Small Businesses Are The Inner Cities’ Only Hope

Monday, 2007-March-19 at 23:45 1 comment

It is already well-known that one of the major problems in our inner cities is the astonishingly low income levels of local residents. This more or less forces many residents into the underground economy (deriving income from illegal activities), as it is not possible for them to support themselves otherwise.

Yes, there are serious drug, gang, and other crime issues. Some of these are effects of pervasive social issues. A study published by the Upjohn Institute for Employment Research [PDF] in 2000 found that a part of the problem with inner-city economies is a “spatial mismatch.” This is the idea that most of the economic development occurs around the periphery of cities, causing “environmental damage, congestion, and labor shortages at the periphery, and poverty and neighborhood deterioration in the central city.”

However, the study’s solution does not really solve much. At least in Southern California, many residents already spend two to four hours each day getting to and from work. Many residents of areas like the Inland Empire and High Desert are already seeking local opportunities before their vehicles wear out.

Regional solutions are needed, but those solutions must encourage business development to occur closer to residential communities, and encourage employers to seek nearby residents for their workforces.

Milwaukee’s Journal-Sentinel has an editorial that puts this into a more practical perspective. While trying to recover from the loss of industrial firms, the city must still cope with its economically stagnant inner city. “Income per taxpayer, adjusted for inflation, in one ZIP code alone on the city’s increasingly troubled northwest side, was down 7.7% in one year. Meanwhile, the gap between city and suburban incomes continued to grow.”

When I was driving to a federal office in the Los Angeles area every day, I was leaving at 4:45 AM in order to arrive by 7:00 AM. Why? Because around 5:50 AM, a place I needed to pass where another freeway met the one I was on suddenly jammed up. At that point, it took more than an hour to travel the last 17 miles of my 90+ mile journey. It took longer to travel the last 17 miles than it did to cover the first 78 miles.

The Upjohn study suggests:

These problems are distinct because neighborhoods are not job markets. Most Americans do not work in the neighborhood they live in. Research suggests that relatively few of the jobs created by inner-city economic development are likely to go to inner-city residents. Rather, these jobs will go to workers living throughout the metropolitan area.

This is one of the problems with being dependent upon larger companies as the foundation of the regional economy. A vibrant community is likely to have a proliferation of smaller businesses, many of which will be owner-managed businesses, along with some medium-sized and larger businesses among the mix. These locally-owned businesses are much more likely to hire nearby residents. Now there is definitely something positive about having a certain percentage of the people who work in the area coming from outside–these people are going to spend money in the area’s restaurants, for example. Yet, if that percentage rises too high, then neighborhoods become ghost towns after 5:00 PM, with no businesses or services remaining available in the evenings for those who do continue to live in that community.

We have to find a balance. I suggest that the balance is for communities to encourage, support, and even finance locally-owned small businesses. This, of course, should not be a blank check or given without strings. For a certain amount of loan guarantees, a certain number of locally-resident employees should be maintained for a particular time period (which should be at least one to two years). In order to qualify for a larger guarantee amount, both the number and the time period should increase. Perhaps percentage targets are more appropriate: 50% for the first guarantee level, 75% for the second, and 85% for the third, with some numerical “floor” to qualify.

[This would also be helpful in areas such as the Victor Valley and Barstow areas (in the High Desert of Southern California), where there are miles of housing areas, but employment is usually obtained by commuting to other communities.]

If inner-city economic development won’t help the central-city poor much, should the government encourage inner-city economic development? Yes, because business development in the central city vs. the periphery causes different community spillover effects. On the periphery, new business development causes environmental problems and congestion and may require costly infrastructure. In the center city, business development may help improve amenities and safety in inner-city neighborhoods and also the city’s tax base. Private investors do not take account of these 2 spillovers. Government can encourage business to take account of these spillovers by providing central-city business development with public subsidies.

By placing smaller businesses at the center of economic development and ensuring that these job sources are in proximity to employee pools, we can do more than that, especially if we provide employment training that is directly tied to a particular employers requirements. If company X needs 15 employees that can operate a particular type of lathe, we train 15 local residents and they go directly into company X’s workforce. Now, there will have to be social programs in those areas, including financing, so that local residents can become owners of their homes (perhaps turning housing projects into resident-owned condominiums) and begin to experience the “pride of ownership” that will lead them to help prevent graffiti and other property damage.

A more recent study, from the US Small Business Administration, claims that “Small Business Drives Inner City Growth And Jobs.” We should not be surprised, as larger businesses have to consider locations that can pull in employees from a wide area. They choose freeway crossroads, for example, if they are retail-based, so that employees and customers can drive from all over the metropolitan area.

“This report demonstrates that local entrepreneurs are not only the backbone of inner city economies but their strongest source of new jobs,” said Steve Adams Region I Advocate for the Office of Advocacy and formerly the Director of the Center for Urban Entrepreneurship at the Pioneer Institute. “Policy makers should take note of these findings showing that supporting new and established entrepreneurs in inner cities should take priority in their urban development strategies.”

Again, not surprising, except to those who have been lured by the siren song of the large corporation. Local business, local employees, local tax revenues–what is so hard to understand about that? It is a “slam dunk,” a win for all concerned.

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1 Comment

  • 1. Benjamin  |  Thursday, 2007-March-22 at 15:56

    Wow, a long post with a lot of interesting ideas, but too many for me to respond to them all!

    What I would like to point out, though, is that the patterns you find are mostly true for automobile oriented cities in the South and West USA. Older cities like Boston, New York, Philadelphia, Chicago, etc, do not have the same problems. (They have their own problems, of course.) These are residential cities, where people live in every neighborhood, including the downtown. They have mature and workable mass transit systems, which make for easier and more efficient commutes, but also require more activities to occur in central places (or satellite hubs).

    I think physical infrastructure can solve some of the issues you raise. New residential subdivisions should not be permitted so far from other activities. Neighborhoods should be zoned for mixed use, and transit options need to be built, or planned, to coincide with urban growth. Density needs to be higher. Freeways should not be built so rampantly, commuter trains and small nodes of activities around the stops are required instead.

    Southern California needs major reworking! But if you look at the efforts of the MTA, you’ll find they are making a lot of smart decisions right now. They’re on the right track! It just needs time and continued faith until the results start to show for themselves.

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