October 11, 2015

The Solution to Unemployment: Bring Money In and the Jobs Will Follow

In the Sunday, January 23, 2011, New York Times magazine, there was an article entitled “The White House Looks for Work,” written by Peter Baker, a reprint of an article that appeared in the New York Times online version on January 19, 2011. The article contains some hard-hitting photos of people residing in Rockford, Illinois, a city that clearly has faced some very difficult times. The people pictured in the article are all gainfully employed, but they all comment on how difficult life in their community has become, and how many people are unemployed around them.

One of the most difficult things for people in that situation to understand is that the key to reducing unemployment is to figure out how to create businesses and jobs that bring money in from outside the community. To do this, a community has to come together, figure out what people somewhere else with extra money to spend need most, determine what they can offer those people, and then develop and implement plans to create businesses and jobs to meet the needs of those distant customers.

Wealth does not get generated in a depressed community by redistributing money within the community; it has to come from the outside. Early last year, the National Urban League sent a delegation led by Marc Morial, its exceptional President and CEO, to China with an interesting proposal: invest in America’s cities. It was a great idea, and I expect it to bear fruit.

Why did the League go there? It did so for the same reason that Willie Sutton robbed banks: that’s where the money is. I do not believe depressed communities need to go all the way to China to find people with money; it exists on both coasts in enclaves like Greenwich, Connecticut, Beverly Hills, California, or Redmond, Washington. It actually exists less than 100 miles from Rockford, in communities like Lake Forest, Illinois.

However, when people and communities get depressed, they get isolated psychologically and sociologically. They get ashamed to reach out to others, and they fail to realize that the solution to their deep problems is not that far away in distance or time. They look inward, and find insufficient resources to pull themselves out of the deep hole into which they have fallen. Their communities end up finding ways to spread the misery around, rather than to find ways to eliminate the misery by injecting capital or customer revenue from the outside.

Back in the early 1980’s, Joel Garreau wrote a great book called The Nine Nations of North America. In it, he tried to describe the variations among various regions in North America, some of which spanned the Canadian, Mexican, and Caribbean island borders. One characterization of what was then an economically depressed area, the Northeastern United States, stuck in my memory. He said that the Northeast region had many advantages because it had “fully depreciated assets.” What he meant was that the Northeast had an advantage of having much of its infrastructure already in place.

That may or may not be the case with Rockford, Illinois, or other similarly depressed communities, but one thing is clear: every community has something on which to build, based on what used to make it prosper. That something might be the exceptional amount of great agricultural land available inside a city’s borders, which could be returned to agricultural uses. It might be a great telecommunications system that was put into place for military uses, but is no longer needed for the military. It might be a great road and transportation system that can be repurposed for distribution hubs.

Detroit is beginning to rebuild on the first of these advantages, its land; Omaha, Nebraska and the Dakotas rebuilt a generation ago with leftover telecommunications lines from the Strategic Air Command, and Indianapolis took advantage of its position at the intersection of several major highways to become a distribution hub. There is some modern-day equivalent to whatever made the city great in the first place and caused people to move there.

If not, the city always has the ability to take advantage its economically depressed housing and commercial real estate prices to lure businesses in from the outside. The Southeastern United States did that after World War II through lucrative tax credits and other benefits that made it attractive for businesses to place jobs there. I am not a big fan of offering tax breaks to get businesses from the outside that have no other reason to be in a community other than low cost, because there will always be a lower cost community waiting to compete when the business uses up its temporary tax benefits. However, an attractive package gives a community time to rebuild and to develop other assets.

One economic development lesson I learned from watching banks come and go in many communities is that a community is always better off getting businesses anchored in the community off the ground. Big banks get acquired, and then shut down branches or move out of a dying community completely. Retailers close stores. Big manufacturers close plants. Businesses based in the community and owned by local residents are much less likely to move out.

There is another reason communities should want to grow locally owned businesses. The profits and the philanthropy from the business are much more likely to stay in the community. The large business headquartered somewhere else will distribute its charitable dollars near the headquarters community or the other communities in which it is a large, dominant employer. The profits from a publicly owned large business headquartered somewhere else will not be distributed to shareholders based in the community, but will go wherever the shareholders reside when they receive dividends or sell shares.

It’s actually quite straightforward. If money comes into a community, wealth increases. If money leaves, wealth decreases, as do the number of jobs. The Obama Administration would be well advised to help communities think about how to maximize their best assets to create businesses and jobs, which draw money in from all over the world. At that point, more jobs will be created in the community.