In Praise of Enterprise Zones

Obama speaks about the sequester in Washington

This is from my article published by the Oklahoma Council of Public Affairs in their February Issue of the Perspective Magazine.

Economic distress does not always manifest equally throughout America. Some communities are hit hard economically while others may only feel a small economic hiccup. If the same communities are hit repeatedly then they may slide into a state of permanent decline—Detroit is the current poster child for this kind of economic tragedy.

Of course, this is not a new problem. Policymakers have been attempting to tackle hotspots of economic distress for decades. Perhaps the most popularized attempt was the idea of “enterprise zones” first touted by Jack Kemp while serving as Secretary of Housing and Urban Development under President George H.W. Bush.

Fast forward to today and the idea of enterprise zones is alive and well. In fact, President Obama has even embraced the idea of enterprise zones with his recently launched Promise Zones (PZ) initiative.

PZs are designed to help areas of the country that were hit hard by the recent Great Recession and will initially include areas such as San Antonio, Philadelphia, Los Angeles, Southeastern Kentucky, and right here in the Choctaw Nation of Oklahoma. The PZs are intended to help build infrastructure, increase access to education, reduce crime, and, most importantly, provide incentives for businesses to hire and invest by expanding the existing Empowerment Zone tax credit.

Additionally, Senator Rand Paul (R-KY) recently unveiled his Economic Freedom Zones (EFZs) (pdf) which would reduce taxes, enhance educational opportunities, and reduce regulatory burdens. Sen. Paul’s tax reductions include enacting a 5 percent flat rate for the individual and corporate income tax, a 4 percentage point reduction in the payroll tax, boosting expensing on new investments, eliminating the capital gains tax, and a $5,000 per child educational tax credit to help children attend the school that most meets their needs. Unlike PZs, EFZs will be available to any jurisdiction that meets certain criteria and would receive these benefits for 10 years.

However, it’s not just Uncle Sam that has found the enterprise zone model to be useful. There are currently more than 3,000 enterprise-type zones in the United States. Most of these zones are implemented by the states, but they can also be coupled with local tax relief through a popular vehicle known as Tax Increment Financing, which often provides rebates on property taxes or earmarks money to be used for infrastructure improvements.

These initiatives are noteworthy, especially since a new problem has arrived on the scene which threatens to drag down economic prosperity: demographic winter.  Demographic winter is the situation which arises when, due to declining birthrates, there are not enough young people to sustain the current population level. As a consequence, the area afflicted with demographic winter experiences a slow-moving economic depression as both the labor supply and customer base shrinks.

Recently, Kansas implemented a new twist on the enterprise zone model—the Rural Opportunity Zone (ROZ)—in an effort to fight the growing problem of demographic winter in its rural counties. There are currently 73 counties that qualify for a ROZ. ROZs offer individuals a 5-year abatement on their individual income tax and/or student loan repayments up to $15,000 if they move into one of the qualifying counties from out of state.

Overall, enterprise zones, in their many forms, are a step in the right direction. Yet, there are still flaws that reduce their effectiveness. Among the largest flaws is the degree of difficulty complying with the selective parameters of the program. For example, while a tax credit does reduce one’s tax liability, it does not reduce the complexity and compliance costs associated with tax filing—it could actually make them worse. At the extreme, these problems can cause businesses and individuals to forgo the benefits of these zones.

One proposal in Maine seeks to address the problems associated with such complexity. The Free ME initiative would eliminate Maine’s income tax (individual and corporate) and sales tax completely on a county-by-county basis starting in the most economically distressed county. Free ME would create a clean, level playing field for all participants and would not disappear until tangible economic benefits are seen—specifically, seeing the county move back to the state average on key economic variables such as unemployment and poverty. The Free ME initiative is receiving much-deserved state and national attention. This is worth keeping an eye on.

In conclusion, it is not every day that two people from opposite ends of the ideological spectrum, like President Obama and Senator Paul, agree that changing incentives do in fact make a difference in the lives of families across America. This targeted approach embedded in the idea of enterprise zones can help pave the way to broader reforms as the EMZs show progress in tackling some of the most difficult economic challenges of our time, such as stubborn pockets of poverty and demographic winter. The recipe may need tweaking, but at least policymakers are in the right kitchen.

The Importance of Family-Owned Businesses

Organic-Food-Expensive-Cancer-Joel-Salatin-Polyface-Farms From my article on the importance of family-owned businesses:

In full disclosure, there is also a selfish motivation: if we want our children to raise their families near us, we need to provide them with some income opportunities so they don’t have to chase jobs all over the country. –Joel Salatin

Two of my boys are in the midst of reading Laura Ingalls Wilder’s Farmer Boy and Little House in the Big Woods. The older boy, who is always trying to minimize work and maximize play, has commented several times that farm kids must sweat a lot since they are engaged in so much physical labor. The younger boy sees the similarities our family shares with Wilder’s families. Since he is homeschooled, he spends all day working with his siblings and parents just like Almanzo in Farmer Boy.

We’ve talked a lot in our household about the value of owning your own business.  Although we don’t have a brick and mortar business, we try to discuss entrepreneurship on a regular basis with the children. We want them to understand the risks and rewards associated with building your own business.We have them ask questions of local business owners to help them assess what is required to build and maintain a business.

Although many businesses fail, we let our boys know that if they succeed they will have built an income stream that can care for their needs into their old age and then be passed on to their children. We also let them know that if they share the risk of building the business with their siblings, they will have lifelong business partners. In full disclosure, there is also a selfish motivation: if we want our children to raise their families near us, we need to provide them with some income opportunities so they don’t have to chase jobs all over the country.

In the Sept. 18, 2010 issue of The Economist magazine, Professor Joachim Schwass noted that “beyond the public company, private partnership, and the state-controlled company, the other big survivor is the family-owned business. Often forgotten and underestimated yet big GDP and employment contributors, family companies are driven by a very different type of reward: handing over a healthy, performing, and sustainable business to the children. The vast majority would not dream of an IPO.”

In fact, according to a 2003 study by Astrachan and Shanker, family firms comprise 80 to 90 percent of all business enterprises in North America. In other words, most of the wealth in the U.S. is held in family businesses. The authors find that independent family-owned businesses contribute 64 percent of the GDP or $5,907 billion ($5+ trillion) and employ 62 percent of the U.S. workforce. (Unfortunately, family firm data are very limited; this 2003 study of U.S.-owned family businesses in the Family Business Review was the most current data that could be found.)

If you walk back in history 100 years, most people grew up in the family business: the farm. With the family intact and everyone having a valued role in the family’s survival, society and the economy prospered as a result of the farm. Children learned how to provide necessities like food and shelter. They also learned what was most important to society’s advancement: how to take care of their own family instead of looking to someone else to assume their responsibilities.

Virginia farmer and self-described libertarian Joel Salatin is one of the most prolific activists in favor of the renaissance of the family farm as part of the solution to reversing America’s social decline. Salatin skillfully addresses how parents can foster passion for the family business in their children.

For example, a 2012 lecture by Salatin at Grinnell College, “Working With Your Kids So They Will Want to Work With You,” is based on the premise that most family farms lose continuity because of the lack of rewarding economic, as well as emotional, relationships between parents and children. With his suggestions about ways to cultivate the persistence and innovation needed to make kids love working with mom and dad as well addressing ways to structure and scale the farm to make room for future generations, he provides much-needed advice, by example, of how to build a sustainable family business.

The solution to the rebirth of declining agricultural and mill towns is what initially built these towns: families with strong economic ties to their community. Parents and children need to have a stake in their communities in the short and long run if the community is to be viable. That “stake in the community” is not just a property tax bill which pays for the town school, but perhaps a business that provides for the family’s economic needs as well as provides a valuable service to the community.

Higher Ed Bubble: $200k in Student Loan Debt and No Job

bubble shot

My brain just locked on to info in a recent tweet from Brandon Dutcher about Kelli Space who writes about trying to pay for the 200k in student loans used to earn her Sociology degree. The sad news is she’s only 22.  And even sadder: she didn’t land a job even remotely related to her field of study.  She is working for an internet company.  She seems to be acutely aware that in this economy and at her payscale, her long-run financial forecast is abysmal.

It’s criminal that an 18 year-old could be encouraged by high school and college financial aid counselors to take on this kind of debt when the payoff from her degree amounts to about ten percent of the loan “if” she got a job in sociology.  After doing some basic research about what her alternatives could have been, she concludes that any path out of high school would have been better than the one she bought into.  She writes:

An idea that some students may want to consider is going into business rather than going to college. Peter Thiel, billionaire co-founder of PayPal, recently launched an initiative to encourage students under 20 years of age to focus on their entrepreneurial ideas as opposed to dutifully fulfilling the expectation for college. The Thiel Fellowship offers $100,000 each to twenty young people who are willing to put their education on hold in order to pursue these ideas.

Thiel understands that the massive amounts of debt that many students incur by the time they graduate is so burdening that while they spend their lives paying off the borrowed money, they have neither the drive nor the means to tend to other worthy pursuits. Only a few can get these grants, but his idea has much wider application. I suspect there are quite a few ambitious young Americans who would be much further ahead if they went into a business or trade and saved the money their families would have spent on college tuition.

Thiel’s fellowship coupled with my personal Mt. Everest (my hefty student loans) has opened up a world of regret for me as I look back and recognize all of the options I left unexplored at the age of eighteen. I often dream of how I could have worked full-time and gone to community college part-time while living at home, saving money, and paying my own way through school.

Maybe I could have worked while taking foreign language classes (another interest of mine) and, once fluent, applied to become a translator. Honestly, nearly any path after high school would have been better than amassing $200,000 in debt for an assumed rite of passage.

It’s obvious that we’re in the midst of a higher education bubble which is about to explode.  Simple enough: not enough jobs for all the kids graduating from college.  Perhaps parents should get off the college brainwashing train.  One of my favorite books on the topic is Robert Kiyosaki’s If you Want to Be Rich and Happy, Don’t Go to School.

No responsible parent these days should let their child take on loans to go to college.  But, what about giving some consideration to laying the groundwork for your children to start their own businesses ?  What about taking money that you’d put in a 529 account and instead using the money to buy capital for their business ?  By helping your children build entrepreneurial skills and investing in capital for their business, you’re investing in their futures as well as your own.  Not to mention, you might be able to keep them local instead of having them chase jobs all over the country.