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Economists, Housing Experts Question Proposals

Ellzey's Hardware was among the many businesses in Biloxi, Miss., devastated by Hurricane Katrina. President Bush last night urged tax breaks for entrepreneurs.
Ellzey's Hardware was among the many businesses in Biloxi, Miss., devastated by Hurricane Katrina. President Bush last night urged tax breaks for entrepreneurs. (By Spencer Platt -- Getty Images)

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By Jonathan Weisman
Washington Post Staff Writer
Friday, September 16, 2005

In the face of unprecedented regional economic devastation, President Bush last night advanced a mixture of old and new policy proposals aimed at enticing economic rebirth through tax breaks, giveaways and cold cash.

Perhaps the most innovative proposal would give away federal land through a lottery to low-income evacuees who pledge to build homes on the property, according to policy experts on both sides of the ideological spectrum. This "urban homesteading initiative" harkens back to the settling of the West in the 19th century. Similar approaches have been used to develop small patches of urban blight, but not on the scale Bush has in mind, said Edgar O. Olsen, a conservative University of Virginia economist and housing expert.

"There's never been a large program like that since they opened up the Oklahoma Territories," he marveled, "and that wasn't urban. That was very rural."

Bush also proposed to create a Gulf Opportunity Zone, or GO Zone, in which businesses would get substantial tax breaks to invest in equipment and build structures. Small businesses would be able to deduct from their taxes the cost of investments up to $200,000.

"It is entrepreneurship that creates jobs and opportunity," Bush said. "It is entrepreneurship that helps break the cycle of poverty, and we will take the side of entrepreneurs as they lead the economic revival of the Gulf region."

Finally, Bush proposed worker recovery accounts of as much as $5,000, which evacuees could use to finance job training, child care, transportation or any other impediment to a new job. That plan is virtually identical to a long-standing White House initiative to create "re-employment accounts" for dislocated workers, an idea that has gotten minimal attention from lobbyists and little support in Congress.

The proposals were met with some skepticism -- and some hostility -- from economists and housing experts who listened to the speech. The GO Zone is little different from empowerment zones that have proliferated across the country since the early 1990s, said Leonard E. Burman, an economist with the Urban Institute.

There is some evidence they work. A study by Leslie E. Papke of Michigan State University found that empowerment zones in Indiana helped reduce unemployment claims by 19 percent in and around the designated areas. But other examinations suggest entrepreneurs would have invested in designated regions anyway and have gamed the system to take advantage of the tax breaks, Burman said.

Empowerment zone incentives also tend to shuffle economic activity from one area to another, creating winners and losers but no net economic gain, said Isabel V. Sawhill, director of economic studies at the Brookings Institution.

"Why is it better to have more activity here and less activity elsewhere?" Olsen asked. "You'd almost have to have your license taken away as an economist if you didn't believe that's what's going on with these things."

The homesteading proposal was pushed hard by Jack Kemp, a former secretary of housing and standard bearer for conservative anti-poverty activists.

"We have to send a message to the black community that this country profoundly cares about them assuming the overwhelming the burden of this disaster of Biblical proportions," Kemp said.

Under the plan, those chosen from a lottery would receive federal land in exchange for their work and their ability to build, either by securing a mortgage or getting the backing of a nonprofit organization such as Habitat for Humanity.

Bruce Katz, a housing official in the Clinton administration, said Bush's proposal raises more questions than it answers: Even if impoverished evacuees can secure the financial assistance to build on donated land, how will they maintain the properties? Won't the homesteading plan re-create the racial and economic segregation that Katrina so vividly exposed?

"The president called this the largest reconstruction program in the history of the world, but when it comes to housing, the support is almost nonexistent," Katz said. "He's just handing out land."

Olsen said he is concerned that a lottery for the homesteads would effectively concentrate assistance among a random few who will have the least means to improve the property. It would be better to sell the land to the highest bidder, then use the proceeds to help the poor more uniformly, he said.

Finally, there is the question of cost. Bush did not detail the biggest potential expenses for the government -- such as rebuilding water systems, roads and bridges. Moreover, tax breaks in the GO Zone would cost about $1.7 billion over five years. Reimbursing states for the cost of educating students would run to $1.9 billion. And a temporary expansion of Medicaid for evacuees would cost much more. But Bush made no mention of the fiscal challenge or of spending cuts or tax increases to help pay for his proposals.

"I'm disappointed . . . that the president has not done more to demand that Congress and other federal agencies make the same sacrifices millions of Americans are already making," said Sen. Tom Coburn (R-Okla.), noting that a family that donates $100 is likely to save $100 from some other expenditure. "There is no charity without sacrifice."


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