How to Create Poverty
From an Economic Development Perspective

Take any political subdivision: a city, a county, a region, a country. If that area is NOT creating wealth, it is creating poverty. Here is how it works:

Dollars are circulated in an area by payment of wages and salaries, the purchase of goods and services This is simply recycling money that is already in that area. These transactions do not bring new monies INTO that area and each transaction involves the payment of taxes, which takes monies OUT of the area. Unless there are new dollars coming into that area, taxes (and other factors) are draining the area of income that is needed (to pay wages, buy food, pay rent, etc.)

The goal then is to create wealth otherwise you create poverty. Manufacturing, certain wholesale distribution companies and some services are key to a thriving vibrant economy. This is because these businesses sell outside of an area and bring new dollars into that area to enable the payments for more wages food, clothing, shelter

Companies are very fragile. Ninety percent eventually fail. There are stages in a business' growth where they are particularly vulnerable. Start-ups and expansions are most at risk.
One protection for a business is called "barriers to entry". Anything that makes it difficult to replicate a business i.e. patents, copywrites, etc. helps to protect these vulnerable entities. Technology based firms have strong "barriers to entry" and are considered most desirable. Austin is a great example of the wealth that can be generated from technology-based businesses. Twenty years ago this city was vastly different than what it is today.

An area then needs to attract business to it, retain the businesses it has, help new businesses start, and encourage growth for these firms. Businesses often look for incentives when considering moving to, expanding and even starting in an area. They also consider other important factors such as, services (schools, EMS, snow removal, basic infrastructure of roads, sewage systems, water, energy) Quality of life is another important factor that a business will consider. This includes such things as parks, museums, and symphony. Availability of labor and training are key for a business location decision and safety (this includes government stability) is also a high priority.

A strong tax base is good for an area because taxes support the services that enhance the quality of life for an area. It is when the taxes get "out of whack" that trouble ensues, and thus poverty is enhanced. The loss of Terex to Hudson is a perfect example of harm that can be done to the tax base. The schools were particularly hard hit by this loss and it took years to replace that revenue.

Areas will sometimes establish economic development "incentives" to attract, retain and help start businesses, particularly certain desirable, wealth creating industries. For example, it makes no sense to offer tax abatement, or low cost (which is generally subsidized) financing to a McDonald's restaurant. The business may enhance the quality of life for an area, but it only recirculates existing dollars.

Tax abatements and other economic incentives add to the wealth creation of an area. Take Twinsburg for example. Not long ago Twinsburg was a very poor area. Some enlightened politicians, perhaps out of desperation, decided to offer tax incentives to attract business expansions to the community. A man named Erwin Geis of Geis Construction, was particularly influential in building the Twinsburg, as well as surrounding areas, economies. With the help of tax incentives, the clever and creative use of economic development financing incentives, and sheer drive, Mr. Geis built many light industrial facilities for businesses that are now contributing to the very wealthy and thriving community of Twinsburg. Mr. Geis would travel to visit his friends in Germany and encourage them to set up "shop" in Twinsburg. This brought many new technologies and a strong work ethic to the region. Mr. Geis would build "industrial incubators". These were multi tenant facilities that often shared business resources, and offered low rent that was graduated. The rent would increase over time as the business became established. Then as the business needed to expand, Mr. Geis, with the use of economic development incentives, would build a larger and then larger facility. The success of these businesses would attract other businesses with similar technologies as well as business services to the area. This is called a "Cluster".

About ten years ago, the country of Ireland began offering tax incentives to business in order to attract manufacturing, in particular, to its country. Today their economy is thriving with business that is paying into a very strong tax base that is thus buying services that are contributing to a high quality of life.

Tax incentives, when used intelligently, go a long way towards developing economies. Misuse, however, can be harmful. For example, it makes no sense to provide subsidies to companies that are not going to add to the creation of wealth, jobs, etc. or who are not in need of these kind of incentives.

The measure of economic development is job creation. This is a way to assess the wealth that is coming into an area and a clear alternative to poverty. The types of jobs are important too as some pay higher wages than others. Technology based businesses (those with strong "barriers to entry") tend to pay higher wages than say a McDonald's restaurant for example.

There are many "drains" on an economy that contribute to the growth of poverty. We have been observing the "exporting" of our labor to China, as an example. Draining a country of its resources (natural and otherwise), charging interest and other banking fees that are directed elsewhere, all contribute substantially to the growth of poverty.

There are a number of economic development financing tools that contribute greatly to an areas economy. Industrial Development Revenue Bonds have been the umbilical cord to making things happen in this country. Those areas that make use of this tool are way ahead of their poorer counterparts. There was a firm with a unique technology for finishing metal that greatly enhanced the body of certain automobiles. Lexus was a customer. They were looking to establish a manufacturing and world headquarters facility. At the time, the venture capital investors came from England and the firm could have located anywhere in the world. They decided on the U.S. primarily because of the low cost financing of industrial development revenue bonds (IDRB's) that was made available. IDRB's made this country competitive with the rest of the world for attracting businesses that were expanding.

Most of the development financing tools available are used to finance fixed assets. They get the job done, and do an awful lot of good. What has been very badly needed is working capital, particularly for small, young, firms that may not have or need fixed assets to leverage. In recent years programs like "Capital Access" have been useful in providing funds for firms that otherwise would not be able to obtain financing. Many states have established Capital Access Programs and even the U.S. Small Business Administration operates under a similar "insured risk" concept.

Areas need to protect against the misuse of economic development incentives. Micro loan programs have been known to require so much red tape, that in the end, they can be a hindrance rather than a catalyst to a business' growth. Red tape generates and creates poverty. It is important to insure that those in decision-making positions are of the highest business ethics and integrity. Bankers, lawyers, accountants and others who are simply looking for ways to feather their own nests, no matter who or what is injured, should be avoided at all costs because, at the end of the day, they will help build poverty in order to build their own bonus'. Self-dealing and collusion of those in governance positions of community development organizations contribute to the demise of a community.