Federal Economic Development and COVID-19 Recovery: Issues and Policy Options

Federal Economic Development and COVID-19 Recovery: Issues and Policy Options

INSIGHTi

Federal Economic Development and COVID-
19 Recovery: Issues and Policy Options
February 2, 2021
States and local governments traditionally lead U.S. economic development efforts, with the federal
government selectively intervening to address significant need. However, the 2019 Coronavirus Disease
(COVID-19) pandemic has caused pervasive social and economic dislocation and extreme subnational
fiscal stress, straining existing federal economic development structures. This Insight examines current
federal economic development policy and outlines various options for addressing a potentially lengthy
pandemic recovery, or future such long-term challenges.
Federal Economic Development and COVID-19
The nationwide scope and protracted time horizon of the COVID-19 pandemic has challenged the
existing economic development infrastructure at all levels of government. This system is not designed or
arguably equipped to address scenarios in which otherwise unusual distress is endemic, and state and
local governments are acutely constrained by both the scale of the crisis as well as fiscal limitations.
The Federal Approach: Distress-Based Interventions
In the United States’ federal system, economic development activities are primarily the responsibility of
state and local governments, which fund various programs that may include business relocation and
retention incentives, workforce development, and other policies that stimulate growth and job creation.
State and local governments are also the primary agents (sometimes with the support of federal funding)
in other economic development-related activities—such as improvements to general infrastructure,
housing, community facilities, land use, education, and public safety. Those unmet needs not fully
addressed at the state and local levels, particularly in economically distressed or disadvantaged
communities, are targeted through federal economic development interventions.
Most funding programs provided by the principal federal economic development agencies—the
Department of Housing and Urban Development (HUD), the Economic Development Administration
(EDA), the Department of Agriculture (USDA), and the federal regional commissions and authorities—
prioritize economic development resources for communities exhibiting acute socioeconomic distress. For
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example, HUD’s flagship Community Development Block Grant (CDBG) program is targeted at low- and
moderate-income individuals in predominantly urban places. The EDA utilizes distress criteria, and has
historically focused on rural and other non-urban places alongside USDA’s rural development programs.
The federal regional commissions and authorities employ taxonomies of distress in delineated geographic
service areas to prioritize their economic development activities. In addition, federal tax incentives for
economic development—such as the New Markets Tax Credit and Opportunity Zones—prioritize areas
shown to demonstrate high levels of economic distress.
Economic Development in a Time of COVID
The efficacy of the federal distress-based approach to economic development is broadly conditioned on
state and local governments’ ability to conduct more general economic development. In situations of
acute short-term disruption, such as a localized natural disaster or emergency, the federal government can
utilize its economic development and emergency management toolkit to support state and local
governments, organizations and businesses, and individuals with recovery.
However, the pandemic’s scale and longevity has challenged the existing federal economic development
and emergency management apparatus. In response, Congress has provided emergency supplemental
appropriations to increase the capacity of existing federal economic development infrastructure and
support temporary capabilities—such as the Federal Reserve’s direct lending programs, supplemental
unemployment insurance, stimulus cash payments, and the extended deployment of various short-term
emergency management authorities and countermeasures.
Despite congressional action, the pandemic has contributed to surges in poverty, food and housing
insecurity, waves of business closures, and a sharp annual decline in growth, indicating the limits of
federal economic development approaches.
Policy Options for Congress
Congress may consider policy options for adapting federal economic development tools to address high-
impact events with extended or indefinite time horizons (e.g., pandemics, climate/weather-related
disasters, or manmade emergencies), such as:
 Increasing funding for HUD’s CDBG program, and providing additional grantee
discretion for addressing distress not necessarily captured in CDBG’s current national
objectives—such as fiscal and public health;
 Permanently authorizing broad-based relief tools like CDBG authorities for disaster
recovery (CDBG-DR), or a CARES Act Coronavirus Relief Fund-type analogue, that
could draw from a “no-year” strategic account similar to the Disaster Relief Fund;
 Developing a standing fiscal support function for states as well as localities, potentially
based on an expanded Community Disaster Loan-type program;
 Building on the federal regional commissions model, providing a framework for
establishing and resourcing intergovernmental federal-state regional commissions
throughout the United States as the principal loci of regional economic development, like
once provided under Title V of the Public Works and Economic Development Act of
1965 (“Title V” commissions);
 Developing authorities for targeted basic income and “job corps” workforce programs,
which could be rapidly activated and expanded during emergencies to provide cash relief
to affected individuals and fill urgent labor needs (such as contact tracers and medical
auxiliaries during the pandemic); and

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 Establishing a permanent interagency infrastructure to plan and coordinate industrial
mobilization and support, using the Defense Production Act (DPA) and other emergency
authorities, to respond to future social and economic dislocations.
Congress may also consider policies to strengthen and revise the national approach to economic
development generally, including:
 An integrated, intergovernmental economic development framework where federal, state,
and local governments coordinate on planning, priorities, and funding;
 A greater emphasis on cultivating business development and job growth regionally
(“economic gardening”), and shifting from incentive-driven regional competition to
regional clusters of comparative advantage in a global economy; and
 Developing industrial policies that promote the development of strategic industries and
supply chains—beyond the defense industrial base—and drive investments in domestic
(and certain allied) supply chains anticipating various possible contingency scenarios.
Congress may also take steps to increase the breadth of these reforms, such as by utilizing reinsurance
markets for a permanent CDBG-DR-type program; authorizing federal regional commissions to issue
bonds for strategic projects; broader adoption of federal loan and loan guarantee mechanisms in lieu of
some grants; and taking equity positions as part of direct investments, including potentially in DPA Title
III projects.

Author Information

Michael H. Cecire

Analyst in Intergovernmental Relations and Economic
Development Policy

Disclaimer
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