Investors want to play their part but government must lay the groundwork
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If every billionaire were Steve Case, middle America’s prospects might look rosier. The “You’ve got new mail” founder of AOL is becoming famous again — this time for his “Rise of the rest” bus tour that seeks entrepreneurs in America’s forgotten towns and cities. Mr Case’s case is solid (you might say it is a case of Upper Case switching to lower case). Roughly three quarters of US venture capital goes to Silicon Valley, New York City and Boston, covering much less than a 10th of the population. The remainder must make do with just a quarter of the start-up funding. If ever there were an example of geographic winners taking the lion’s share, the skewed nature of US capital allocation is it. That is without mentioning the implicit bias of bank lending, which has all but dried up in low-income communities. It also overlooks the demographic bias of US VC allocation. Barely 2 per cent of VC funds goes to all-women business start-ups. African Americans fare similarly badly. Mr Case wants to put a dent in these numbers. He is making a big bet — that wealthy investors can bridge the gap between the booming largest cities and the rest. It is more reputational than financial. With a fund of $150m and investments of between $100,000 and $1m, Mr Case’s outlay is relatively modest. Even if it leveraged roughly 10 times that amount in additional funding — $1.5bn — it would offer more of a demonstration effect than a transformative capital influx. Still, something is far better than nothing. Mr Case has already backed several dozen entrepreneurs who might otherwise have found no support. But his real bet is reputational. Will enough private capital find enough local opportunities to spark an economic revival in left-behind America? Can it do so without the benefit of the big investments needed to improve infrastructure, worker skills, and public housing in these areas? Donald Trump’s administration is making a similar bet. Tucked away in its big 2017 tax cut was the creation of opportunity zones — so called O-Zones. These offer investors a partial capital gains tax break if they invest in deprived areas. The break rises the longer the investment is held. Roughly three-quarters of US venture capital goes to Silicon Valley, New York City and Boston Many urban revivalists, such as Bruce Katz, author of The New Localism, believe the tax incentive could attract other investment and help reverse the fortunes of rusting cities such as Buffalo, Cleveland, Los Angeles’s rundown “inland empire” and elsewhere. Again, however, the onus is on them to prove their case. The history of such tax breaks is not good. In the 1990s, President Bill Clinton created “empowerment zones”. They had negligible impact and ceased to exist. The same applied to Margaret Thatcher’s “enterprise zones” in the UK in the 1980s. Critics point to three weaknesses. First, they misunderstand why deprived areas lost their lustre, which had little to do with tax rates. London’s Docklands were left behind by the growth of containerisation, leaving them outmoded. Ohio’s rust belt cities were undercut by competition from Asia. LA’s inland empire lost much of the defence industrial production machine to other parts of the US. Second, the O-zone boundaries are easy to game. Many set up in the past 18 months are close to deprived areas but do not include them. One example is the Long Island City neighbourhood of Queens, New York, which Amazon initially chose for its second HQ. It abandoned the plan in the face of local protests. It was not a particularly deprived area but the project would have been showered with tax breaks. Third, companies often receive breaks on investments they would make anyway. London’s Canary Wharf is a famous example. Moreover, little of the Docklands revival would have taken place without heavy public investment in infrastructure. Many of the same questions are being asked about impact investing, which has taken off in the past two years. The premise is that investors can do well by doing good. In other words, they can find moneymaking ventures that transform the lives of the poor. The evidence is weak that this can be an individually profitable activity. If Bill Gates funds a new medicine to inoculate against Ebola, that would be dramatic. Whether he would make money is another question. In the US, the biggest obstacles are the lack of skills and deteriorating infrastructure. The US spends 0.11 per cent of its GDP on worker training — a fifth of the OECD average and roughly a 20th of what Denmark spends. It is similarly lagging on infrastructure spending. No entrepreneur can make money training millions of workers or building new roads and logistics hubs. Every potential entrepreneur, on the other hand, would be better off if the US government stepped in to do its job.