CDPS Blog

Current trends in economics: Implications for community and economic development in 2020 and beyond

February 5, 2020

In the next decade, what will be the most important advance or “big story” in community and economic development? In this article, we anticipate seven promising and aspirational contributions from the field of economics that may increase our chances of solving some of our most pressing challenges associated with poverty in low-income neighborhoods. In the past decade, our economy experienced the longest economic expansion on record but also declining economic mobility, rising income and wealth inequality, stagnating business formation, lower labor market dynamism, worsening rent burdens, and other developments that limited broad-based participation in economic growth and prosperity. Through research, analysis, and engagement, many economists seek to influence the policies that aim to reverse the developments damping the economic mobility and resilience of low-income households and disadvantaged neighborhoods. In other words, we seek to influence the trajectory of communities and their economic development. We wish to share our perspectives with those engaged in the areas of community outreach, organization, and development in the hopes of soliciting wider discussion and building a consensus on where our combined efforts may stand a greater chance of strengthening the economic well-being of all households.

Establishing which approaches work well to serve local communities is a key input into the success of community and economic development. Economists generally aim to learn about what works through careful measurement, analysis, and statistical techniques that generate evidence and guide conclusions. This approach is consistent with a growing trend seen during the last several decades across all levels of government, many research-based organizations, and the private sector. At the federal level, Congress recently passed the Foundations for Evidence-Based Policymaking Act of 2018, which codifies that federal agencies should seek to develop, collect, and rigorously analyze data wherever these efforts may improve government policies and programs. In addition, many new academic “policy labs” focus on experimentally and empirically evaluating antipoverty, consumer protection, housing, education, health, and other social programs (see, for example, JPAL, LEO, RIPL, UofC Urban Labs). And many philanthropic foundations have increased their expectations for compelling evidence-based, cost-benefit propositions from the programs seeking funding. Thanks in part to these changing factors, there is greater availability of data and evidence to improve our shared understanding of what works well for local communities. We see many new opportunities and challenges for community development programs as data-driven and evidence-based approaches are further embraced. After all, as former Federal Reserve Chairman Ben Bernanke once remarked, “community development has a long history of innovation and learning from experience.” We join many others in the shared view that the continued embrace of an “evidence culture” will, on balance, contribute to innovation and programmatic diversity in a way that serves local communities well.
Over the last several decades, economists’ research on objectively estimating policy or program impacts have guided the allocation of public resources to productive uses. For example, knowledge about the magnitude of the long-term returns of early childhood investments helped transform this topic to an influential economic development issue. Earlier, results from the negative income tax experiments of the 1970s helped inform the expansion of the earned income tax credit in the 1990s, which studies have shown is a powerful anti-poverty tool. As economists continue to estimate and debate magnitudes, what more will we learn about where our public policies and programs yield the greatest social return? Moreover, how will recent research estimating magnitudes related to community development programs, such as the low-income housing tax credit or business tax incentives – or on changes in a community, such as the economic forces behind gentrification – influence additional actions among policymakers and practitioners? Will new knowledge steer resources away from less-productive programs? And what kind of counterweight to popular perception will economists provide by applying rigorous and unbiased techniques to estimating magnitudes?
Economists are questioning whether the “rules of the road” governing market competition are leading to adequate consumer benefits. Indeed, recent research documents a secular decline in competition and rise in market power among firms across many markets. And many economists are concerned. We see promise in this line of inquiry for community development as rising bank concentration, stringent housing market regulation, greater occupational licensing, and more market power among hospitals – among other market frictions – may have tilted over the last several decades to make accessing jobs, financial services, housing, health care, and so on more difficult for low-income communities. Moreover, these market frictions may strain households’ finances and, by some back-of-the-envelope estimates, the median household would save about $300 per month if markets were more consumer-friendly. Greater competition may also benefit consumers by enhancing product quality, variety, and innovation in addition to lowering prices. Should policymakers seek actions, economic research can provide useful knowledge on the causes of market power and inform the design and targeting of policy tools.
Policymakers usually need to consider multiple perspectives in the process of policy design and implementation. Many economists view this deliberation as an essential part of the policy process because, among other things, it can help avoid or mitigate the unintended consequences of policies. For example, consider the “ban the box” campaigns that seek to remove questions about criminal records from job applications. Many view this initiative as a way to improve labor market outcomes for those with previous criminal convictions and, secondarily, to reduce racial wage gaps. However, others might argue that “banning the box” could have unintended consequences and increase forms of discrimination in the labor market, which is contrary to the economic objectives. This unintended consequence might arise if, for example, employers turn to other objective or subjective indicators of potential worker productivity in their hiring decisions once they can no longer use criminal records. Through research, economists seek to better identify who gains and who is hurt, who bears the costs of this initiative, and whether additional measures can mitigate the unintended consequences while maintaining the program’s benefits (such as by introducing new antidiscrimination oversight). Currently, economic research on the efficacy of banning the box finds both positive impacts and negative unintended consequences, and continued analysis of “ban the box” will likely be informative for policy deliberation and refinement.
In the wake of the financial crisis, tighter mortgage credit has coincided with greater use of non-mortgage credit among low- and moderate-income individuals and communities. Indeed, in the past decade, the volume of subprime auto lending markedly increased, and across the credit spectrum, loan maturities and leverage also rose. Today, payday, auto title, high-cost installment, and other high-cost short-term loans remain prevalent, and new product offerings continue to enter this market. Of late, unsecured personal loans have been the fastest growing category of debt. And there has also been growth in lines of credit, peer-to-peer lending, and many types of small business lending. Non-bank financial institutions and financial technology companies account for much of this growth in non-mortgage lending, particularly as many non-bank lenders seek out borrowers previously excluded from credit markets with the help of new alternative credit scoring models for those without traditional credit scores. While greater access to credit may help underserved households, many of these new algorithmic scoring and decision techniques may further entrench or exacerbate existing disparities, which would be an unintended consequence. Analyzing the implications of these large shifts in the credit landscape – especially those related to alternative credit scoring and financial services – may be an important economic contribution in the coming years.
Labor markets are dynamic and constantly evolving. One implication of this is that interpreting a longstanding trend may require analyzing a constantly evolving set of factors. For example, employment rates among working-age (or prime-age) men without a college degree have been declining for more than 50 years. Though it is tempting to look for a “smoking gun” explanation, economic research aims to promote evolving, comprehensive, complex, and nuanced views on this trend. Many labor demand and labor supply factors, such as skill-biased technical change or the rise in disability rolls to name just a few, have contributed to the decline in employment among prime-age men without a college degree. Importantly, economic research finds not just that the explanations are varied, but also that their relevance varies over time, place, and specific circumstances. On this particular issue, diagnosing the evolving factors behind labor market dislocation through economic research and analysis can help policymakers design solutions suitable for today’s job market, not yesterday’s, and help target resources where they may have the greatest impact.
Given the pressing economic challenges of our time, many economists focus on topics related to community and economic development: place-based policies, neighborhood effects, segregation, income and wealth inequality, zoning and land-use regulations, concentrated poverty, among many other topics. Of late, much of this research involves analytical rigor as exemplified by the use of randomized controlled trials or quasi-experimental research designs, econometric analysis of large-scale administrative or “big” data, or complex theoretical and statistical models. Economists apply this type of analytical rigor because, over time, this feature has become necessary for informing policy debate and design through robust inference, program evaluation, and policy simulations. We also do it because, given the many unknowns, such rigor helps formulate firmer conclusions and reduce policy uncertainty. We expect the trend – where more community and economic development topics are folded into the economics mainstream – to continue. Many recent PhD candidates have applied rigorous and innovative methods to community and economic development topics in their dissertation work. Moreover, advances in machine learning and prediction may extend to research on these topics. Lastly, policymakers and the policy process may demand the rigor of economists in light of the shift at various levels of government to promulgating evidence-based policy (see contribution #1).

Conclusion

This article highlights seven promising and aspirational contributions from the field of economics for community and economic development in 2020 and beyond. As we said at the outset, we share our views in the hopes of soliciting others. Of course, there are many important aspects of community and economic development that are well outside of the purview of many economists. For example, community organizing, political advocacy, social activism, and creating a sense of belonging are important elements and worthy of their own discussions. Also, issues related to culture and organizational innovation are crucially important but also areas where economists are unlikely to make scholarly or analytical contributions. But together, we can all endeavor to take on the opportunities and challenges of community and economic development in the decade to come.


The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.

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