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  • 05.26.15

Can We Turn Around America’s Distressed Cities With Venture Capital And 401K Plans?

Investors can help struggling cities–they just need the right set of incentives.

Can We Turn Around America’s Distressed Cities With Venture Capital And 401K Plans?
[Top Photo: Engel Ching via Shutterstock]

In some ways, the U.S. economy has rebounded quite well since the recession. At 5.5%, national unemployment is half what it was. The stock market has more than doubled in value. And cities like San Francisco and Austin are riding along quite happily (at least for many people), buoyed by investment, new businesses, and infectious energy.

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But some parts of the country have stagnated, or gone backwards. Places like Las Vegas, Sacramento, Philadelphia, Buffalo, and Hartford, Connecticut, have lost high-paying jobs, while other cities, like New Orleans, Rochester, New York, and Tampa, have seen jobs come back, but only in low-paying form.

There’s income inequality in America, but also “geographic disparities,” as a new report points out. For example, in December 2014, San Francisco had an unemployment rate of 5%, while the inland city of Fresno, about 200 miles away, had more than double that. Other California cities have even worse joblessness: Merced and Yuba City, for example, were at 12.6% and 12.2%, respectively.

Carli Jean via Unsplash

The report, by Jared Bernstein and Kevin Hassett, and published by the Economic Innovation Group, a Washington, D.C., think-tank, looks at new ways to help poorer neighborhoods get moving again. It considers how the federal government can incentivize private investment and tap into the trillions of dollars of “unrealized capital gains and cash holdings” currently sloshing around the financial system.

“The idea is to find a channel by which capital that’s sitting on the sidelines, or just compounding on financial markets, that could find its way into these disadvantaged places,” Bernstein says in an interview.

Bernstein and Hassett want to create a fund that’s “analogous to that of a venture capital firm or mutual fund company, but specialized in development investments in businesses in predetermined locales.” The vehicle would raise capital from both individual and institutional investors and come with attractive tax arrangements. For example, it might allow people to transfer funds from a stock market investment without incurring normal capital gains tax.

“There are investors who would like to do well by doing good, but who don’t want to be the first mover,” Bernstein says. “They don’t want to do it themselves. They want to do it in concert with others. That led us to think about an investment fund that was designed to allow everyone from a 401K holder to an investor in a hedge fund to invest in these areas, instead of an index fund somewhere.”

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Siddharth Kothari via Unsplash

There are already plenty of government incentives to encourage investment in depressed places. The report identifies nine of them. The problem, says Bernstein, is that they tend to have complicated rules, long lead-times (stopping investors retrieving their money) and not to be structured to involve intermediaries like banks, private equity, and venture funds (i.e. the people who really pull the strings).

Of the vehicles Bernstein and Hassett consider, only one called the New Markets Tax Credit (NMTC) seems to have made much headway. It offers a 39% credit against federal taxes for every dollar of loans, investment, and consulting services someone offers to designated communities. A 2013 Urban Institute analysis found that it has spurred a lot of projects that otherwise might not have happened.

Bernstein, who until 2011 advised Vice President Joe Biden on economic policy, admits the new idea needs fleshing out in more detail. But he reckons a combination of pooling capital, expanding access to new sorts of investors, and generous tax incentives might lead to something useful. He even thinks there’s good money to be made, as assets in distressed communities tend to be cheap.

The idea isn’t entirely new. We’ve seen before how people are trying to mainstream “impact investing” beyond high net-worth groups, for example through projects like Vested.org. But having the specific backing of the federal government might lead to something more significant. Bernstein and Hassett now just have to persuade a few powerful people to back it.

About the author

Ben Schiller is a New York staff writer for Fast Company. Previously, he edited a European management magazine and was a reporter in San Francisco, Prague, and Brussels.

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