WHENEVER WASHINGTON officials worry about ways to inject life into an anemic economy and reduce unemployment, a vital aspect of the problem usually is ignored. The aim of national policy is not only to promote stable economic growth, difficult as that may be, but also to ensure as far as possible that new investment and job opportunities are targeted at those who need them most.
It makes little economic or moral sense, for example, for Washington to provide equal encouragement for new investment in the outer fringes of Dallas-Ft. Worth, a metropolitan area where the latest jobless rate was only 3.9 per cent, and in Jersey City, N.J., where it was a devastating 11.6 per cent. By what logic should the federal government do as much for an outer suburb of Chicago where there is virtually no unemployment and for San Diego, Calif, where the jobless rate was 9.4 per cent?
While Washington long has had programs to provide direct aid to decaying urban and rural areas, officials have failed to use an equally - and perhaps more - promising way to help accomplish these ends through the tax system. The Carter tax program, according to authoritative reports, ultimately may contain up to $22 billion in tax reductions, some in the form of incentives to encourage business and industrial investment. By making the incentives greater if the investment is placed where the need is greatest, a portion of that investment could be channeled to distressed central cities and rural areas where unemployment has reached appalling levels.
The country has used tax incentives before as a means of directing investment according to national need. During World War II and again during the Korean war, an accelerated depreciation allowance was granted for investment in industries defined as war-related but not for others, and the system served its purpose. In principle, discrimination on the basis of geography is just as feasible as discrimination on the basis of industry group. Drawing the boundary lines between eligible and ineligible locations admittedly involves difficulty, but deciding what industries were war-related involved tough boundary decisions, too.
Indeed, discrimination between prosperous areas and those in need is accepted as a matter of course in other programs. Every since 1961, depressed areas legislation and emergency public works programs have made funds available only to areas of high unemployment. The Appalachian Regional Development Program, and the kindred regional programs established under the Public Works and Economic Development Act of 1965, confer benefits only on regions of relative improverishment. It is equally logical to confer higher benefits on areas of need when tax breaks written into law.
No Extra Cost
THE CRUCIAL IMPORTANCE of the tax approach is that it provides an incentive for private investment and private jobs. A shortcoming in existing programs for depressed urban and rural areas is that they are limited to public investment and public jobs. These are useful and necessary in themselves, but they usually do not lead to self-sustaining, permanent growth. Sometimes public investment that spruces up a community makes it so attractive that private investment follows - but not often enough or quickly enough to serve the purpose.
Experience also tells us that offering loans on favorable terms to private firms - as through the proposed "urbank" that is reportedly being designed - will not do much to influence locational decisions either. Small, marginal firms may find the credit helpful, but big companies do not lack for access to normal credit markets. What is needed to lure more their investments into distressed urban and rural areas has to be something more tangible - a direct cash benefit. The subsidy could be provided in various forms, but since the proposal about to be offered by President Carter is to give a direct cash benefit to all firms through the tax route, introducing a differential rate into that benefit would appear to be the quick, easy, simple way to do it.
This need not cost the Treasury anything extra. The present investment tax credits is 10 per cent. Whatever additional tax credit the administration concludes is necessary to spur investment can be provided either as a flat rate or as a sliding scale. To increase by half the present benefit, for instance, a flat rate of 15 per cent could be offered or a range could be established - perhaps from 12 per cent in areas of relative labor shortage to 20 per cent in areas of heavy unemployment - that would produce the same volume of additional investment at approximately the same total cost to the Treasury.
Moreover, to employ tax policy in this manner would represent an important beginning toward carrying out the intent of Congress in the Urban Growth and New Community Development Act of 1970. That law committed the United States to adopt a "national urban growth policy" that would seek to stem urban and rural decline. No specific policy was proposed by either President Nixon or President Ford, but there is every sign that President Carter is taking the statutory mandate seriously. His administration is preparing the biennial report on growth policy called for by the act, and a White Houswe conference on balanced national growth and economic development is scheduled for late January.
All of the major industrial countries of the world - except the United States - have explicit and well-established national growth policies designed to steer investment to where it is most needed. "Take the work to the workers" is the slogan in the European countries, and direct subsidy to investors is the universal means.
This is seen as the way to preserve and restore communities, to minimize hardship on individuals and families, and indeed to serve the goals of maximum employment and production with minimum inflationary consequences.
But "taking the work to the workers" is exactly what is not happening in the United States today. Our concentrations of unemployment and underemployment are in the inner cities, in declining rural areas and in old industrial centers. But most new jobs are being created in the thriving suburbs of major metropolitan areas.
Waste, Hardship and Inflation
THIS IS WHAT happens in the absence of a national, growth policy - and it undesirable for four clear reasons.
First, such a pattern of growth is wasteful. If a new plant is put in a green field 20 or 30 miles from the center of St. Louis or Chicago or Philadelphia, a whole array of public facilities has to be created at public expense - while facilities that already exist in the center of the city or in the declining small towns of the hinterland are underutilized. The result is urban sprawl instead of compact settlement, and sprawl is synonymous with waste - waste of resources, waste of energy, waste of productive agricultural land.
Second, such a growth pattern is inhumane. It forces people to uproot themselves and move - often at great financial loss - from where they are to where the jobs are put, or to spend hopeless hours trying to commute. Housing is not necessarily available to low-income blacks and other minority group members who might seek to relocate from the cities to where the jobs are. As for interregional migration, experience both in this country and in Europe shows the great reluctance of workers to leave their native areas. When the Labor Department some years ago tried subsidizing the relocation of unemployed iron miners from northern Minnesota to steel centers of the Middle West, the experiment failed: The workers drifted back. As for commuting, the new jobs located on - and beyond - the beltways that girdle the metropolitan centers usually are inaccessible by any form of public transportation to the unemployed of the urban ghettoes, and they are beyond the commuting range of most of the rural unemployed as well.
Third, such a growth pattern is inflationary. If most of the country's growth takes place in areas of relative labor scarcity - and the outer suburban fringes of major metropolitan centers are such areas - as the economy expands, labor shortages and bottlenecks appear relatively quickly, costs rise and price increases follow. By contrast, if the jobs are taken close to where the unemployed live, labor surpluses are absorbed and the economy can move significantly closer to full employment before shortages occur and inflationary forces are set in motion.
Fourth, such a growth pattern is destructive of communities - originally the communities of rural and small town America and now the great metropolitan central cities as well. The national interest in maintaing a viable New York or Detroit or Cleveland need hardly be argued.
The Lure of the Suburbs
SO WHY, IF THERE are all these consequences, do investors choose the suburbs? There are many reasons. Land costs are lower than in the city. Low, rambling buildings with spreading lawns are possible. Business transportation problems may be eased. The air is cleaner, the crime rate lower, the environment more pleasant. The available labor force may be better trained or more tractable.
But the benefits to individual firms have to be weighed against the economic and social costs borne by employees, taxpayers and the country at large, and the previously noted public costs - waste, hardship, inflationary impact, destruction of communities - surely outweigh the private benefits. The object of the tax differential, then, would be to provide enough subsidy to an investing firm that takes its jobs to the workers to offset the gains it would otherwise realize by locating on the suburban fringe.
It may be, of course, that the forces that lead entrepreneurs to avoid investing in distressed areas, particularly in the most rundown central cities, would prove too powerful in most cases to be offset by the scale of the tax differential. If this proved the case, the government would have to decide whether to increase the differential, at least for the most neglected areas, or possibly abandon the objective altogether. In that case, the Treasury would have lost nothing, since there would be no extra tax breaks if firms did not bite.
Yet there is great diversity among American cities, and in all likelihood they would respond quite differently. Some probably would benefit from a differential of any size; others might be beyond rescue no matter how large the subsidy proffered. The answers to these questions cannot be known in advance. They can be learned only by enacting something and finding out what happens.
The rural areas and old industrial centers that would benefit are a diverse lot, too. Rural distress seems to have dropped out of the news of late while the South Bronx and Detroit are the centers of attention. But only a few years ago it was the poor of Appalachia and the Mississippi Delta who captured the nation's sympathy. Indeed, it was the plight of the rural areas that originally gave rise to the agitation for a national growth policy that culminated in the act of 1970, and the statute seeks rural-urban as well as city-suburban balance."Taking the work to the workers" has to mean steering investments to wherever the unemployed and underemployed are concentrated, whether the locale be a declining metropolitan core, a New England mill town, a Pennsylvania mining center that has lost its basic industry, or a county in the Southern Black Belt.
This is not only the most equitable approach, but it is also the basis for the political coalition needed to pass such a measure. The prospects for aid on a scale necessary to turn the tide in the cities would be hard to come by if the cities and their supporters tried to go it alone. But a coalition of the cities with the rural and small town areas that are fellow sufferers could well prove irresistible. Even a good part of suburban America might support a city-rural coalition dedicated to claiming the bulk of new investment for their communities; not all suburbanites are in favor of headlong, unrestrained growth.
Two Senate votes a few years ago show both the power of the tax differential idea and the strength of the city-rural coalition.
One of those votes came in 1969, President Nixon had recommended that the 7 per cent investment tax credit then in effect for manufacturing investment be removed. This passed the House, but when it reached the Senate floor, Sen. Ted Stevens (R-Alaska) proposed and amendment to retain the tax credit for rural areas of "substantial out-migration." Even though the idea came as a surprise at that time, it carried the Senate by two votes. It was lost, however, in the House-Senate conference.
The second vote came two years later, when Nixon reversed himself and recommended that the 7 per cent investment credit be restored. Again the House supported the President, and again an amendment was offered on the Senate floor. This time, Sen. James Pearson (R-Kan.) proposed that a differential of 3 per cent be added for most rural areas, and the bill's sponsors accepted the idea. Sen. Abraham Ribicoff (D-Conn.) then demanded equal treatment for central cities with unemployment over 6 per cent. This was approved, 56 ot 24, and the combined Pearson-Ribicoff amendment was adopted by the overwhelming vote of 60 to 19 - better than 3 to 1. But the bill's managers refused to support it on the ground that the projected revenue loss of $750 million - the extra incentive in this case was to be placed atop the general investment credit - was more than the Treasury could stand, and the idea was again lost in conference.
No such proposal has been voted on since, but there is every reason to believe the potential for a powerful coalition still exists. This coalition, it should be noted, cuts across the current Subelt-Snowbelt argument. Both North and South have their areas of unemployment and underemployment that would be eligible for any special tax concession, and their flourishing metropolitan fringers that would not.
The European Experience
IN TIME, the United States might find that tax concessions are not the simplest and most effective means for influencing the locational decisions of investors. That has been the experience in Europe.
There, tax devices were used intitially when experimentation with growth policy began in earness in the post-World War II years. But the European countries, and Canada as well, have long since shifted their emphasis to direct cash grants made by the government to the investing firm as more direct, more open, quicker and in the end less costly. The standard grant for locating an investment in an area of labor surplus seems to have settled down at 20 per cent of the cost of the investment, but gradually the countries have developed sliding scales of subsidies for different areas - a kind of zoning according to the degree of need - and the rate may range from 10 or 15 per cent to 25 or 35 per cent or even more in a few cases.
The nine countries of the European Community together are spending an estimated $17 billion a year on locational incentives. There is recurrent debate, of course, about the fine points of policy - what areas and what kinds of enterprises should be eligible, and for how much. And policies change from time to time. But on the principle itself here seems no longer to be any debate anywhere in Europe.
The consensus is that the policies have been successful. New jobs that otherwise would have been located on the fringes of London or Paris or Milan have been steered to Scotland and Brittany and the improverished Italian South. Three independent analyses by British economists of that country's program several years ago credited 30,000 to 70,000 additional jobs a year in development areas. One of the studies concluded that the policy measures had cut the north-south migration flow within the country by half, reduced the national unemployment rate by one-half of 1 per cent and increased national output by $500 million a year.
Whatever the economic analyses show, the political judgment in Europe is that the benefits of the locational incentive systems far outweigh the costs. Every major political party in every country supports the programs. All the parties agree that it is a proper fuction of government to attempt to influence and guide the geographical location of investment - to put the jobs where, in the interest of the whole society, they are most needed.