"Only the Rich Can Play" and Place-Based Policies

Cross Posted at the Niskanen Center


This book review is about people v. place-based policies at the federal level (and Congress) but, because there is a good bit about inter-governmental relations, I thought it would be of interest to SLOG-Law readers, so I'm cross-posting it. -- DS


David Wessel’s Only the Rich Can Play : How Washington Works in the Gilded Age is sure to enter the pantheon of Washington, D.C., books that explain the complicated, exciting, and messy ways big legal changes actually get through Congress. The book is in many ways a successor to Showdown at Gucci Gulch, a book that explains how D.C. really works.


But the book also has important lessons for understanding the future of regional economic development policy. We’ve had a long national debate about “people-based” and “place-based” responses to entrenched poverty. Most of this debate takes the form of comparing theoretical policy ideas, a war of white papers and academic articles about what some hypothetical Congress should do. Only the Rich Can Play shows why it is hard – and maybe impossible – for our actual Congress to pass decent place-based policies. Whatever one thinks of “place-based v. people-based” policies in theory, Only the Rich Can Play should be seen as a powerful argument against our capacity to make place-based solutions work in practice.


As a Washington reportage, the book brings it and then some. Sean “You know what’s cool? A billion dollars” Parker creates a think tank and a team of lobbyists to push for what is now known as the Opportunity Zones (OZs) tax break. The program shields investors who earn capital gains from paying taxes on those gains if they invest the money in economically distressed communities. The group includes wonks you’ve heard of (Kevin Hassett, Jared Bernstein, and Ron Klain, among others) and lots of people you haven’t. They pull together a coalition of Democrats and Republicans, most notably Senators Tim Scott and Cory Booker, who put OZs into the broader tax cut package Republicans pushed through in 2017. The broader coalition supporting OZs is at turns idealistic (probably more than the book allows) and self-interested, but the Parker collaborative at its core is at all times smart and coolly strategic, bringing together lobbying muscle, lawyerly savvy, and genuinely expert analysis.


As the OZ package works its way through the legislative and administrative process, it becomes increasingly friendly for rich taxpayers. The description of the inner workings of the regulatory process in the Trump administration in Only the Rich Can Play is both delightful and horrifying. Fans of congressional process, of budget scores and “Byrd Droppings,” will find many fascinating details. Further, Only The Rich Can Play does a better job than any book I can remember at showing how lobbying and the work of policy experts are linked in contemporary politics. Ideas and analysis play an important role in politics, and thus play an important role in lobbying.


OZs were intended to bring investment to economically distressed communities. People with large capital gains were given a tax break for making long-term investments in targeted areas. Avoiding capital gains taxes was a huge incentive for investors, but the regulatory process made the deal even sweeter. Investments that qualify for the tax break are not tied to job creation among residents of distressed communities, despite research suggesting that this is the key to ensuring that place-based subsidies actually target the needy. Even though many OZ designated places are economically depressed, other designated locations were not. Locations eligible to receive OZ investments ended up including not-exactly-depressed places like the Pearl District in Portland, Ore., Hell’s Kitchen in midtown Manhattan and downtown Berkeley, CA. Growing and gentrifying places have received a substantial amount of the overall OZ investment since 2017, providing tax breaks for deals that likely would have happened anyway.


This a Washington story, about how regulation works in the bowels of federal agencies and congressional committees. But the book has a lesson for the broader debate over “place-based policies.” The last 40 or so years have featured a growing geographic inequality, the rise of the New Yorks and San Franciscos of the country and the decline of the heartland. This has led a whole variety of wonks and academics to push against the broad agreement in favor of “people-based” solutions to poverty (cash or in-kind aid to low-income individuals) and to argue instead for “place-based” solutions like sending money to firms that hire people in the distressed areas or to their governments. This literature claims that aid that creates employment and better services in economically distressed areas will better target true economic disadvantage than social welfare programs that target aid to low-income individuals (people with low incomes today won’t necessarily have them tomorrow, after all). Those in favor of people-based solutions respond that traditional welfare programs actually do a better job of targeting the needy, and that place-based policies distort where firms move, reducing economic efficiency.


But this debate is mostly a clash between visions of ideally drawn policy. What Only the Rich Can Play shows us is exactly how unlikely it is for a decent version of place-based policy to get through a geographically structured Congress in a country with 50 states.


One of the central lessons of the political science literature on infrastructure spending in Congress (think Barry Weingast or John Ferejohn) is that it tends to get spread around districts. “Distributive politics” norms of pork-barrel deal-making lead to a failure to concentrate spending on valuable projects. The same problem distorts place-based policies.


Getting OZs through Congress required three important political steps, each of which took the program further from the ideals of place-based policy.


The first step was tying investment in distressed areas to a powerful interest, namely people with huge capital gains who would like to avoid taxes. There’s no obvious connection between helping poor communities and the tax cut. Tax breaks for investment in these areas could have been given to people who didn’t have large capital gains. But tying capital gains reductions to OZ investments had a powerful political logic – it linked the interests of the very rich to a program aimed at the poor. This marriage came at a price: The lobbying sway of rich investors made the program ever more generous to them as it went through the regulatory process. The result is that a policy designed to alleviate poverty in poor areas makes the tax code less progressive as a whole.


The second move was making the tax break available for investments in every state. The debate over place-based policies is largely about the economic decline of Appalachia, parts of the South, and the Midwest. But Congress simply isn’t going to pass something that does not offer benefits for most districts and states. Even in a polarized Congress, the logic of distributive politics is powerful. OZs ended up not being a program designed to alleviate the problems of Appalachia and the Rust Belt; instead, it became a program aimed at places everywhere. The bill used a definition of a “distressed community” that could have applied to about 40 percent of the nation’s Census tracts, piggybacking on a definition from a previous program, the New Markets Tax Credit. This spread investment around, reducing the benefits the program had for truly distressed areas. Further, the program targeted Census tracts rather than metropolitan areas. This meant that the tax break was available even in rich metropolitan areas, providing benefits to projects where the immediate neighborhood may have been struggling, but the jobs could easily go to people commuting in from thriving neighborhoods. This meant that the tax break was not very well targeted at true need. The problem is not that the designations weren’t targeted at all, but rather that, for place-based policies to be better than “people-based” policies, the geographic targeting has to be very good. And politics stands in the way of that happening.


The third move was allocating decisions about which areas should get subsidies to state governments. Rather than being very specific in the legislation, Congress set out broad parameters about which districts qualified and then gave governors the power to choose 25 percent of the eligible districts in their states. Previous targeted programs had bestowed that power on the Treasury Department, but OZ supporters handed it to state governments as a way of building political support – getting the decisions out of D.C. and giving governors “skin in the game.”


But when states designate areas, they have an incentive not to target the worst-off areas but instead to target the best-off areas that qualify. For OZs to drive investment in their states as opposed to elsewhere, governors needed to choose districts that would be attractive to mobile capital. No governor wanted to choose areas that would lead investors to avoid her state. The result was that many (although not all) governors designated places that barely fit within the letter of the law: qualifying because they were rich but adjacent to poor areas, or being counted as low-income because they had public or student housing despite being in middle of rich cities. A number of already well-off places that would have attracted investment anyway wound up getting OZ tax breaks – offices in Manhattan, a Ritz-Carlton in Portland, and so on. Providing tax breaks for investments that already would have happened is wasteful.


With these politically savvy moves, the bill sailed through Congress. But this legislative success came at the cost of making the policy fall further from the ideals of place-based policy.


The best advocates of place-based policy, like Tim Bartik, have been very critical of the OZ program. They advocate for subsidies for firms that hire people and provide public goods in depressed areas. But policy drift with this particular kind of program is inevitable. Congress has never been good at directing resources only to one type of area. Bills need powerful supporters. State governments are powerful interests that need to be cut in on the deal.


One can argue for or against Opportunity Zones, but they areare what a realistic, American place-based policy looks like. We live in a kludgeocracy, and place-based policies in the real world look like kludges, not academic articles come to life. And based on this evidence, real world place-based policies are just unlikely to target aid to people facing economic disadvantages very well.


Place-based policies have other flaws beyond their quality in targeting aid at they truly needy. As I and many others have argued, one of the central problems of place-based policies is the way they seek to lock in our existing economic geography, discouraging people and firms from moving in response to technological or economic changes. Whatever gains they offer, they are deeply conservative, slowing adaptation to a changing world. The real-world versions of these policies are even weirder, benefiting some rich areas and not others, and directing economic activity to this or that pocket of a region for no discernable reason. It is hard to justify using giant capital-gains tax breaks to encourage offices to be built in Hell’s Kitchen or Long Island City rather than elsewhere in New York City. It is just economic distortion without much purpose.


In contrast, people-based programs are straightforward. Things like the Child Tax Credit or “stimmys” may pass or may not. But it is less likely that they will be deformed beyond recognition on their journey through Congress. There are sometimes policy decisions associated with them – work requirements, strange phase-out rules, etc. – that change their form in order to increase their political viability. But their simplicity and broad availability is their central political asset. Most of the benefits and costs of these programs are actually captured in white papers, for better or for worse.


The debate between place- and people-based policies should consider the likely real-world versions of these policies, not their idealized forms. Only The Rich Can Play shows a central flaw of place-based policies, the way they inevitably get deformed in the political process.