Federal Aid Didn’t Fix Downtown Detroit

Grants and tax credits didn't create jobs; city must fix fundamentals

Detroit was one of the first cities singled out by the federal government in the 1990s to get grants, tax credits and other help that was supposed to bring economic growth back to its inner city. But it hasn’t happened.

The federal Department of Housing and Urban Development’s success story for Detroit is how taxpayers helped fund the creation of the Clinica Dra. Elena, which provides affordable health care to inner-city residents.

It is a great story, but it’s not necessarily the kind of economic development that will bring back Detroit’s inner city – a core urban area that has higher poverty and unemployment rates and a lower income level than the surrounding metropolitan area.

Michael Porter, a professor at the Harvard Business School who focuses on how to improve economic development and competitiveness among regions and cities, recently examined how the economies of inner cities in the nation’s 100 largest metro areas are faring today. Detroit did the worst.

Detroit has worst inner city

The Harvard study found that since 1995, inner Detroit’s job base shrunk by more than 3 percent and wages plummeted. Back in 1995, Detroit enjoyed wage levels near the top of American cities. But by 2003, average wages had fallen to just below average, meaning the highest-paying jobs fled Detroit the fastest.

Detroit is not alone – most of the inner cities lost jobs or failed to gain jobs as fast as the suburbs.

The irony is that the centerpiece of America’s inner city revitalization efforts for the past decade – grants and tax credits under federal empowerment zone and renewal community programs – was apparently the wrong approach.

When Detroit was picked as one of the early targets for turnaround, the inner city empowerment zone got a cool $100 million in grants, followed by a share of $17 billion in tax credits for efforts to create inner-city jobs. And the 2005 annual report from the Detroit empowerment zone lists more than $650 million in other federal, state, local government and private grants.

Federal subsidies wasted

We might as well have stacked those hundreds of millions of dollars and had a bonfire with toasted marshmallows. All we got was a rush – of jobs and people – out of Detroit.

“Whatever these programs were, the research and the experience suggests that their impact was marginal at best,” Alan Berube of the Brookings Institution told the Associated Press.

HUD’s own assessment of the program was equally bleak. It could point to individual examples of creating jobs, but could not point to anything with broad and sustained growth. Only a third of the inner cities that have empowerment zones saw any job growth during the last 10 years.

It is time to think of a new strategy. The Harvard study points out that a distinguishing characteristic of the 10 inner cities that gained more jobs than their suburbs is that they had a different economic identity and mix of industries than the suburbs.

Identify competitive niches

Detroit does not have an economy distinct from the suburbs – anything you can get downtown you can get elsewhere. So identifying economic niches that the inner city can dominate is crucial.

But before Detroit can really develop economic niches, some things that are broken have to be fixed. As Porter points out, there is no silver bullet for success; it is a matter of fundamentals. The conditions necessary for economic growth are decent public safety, good schools and reasonable taxes and business regulations.

In the last decade, Detroit lost thousands of jobs and saw its population shrink 10 percent, but the number of city workers increased 15 percent. Only in the last couple of years has the city been forced by budget deficits and declining revenue to cut city jobs.

When fewer taxpayers support more workers, it’s a familiar recipe for collapse.

At the same time, Detroit has one of the highest tax burdens for a working family among America’s large cities and is a poster child for burdensome business regulations. Crime rates have improved but are far from attractive. And the schools have a long way to go.

The future of Detroit doesn’t depend on more federal block grants or tax credits. It depends on city leaders learning to focus on fundamentals and making them work.

Adrian Moore, Ph. D., is vice president of research at Reason Foundation.