It would make a terrific television documentary. The "before" shots would pan over acres of urban wasteland: empty factories, decaying housing, drifting knots of unemployed youths and discouraged adults The "after" images would reveal thriving small businesses, burgeoning construction, and bustling, smiling people. The announcer would say, "Enterprise zones have let the free market go to work revitalizing our great American cities."
But I doubt that the program will ever be made.
Inner cities have been rotting for years, and decades of traditional urban renewal -- federal subsidies for slum renewal and new businesses -- have only exacerbated the problem. The Reagan Administration has urged a change. It says we need to create a healthy climate for businesses in stricken areas by cutting the tax burden and easing regulations. Then entrepreneurs will flock to these oases of enterprise, creating new jobs without federal subsidies The zones and the areas around them will bloom with prosperity.
Businesspeople find this scenario attractive, if only because it is a refreshing change from decades of left-wing talk of welfare rights and the asserted inability of capitalism to provide for the poor.
But beneath the veneer of free-market rhetoric the promoters have given to free enterprise zones, they are just another form of government subsidy -- federal aid disguised to look like something else.
The enterprise-zone concept originated in England, which has been experimenting with zones for about three years A Socialist, Professor Peter Hall of Reading University, visited tax-free zones in Asia and proposed that the United Kingdom try them The British government designated 11 zones in 1980 and 13 more in 1982 The idea then bounced across the Atlantic, where U.S. supporters and detractors are still arguing over enterprise-zone theory. Why don't they examine the British experience, which should tell them much about the actual potential of enterprise zones?
Have new businesses moved into the zones? Are the jobs these businesses create new jobs? Did they come "free" -- that is, without additional government expenditures? The answers are yes, not all, and no, respectively
The British zones have expenenced a net increase in business activity, but the increases come not entirely -- or even by half -- from new enterprises. In some areas, the percentage of businesses that have relocated into the zones from other areas runs as high as 70%. Jobs outside the zones are being abolished, only to reappear inside the zones -- a transfer rather than a net increase in employment.
Why are the zones relatively more attractive to established companies than to start-ups? Hard data are sparse, but I can offer two hypotheses. First, existing businesses have historical data on their costs and so might be alert to the cost-benefit ratio of relocation. Second, many new businesses in the United States, as in Britain, are service businesses, for which proximity to potential clients is comparatively more important than it is for, say, manufacturers. If there are few potential clients for an instant-print shop within the zone, one can hardly expect the clever printing entrepreneur to locate his shop there.
In any case, the new jobs are decidedly not free. British zones grant 100% relief from property taxes -- which are a much larger burden in the United Kingdom than they are in the United States -- in hopes of attracting new entrepreneurs. But British theorists seem to have forgotten how a free market would respond to such a move. Property prices and rents within the zones have inevitably risen to reflect the value of the tax break, and in areas surrounding the zones, rents and occupancy have fallen.
In Britain, property taxes are levied upon the tenants, not the owners. If the going rate for space within a zone is ?3 per square foot and the property tax in areas surrounding the zone is ?1 per square foot, then the rental value of properties in adjacent areas will presumably have to fall to nearly ?2 per square foot to be competitive. Already, examples abound of 10% to 50% declines in rent for buildings adjacent to zones. To combat the inevitable increase in rents within its zone, the Swansea (South Wales) authorities have slapped on a rent freeze -- the antithesis of what zones are supposed to represent.
The second main benefit that zones bestow is regulatory relief. In Britain, supporters predicted that this reduction would not only unleash the entrepreneur, it would also reduce the size of local government -- and thus the burden on all the citizens of the area in question. But the London Times reports that rather than reducing their number, local bureaucrats have never been so busy, and local authorities are spending more.
In Swansea, the local council has already spent ?1.4 million (about $2 million) on its zone, which has created 96 new jobs. That works out to about $20,000 per job to date. Since zone status is granted for 10-year periods, it is clear that the previous benchmark in British subsidies, the De Lorean plant in Northern Ireland, at roughly $45,000 per job, will not last out the decade.
As attractive as they appear to free-market enthusiasts, enterprise zones don't provide much of what entrepreneurs need. Zone supporters assert that regulation and taxation are the two overwhelming barriers to the entrepreneurial rejuvenation of depressed urban centers. That just isn't so. When someone considers starting a business, his or her first questions tend to be: Have I actually spotted a gap in the market, or will I be bankrupt and homeless in six months' time? Do I have adequate capital? What is the right location for my business, and how do I find and manage qualified workers?
A survey by the National Federation of Independent Business (NFIB) showed that city licensing, permits, zoning and regulation, and taxes were among the "least frequently" mentioned problems among its members. In fact, they were not mentioned in more than 5% of the responses. That should not be surprising. After all, the new entrepreneur has to make a profit first before he worries about taxes.
Even though businesspeople with existing companies have passed the hurdles that so worry new entrepreneurs, regulation and taxation still do not head their list of concerns. In a survey of 25 smallbusiness problems, again by the NFIB, the owners and managers of such companies ranked local tax rates 5th, after interest rates, insurance, utility costs, and labor. Owners of existing businesses rank local regulations as just about the least of their problems. Inspections and ease of obtaining permits and licenses ranked 20th and 21st, respectively, well after locating qualified employees (6th), local crime rates (10th), and cost-effective advertising (15th).
Politicians who support the zone concept label it a free-market solution to urban problems, asserting that the market will work where government interverition has not. Local businesspeople quickly see the flaw: Zones are just another kind of government intervention in the market forces of their area.
Zone enthusiasts are like Canute trying to turn back the tide. Populations and businesses are always on the move, seeking new pastures, new opportunities. From the east people moved west, and from the country they moved to the cities Now we see a north-south shift, with a decline of many large cities and a move to the suburbs and smaller cities. St. Louis loses nearly 30% of its population while San Jose gains that much or more.
Business and industry will not flock back to inner cities until and unless the market signals that there is a clear economic advantage in doing so. Enterprise cannot be packaged into nice, tidy, little parcels and parachuted into depressed areas chosen by politicians.
Dying cities should be left alone to die, and new growth areas should be left free to flourish. Trying to keep or put a business in St. Louis when it wants to be in Silicon Valley is not only costly, it is also futile. If St. Louis and other cities are allowed to find their real market level of activity, and Silicon Valley and similar growth points are allowed to expand, movements in property prices, labor shortages, labor surpluses, and a million and one other real market factors will in time lead business back to currently depressed areas far faster than any political contrivance.