Posted on May 27, 2005

America’s Worst Urban Program

Steven Malanga, City Journal, Spring 2005

In its new budget, the Bush administration is proposing to eliminate one of the last and least effective vestiges of the War on Poverty: aid to cities doled out in the form of community-development block grants. The president has proposed slashing funding for this $5 billion-a-year boondoggle, which allows local officials virtually a free hand in spending federal money in their cities. Bush would fold what remains of the block-grant program into other, more tightly focused and controlled grant schemes.

The end cannot come soon enough. Over the last 30 years, the block-grant program has expended some $100 billion in thousands of communities, with little to show for the effort. Local officials squandered the billions by financing unworkable projects that often went bust, investing in new businesses that couldn’t survive in depressed neighborhoods, and funding social programs with little idea of how they might actually strengthen their communities. A paradigmatic example of government ineffectiveness, this tempting pot of money gradually evolved into nothing more than a funder of local patronage and congressional pork spending. By killing the program, the Bush administration will do more than just save billions of taxpayer dollars. It will send a message that cities must cast off the 1960s dependency mentality that viewed federally subsidized programs as the only road to inner-city community revival and economic development — a notion that years of failed efforts should now put to rest.

Created in response to the riots of the mid-1960s, urban-aid programs sprang from a belief of those radicalized years that the economic decline of inner cities resulted from external forces unconnected to the cities’ own high-tax, antibusiness policies or the growing culture of inner-city dependency, nurtured by a vast expansion of welfare. Instead, such model-cities gurus as Edward M. Kaitz and Herbert Harvey Hyman, in their Urban Planning for Social Welfare, blamed urban decline on, among other things, federally subsidized home mortgages, which they argued encouraged the middle class to abandon the cities, and also on the nation’s Protestant ethic, which directed private charitable institutions to target their aid only at the “worthy poor” who embraced our culture’s values, but skimped on aid to those who didn’t. To counteract the sins of the federal government and of our bourgeois culture, federal officials proposed spending immense sums to rebuild neighborhoods, stimulate local economies, and finance social services that could restore the sense of community evaporating from inner — city neighborhoods as poverty demoralized their residents. President Johnson grandly asserted that with this investment, the federal government would help create “cities of spacious beauty and living promise,” while the director of his Office of Economic Opportunity, Sargent Shriver, confidently predicted that the government could all but eliminate poverty in a decade. Buoyed by such optimistic self-assurance, Washington crafted a panoply of urban-aid programs and eventually rolled them into one gigantic block grant, funneling billions of dollars of urban aid to local public officials, many of whom understood little about the true causes of urban decline or about how the economies of cities and neighborhoods worked.

A graphic illustration of how little this money accomplished is the failure of the program’s key initiative: a loan scheme designed to stimulate business in poor neighborhoods. War on Poverty planners had argued that poverty persisted in distressed areas partly because banks and other businesses redlined them, starving them of the investment they needed to revive by refusing to do business there. To counteract that lack of capital, the block-grant program poured hundreds of millions of dollars into businesses in poor communities, often financing companies that had difficulty repaying their debts, backing projects that went bust, and rarely creating jobs in the distressed areas at which they were targeted. Nationwide, nearly 25 percent of block-grant-backed loans wind up in default, according to a recent analysis of dozens of community-lending portfolios. Even worse, a second HUD program — known as Section 108 — which allows block-grant communities to raise money for loans by floating HUD-backed notes, has a staggering 59 percent default rate. Although government programs are expected to make riskier bets than private banks (whose loan-default rates are typically in the low single digits), the stratospheric failure rate of HUD loans amounts to a squandering of millions of taxpayer dollars, since taxpayers are on the hook for these loan guarantees.

When it comes to such lending programs, the bigger the effort, the worse the failure. In Los Angeles after the 1992 riots, for instance, the federal government plowed a staggering $430 million into a loan program designed to finance a cornucopia of jobs in East, South, and Central Los Angeles but that went bust after creating pitifully few jobs. The federally sponsored Los Angeles Community Development Bank (LACDB) searched out worthy businesses in depressed areas, but since its crime-ridden target area remained an economically inhospitable place, the bank had trouble finding companies to lend to. Criticized for not making loans quickly enough, it then started pouring money unwisely into local businesses. It made one of its biggest loans to a former welfare recipient who had become a successful soft-drink salesman and wanted to open the country’s first minority-owned dairy. Turned down by every commercial lender he approached because the venture was so risky, the salesman, Kevin Copeland, won a $6 million loan from LACDB. Then the troubles began. The company racked up big losses, and, as the red ink spread, LACDB replaced Copeland and poured more money into the operation to keep it alive, until the bank had invested $24 million — violating its own lending limit. Even that wasn’t enough to salvage the dairy, which closed only 18 months after then — vice president Al Gore touted it in a speech as a major success story of government-backed lending.