Hard Times USA

What Recovery? Across America, People in Distressed Cities and Small Towns Face Economic Catastrophe

It's time for a new economic approach that brings jobs and hope to the places left behind.

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The US economy, many believe, is turning a corner.  Maybe so, but for much of the country, what lies around the corner is a dead end.  In far too many places, high levels of unemployment still exist, and joblessness has been the norm for years, even decades. Unless we try something different, these places will once again be left behind as more prosperous areas recover.

In over 200 metropolitan and micropolitan areas, the jobs crisis dominates everyday life, but these communities were experiencing high levels of unemployment long before the Great Recession. They are “distressed areas,” which we define as areas where the unemployment rate has been at least 2 percentage points higher than the national average for at least five years—in some places, for over 20 years.

We usually assume that economically distressed areas exist only in inner-city slums or rural backwaters. But areas plagued by persistent high unemployment almost never fit into conventional categories. Distressed areas share characteristics that make them unlikely to recover if the remedies offered rely only on the standard approaches to boosting the economy.

In distressed areas,government aid provides nearly one-third of residents’ incomes, compared to 17 percent nationwide. Upwards of 40 percent of the population in these areas lives on $30,000 a year or less, and the workforces there have low educational-achievement rates, with more than half possessing just a high-school degree or less. Most jobs are in low-end service industries, especially prisons, casinos, nursing homes, and retail. Such jobs offer few chances for upward mobility or skill enhancement.

For instance, unemployment in Yakima, Washington, has averaged 4 percentage points above the national average over the past 20 years—57 percent of its adult residents have only a high school degree or less. Similarly, in Rockford, Illinois, where the average unemployment rate has been 2.4 percentage points above the national standard for over 10 years, 53 percent of the population has no education past high school. To take one more example, a staggering 62 percent of the population in Danville, Virginia, has only a high school degree or less, and its unemployment rate has hovered 2.1 percentage points above the national average over the past five-plus years. In the country as a whole, by comparison, 43.3 percent of the adult population has no post-secondary education; in some thriving areas, the figure is much lower—for instance, Cambridge, MA (22.7 percent) and Seattle, WA (25.8 percent).

What distressed areas need is a new approach to reducing joblessness and building sustained prosperity. Efforts to promote industrial development, either by the Chamber of Commerce or through targeted government grants and subsidies, are no longer enough.  Worker-training programs are also insufficient, since trainees often discover after completing such programs that the hoped-for jobs do not materialize. The challenge is even greater for those who have been out of work for extended periods of time.

The dire conditions confronting jobless American workers in distressed areas won’t go away if we just wait for the long-anticipated increase in economic growth. These places have been struggling through both booms and busts; they offer proof that, unfortunately, a rising economic tide does not lift all boats. We need new approaches to reverse the long-term trends in unemployment.  

One approach that might bring about job growth is to expand access to startup capital for small businesses. Distressed areas lack the capacity to support new businesses. Moreover, existing businesses are unlikely to expand into distressed areas.

Report after report notes the number of unemployed workers in their 40s to early 60s who face poor prospects of restarting their work lives in their previous career field. In addition, there are countless younger workers who want to pursue new opportunities but can’t find any in the distressed areas where they live. For many of them, moving is not an option—they simply can’t afford it.

Both of these categories of workers provide a potential talent pool for entrepreneurial ventures that could be launched if funding were more readily available. While local financing might exist, either with banks or other financial institutions, the costs of borrowing, paperwork, and administration associated with loan-making at these institutions are often a serious obstacle for small enterprises. We need an alternative—a simplified and standardized loan process.

Here is where a new partnership between public and private interests could make a real difference. We could develop regional national investment banks—these banks would make funds available to local financial institutions that could then make loans for new ventures and base their decisions on a risk/reward model: that is, these loans would be given with the full understanding that they are risky. The reward would be providing new jobs for enterprising individuals and the workforces they hire—think of them as “revitalization loans.” This is similar to the rationale behind the government’s backing of standardized 30-year mortgages (through Fannie Mae and Freddie Mac) to make them profitable; the difference is that instead of encouraging homeownership, we would be encouraging job creation and economic growth.

What kind of enterprises might be started? The businesses could range from niche industries (coffee shops, small specialized stores, landscaping) to small manufacturing units (green industries or specialized metal-making companies). They would most likely focus on activities that are no longer performed locally. These revitalization loans would capitalize on individuals who are unemployed but possess untapped and underutilized capabilities, as well as knowledge of what their communities need and will support. The loans would be provided with the understanding that they can be paid back slowly and with relatively low interest rates, thereby ensuring that the new companies have the financial flexibility they need to develop and promote their businesses. 

It is inevitable that some small businesses will default on their loans. In distressed areas, however, little if any alternative exists if we wish to stimulate the local economy and reduce joblessness. The potential rewards—successful new enterprises, higher levels of employment—far outweigh the added risk. Without revitalization loans, there is little chance that new enterprises will attract funding.

Revitalization loans wouldn’t remove risk entirely, but the existence of federal credit guarantees would make short-term risk disappear for the local bank. This would encourage local banks to make riskier loans. In essence, credit guarantees can release private funding for public welfare by switching who shoulders the risk. Because the source of funding is national, not local, risk is spread rather than concentrated in one bank. 

We need a partnership between the public and private banks—with the public making funds available and local banks being strongly encouraged to make loans that involve less paperwork (and therefore lower administrative costs for both lenders and borrowers) to support risk-taking by entrepreneurs. We know that many small businesses fail, for a range of reasons. But if some ventures that receive revitalization loans succeed, we will have given jobless workers the opportunity to gain employment, stability and brighter futures.

The risk/reward model focuses heavily on extending the possibility of small-business ownership to those who did not have that opportunity in the past. The loans given to these entrepreneurs would have an associated repayment plan similar to that of a standard small-business loan. The difference would be that regional investment banks could extend or revise repayment plans and could provide more credit guarantees to local banks—that way, if a business needs more funds so that it can continue to operate, the local bank can provide those funds. Small enterprises require more flexibility to adjust to changing market conditions than typical banking arrangements allow. 

In the end, of course, some businesses will not make it, and the public would have to absorb the loss. But such losses would be small compared to the cost of doing nothing, which is an untold amount of irrecoverable lost income. The cost is also small compared to the current loan guarantees provided for renewable energy projects.

Some enterprises that revitalization loans would make possible will likely be innovative; others may teach their workers new skills that they would not acquire otherwise. Access to credit and support for small enterprises represent a critical movement forward—a movement toward incremental institutional change to support distressed areas where new businesses might thrive. It is a model that all Americans and their elected representatives should be able to get behind.

Louis Ferleger is Chair, Professor of History at Boston University

Jacob M. Magid is completing his master's degree in economics at Boston University