Can Clinton's urban policies really work? B.E.'s economists weigh the value of empowerment zones and community banks in revitalizing America's cities.

U.S. BUSINESS AND ACADEMIC economists declared recently that the economy was expanding and jobs were being filled at such a healthy pace that we would soon achieve "full employment." Such economic artifice bears little resemblance to reality when you consider the fact that our unemployment rate still hovers around 6% and nearly 13% of blacks--more than 20% of the total number of unemployed Americans--remain jobless.

Ironically, those economists made their remarks the same month that Ralph Ellison turned 80. In 1952, Ellison captured white America's willful blindness to black life in his National Book Award winning novel, Invisible Man. Now, 42 years later, the great author is dead, and African-Americans--as well as other minority and poorly educated segments of America--are still invisible when the U.S. economy is calculated.

The BLACK ENTERPRISE Board of Economists gathered recently at the magazine's New York City headquarters to take a close look at how well President Clinton's urban economic policy is likely to address the needs of invisible Americans. To prepare for the one-and-a-half-day meeting, each board member studied the Clinton plan's key components: the creation of urban empowerment zones (EZs) and enterprise communities (ECs), a strengthening of the Community Reinvestment Act (CRA), and the proposed creation of a national network of community development banks.

Their conclusion: All were underwhelmed. The group agreed that:

* While the Clinton administration's EZ and EC plans are sincere attempts to do something, their actual application will be limited in scope and impact.

* Although EZs were devised to boost employment, in reality most will be more of a boon for small entrepreneurs who can benefit from the EZs' tax incentives.

* The EZ and EC plans should not be allowed to serve as a sop to minorities without addressing the legacy of systemic and institutional racism in America.

* Instead of creating a new network of community development banks with limited capital, the federal government could broaden minority business opportunities by providing guarantees against lending or investment risks to minority banks.

* The CRA's success should encourage blacks to use existing antidiscrimination laws to press for economic change.

* In 1994, based on forecasts by board member Andrew F. Brimmer, the African-American percentage of the labor force will grow faster than the black share of employment and income. This will lead to wider job and income deficits.

These sorts of concerns about Clinton's plan are nothing new, the board members agreed. "In recent years critics have attacked the validity and success of [urban] economic development programs in general," said BE Publisher Earl G. Graves--who is intimately familiar with Brooklyn's successful Bedford-Stuyvesant redevelopment project because of his work with Robert Kennedy during the 1960s.

He pointed out that for 30 years government officials and their critics have actually learned a lot about what does work in correcting urban America's ills. "I ask them and you to consider the consequences of not having made those limited, but constructive, steps," said Graves. "[Now,] after 12 years of a mixture of GOP hostility and benign neglect toward urban problems, what can African-Americans expect from President Clinton's urban economic policy?"

Discussants at the session, which was chaired by Graves, included guest economist Cecilia A. Conrad, professor of economics at Barnard College, as well as board members Gerald Jaynes, professor of economics and African and African-American studies at Yale University; Marcus Alexis, professor of economics at Northwestern University; Brimmer, president of Brimmer & Co., a Washington, D.C.-based economic consulting firm; Courtney N. Blackman, an international business consultant; Edward D. Irons, dean of the Clark Atlanta University School of Business; and David H. Swinton, president of Benedict College. Margaret C. Simms, research director at the Joint Center for Political and Economic Studies, led the discussion.

HOW POTABLE IS CLINTON'S PLAN?

A major public policy challenge in the 1990s is devising urban economic plans that create jobs and boost income. Earlier this year, John E. Jacob, president of the National Urban League, in the group's annual State of Black America address, challenged President Clinton to make "job training and job creation for the disadvantaged a top priority. The President [should] press as hard for jobs as he did for NAFTA."

Unfortunately, while open trade borders have been established to the north and south of the United States, America's inner cities still seem as far from new industry and increased income as the moon, according to the board. In an attempt to redress this isolation, the Clinton administration will spend $3.8 billion in six urban and three rural empowerment zones over the next four years (see Economic Perspectives, Dec. 1993). Each EZ will receive block grants of up to $100 million, tax incentives for worker training expenses and tax write-offs for various investments--such as a 50% exclusion of capital gains for investments in certain businesses. Grants of $3 million apiece will be allocated for 95 enterprise communities.

The need is great. Considering the ubiquitous nature of unemployment, endemic crime, AIDS and homelessness, it is not surprising that more than 500 applicant cities are vying for the awards. Completed applications are due by June 30, and winning cities will be selected this fall. Easy-to-describe--but harder-to-accomplish--principles will guide the selection process. The EZs must create jobs, attract private investment and stimulate economic activity in their regions. Each zone's plan must be part of a larger coordinated and comprehensive strategy, including safety, environmental, social and civic components.

The plan is also supposed to be top-down as well as bottom-up in design, coordination and leadership. This means that input from community-based, private, nonprofit, religious, local and state organizations will be as crucial as that from the federal government. Finally, a strategic vision of urban change is supposed to knit these ideas, entities and individuals together.

One concrete part of the EZ plan that entrepreneurs will relish establishes as many as 12 Small Business Administration-backed "One-Stop Capital Shops." These national and regional capital distribution points are slated to provide $300 million to $400 million to small business in the form of private loans and equity investments during the next five years.

Yet despite such positive aspects, the board is not particularly impressed. This assessment is no indictment of President Clinton's sincerity, but rests on a belief that America's current fiscal conservatism and impatience with urban problems may well ensure there is not enough money or time to produce quantifiable positive benefits in the EZs. Margaret Simms, the Joint Center's research director, wonders whether enough money has been allocated for each zone. She is also concerned that the same amount of money will be allocated to each EZ, regardless of how large or small the surrounding city is.

Clearly, $100 million is a lot of cash, but the amount pales when held against the mega-problems and billion-dollar budgets of the nation's largest cities. For instance, if an EZ in Los Angeles is too large, Simms says that regardless of resources, the plan's administrators may find it hard to make a significant difference in job creation, drug abuse programs or education.

"You can't just work on business development and worry about education later," says Simms, "because, clearly, an attraction for business is a skilled and prepared workforce." In the same vein, she adds, the United States "can't just work for education without also working on other problems within the community that may be related to family dissolution."

The notion that EZs may be stronger on paper than in reality also bothers Marcus Alexis. The Northwestern University economics professor and a reputed candidate for a Federal Reserve System governor's chair favors the idea of targeting specific urban areas and involving local small businesspeople and other private-sector elements.

But even a viable EZ won't have an impact on every unemployed person in the area covered. Alexis says EZs are not created with the unemployed in mind. Instead, they are directed at "people who have serious entrepreneurial ambitions on a small scale," possess an idea, a risk taker's mentality and some capital to work with. As he points out, the goal of EZs--but not the requirement--is that workers would be hired from the neighborhood surrounding the EZs.

There are no guarantees that this will happen, though, and the board has other, deeper misgivings. Most members see the EZ plan as a rewarmed, old idea. There is also a belief that in spite of all the administration's intentions, enacting the EZ and EC plan only serves as a sop to minority demands without addressing the real problem: the corrosive legacy of U.S. systemic and institutional racism.

For those reasons, Swinton, Benedict College president-elect and former dean of Jackson State University's business school, believes that "the program should not be widely hailed or accepted by African-Americans." He contends that the EZ concept lacks a solid theoretical base. In effect, he says, it's a feel-good solution based on the mistaken assumption that if there's a problem and you direct enough energy at it, you'll somehow solve the problem. As a result, he says, African-Americans must not get caught up in the politics of just getting something done.

Barnard College economics professor Cecilia Conrad also questions the type of jobs brought to an EZ. Can success be declared if warehousing firms open up instead of labor-intensive manufacturing plants? It is not unreasonable, she says, to assume that firms moving into an EZ may receive large tax credits and then hire few workers from the surrounding neighborhood. Or what does a community do if labor-intensive companies are attracted to the area, but all the jobs require an education and skills level not found locally?

There was one dissenter to this negative litany from the board. Edward Irons, dean of the Clark Atlanta business school, acknowledges that the EZs will face difficulties regardless of how they're structured. But he says that whether companies are lured by tax incentives or by access to transportation hubs, even EZs that produce only a small number of jobs are a positive force in poor communities where such businesses, jobs and income did not exist before. In addition, the one pure benefit of the EZ plan, he says, is that even cities that are not selected will still benefit: Simply by creating a serious proposal to submit, they will end up with a blueprint for how their community can move ahead in the future.

BANKING ON COMMUNITIES

The purpose of the proposed community development banks is to bring capital, credit and financial services to populations and areas not served by traditional financial institutions. Before BE went to press, the House and Senate had each passed versions of the community development bank (CDB) initiative, which allocates the dispersal of $382 million or $500 million, in the respective versions, during a four-year period. The plan now awaits final compromise in a joint House-Senate committee, which is expected to reach an agreement before the summer recess.

The compromise plan will probably create new banks whose sole purpose is to spur economic development. Whatever amount of money ends up being allocated will be used for small business-credit, low-income housing, financial services and training. Existing minority-owned and community banks will also get a chance to distribute pieces of the financial pie.

But with spotty community lending records, most of the African-american-owned banks may have trouble qualifying for CDB backing. Because African-American banks tend to operate in communities that are disproportionately poor, where loans are disproportionately risky and where insurance is hard to come by, most tend to invest their capital in buying and selling government securities for their own accounts rather than in tending funds within their communities. Thus, there's an ongoing debate as to whether black-owned banks serve their communities to the limit of their capabilities (see "Building a Financial Powerhouse," this issue).

The big question is: Would the CDB funding let black banks that are meeting community needs do so more efficiently, and will it free banks that are not as active to do more community lending? No one knows, but there are strong opinions. Historically, a dearth of equity and loan capital has retarded the growth of black entrepreneurship. To Swinton of Benedict College, launching a network of CDBs could lay a foundation for filling that gap by providing a capital boost. But Brimmer disagrees. "I believe that creating new [federally sponsored] financial institutions ... is an outright mistake," he says. Such banks would be beholden to the government, rather than the market, and would thus not provide sufficient new resources for black opportunity.

The other significant problem with the CDB plan is the piddling sum of money involved. If, for instance, the full $500 million is approved for the CDBs and only one bank were to be set up in each state--which seems highly unlikely--it would receive only $10 million during a four-year period. The plan's weakness leads Irons of Clark Atlanta University to say, "It is ludicrous to throw out this amount of money nationally and to expect it make a difference." If the administration is serious about the plan, it should "add more money."

MAKING LENDING FAIRER

Of course, many African-Americans do not want special treatment. In recent years, a number of minority organizations have used the CRA--a law that Congress created to ensure that banks and thrifts provide equal access to capital--to inject new capital streams into African-American communities.

In July 1995, a new version of that act will give the law even stronger teeth. The reforms will put in place 12 performance tests for lending, service and investment that banks must meet, instead of only three tests now in effect. Among the new measures are: the demand that banks document where in their markets they actually make loans rather than simply showing how they are trying to expand their efforts; separate and less stringent lending policies for banks with less than $250 million in assets and tougher ones for those with more than $250 million; and active solicitation of community opinion about a bank's performance.

Comptroller of the Currency Eugene A. Ludwig says this reinvention of the CRA will "channel billions of dollars in new credit into America's distressed communities, while at the same time reducing unnecessary burdens on banks."

Brimmer, a former Federal Reserve governor, is quick to point out the paradox. Nearly every black-owned bank will be excluded from closer CRA scrutiny because most have less than $250 million in assets. Yet, at the same time, he notes, these banks will still be required to meet such basic CRA standards as reasonable extensions of loans and reasonable loans to small businesses and individuals.

Swinton, for one, believes that the CRA reforms may, ironically, have a more beneficial and lasting impact on minority communities than EZs. His premise is based on CRA enforcement of basic fair lending policies, which would put more capital in the hands of previously under-served clients. "It [CRA reform] would really make a major difference to both the consumers buying houses and businesses seeking loans," he says. Regulators, he adds, are "even saying the banks should make investments in organizations that make loans to small and disadvantaged businesses."

As a result of the powerful impact of CRA reform, combined with dissatisfaction over the EZs, Yale University's Gerald Jaynes suggests that black energy be focused elsewhere. Community groups, which mastered the CRA's complexities and won battles with major financial institutions across the United States, should redirect their energies. As he points, out there are many other antidiscrimination laws already on the books that, like the CRA, could be used by African-Americans to reap "huge pay-offs" for the black community.

NO REAL RECOVERY FOR BLACK JOBS OR INCOMES

The economy is picking up steam. However economist Andrew F. Brimmer, president of Brimmer & Co. Inc., says that while "the progress of black Americans will improve slightly," the black population and labor force will grow faster than their share of employment and income. As a result, he predicts, "the jobs and income deficits which blacks suffer will widen further."

This year, the black civilian labor force should grow to 14.4 million, or to 11.1% of the total U.S. workforce, vs. 14.1 million, or 11% of the total in 1993. African-American employment, meanwhile, is likely to hit 12.6 million, or 10.32% of total employment, vs. 12.2 million, or 10.2%, last year.

This means that there will be nearly 1 million more black workers in 1994 than there are jobs for them. As the nation's gross domestic prodcut (GDP) picks up, black unemployment will be slightly lower than last year, but it will still stand at 2.27 times that of whites. Black joblessness is projected to average 1.83 million in 1994, or 23.3% of all those unemployed vs. 1.89 million or 21.7% last year. That translates into a black unemployment rate of 12.7% this year vs. 13.4% in 1993.

By contrast, total unemployment in the U.S. may dip to 6.1% for all workers vs. 6.7% last year, and to 5.2% for whites vs. 5.9% in 1993.

On the bright side, if black employment grows, so does black money income. Of course, the parity share of money income would be larger if blacks were employed in numbers equal to their share of the civilian labor force. In 1994, total U.S. money income is projected t be $4.17 trillion, and the black share may rise to $319.8 billion or 7.7% of total U.S. income vs. $300.6 billion or 7.6% last year. If blacks received a parity share of income, their share would rise by $142.6 billion more this year.

CLIMBING A ROCKY INCLINE

If Brimmer were looking at the emerging pattern of America's weather instead of its economic forecast, he would likely say that this year will feature blue skies with a slow accumulation of clouds. Brimmer says that in 1994, "the American economy will expand at a decelerating rate." He adds, "the pattern of growth will reflect the strong momentum carried over from last year--moderated by the restrictive monetary policy adopted by the Federal Reserce early this year. The results will be a significant reduction in unemployment and the continuation of subdued inflation."

By fourth quarter 1994, GDP may have slowed to a 2% growth rate, with the growth rate for the year as a whole running at 4% vs. 3% in 1993. The final quarter decline in GDP will result from a downturn in home-building as interest rates rise.

The Clinton administration's plans to cut the $200 billion budget deficit through spending cuts and t ax increases will be another plus for the overall economy. But the continuing global recession and increased U.S. consumer demand will skew the balance-of-trade figures as projected exports go up 4%, while imports climb 11.3%.

Brimmer does not believe, as many do, that inflation will be "rekindled in 1994." Instead, he projects a period of relative price stability.

Despite this stability in prices, he expects interest rates to rise "significantly" this year, based on the pattern already set by the rise in rates on U.S. Treasury bills and 30-year government bonds. Investors are spooked, he says, by an "ingrained fear of an increasingly restrictive Federal Reserve monetary policy."

As a result, long-term interest rates will be higher than thy would be if the market viewed economic conditions objectively. He expects the U.S. Treasury-bill rate to run at about 3.7% and 30-year U.S. government bonds to be about 6.95% for the year.