Will Jack Kemp's Prescriptions Work?

No: Like Jesse Jackson, he sees government programs as the answer

LIKE Jesse Jackson, Housing and Urban Development (HUD) Secretary Jack Kemp blamed the outbreak of looting and violence in Los Angeles on hopelessness and despair in the inner city. Both champion government activism to get at the "root causes." But while Reverend Jackson wants to greatly enhance traditional welfare programs, Mr. Kemp says he has some better ideas.

President Bush is right that the traditional welfare approach has not worked. Even if it had, the public has become impatient with the kind of income redistribution championed by Jackson. We do indeed need new ideas. But are Kemp's ideas the right ones?

Primary among Kemp's ideas is the enterprise zone, which designates sections of cities for lower taxes and special grants to promote new business activity. He predicts that lower operating costs will lead the inner-city poor to open new firms and hire new employees. This will lift people out of poverty, give them a stake in their communities, and help them respect others' property.

The trouble for Kemp is that Los Angeles already has an enterprise zone program, according to a 1990 article in Plants, Sites, and Parks magazine, reprinted by HUD. And one zone covered the South-Central area of Los Angeles. For years, the state offered business tax credits of $19,000 per new employee, sales tax credits on new machinery up to $1.2 million, tax incentives for lenders who make business loans, 15-year carryover of net operating losses and depreciation, subsidized rents, and marketing assist ance. These are among the most generous benefits provided in any of the nation's 38 state-level enterprise-zone programs.

The beneficiaries of the California program have not been the inner-city blacks that Kemp wants to lift out of poverty. The investment incentives are mostly used by outside businesses that move their operations to the "zoned" location. The state of California knows this: Its zones are advertised in slick development and financial magazines. The inner-city poor do not subscribe.

California's South-Central enterprise-zone program did benefit some minority-owned businesses: those owned by industrious Korean immigrants who probably would have opened businesses even without tax incentives. And these new enterprises have been burned down to the ground. If private property cannot be secured against vandals, and insurance companies are reluctant to take on high risks, not even zero taxes will be an incentive to build a new network of businesses.

Expanding the enterprise-zone program to the federal level will not prevent a repeat of the Los Angeles experience in other major cities. High taxes don't turn would-be entrepreneurs into hoodlums who kill people and burn whole city blocks. Why should we assume low taxes will do the reverse?

Kemp does not like to talk about the cost of federal enterprise zones. The bill he wants Congress to pass, sponsored by Congressman Charles Rangel (D) of New York, demands that any state with enterprise zones link tax benefits with "job training, transportation, education, day care, health care, and other social service support." How is this different from Jackson's big spending approach?

Kemp also wants to subsidize the poor to own homes through a program called Homeownership and Opportunity for People Everywhere (HOPE). He says this, too, will give people a stake in their community. But it's hard to see how this would prevent a repeat of the LA nightmare. Social science has yet to establish a causal link between being a renter and being a felon. And the conversions are very costly. For example, renovating and converting the Kennelworth-Parkside project in Washington, D.C., to tenant-own ed properties cost taxpayers about $170,000 per unit, the cost of an upscale townhouse in northern Virginia.

Interestingly, HOPE does not really establish formal ownership at all. The few poor people who make it through HUD's red tape to take possession of their units are not allowed to resell their homes to people not approved by the federal government. And they can sell only at prices set below market by HUD bureaucrats.

As long as this is written into law, where's the incentive to make home improvements and maintain or increase the home's value? Perhaps that's why Congress granted HOPE only one-third of the $1 billion Kemp asked for in fiscal year 1993.

Kemp's final idea is to repeal federal laws that cap the assets of welfare recipients. He argues that people on welfare should be able to save up to $10,000 - 10 times the amount allowed under present law - and still receive checks from Uncle Sam. But making this change would remove an important incentive to get off welfare, that is, the desire to earn and save more income. In fact, removing the ceiling on assets would make millions of new people eligible for welfare, with the effect of vastly expanding welfare roles.

Perhaps Kemp should focus his attention on solving growing financial troubles at the agency he heads. A recent audit conducted by the General Accounting Office has found that the agency lost track of more than $1 billion earmarked for low-income rental assistance. This is the sixth audit in the three years Kemp has headed HUD that has warned of waste, mismanagement, and possible fraud.

The nation's Great Society experience demonstrated dangers of plunging into expensive and untested policy waters. We do not need a new set of federal programs that everyone will see as failures 25 years down the line. Honesty compels the admission that, in South-Central Los Angeles, both the problem and the solution are ultimately local, cultural, and moral.

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