Policy: Economy

Rand Paul's plan to save Detroit faces familiar political challenges

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Columnists,Shikha Dalmia,Detroit,Rand Paul,Economy,Analysis,Detroit Bankruptcy

Like yesterday's fashions, old policies never die, they simply return with new accessories. So it is with Rand Paul's proposal to create "economic freedom zones" for Detroit and other depressed cities -- a recycled version of the "enterprise zones" of 1980s.

But if past is prelude, this idea won’t work — not because it doesn’t make sense, but because Washington won’t allow a sensible version to pass its august chambers.

Freedom zones are Paul's answer to Obama's bailout -- oops, aid package -- for Detroit and a way to show minorities that the GOP cares. Unlike Obama's plan, Paul won't offer federal handouts for housing, brownfield cleanup, highways and gang-busting. Rather, he'll slash federal taxes (income, corporate, capital gains and payroll) and regulations (EPA's stormwater clean up rules) for areas where unemployment is 50 percent more than the national average.

For Detroit, this would work out to a $1.3 billion stimulus over 10 years. “These zones don’t ask Houston or Atlanta to bailout Detroit,” he said last week. “It frees Detroit to bail itself out.”

That would be a correct statement if Paul's proposed bill had included spending cuts to offset the lost tax revenue. It doesn't.

That issue aside, the theory behind the freedom zones concept is that jumpstarting growth in depressed areas requires not a top-down industrial policy with Uncle Sam picking winners and losers. Rather, it requires giving these areas a more competitive economic environment that overcomes their existing disadvantages -- inhospitable climate, dying local industries -- to boost local entrepreneurs and attract outside investors.

This approach worked well in England, turning London's depressed docklands into a super-dynamic hub for finance and other businesses in the 1980s. It also transformed India's Bangalore from a sleepy little town (that Winston Churchill once compared to a prison) into a global IT powerhouse in the 1990s.

But it has been a disappointing failure in America. Why? Because neither Republicans nor Democrats have ever managed to create anything resembling a genuine enterprise zone.

The crucial thing is not just tinkering with taxes but also regulatory relief at both the federal and local level. But even Ronald Reagan, whose HUD Secretary Jack Kemp conceived the whole idea, ultimately proposed only cosmetic regulatory changes, focusing mainly on tax breaks. The upshot was not new growth but simply shifting of businesses -- sometimes moving no more than few blocks -- to lower-tax ZIP codes.

Bill Clinton gave up even the pretense of tax relief in his 30-plus “enterprise zones,” deploying instead “targeted investments,” a glorified term for handouts. Worse, in order to qualify for these “investments,” state officials had to submit elaborate plans for retraining workers and building cheap housing to an “enterprise board.”

This exercise in bureaucratic central planning turned the whole concept of enterprise zones on its head, producing no discernible impact on the targeted communities. (Some areas of Detroit got the "empowerment zone" designation in 1994 but that didn't stop the city from becoming an economic basket case anyway.) It also increased local red tape and corruption. A 2003 audit of Cincinnati's empowerment zone found that state officials routinely misused federal funds to inflate their own salaries, prompting President George W. Bush to eventually slash funding.

The bipartisan failure to implement the concept without dilution or distortion is no accident. There are systemic reasons for it.

The federal regulatory state has been the liberal tool of choice for enacting sweeping environmental, consumer, and workplace protections over the past 50 years. Liberals regard the country’s primary challenge not as wealth creation — but protecting Americans from the ill effects of wealth creation. Depressed cities are a price they are willing to pay (unlike, say, in India, where eradicating rampant poverty is still the central political task).

Hence, liberals are not going to simply stand back and allow the weakening, say, of EPA’s clean water mandates or OSHA’s workplace requirements in the name of reviving local economies.

If Paul wants to succeed, he'll have to do more than outline an abstract concept. He'll have to present it in a form that can withstand the inevitable political onslaught. Lame half-gestures won't fix Detroit or win over its minorities.

Shikha Dalmia, a Washingon Examiner columnist, is a senior policy analyst at Reason Foundation, a nonprofit think tank advancing free minds and free markets.
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