of it, and then you build roads, so that more competitors can come compete with me. Do I --- is that something that I really want?

Dronyk-Trosper: It's a good question. But a lot of this isn't just --- it can be things like: oh, we're going to beautify the area. Things that might encourage more customers to come to the area. And there's also this, what we call, agglomeration effects, right? So, if you look at a lot of cities, [then] you might realize that we actually have this agglomeration system going on even at a small level. So, in a lot of cities --- if you drive down a road you might see a fast food restaurant. They’re almost always --- they're almost never the only fast food restaurant. You'll see chains of them, you know, all along the road. You know, there's a reason why Silicon Valley is called Silicon Valley. Because oftentimes, even though you may be competing to some extent on like fast food or in tech, you're not initially competing precisely on the same things, right? So, you know, if I’m a McDonald’s, [then] I may not necessarily be completely competing with Chick-Fil-A. And people that would have --- and so, if you bring customers in, [then] some of them by having that option, you may be bringing in --- more customers than you would have if you didn't have that option. So, there's actually advantages to having those kind of grouped up businesses in the area. In addition, again, the city can also make sure those are nicer areas that may attract more people. So, you know, oh the roads are nice up there. Or oh, they all everything all looks nice sometimes. These TIFS include construction of buildings. So it might not just be, oh, you know, you can move in here, but we'll actually build the building you need to live in for your business, and then we'll basically like rent it out. Or maybe even just give it to you for free, depending upon what the city wants to do with it. But we'll provide a lot of that stuff that would have been expensive for the business to do.

Stitzel: So, the agglomeration effects were in the same area. And getting those --- kind of the benefits of being people [that] are thinking: where do I want to go eat? Let's go over there where all the restaurants are, and the roads are nice, and the sidewalks are nice, and it's safe, and it's easy to drive to, and on and on and on it goes. And it's, you know, this is where I want to go on a date. It's a nice atmosphere, etc., rather than the McDonald's being sandwiched between a bank and a plant of some type, right?

Dronyk-Trosper: Hmm mmm.

Stitzel: But they're also a really common one. And maybe it's harder to think about this in the context of, like, fast food or something. But agglomeration effects are also often because of supporting industries, or even infrastructure things that are similar; but not exactly the same as, like, attracting customers, but infrastructure that actually support your business there. Is that some of what you have in mind when you’re talking about place-based initiatives?

Dronyk-Trosper: Yeah. So, that can be that can certainly be part of it. So, anything that’s, you know, drive to, like, bring somebody in could start that agglomeration effect. So, you know, I’ll go back to Silicon Valley because it's just, kind of, the most commonly, you know, used example. But Silicon Valley is where it is. And, you know, it's well known as a tech hub, partly because once you get one or two tech companies in there, now you have other companies that know how to support them. So, they know what things that a tech company might need. And so, those resources are available if another tech company wants to move in and get started. You also have people that have worked at these other tech companies now. You could hire them. So, you have a lot of benefits for businesses to locate an area because you can bring on talent that already knows what they need to do. You can contract out with businesses that know what they need to do to help you out. Things like that. And so, one of the things you can use place-based initiatives for --- you know, sometimes seen in other countries like in Sweden and in the EU to some extent --- is you'll see these place-based initiatives started with the objective of let's create (let’s start up) an agglomeration effect. So we bring in something and then, kind of, you hope that that ends up pulling in others in the same business and --- you, kind of, become --- that, kind of, becomes your thing. So, you know, universities are oftentimes thought of as a big agglomeration machine, because whenever university is started in an area, or exists in an area, [then] you tend to see a lot more the residents have, like, you know, bachelor’s degrees. They have high levels of high-increased, high-levels of higher education. And so, that becomes a pool of workers that you can draw from, that local businesses can draw from. So, it, kind of, brings in businesses because --- not because necessarily the, you know, oh they can get money from it, but because --- a lot of the stuff that they might need it might be useful is already located there. And that makes, you know, running a business a lot easier; rather than having to worry to figure out: well, who am I going to hire? How am I going to operate in this area?

Stitzel: So, we talked about push-pull mechanism, and then of course, agglomeration is a part of that. You mentioned a couple of other reasons that we might not see place-based initiatives work very well. And one of the things you mentioned was malinvestment. So, go into that a little bit for us.

Dronyk-Trosper: Yes. The idea here is, you know, if I don’t provide any incentives for a business, presumably you know with caveats, they're going to choose the best place for them. So, you know, if every place in the United States costs the same --- you know, there were no differences in incentives or anything like that --- then the choices that a business would make would be the optimal for them. So, whatever would make them essentially the most, you know, profit given, you know, opportunity costs and things like that. As soon as you start putting in those incentives, you start to change that calculus. So, now you start talking about a situation where that business might have had its best outcomes in one location; but because you're giving them these incentives to locate someplace else, they move into a location where they’re just not as good. And so, you might result in a situation where you've built up an industry. You've built up this group where the only reason why they're there is because these incentives. And should those incentives ever be taken away, then you've kind of pulled the rug out from underneath them. Now that's, kind of, the idea behind the agglomeration effect is the hope that you can pull those incentives out, and oh, you have this agglomeration effect that, kind of, counteracts that. But that's oftentimes not going to be the case. It's hard to get those agglomeration effects started in a location. And so, what will happen is you just have this choice. Basically you introduce inefficiencies in industry decision-making process, because now they're going to be chasing those additional funds that they wouldn't have done otherwise. Because they wouldn't have said: O.K., I’m going to locate here. Because they would say: oh well, we're just not going to sell as much. Maybe there’s a reason to locate in that place where they're not going to sell as much if the city is going to give them, you know, $50,000 a year for being there.

Stitzel: So, your cost so far --- push-pull mechanism, not cost, but maybe, yeah cost --- but definitely also reasons that you would see failure. Let's talk about race to the bottom a little bit, because we're talking about this idea that, you know, different cities might compete over attracting a firm.

Dronyk-Trosper: Yes. You see this a lot with, you know, taxes as well. I think it's, kind of, a commonly well thought out, like, something that just exists, right? So, you know, if you have to compete, [then] what do you compete on essentially? You know, if you're in labor, you compete on your skills. You compete on what you can provide to your company or wherever you work. Businesses, you know, [and] governments have to do the same thing. It might seem kind of weird that governments compete, but in fact they do. You know, in that case they compete on a variety of different things. And, you know, taxes can be one of them. Incentives can be another. And really, I mean, it's basically just they compete on taxes and expenditures, which is what every government competes on. What I mean by compete is --- at the end of the day if a government, like a city, wants for example new jobs to move in, [then] they have to do that somehow. You know, they can't just create them out of thin air. So, you basically have to figure out some way to bring them in. How do you bring them in? Well, that's where the competition comes in. You can also see the same thing with people. So, you know, city might want to grow its population, particularly if it wants a tax base, or if it wants to do, you know, has some sort of objective. So, you have to encourage people to come in. There are a few ways in which cities can compete, right? So, like, you know, a city in in California might be able to advertise its weather; but that's not something any other city can do. So, there are certain advantages that you can compete on. They're just, kind of, naturally there; but there are certain things that every city has that they can change that they can compete on. And that's going to be basically how you collect taxes, and how much you collect taxes, and how you spend them, or, you know, what you choose not to, you know, spend them on. And so, place-based initiatives are, kind of, a good example of some place where you can see cities oftentimes competing. So, you know, I’ll go back to this Oklahoma example. A long time ago Bass Pro was considering moving into Oklahoma; and there's two big cities, essentially, there's Oklahoma City and Tulsa. And there was actually, kind of, a big competition between the two cities about where Bass Pro was going to locate. And so, what happened was they started offering varying levels of incentives to try and get them Bass Pro to locate in one of those cities. Now, of course, the key thing at the end of the day was that while Bass Pro would never admit this, they wanted to be in both cities, right? Because those are two markets separated by basically a 2.5-3 hour drive. So, you're serving two different markets. So, as long as the markets are large enough you could support two Bass Pro Shops. But, you know, you don't have to let the cities know that you want to build in both places. You can have them fight over you, and then take the best outcome, and then you could locate the other city if you want to. Or, if you only have the ability to locate in one --- so for example, if the cities are close enough together, or if they're just the market size just isn’t that big --- then you have to make that decision where you want to go. And so, the cities are going to --- they might compete. And so, one might say: we'll give you $50,000. And that one might say: oh, we'll build you a building and you can locate here. And so that business decision is going to be (could be) determined by that. And remember that at the end of the day --- those cities are essentially foregoing --- they're either choosing to forego tax collection, or they're spending citizens money to bring that place (bring that business) into that city versus another city. And so, that's where you get that race to the bottom where everybody's trying to compete over where a business is going to locate. And depending upon the decisions that the governments may make, and policymakers in those areas, you know, they may compete pretty heavily to do that.

Stitzel: So is there a Bass Pro in Tulsa?

Dronyk-Trosper: There's a Bass Pro in Tulsa. There's a Bass Pro in Oklahoma.

Stitzel: O.K. So, they've played them. They've played. Well that's interesting. O.K. So, we talked about, you know, evaluating place-based initiatives, and how they would succeed or not succeed. And [we talked about], sort of, what are some of the motivations --- which I think that got into, well it gives a little sense of the history of place-based initiatives --- and maybe some examples. We mentioned TIF and opportunity zones.

Dronyk-Trosper: Yeah. So, there's a variety of them, whenever you're thinking about, kind of, the bigger ones. You've got new market tax credit at the federal level, empowerment zones and enterprise zones at the state and federal level. Again, those tend to be smaller in size. I think the really interesting ones are at the local level where you have the tax increment finance districts --- the tiffs. BIDS are really interesting ones as well. These are called (they're called) BIDS. They're business improvement districts. I think they're fascinating because they're actually, basically, like a self-government. Business is self-governing in, kind of, a way in that you get together with a bunch of businesses. They all volunteer to be a part of this system. And they, actually, voluntarily tax themselves. You don't really think about that very frequently. You think: oh well, businesses don't want to pay taxes. But, you know, businesses are run by people. And, you know, everybody understands that, you know, you need certain things to run businesses. And so, sometimes if businesses in an area feel like they're not getting enough services --- particularly from the local government for one reason or another --- they may (they could) form a BID and then basically collect taxes from everybody in that BID. And then that those taxes are then returned back to the BID itself. These are mostly used to, for example, hire additional police, or security, [or] garbage collection, like, basic kind of services. They're not normally set up to, like, build skyscrapers or build anything like super crazy because oftentimes these relatively small amounts. But they are, essentially, like a, kind of, a quasi-governmental entity in that they have this taxing power. Essentially, there are limitations to this. Obviously, you know, it's not they can't go crazy with this, but it is essentially a system where they get together and say: O.K.. we want some services, so we're going to tax ourselves to get those services. Because any one business might not be able to afford it. But if you spread those costs out over several businesses, it might be a lot easier to afford that additional service that you need for whatever you're doing.

Stitzel: What's the --- are you familiar with the literature on this? What is there? What [do] economists have to say about the effects of that?

Dronyk-Trosper: I think I think BIDS are, kind of, an interesting setup in that I haven't really seen a whole lot of that would suggest they're necessarily negative; but I wouldn't say I’ve seen a whole lot that suggests they're super positive either. I think the idea here is that unlike things where we're talking about a local government --- saying: O.K., I’m going to give you a bunch of money to try and get something to happen with some kind of objective --- essentially, you can almost think of it as we're going to try and pay for a job. So, how much out? How much are we going to spend for each job that comes in? In this case it's a little bit different, in that the objective isn't necessarily economic growth or anything like that. It's just service provision. And in those cases, it's service provision with a willingness to tax ourselves. So, it's in some sense, it's almost, kind of, this weird question of is there [or] can there really be, like, a positive or a negative (for lack a better word). Because, you know, it's just --- we're going to collect money to pay for a service. It's just like, you know, is it a positive for a business to go hire an ad campaign? You know, things like that. Like, it's, you know, whether it's valuable to you in terms of customers or anything like that might be, you know, kind of up to you to figure out. But the whole point is that these businesses have decided we really need more garbage collection. The city can't do that most frequently because cities are limited by different levels of provision (service provision). They can't technically differ their levels of service provision across a city. So, you can’t concentrate services in an area just because they would be willing to pay more. So instead, you can get around that by letting the business do it themselves.

Stitzel: So, it's not a public activity. It's a private activity. Or oh, this is elegant. Yeah. That's very clever.

Dronyk-Trosper Yep.

Stitzel: And, I mean, you could still have positive/negative externalities from that; but it doesn't seem, like, especially ripe ground for having external costs. So, if it's just mostly private --- this is voluntary activity. It's private…

Dronyk-Trosper: Basically.

Stitzel:…official exchange and away we go, right? This is Principles [of Economics] 101.

Dronyk-Trosper: Hmm mmm.

Stitzel: That's interesting. So, you mentioned job creation in there. I want to talk a little bit about that, you know, because we talked about the motivation for place-based initiatives being this, sort of (I forget the word exactly) where you use amorphous or, sort of, vague, like, there’s an area over there that's undeveloped. Like, we should develop that, so let's give incentives for that to be developed. And then, we're not thinking about the cost benefit analysis much beyond that. But you did mention job creation there. So, what how does job creation factor into the motivation for place-based initiatives?

Dronyk-Trosper: Yeah. So, if you go to planners, and you go to city officials, job creation is almost always one of their top two or three, you know, big things that everybody's always concerned about. That's always the topic on everybody’s mind. And so, at the end of the day, a lot of these place-based initiatives are built around they would say economic growth. They would say these things. But in reality, what they're really trying to do is we want more jobs, right? Because jobs bring in money for the city. They bring in the ability to create services. They also bring in people that you can provide services for. They grow the city. They ensure it's not shrinking. Like, there's basically benefits. There’s a lot of benefits to having jobs in a city in some, sort of, job creation system. And in fact, most cities where you look at them, they will have, some sort of, an economic development council or a development program, you know. Anybody who has a degree in economics can look at these. And they’re always interested in trying to find people that work for these. And it's just --- a lot of this is just --- evaluating like how should we help convince businesses to move in. Or in other words, how do we create jobs? You know, most of the time the idea is, well, in order to create jobs, we can't really increase the size of current businesses. That's a little bit more difficult. So, we should bring in new businesses. And so, that's really what's going on. Is when we talk about economic development, they're just saying: O.K., we need more jobs so let's bring them in. And so, that's where the cost benefit discussions start to come in is this question of if your objective is in fact to create jobs (which some of these they don't really have that objective) but essentially that's what they're trying to do. They're just --- it's not always spelled out. You could actually kind of figure out. You could say: O.K., I’ve created 10 jobs. These jobs pay $20,000 a piece. You know, so I know how much activity I’ve brought in. How much am I spending in taxes? How much am I forgoing in taxes to bring those in? And is it worthwhile? And this is where you get into questions of a lot of times these city governments don't have the capacity or the ability to verify this stuff. So, sometimes these things just, kind of, happen and nobody checks. And some bigger cities you’ve seen pushes to do this. You've seen more transparent attempts. The good jobs --- first programs, things like that, where they're trying to, like, you know, they're actually in some cases begrudgingly going through and --- [where they’re] trying to actually say: O.K., this is how much we're spending per job.

Stitzel: This is where we circle back to that political economy that we were talking about this public choice idea; because they're getting --- I’ve seen this at universities [and] I’ve seen this at city levels where they're doing --- this analysis and scare quotes that you’re talking about. But it's ignoring these, kind of, cannibalization crowd out malinvestment type ideas that you're talking about. They just add up whatever activity there is ignoring that Kmart went out of business, right? So, it's like --- oh look, we have we have $2 million dollars in sales revenue from this TIF, which includes the big Target; [thus] ignoring that you’re, you know, you lost a $1 million dollars in sales revenue from sales tax revenue from Kmart, right? So, what's your evaluation overall sort of this, right? So, economists sometimes have there's some economists that make these kind of arguments that this job creation motivation is not a very good one. What's your evaluation of that in this context?

Dronyk-Trosper: It's --- that's a really good question. Because, I think, I unfortunately in, kind of, an unhealthy-helpful sense, I kind of straddle the line. I think it's just all nuanced, and, kind of, depends upon what you're talking about. I think in a lot of cases, what's going on is we're outputting lots of money for what amounts to relatively low income jobs. And I’m not sure that on met is really beneficial. But that being said, I don’t think it's necessarily a bad thing to be trying to do this, particularly if we think about --- right, so this is, so, you know, kind of, pulling back a little bit --- trade is a really good example of where, you know, depending upon what your objective is, you may be willing to take on things that are damaging to some people in exchange for helpfulness for others, right? So, you know, I always give the example --- let's say you have, you know, 50 people. And I take, you know, $1 from every one of those 50 people. And then I give $40 dollars back to somebody else to this other person. So, you have diffuse losses and a big gain. That may be something that you really care about, particularly if those people are all really well off, and that person who we gave to isn't that well off, even if at the end of the day note that we lost $10 because of inefficiencies in the system. So, depending upon, you know, kind of, what we're talking about --- if you're really doing a good job of bringing some of these lower income areas up, and kind of really supporting them there --- it may be O.K. to be willing to accept some of those inefficiencies and some of those losses. I think the problem that we oftentimes see is that that's not what's happening. And that's where I think it gets into the question of does it really make sense to be doing these a lot of cases? And do we do we really want to be targeting jobs? Or do we want to be targeting the infrastructure for jobs? You know, that's where, I think, you know, the question really stems from. Does it really matter if I bring in a business? Or would it be better spent saying: O.K., I’m going to build all the roads. I’m going to get electrical out to you. I’m going to, you know, I’m going to ensure that I’ve incentivized that we have --- like, higher education families in the area, or things like that --- that gives the business everything they need to do well if they want to come. If you do that, then, you know, maybe there's, you know, what you've done is you've essentially provided services, which is, kind of, what the objective of governments are supposed to be. And if you could do that well, then I would argue that you shouldn't be chasing job creation. So, I mean, kind of, in some respects, unless you're really trying to fix a big disparity in income, or in poverty rates, or something like that, where, you know, maybe you can make an argument that's O.K. to lose out some. You know, outside of that, I think it makes a lot more sense to --- basically say [that] if I’m having to go out and try and find jobs, because I need job creation, [then] maybe I should --- take a step back and say: am I doing everything I should be doing in the first place? Am I providing the level of services I should be, given my tax base? Because maybe the problem is [that] you’re just not really doing what we would like you to do. Yet, once you, kind of, fix maybe some of those problems you're facing, then maybe you'll see that that economic growth without ever --- having to, like say O.K., without --- having to bribe businesses to come.

Stitzel: You anticipated both of the things that I was going to say in response to that; because my first observation was I just don’t think place-based initiatives have a great track record. And actually, well some of these initial tax increment finance districts in particular are literally targeted. And the word they used were at areas of blight, right?

Dronyk-Trosper: Hmm mmm. 

Stitzel: Which, you know, if you're talking about in a developmental sense of, like, literally physically the ground is blighted, [then] that'd be one thing.

Dronyk-Trosper: Yeah.

Stitzel: You know. But some of these are not, right?

Dronyk-Trosper: Hmm mmm.

Stitzel: They're actually talking about, like, really low quality housing areas and stuff like that. It's not obvious to me how you made inequality better…

Dronyk-Trosper: Hmm mmm.

Stitzel:…in that context. So, you seem to agree with that. So, it's sort of like in theory it could work, but in practice it doesn't or?

Dronyk-Trosper: Yeah. I would say that's a lot of what we see is basically just that these are generally just not easy to do. And I will cover up this with the fact that when it comes to TIFS, when it comes to BIDS, those are a smaller portion of all the place-based initiatives. The largest portion by far are just direct business incentives and cash. And those are probably the worst kind. And so, the largest portion of what gets spent is probably the worst kind, which is literally just bribing businesses to come here without having built the infrastructure, without having done all this other stuff that would be beneficial overall. Instead you're --- that's like, that's the direct version of push-pull. That's the direct version of malinvestment. We give you enough money. You give somebody enough money, [then] you can get them to do almost anything, right? And that's, you know, that's doesn't mean it's a good idea. And that's, kind of, what we're seeing is that a huge chunk of the $50 billion that state and local governments spend, something like $46 billion is basically direct business incentives and cash. And those are the ones that are generally going to be --- those are the ones you're most likely going to be --- spending way more on bringing in business than you’re ever going to get back.

Stitzel: And that's most those are the ones most vulnerable to race to the bottom too?

Dronyk-Trosper: Yeah.

Stitzel: And then the second thing that you said --- which I was going to weigh in when you're talking about this, but you perfectly anticipated it --- is just fundamentally the job of local governments to provide the infrastructure for the businesses. You know, so if you have somebody that come in and want to that wants to have a business in your town, and they want to set up on this road, and they need electricity in there, [then] I mean, this is just why we have local government. So, you know, you want to be careful if you're thinking about these things. You want to say it is the job of the government to do these service activities. But it's not the job of the government to use those in a way that tries to actually manipulate the outcome that we get.

Dronyk-Trosper: Hmm mmm.

Stitzel: You provide a good platform, and good services, and infrastructure, and all that kind of thing, right?

Dronyk-Trosper: Yeah. In an ideal world you wouldn't have that. I mean, you know, of course, you know, governments are governments. And you're going to have people in that they're going to try and do those sorts of things. But in an ideal world, you know, the job of the government is to collect the property taxes --- the sales taxes for, you know, everybody that's in the area --- and then return that in the form of valuable services for people. If you can do that, you know, that should be enough to attract businesses. Now there might be --- and this is where it gets, kind of, wishy-washy and that, you know, maybe there are --- fundamental problems with this, your situation, or where you’re located at, or things that cause businesses to not want to be there for a variety of reasons. And that's where, you know, I think you can, kind of, say: well, maybe there does (maybe there is) room for these sorts of things, right? There might be, you know, really good example honestly is rural America. You know, we're having a lot of problems because you know depopulation in these areas has really dried up a lot of business opportunities. And so, what can a small town do to provide services whenever your tax base is leaving, right?

Stitzel: But let's take the holistic view here. As a nation, as an economist who cares about everybody --- is that what I want to do? Do I really want to prevent people from going to the cities? Do I really want to prevent people from moving to those places where they potentially are happier [and] more productive? But all sorts of good economic outcomes --- what's the value in dragging them back to a small town talent? There are many people who love small towns and they should be in small towns. So, I think I can see some of an argument there that says: O.K., you go to a small town. But if a few people want to be in a small town, and that's just not viable in a particular area, that small town is going to go away. But it doesn't strike me as a very good policy to say: right, but we should force people to live in small towns so other people who want to live in small towns can.

Dronyk-Trosper: Hmm mmm. Yeah. I think that this gets into the question of, like, how much do you want economic concerns to decide your --- I don’t want to say moral judgments, but it's more like what who you want the --- winners and losers to be, right? So, at the end of the day, all economic policies are all about who wins and who loses. And in some cases, there might be some people [who] have --- and because of that people can --- weight their preferences for who's winners and who's losers differently. And I think that's the big question. And to some extent, kind of, the big question that cities, and states, and the federal government has to ask themselves is: who do we want to be winners? Who do we want to be winners? Who do we want to be losers? Who are we willing to put in those camps? And, you know, how much are willing to spend to do that? You know, from an [economic] --- if we take all of that kind of moral judgment those considerations out, [and] if you're just talking about, you know, from an economic ---- efficiency perspective, it makes very little sense for these small towns to have these sorts of programs in place. Or trying to encourage them to have these programs, because that would lead, exactly, those businesses left for a reason. Those people left for a reason. Most likely, you know, by trying to force them back or trying to change the current trajectory that they're on, you probably are going to be introducing those malinvestment problems. You're going to be introducing those types of problems. The question is, you know, is that O.K. with you? And that's the, you know, again, that's gonna be, like, the political economy discussions where, you know, is it O.K. to take that kind of situation. Is that who we want to have to be the winner --- small cities vs. big cities?

Stitzel: So, let me switch sides and take the small city side. Maybe people moving to the cities because the cities are wielding more political influence, and they're doing more of this. They have Bass Pros and we don't out in the countryside. And therefore, people are moving there. And how do you combat that? Do you want little towns then trying to compete in the race to the bottom that we were talking about? You know,  does it make sense to have small towns die because they can't compete in a political economy sphere where the balance would have been different in the absence of all of those kinds of policies?

Dronyk-Trosper: Yeah. And I mean to be fair, a lot of the, some of the problems that we do see is that they can't compete on an incentive, right? So, you know, we talked about this race to the bottom. And, you know, all these all these cities are frequently doing these sorts of business incentives, these cash grants, [and] things like that. If I have a tax base of you know $500 million dollars, you know, I could probably easily spend half a million to bring, you know, a business in a small city that might be an entire small city's budget, right? They cannot physically compete on that. So, you know, whenever you agglomerate that economic power into these big cities, then yeah. A lot of what you may be seeing is actually more just they can wield that. And, you know, small cities have, like, no response.

Stitzel: But if it's fundamentally agglomeration economies, [then] this might be a good thing.

Dronyk-Trosper: It might be a good thing.

Stitzel: Right.

Dronyk-Trosper: Yeah. I think the issue is that --- there's not, we don't really, you know, I think at the end of the day --- there's pretty good evidence to suggest that in general, like, urbanization has been a positive thing, at least in the sum total for, you know, the U.S. But it has created winners and losers. And, you know, whether you want those, whether you want to deal with that, is kind of the big question. And that's --- and that, kind of, underpins some of these place-based initiatives in the first place is [that] essentially, you know, a willingness to accept that there may be some people that will lose out in exchange for creating certain winners. And who you select as those winners is the big kind of question. The big thing that can cause lot of fights over these.

Stitzel: So, we're coming up on an hour now. So, I probably need to bring this in for a winners and losers landing. I think you've set us up for a perfect question to take us out here. What are the likely outcomes of most of these place-based initiatives, in terms of those winners and losers?

Dronyk-Trosper: Yes. That's an interesting thing to kind of talk about. I think, we're already seeing some movements on some of these like TIFS. California got rid of theirs. There's been discussions in other states about removing them. I think that over the past, particularly over the past 10 or 15 years, we've seen a lot more questioning of place-based initiatives come in. You know, a lot more realization that A) we should be actually checking up on these and analyzing them, and B) should we even be doing them? And I think you’re seeing a lot of movement away from that. But, I think, it's going to be hard. I think this is going to be a long process; precisely because no matter what, a city can always feel that they always can tell the outcome, right? It's that thing where, you know, if I give you an additional $1,000 dollars to move here, and you actually move here, [then] I feel like I’ve done something, right? You can actually use that. And that's valuable to city planners and city governments. And so, I think it's going to be hard to move away from that kind of idea that that might not be the best way to spend that $1,000. So, it's going to be a long process. I do think we'll see a movement away from some of these place-based initiatives. I think we're going to see a movement more towards more transparency, so that people can analyze them and, kind of, check and tag whenever, you know, these (some of these) programs aren't working out well. And I think we are going to see a transition to place-based initiatives that are a little bit more designed for infrastructure. Things like that. That's been a big topic recently. I think we're going to see more of that about, you know, what we're going to do is we're not going to try initially get any specific business. We're going to do everything that businesses need, and then, kind of, say: hey, look at what we've built for you; and kind of hope that they can do it that way, rather than set up these formal systems that sometimes don't work out well in the long run. They may work out on the short run, but, you know, they may be missing out on a lot of income. And you may, in some cases, might forego a lot of taxes that could be well spent in the rest of the community whenever you set these up. So, doing something that's a little bit less formalized, so that you have that flexibility; because, I think, city governments are moving toward more flexible systems of revenue, more flexible systems of expenditures, and so on.

Stitzel: My guest today has been Trey Dronyk-Trsoper. Trey, thanks for joining us on the EconBuff.

Dronyk-Trosper: Thanks. Happy to be here.

Stitzel: Thank you for listening to this episode of the EconBuff. You can find all previous episodes on YouTube at EconBuff Podcast. You can check out our website at www.econbuffpodcast.wixsite.com. You can contact us at econbuffpodcast@yahoo.com.