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Encourage Enterprise, Empower Cities: The Promise of Entrepreneurship

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Encourage Enterprise, Empower Cities: The Promise of Entrepreneurship

September 16, 2015
Urban PolicyOther

Editor's note: The following is the fourth chapter of The Next Urban Renaissance (2015) published by the Manhattan Institute.

Introduction

Can cities be pro-poor as well as pro-business? Many popular progressive policies, such as raising taxes on rich urbanites, are likely to send successful entrepreneurs to some other locale. This essay argues that entrepreneurship districts located in high-poverty areas may encourage economic success among the less fortunate in a way that lifts up the entire city.

Three decades ago, Sir Peter Hall persuaded Margaret Thatcher to experiment with “Enterprise Zones” in the United Kingdom. These zones would provide tax breaks to firms that locate in higher-poverty areas. The U.S. followed in 1993, with “Empowerment Zones,” which also targeted tax cuts toward particular locales. These policies increased employment but at an impressively high cost—some estimates run as high as $100,000 per job.

The principle of spatially targeted assistance is most compelling if the zone is a potential model for the city—not a tax-subsidized neigh- borhood. Ideally, entrepreneurship zones can play the role that Hong Kong once served for China: providing a tangible illustration of what better government can achieve.
Entrepreneurship zones have two parallel tasks: encouraging en- terprise and empowering the community. The first task focuses on encouraging local business formation, primarily through simplifying the permitting process but also by mentoring would-be entrepreneurs and consolidating existing public support for small businesses. The second task focuses on local schools, community groups, and other organizations that can help train local residents to work with entrepreneurs and to be entrepreneurs themselves.

The encouraging-entrepreneurship task begins with reducing the regulatory barriers to opening new businesses. Ideally, this can occur with legally mandated one-stop permitting that can get any business going within 30 days. When new legislation is not feasible, one-stop permitting can be facilitated with independent legal support (funded publicly or privately) for would-be entrepreneurs that can offer the same sort of one-stop service. In immigrant communities, these services would be explicitly polyglot.

Existing pro-business policies, including government loan programs, can also be embedded into the zone structure. Successful entrepreneurs should be encouraged to become more actively engaged, especially in forming local angel-investor groups for would-be start-ups. Empowering the community means ensuring relevant skill accumulation in the entrepreneurship zone so that local residents are not merely bystanders to expanding economic growth. This process can begin in the classroom and can be provided by competitively sourced after-school programs. Vocational education can be strengthened and targeted toward vocational skills that are in high demand. Entrepreneurship is a skill—and more likely to be taught well by entrepreneurs
themselves than by traditional educators.

Entrepreneurship zones are far more likely to work in successful cities, such as New York, Boston, and San Francisco, than in more trou- bled areas like Detroit. The time is right to experiment with such zones in thriving places—and to test whether such a relatively low-cost intervention can be an alternative to economically expensive redistribution.

I. Background

Mayor de Blasio won election by emphasizing the poverty that persists alongside wealth in New York City—the “two cities” side by side. Some 2,500 years ago, Plato wrote that “any city, however small, is in fact divided into two, one the city of the poor, the other of the rich.”1 Urban inequality is persistent because cities attract rich as well as poor people; and there is nothing intrinsically wrong with such economic diversity.

Yet dangers stalk a city of scattered prosperity. The city may fail in its central task of permitting upward mobility and instead create a permanent underclass. The income inequality of the two cities may degenerate into class conflict that harms the city as a whole and its wealth-generating capacity. Plato declared that the two cities were “at war with one another.”

For much of the last 30 years, many U.S. cities have embraced centrist government that valued competence above all and recognized the limits that all local governments face. Today, spurred by anger about the stalled progressive agenda at the national level, some local leaders have sought to use local tools to reduce inequality.

If local progressivism becomes local redistribution, there is much danger and little upside. The history of U.S. cities in the 1960s and 1970s should remind us of the risks of a wealth exodus to nearby suburbs. Some local leaders, such as Detroit’s Coleman Young, angrily at- tacked America’s inequities and ended up presiding over a city that was poorer than ever. Economist Thomas Holmes’s work documents how strongly industry followed pro-business policies in postwar America.2

Among the great advantages of American local government is that cities can be laboratories of good government. We don’t know exactly how to fix the significant problem of rising American joblessness among prime-aged adults that persists in good times and bad (Figure 1). Cities are well poised to experiment, whether with welfare-to-work or entrepreneurship zones, but there is little upside to experiments that emphasize large tax increases on the wealthy. National policies based on such local innovations would have little chance of success in Washington today.

If city governments can figure out better ways of solving social problems, particularly underemployment, on the cheap, such policies will not repel the rich from the city. These policies will also more naturally appeal to a national audience. This is the moment for experimenting with local, lower-cost interventions that might reduce urban poverty and provide greater upward mobility.

This essay focuses on entrepreneurship-related interventions because the connection between entrepreneurship and local economic

success is strong. Fifty years ago, economist Benjamin Chinitz argued that New York was more resilient than Pittsburgh because New York’s garment industry had built a culture of entrepreneurship and Pittsburgh’s steel industry had not.3

A large statistical literature has shown a strong link between measures of entrepreneurship, such as initial shares of employment in startups or average establishment size, and subsequent local economic success. That connection holds within region, city, and industry, and using a large array of statistical techniques.4Figure 2 shows the remarkable difference in job growth between those areas with the smallest average establishment sizes (quintile one) and the largest average establishment sizes (quintile five) between 1977 and 2010.

If cities are able to promote entrepreneurship among the less skilled, they will be able to strengthen both the poor and the city as a whole. Yet even if cities everywhere agreed on the need for more entrepreneurship, especially among the poor, we still need more understanding to achieve that objective. We now turn to a zone-based approach that targets investments toward specific neighborhoods.

II. The Case for Entrepreneurship Zones

There are three starkly different rationales for a zone-based approach to encouraging entrepreneurship: targeting, agglomeration, and ignorance. The targeting argument is that we want to support zones in order to target resources toward people who live in poorer areas. The agglomeration argument is that since we see successful examples of private-sector clusters emerge naturally, as in Silicon Valley, the govern- ment should follow this lead. The ignorance argument is that when we don’t know exactly what works, we should experiment on a small area before blanketing the city or the nation with an idea.

The targeting argument has strengths. If we have agreed that a policy is beneficial—charter schools or preschool, perhaps, depending on your political perspective—it makes sense to target scarce resources toward the most troubled areas. Yet if done with large-scale spending or tax breaks, targeting can easily become the artificial subsidization of high-poverty areas. Such subsidization is dangerous.

Subsidizing poor areas essentially bribes poor people to stay in underperforming districts, when out-migration may be a far better

path toward economic opportunity. Economist Bruce Sacerdote found that children who were forced by Hurricane Katrina to leave New Orleans typically experienced better educational outcomes elsewhere. In many cases, the benefits from such subsidies are received by the prop- erty owners in the locales, not the individual residents. If a targeted tax break causes rents to rise more than wages for poor residents, it can actually make them worse off. We should focus on helping poor people, not poor places.

Yet when it comes to both regulatory reform and education, there is value in targeting. Successes can later be scaled, so that they do not provide a permanent subsidy. Politically, it is far easier to make the case for deregulation if the beneficiaries are

likely to be entrepreneurs working in higher-poverty areas. Since education is often delivered at the institutional level, limited resources may force a focus on a single institution.

At the heart of entrepreneurship zones is the idea that the best economic development strategy is to attract and train smart people— and then get out of their way.

The agglomeration argument has strengths but is also bedeviled by numerous complexities. True, successful firms often generate benefits for their neighbors, which is why industrial clusters are so common; and the existence of such spillovers provides a possible case for government support of a cluster where smart entrepreneurs and workers learn from one another. Yet it should be obvious that the delicacy of person-to-person idea flows is not natu- rally managed by a public bureaucracy. Clustering firms in one area will also reduce the potential for those cross-industry leaps of imagination that can be particularly productive.

Empirically, the track record of industrial clusters is mixed.5 Some efforts have worked uncommonly well—the Innovation District in Boston and Silicon Alley in New York stand as successes—but there are many failures. It is far safer to encourage entrepreneurship generally within a given zone than to try to micromanage industrial choices; and, importantly, urban entrepreneurship can mean owning a grocery store as well as writing software.The strongest case for a zone-based approach is that it facilitates learning. If we accept that we do not know what will generate new enterprises or reduce joblessness, we should not start by adopting a uniform policy everywhere. We should experiment with particular policies in particular areas, and, through careful experimentation and evaluation, we can learn what works.

Some experiments could be done citywide. For example, if we were happy trying out a particular form of entrepreneurship training, such as that espoused by the Kauffman Foundation of Kansas City, we might randomly select high school students from throughout the city to receive this training. Yet the cost of implementation is often far lower if the experiment is done in a particular locale.

We should start with the view that the zone itself is an experiment but that there are also smaller experiments within that zone. Different students may receive different types of after-school training, which will enable the impact of the training to be properly evaluat- ed. Evidence on private-sector innovation is constantly provided by customers and financiers; the success, or failure, of public-sector innovation is often less obvious. A well-designed zone can be a tool for evaluating local policy change.

III. Entrepreneurship-Zone Design: Encourage Enterprise

The first key element in entrepreneurship-zone design is encouraging enterprise. The most important way to encourage enterprise is to reduce the regulatory burden on new enterprises within the zone. There is nothing novel about reducing regulations; the original ideal of an enterprise zone also favored less regulation. Yet in the U.S., enterprise zones have more often been marked with financial support than with a reduced regulatory burden.

America’s cities face an enormous array of business regulations. The U.S. Chamber of Commerce Foundation recently completed a report6 documenting the number of procedures needed to start a professional-services business in various cities. In Chicago, the business required seven procedures, cost $900, and took 32 days. New York City also required seven procedures, which took less time (eight days) butcost $1,306. The permits required for food-related companies, or for changing the physical structure of a building, become far more onerous. Since 1996, the Devens Enterprise Commission has provided a model for permitting. When the Fort Devens military base was closed, Massachusetts searched for an alternative model for the area and imagined an economy rebuilt around freer markets. To that end, the Enterprise Commission was established to provide speedy one-stop permitting to any business wanting to start in the area. The commission has largely fulfilled that goal, and the area has done relatively well despite its noncentral location in the Boston metropolitan area.7

The advantages of a single centralized permitting agency are accountability and measurement. It is easy to tell if Devens is fulfilling its mandate to provide speedy one-stop permitting. If the commission goes too far and permits a firm that does public harm, that will be obvious as well. The commission can still turn to the expertise of the fire department and other experts but cannot force them to take responsibility for delayed business permitting.

New York City has attempted to embrace a more transparent permitting process, with NYC Business Express and its New Business Acceleration Team (NBAT). Business Express provides a single website where one can learn about the permits required to open a new business. The New Business Acceleration Team appears ready to help new restaurants negotiate the tricky regulatory terrain. These are admirable steps, but the city’s regulatory maze remains burdensome, and different departments have maintained their control over different forms of regulation.

There are two distinct approaches toward reducing the regulatory burden in an entrepreneurship zone: one modeled on the Devens Enterprise Commission and the other modeled on the NBAT. The first approach requires significant new legislation; the second merely requires private or public money.

The Devens approach, which is more likely to be effective, defines each entrepreneurship zone as a distinct legal entity. Within that zone, an independent commission maintains control over permitting. The mandate is to permit as quickly as safety permits, with data kept continuously about the speed and success of new business applicants. The commission will employ outside experts but will keep responsibility to itself.

The NBAT approach is simply to fund a one-stop shop for new business formation within the zone. This can be funded by the city government or by an independent nonprofit. There are advantages to the legitimacy conferred by public funding, but independent funding may allow for greater nimbleness and stronger incentives. It is then the job of the shop to handle all permits for the new business. The one-stop shop’s success can still be measured and its leadership can be held accountable, but it will be hard to blame the entity if outside regulatory processes are slowing it down.

Ideally, entrepreneurship zones can play the role that Hong Kong once served for China: providing a tangible illustration of what better government can achieve.

In either case, the permitting entity can develop special skills for interfacing with public bureaucracies and for connecting with the neighborhood. In many poorer neighborhoods, language is an issue: it is crucial for the entity to have good skills for interacting with non-English speakers, who can often be among the most entrepreneurial urbanites.

Regulatory ease is one major way to encourage enterprise in an entrepreneurship zone. There are others. Cities, states, and the national government already have a bevy of programs intended to support new businesses, including loan guarantees and other forms of financial support. Many economists are often skeptical of public attempts to play venture capitalist; but if these programs exist, they should be used most effectively and evaluated.

The natural way to incorporate these programs into the zone structure is for there to exist a central public support office with close ties to the permitting entity. In many cases, the personnel could overlap. Ideally, all public funds would be consolidated into this single office, which would enable one-stop shopping for public support, as well as permits. Consolidation would enable funds to be spread evenly, too, although there is a case for randomization of some funding sources among qualified applicants. Only with such randomized trials can we truly learn if these programs lead to job creation in the long run.

To implement these plans, the city would need to inventory the public funds available within the zone. Boston has already begun this process. After that point, there should be negotiation with the current funding entities to determine the possibility of consolidation within a single zone-related entity, at least for a limited period. A limited time horizon is appropriate if the zone is seen as an experimental entity.

Yet another way to encourage enterprise is to harness the social energy of successful local entrepreneurs. Instead of threatening to punitively tax local entrepreneurs, mayors can form communities to help support and educate entrepreneurs in the  zone. This will be particularly natural if the zone attracts a well-defined group of outside firms into a particular incubator space—which appears to be happening in the Dudley Square district of Boston. Even within such a well-defined community of interest, it is possible to generate business groups that collaboratively work to support new start-ups in higher-poverty areas. Retired entrepreneurs may be a particularly natural resource here.

The community’s first job would be to design an outreach program to connect with would-be start-ups. Ideally, this would be coordinated with the one-stop permitting and public-assistance shops. In some cases, the outreach program would go beyond these two entities, directly into the communities to encourage potential entrepreneurs to take a risk.

The community’s second job would be mentoring: teaching these prospective entrepreneurs how to think about new business opportunities. The possible gains from communicating with entrepreneurial human capital are enormous. In some cases, discussions might work better in small groups. In others, one-on-one mentoring would be more appropriate.

Finally, on an entirely voluntary basis, the community could act as angel investors for prospective start-ups. They could play this role with their own money or, just as plausibly, could play an advisory role to the public entity that is directing the existing public support to new entities. This group should be able to provide expertise that the public sector does not inherently possess.

In essence, this group is meant to help educate would-be entrepreneurs. It can also help in educating the people who will work for those entrepreneurs. That education process is the topic of the next section.

IV. Entrepreneurship-Zone Design: Empower the Community

One great fear facing any local economic improvement strategy is that the neighborhood improves, but the longer-term residents do not benefit. An area can become a hub for entrepreneurs, but that can produce gentrification rather than widespread economic benefits. The strategies discussed here are meant to limit the divisions between new businesses and older residents.

There are multiple prongs to this strategy, just as with encouraging enterprise; but there is no sense that one prong is more important than another. We will focus on entrepreneurship training in the schools first because it connects most closely to the entrepreneurship strategy previously discussed; second, we will discuss vocational reform; and last, the formation of community-entrepreneurship groups.

In the previous section, we discussed the mentoring of new business owners by successful entrepreneurs. This is entrepreneurship training at a fairly advanced state: the new business owners must already have an idea that they want to implement. We can also experiment with school-based or community-organization-based programs to provide entrepreneurship training at a more basic level.

The goal of such training is to teach the basics of new business formation to teenagers. What might make a new enterprise successful? What will ensure that revenues exceed costs? What are the basic rules surrounding new enterprises? The Kauffman Foundation has an established program on entrepreneurship education, which could be adapted for younger students.

Even if these students do not become entrepreneurs, they will learn a bit about how businesses operate, which should be useful. The program will also have the salutary effects of reminding at-risk teenagers of the significant returns that can come from successful legitimate entrepreneurship. Entrepreneurship training may even provide a more compelling means of teaching basic math skills than formal mathematics classes.

The natural delivery mechanism for such training is an after-school program. School days are already sufficiently crowded that they should not be reduced further to make way for this extra training.

One advantage with after-school programs is that they can be competitively sourced, and randomized experiments are easy. One group of students can be put into one class while others are given a different type of training. A program that operates after school for teenagers can also be given to older students through a community center.

In many cases, the need is to train workers as much as entrepreneurs. Start-ups will be more attracted to a district if it has skills that the start-ups need. This means better vocational training.

Some cities have existing vocational schools that can be improved. Boston’s Madison Park High School, for example, dramatically underperforms. Improving the school would require basic management more than any brilliant reconfiguration of the curric- ulum. Ideally, vocational training reform would embed employers from the beginning: What skills do high-school graduates from this neighborhood need to be hired? How can such graduates receive effective training?

After-school programs probably dominate school-day education in providing this human capital. It is too much to ask teachers to take on a new set of skills that they were never trained to teach. Instead, the potential employers of the young can work with the city and the nonprofit sector to develop a robust after-school program to provide training in the most needed areas, from plumbing to writing software.

As with entrepreneurship training, a number of program providers should be evaluated through randomized trials. Evaluation will be easy because pupils can be judged immediately after completing the course on the basis of their displayed competence.

In addition to after-school programs, vocational training should have apprenticeships as well as summer-job programs. Learning on the job is likely to be the best way of learning a skill. Again, randomized evaluation would be ideal, but that may not be feasible if employers insist on choosing exactly one temporary worker.

Many employers might be located within the zone, but that should not be a binding limitation; any employer willing to participate in the apprenticeship and summer jobs program should be welcomed. Boston and New York have had thriving summer jobs programs for many years. These programs can surely be improved and better oriented toward particular skills, but they provide an excellent starting point.

Another way to empower communities is to create a community-based entrepreneurship group. This group will comprise not only entrepreneurs; anyone who cares about the progress of entrepreneurship within the community can become a member. The group will focus on opportunities and problems in the entrepreneurial ecosystem. It will be able to report on the failures of the zone and commend its successes. The ultimate goal of the group is to bring the community together around grassroots economic development. The group should focus on organically developing local jobs, not seeking external largesse. Just as local religious leaders have sometimes been exceptionally helpful in fighting crime, they can be helpful in this context as well.

Conclusion

Entrepreneurship zones are being proposed not because of the certainty that they will be the best long-term solution for encouraging enterprise and employment among lower-income urbanites. We do not always need to know the final destination to know the best path for the present. We face enormous social challenges, especially underemployment, and we need to develop better tools for fighting those challenges. At the heart of the zones is the idea that the best economic development strategy is to attract and train smart people—and then get out of their way. Empowering the community means training smart people. Encouraging enterprise means attracting smart people and getting out of their way. The heart of the entrepreneurship-zone idea is that urbanites are capable of solving their own problems if government does a better job of providing usable human capital and does less to interfere with natural human ingenuity.

These zones are ultimately experiments and should be evaluated as such. The design for measuring their effects should be built in to the programs from the beginning. We need to ensure that they are opportunities for cities to do what they do best: teach humanity how to strengthen itself.

Endnotes

1. Plato, The Republic, in The Republic and Other Works (New York: Anchor, 1973), 111.
2. Thomas J. Holmes, “The Effect of State Policies on the Location of Manufacturing: Evi- dence from State Borders,” Journal of Political Economy 106, no. 4 (1998): 667–705.
3. Benjamin J. Chinitz, “Contrasts in Agglomeration: New York and Pittsburgh.” Ameri- can Economic Review 51, no. 2 (1961): 279–89.
4. Edward L. Glaeser, Sari Pekkala Kerr, and William R. Kerr, “Entrepreneurship and Urban Growth: An Empirical Assessment with Historical Mines,” Review of Economics and Statistics 97, no. 2 (2015): 498–520.
5. Josh Lerner, Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed—and What to Do About It (Princeton, N.J.: Princeton University Press, 2009).
6. See http://www.uschamberfoundation.org/sites/default/files/article/foundatio... tion%201.pdf.
7. Devens Enterprise Commission, 5-Year Review 2006–2011, http://www.devensec.com/ meetings/DEC_15_Year_Review_Final_1-17-12_small.pdf.

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