To understand the present situation in local economic development, it is necessary to make clear two different perspectives. For several decades, local economic development efforts were heavily shaped by federal funding and federal legislation.

Thus there is a national perspective to be considered. There are also strong local motivations, and what is good for a particular municipality or state may or may not be good for the nation as a whole.

The Federal Presence in Local Economic Development

In the years after World War II, a new term was added to the economic vocabulary of the nation: structural unemployment. It refers to a long-term mismatch between the supply of labor and the demand for labor. The mismatch may apply to skills. For example, in the 1960s numerous former farmers and farm workers were unemployed because the postwar mechanization of agriculture had forced them off the land, and they lacked skills for doing other kinds of work. At the same time, the burgeoning computer industry was experiencing shortages of programmers, systems analysts, and technicians. In recent years manufacturing employment in the United States has declined sharply while health care has been a major growth area, so high unemployment rates among industrial workers have at times coexisted with severe shortages of nurses. To a great extent this type of structural unemployment is the result of technological change. The faster the change occurs, the more serious the problem is likely to be.

The other aspect of structural unemployment is geographic. An area may lose jobs because firms have moved out or because changes in technology have reduced their labor needs or because they have gone out of business. If the loss of employment is not matched by corresponding outmigration of population, a sustained condition of high unemployment may result. In general, capital is more mobile than population, so that structural unemployment does in fact occur in just this way. A company's board of directors can in a single, rational, bottom-line-based decision decide to close a plant here and transfer its production operations to a site elsewhere in the nation or, for that matter, elsewhere in the world. It is not so easy for a comparable part of the population to decide to pull out of a labor-surplus area and move to a labor-short area.

The structural unemployment problem did not become apparent immediately after World War II. In welcome contrast to the Great Depression, the postwar period was one of great prosperity. Thus for a time it appeared to many that the only important economic function of government was to maintain this desirable state of affairs by competent management of national (macroeconomic) economic policy.

After a few years, however, it became apparent that even though the nation was generally prosperous, not all regions or all subgroups of the population were doing well economically. The first region for which serious concern developed was Appalachia, its economy seriously weakened by declining employment in coalmining and handicapped by a rugged topography that made it difficult to develop an efficient transportation network. Lying between the prosperous Eastern Seaboard and the then thriving industrial Midwest, the Appalachian region seemed to be in a permanent depression of its own.

Beginning in 1961, Congress began to attack the problem at the national level. The basic approach was to direct federal funds to both the skills and the geographic mismatch sides of the structural unemployment problem. The skills part of the approach involved public money for what was then termed manpower training. Given that it does not have a spatial component, it is beyond the scope of this book. The geographic side of the problem was attacked by programs that directed federal funds to economic development in lagging areas, generally identified on the basis of federal statistics on personal income and unemployment rates. A prototypical project might have been a municipal industrial park, part of whose costs were paid by federal grants. This would permit the municipality to offer sites in the park to businesses at below market rates in order to tip the playing field toward lagging places. The first agency devoted to this purpose was the Area Redevelopment Administration (ARA), established in 1961. It was replaced in 1965 with the Economic Development Administration, which exists to the present time. The Department of Housing and Urban Development (HUD) operated the Urban Development Action Grant (UDAG) program, which funded projects in urban areas. That program no longer exists, but many downtown hotels and convention centers built with the aid of such findings are still operating.

On the tax expenditure side of the budget (see Chapter 9), the federal government has for a number of decades aided local economic development efforts through the mechanism of Industrial Revenue Bond (IRB) funding. There are no payments from the federal government. Rather, provisions in the Internal Revenue Service (IRS) code permit local governments to, in effect, make tax-exempt loans to companies, and this lowers a company's debt service burden. Unlike grant programs, these loans are not specifically targeted to poorer places. Essentially any municipality can make use of them, so just what their overall effect is on the structural unemployment question is not entirely certain.

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