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Capital Availability in Inner Cities

Capital Availability in Inner Cities: What Role for Federal Policy?

Teresa Lynch and Lois Rho for the Initiative for the Competitive Inner City

First published October 2010

U.S. urban areas are sites of high poverty. Data from the 2000 Census show that the country’s 100 largest inner cities were home to almost 20 percent of the country’s poverty and over 30 percent of minority poverty, despite accounting for only 8 percent of the total population and 0.1 percent of the country’s land mass. Unfortunately, economic conditions over the past decade have exacerbated these issues. During the 2001-2002 recession, inner cities lost jobs at a faster rate than the rest of the country and did not add jobs again until 2006 at the tail end of the real estate bubble. By 2008, the latest year for which there are local area employment data, inner-city employment had actually declined slightly from its 1998 levels, while the surrounding regional economies grew on average by almost 10 percent. Given the sluggish performance of the national economy over the past two years, 2009 and 2010 data are likely to show further erosion of the job base in the country’s distressed urban areas.

These trends make clear the tremendous need for federal policies that will support economic growth in the country’s distressed urban areas. This idea is hardly new. Over the past decades, federal policies from Empowerment Zones to New Markets Tax Credits to Community Development Block Grants to SBA’s Emerging 200 have aimed to attract, retain and grow businesses in economically distressed urban areas. Despite many successes, the widening disparity between inner city and national economic performance strongly suggests a need to re-evaluate the efficacy of existing federal policies aimed at supporting inner-city economic development.

In this paper, we examine a key driver of business success—access to financial capital—and discuss current and potential roles of federal policy in ensuring access to capital for inner-city businesses. Access to capital has historically been a problem in low-to-moderate income (LMI) areas, illustrated most extremely in so-called “redlining,” a term coined in the 1960s to describe the practice of refusing to make loans or write insurance policies based on neighborhood characteristics, rather than merits of would-be borrowers. While this practice is illegal, the persistence of the “capital gap” has become a contentious issue among researchers, practitioners, and policymakers. Some believe that major regulatory efforts focused on improving credit access in LMI areas, such as the Community Reinvestment Act (CRA), have rendered the capital gap a problem of the past. Others believe that despite significant improvements, large barriers continue to exist, creating a shortage of capital for even investment-worthy inner city businesses. Resolving this debate is critical for designing appropriate public and private sector responses to the anemic economic performance in inner cities. 

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