Recent efforts to revitalize inner core urban areas have emphasized tax-based incentives for entrepreneurs. What does economic analysis suggest about the likely success of these inner core business-incentive programs? This paper addresses this question by developing an input-output model of a city with an inner core and a suburban region. This experiment suggests that urban structural conditions, especially aggregate goods and financial flows across intra-metropolitan spatial borders, set limits on what micro policy interventions can achieve. Thus, incentive-based methods may not succeed unless aggregate structural imbalances are lessened.
The Trajectory of Urban Economic Development Policy
Economic development in inner core areas has been a goal of American urban policy since the 1960s. In that decade, community development corporations were favored means of planning and financing community-based businesses and housing in lower-income areas. These efforts supplemented the newly established community health and social-service centers and broadened income transfer programs. Then 1970s legislation provided procurement incentives for minority- and women-owned small businesses, marking a turn away from community-centered development. Meanwhile, funding for community centers and for many transfer programs was consolidated into a series of "block grants" to local governmental units. In the late 1970s, many states and localities began creating "enterprise zones," providing property tax incentives for businesses increasing investment and employment in specified lower-income areas.
In the 1980s, the federal government largely eliminated block grants and began providing jobs and housing tax credits in lower-income areas. The Clinton administration established the federal Empowerment Zone program in 1994, and in 1996 it agreed to a welfare reform that restricted transfers under categorical grant programs and substantially increased state autonomy. In 1997, Congress approved the HUBZones program, which provides federal contracting opportunities for small businesses in lower-income areas.
In sum, two policy shifts have occurred. Whereas economic incentive programs once supplemented large-scale programmatic and transfer initiatives, they now constitute the mainstay of inner core stimulus efforts. And emphasis has shifted from community-based economic development to entrepreneur-guided revenue generation. The initiative for urban economic reform has been pushed downward--from the federal government (1960s) to the local government (1970s) to individual entrepreneurs in targeted micro-areas. And whereas the Great Society initiatives largely replaced absent private sector revenue flows, the 1990s initiatives attempt to leverage private sector revenue flows. Michael Porter (1995) has gone so far as to argue that entrepreneurs can revive the inner core by taking advantage of its competitive advantages.
The Inner Core Economy as a Spatial Input-Output System
Can this approach work? Numerous empirical studies have been done, and they are almost uniformly skeptical. Michael Wasylenko (1997) summarized their conclusions when he wrote, "spatially targeted subsidies in the form of tax reductions are, by most evidence, inefficient mechanisms by themselves for increasing the employment of residents in states and regions." Strangely enough, no theoretical literature has sprung up alongside this empirical literature.
This paper uses the workhorse of applied urban theory, the Sraffian/Leontief input-output model, to begin filling this gap.  This framework, …