Bottom-Up Economics pt. 2 – A Plan I Could Support

More web searching on the subject of “bottom-up economics” has turned up a few interesting reads. One of them is this article published by MIT, which is an interview with Iqbal Quadir, the founder of GrameenPhone, Bangladesh’s largest provider of wireless phone service.

The story of GrameenPhone is fascinating. By the late 1990’s, Bangladesh still lacked a wide-reaching and dependable telephone infrastructure. Quadir and his associates proposed a novel solution: give thousands of individuals access to microloans from Grameen Bank, and then have them use the money to purchase wireless phones and airtime, which they would then lease to others at a profit. A portion of that profit would be returned to GrameenPhone, thus establishing a primary revenue source for the company. By 2003, GrameenPhone had grown to 1 million direct subscribers, and they still contracted with 30,000 entrepreneurs whose phone leases provided wireless access to an estimated 50 million Bangladeshis.

The article’s author thus described Quadir’s philosophy — “investing in local entrepreneurs, rather than funneling aid to their governments, may be the best hope for the world’s developing economies.” Quadir obviously supports a decentralized economy driven by a market of small-scale entrepreneurs and individual consumers. Actually, his concept sounds very similar to the original idea behind HUD “empowerment zones.”

In the 1980’s, bolstered by the early successes of supply-side economic theory as evidenced by the “Reagan” (actually Kemp-Roth) tax cuts, a group of conservative politicians led by Jack Kemp proposed special “enterprise zones” as a solution to the chronic undercapitalization in certain segments of American society, particularly inner cities.

Kemp opposed the idea of “free” Federal money being poured into these neighborhoods with no requirements for productivity. Instead, he proposed creating special zones, and then encouraging private venture capital firms to channel money into them. Kemp proposed offering special tax breaks and other incentives in order to spur these private investments. Local residents would use this capital to open small businesses, which would then restore economic stability — and eventually prosperity — to blighted areas. The government’s only roles would be to grant tax breaks and other financial incentives to both the venture capitalists and the entrepreneurs, and to ensure that burdensome regulations that were not absolutely essential would be suspended or eliminated outright, thus making it easier for the “enterprise zone” startups to survive.

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Of course the original Kemp plan didn’t survive Congress. By the time it became part of the Housing and Community Development Act of 1987 it had been watered down into little more than a new series of HUD grants, along with conditions allowing for the suspension of HUD regulations under special circumstances. Ironically, Jack Kemp himself became Secretary of HUD during the George H. W. Bush Administration; he expressed his displeasure with the drastic changes made to his own legislation by refusing to designate any enterprise zones unless Congress reintroduced private investment and financial incentives into the program. Kemp had a myriad of other battles to fight while at HUD, and enterprise zone idea fell off the radar until the Rodney King riots in Los Angeles in 1992 renewed America’s interest in its inner cities.

Three years later, in fiscal 1995, the Clinton Administration finally approved federal funding for a revamped program sponsored by Harlem Congressman Charlie Rangel that created “empowerment zones” in blighted neighborhoods. These new empowerment zones were administered by HUD but actually financed through the provisions of the Social Security act, a clever political maneuver that forced a significant portion of the money to be spent on social services.

Writing in 1995, here is how author and university professor Mitchell Moss described the empowerment zone program:

Each empowerment zone would get $100 million over two years, and each enterprise community would get a grant of $2.95 million to promote economic self-sufficiency through adult education and training, welfare-to-work transition programs, workplace day care, and job placement. Businesses in the zones would get a 20 percent tax credit for the first $15,000 of wages and training expenses paid to employees who live or perform most of their work in the zones. In addition, small businesses in the zones are allowed to deduct an additional $20,000 per year for depreciable equipment, beyond the $17,500 already permitted. Although the empowerment zone program provided incentives for private investment, it also gave the Clinton administration a new framework for social service spending, not just on job training or welfare-to-work programs but also, under Title XX of the Social Security Act, on emergency and transitional homeless shelters or drug-and alcohol-abuse programs in big cities.

New York, Atlanta, Baltimore, Chicago, Detroit, and Philadelphia became the first cities with neighborhoods designated as empowerment zones.

While empowerment zones have met with some success, they have unfortunately become yet another huge Federal government boondoggle, a prize often awarded through political wrangling and back-scratching that leaves poor neighborhoods flush with government social service funding, yet generally devoid of private investment.

The successes of GrameenPhone and Grameen Bank indicate that small capital investments given directly to individual entrepreneurs can elevate needy people to a sustainable level of self-sufficiency. Such “bottom-up” investments, made with private capital injected directly into undercapitalized or impoverished areas, seem to have an awesome potential, and are theoretically far more efficient that government subsidies.

Naturally, these ideas have spawned quite a bit of criticism from both the left and the right. Liberals (as they did during the 1980’s) complain that enterprise zone and microloan programs lack a mechanism to immediately address the pressing social needs of inner city neighborhoods, such as drug and alcohol abuse treatment, day care, and primary medical care. Liberals stress that the transition from being on welfare to earning one’s own living is very difficult (as evidenced by the plight of poor New Orleans residents after Hurricane Katrina), and unless inner city residents are healthy and have unfettered access to counseling and training, they are unlikely to successfully make that change. Some conservatives agree to a certain extent, pointing out that American inner city residents are generally members of dysfunctional families or communities whose consistent exposure to selfishness, irresponsibility, broken sexuality, and rebellion (generally leading to drug and alcohol addiction, incarceration, and violence) make them poor candidates for entrepreneurship. Conservatives also note that the heavy crime and crumbling infrastructure of inner cities would strongly discourage most venture capital firms from investing there. And the recent subprime mortgage-driven financial collapse illustrates the folly of giving poor residents generous lines of credit if they have no way of paying the money back.

Of course as a Christian I believe that poverty is also the result of some major spiritual deficits (in both the rich and the poor) that must be addressed if it is to be completely alleviated, but that is a discussion for another time.

Even in the light of these obvious concerns, I would still favor a “bottom-up” economic stimulus program based on the original enterprise zone concept, as opposed to the warmed-over Marxist “bottom-up” redistribution schemes that seem to be supported by Barack Obama and his circle of advisers. Unmerited redistribution of wealth, with no requirements for productivity attached to the money, quickly brings despair and shiftlessness because the standard of living available to the recipients is severely limited by the size of their benefits, and the recipients of such money are usually given few incentives or opportunities to improve their circumstances. Studies have shown that an individual’s subjective well-being is strongly influenced by his sense of mastery, which in turn is “a global evaluation, an overarching sense of the degree to which one experiences control over what goes on in his or her life.” Those who depend on government handouts give up a great deal of personal freedom, while those who work to support and advance themselves have far more freedom and experience a far greater level of happiness and satisfaction with their lives.

And isn’t that what ending poverty is truly about?

– Michael Laprarie