Published on October 21, 2021
Review: Only the Rich Can Play: How Washington Works in the New Gilded Age, by David Wessel (PublicAffairs, 352 pp., $14.99)
The rapper T.I. may never have read Kevin Williamson’s infamous suggestion that struggling communities need “real opportunity, which means that they need real change, which means that they need U-Haul,” but he is clearly familiar with the mindset. As he tells Brookings Institution senior fellow David Wessel, a friend of his once asked “Hey, man, why is it that the answer to the problems in our community is always for us to get rich and move out and never come back?”
The approach typified by Williamson and lamented by T.I.’s friend has long been conventional wisdom among economists and policymakers. Increasing opportunity meant promoting geographic mobility and getting people out of declining areas, rather than throwing good money after bad. Public funds, the thinking went, should be spent on poor people, not poor places.
But that prescription has begun to change, assaulted from the right by commentators and writers unsatisfied with what urbanism researcher Jason Szegedi has aptly labeled the “U-Haul approach to public policy.” The center-left, too, has come appreciate the importance of investing in disadvantaged places, thanks in large part to research by Harvard University’s Raj Chetty into the long-term impacts of neighborhood effects. Ed Glaeser, Chetty’s colleague, summarized the shift in economists’ thinking at a 2021 Brookings conference: “America’s spatial inequalities have gone up. Our geographic sclerosis has made the case for place-based policies better, but it is still possible to screw it up enormously.”
T.I., né Clifford Joseph Harris, Jr., now invests in Opportunity Zones (OZ), a new place-based program created by the 2017 Tax Cuts and Jobs Act which offers targeted tax breaks to catalyze capital investment in distressed neighborhoods. Wessel’s new book, Only the Rich Can Play, is a well-researched guide to the program. It recounts the story of how the latest attempt to rejuvenate left-behind places came into being—and by some accounts, may give credence to Glaeser’s fears.
A long-time Wall Street Journal economics reporter, Wessel believes that “Opportunity Zones are a peculiarly American solution to the problem” of concentrated poverty, “one that reflects an antipathy toward raising taxes to support big government investment.” Lawmakers love plans that have a low 10-year budget score, that offer tax credits rather than actual spending, and that purport to cut red tape. These dimensions of how OZs were pitched made policymakers more interested, at the cost of leaving the government short-handed when making sure the provisions weren’t being abused. Under a Republican White House and Congress, Wessel argues, the focus invariably shifted from ensuring dollars flowed to where they could make the most difference to making the opportunity as appealing as possible to potential investors.
The book’s title refers to a characteristic feature of Opportunity Zone investments: only capital gains (proceeds from the sales of stock, real estate, art, etc.) can be invested into a fund or project that qualifies for the OZ treatment. Governors select the census tracts eligible for OZ investment, and the funds that invest in the designated tracts receive generous tax benefits. Capital gains invested in OZ funds have their taxes deferred until 2026, and if you hold onto the OZ investment for at least ten years, there will be no capital gains taxes due on the profit.
There is an inarguable logic to the Opportunity Zone concept. In communities that lack a fully functioning formal economy and access to capital, increasing the flow of investment can have positive social effects. More investment can lead to more businesses, more jobs, and stronger communities.
The idea stemmed from Sean Parker, the Napster co-founder and early Facebook investor, who wanted to explore an emerging-markets-style tax break here at home. Instead of a PR campaign, he quietly provided funding to launch a think tank, with the intentionally non-descript name “Economic Innovation Group,” or EIG.
In John Lettieri and Steve Glickman, Parker found a pair of well-respected D.C. hands to put his vision into action. Throughout the book, Wessel refers to Lettieri and Glickman as “the EIG Boys,” a moniker redolent of “the Chicago Boys,” disciples of Milton Friedman who spearheaded the neoliberal revolution in Chile. Like the Chicago Boys, EIG spearheaded an effort to free up capital and use the market to drive economic development. And like the backlash the Chicago Boys received in Chile, where they were perceived as having drive up gains for the wealthy without doing much to change the underlying dynamics of disadvantage, Wessel finds plenty of critics of EIG’s approach.
Wessel walks through how the sleepy-sounding think tank was able to lay important groundwork behind the scenes, with well-regarded bipartisan advisors Jared Bernstein and Kevin Hassett and co-sponsors Senators Cory Booker and Tim Scott. What made OZs attractive across the aisle, Wessel relates, was the idea they would “restrain the bureaucracy and let investors and the market identify the most promising investments.” But when a surprise election win in 2016 put a tax-credit-loving real estate developer in the White House, the EIG boys went from the slow boring of hard boards to using a power drill.
Following some, shall we say, inartful presidential comments after the “Unite the Right” rally in Charlottesville, Senator Scott ended up in the Oval Office, poised to deliver a crash course on American race relations and a simple legislative ask. The President asked the junior senator from South Carolina, “Tell me what I can do to be helpful to the people I’ve offended.” According to Politico’s Tim Alberta, Sen. Scott replied, “Well, you can support the Investing in Opportunity Act.” The White House did, and Opportunity Zones rode the slipstream of a tax reform package considered a must-pass by Congressional Republicans. Tucked into a broader bill, Opportunity Zones didn’t even merit a mention in congressional markup hearings.
In four years, Opportunity Zones went from a brainstorming session at Davos to an act of Congress—a masterclass in effective lobbying, policy-focused scholarship, and seizing an opportune moment.
But the race across the finish line had its costs. Flaws that could have been identified and avoided in a more deliberative process were baked into the OZ proposal, and a laissez-faire administration took no pains to correct them when legislation turned to implementation.
Wessel has done his homework on the OZ concept and its intellectual forebears. He reviews past attempts at place-based policymaking, and how their design flaws and middling empirical results directly led to specific choices in designing Opportunity Zones to avoid those pitfalls, but left the door open to different abuses.
Some of Wessel’s critiques are unfounded. He highlights naysayers who wish that OZ investments had been required to produce a “social return on investment.” That would have turned the program into a shell of its intent. A well-run, for-profit businesses can be the pillar of a community turnaround without being a B-corporation or minority-owned.
But there were other flaws that did weaken the program’s effectiveness and undermined OZs in the public eye. For instance, the Trump administration based census tracts’ eligibility for OZ designation on five-year poverty-level estimates from 2011 to 2015. Instead of waiting for more up-to-date data, areas that had gentrified since 2011 were deemed OZ-eligible—including parts of downtown Portland, Los Angeles, and Charleston that had almost passed from up-and-coming status into downright trendy.
Choices meant to increase OZ flexibility created more loopholes. Allowing governors wide discretion in selecting census tracts was intended to give localities more “skin in the game.” However, when coupled with the ability to choose not just eligible census tracts, but ones “contiguous” to them, the door was opened to headline-grabbing abuses—New York Governor Cuomo was an especially notorious offender. As a result, an estimated 56% of all census tracts in the country were eligible for the exceptionally generous tax treatment. When over half the country is a potential Opportunity Zone, it’s fair to question whether it was neighborhoods’ trajectories that were changing, or just the wealthy’s investment strategies.
More careful legislative drafting could have ensured that buildings purchased post-completion, but prior to acquiring a certificate of occupancy, could not be counted as OZ-eligible. It’s hard to imagine its boosters had in mind self-storage facilities, college-student housing, luxury hotels, or a robotic sex toy start-up as some of the more visible stories to come out of the program. Lettieri, one of “the EIG Boys,” expressed his frustration to Wessel about Trump administration’s hands-off approach to curbing more egregious abuses by governors, and legislation has been introduced to tweak the program to curb some of the more glaring loopholes —whether it will pass or not is anyone’s guess.
It is still early in the life of Opportunity Zones, and future data may reflect a broader impact. But Wessel would have us temper our expectations based on the initial anecdotal reports. He sums up the program’s impact thus far as having done “more to help wealthy investors and real estate businesses reduce their tax bills than to help residents of the neighborhoods it was supposed to revive.” Though he draws blood, he ultimately turns the cynicism dial about one click past what the record merits.
If it is fair to note errors in execution, it is also necessary to defend OZ advocates from charges of ill intent. Many of OZ’s critics accuse the whole program as having been conceived in bad faith—as if Parker and EIG’s entire purpose was to construct a Potemkin village of neighborhood investments to conceal their real aim of sheltering rich people’s money. Wessel’s book provides ample evidence that this critique is ill-founded.
Parker could very easily have committed his billions, as many other successful entrepreneurs have done, to shield more of his hard-earned cash from the tax code. In fact, he told Wessel he has intentionally avoided investing in Opportunity Zone funds to avoid the accusation of pursuing them for self-interested reasons. “The EIG Boys,” for their part, knew which doors to knock and which papers to produce, which makes them no different than any other interest group advocating for any other preferred policy. What made the difference for them was that the moment met their preparation, perhaps before they were expecting it.
Only the Rich Can Play is an uncomfortable reminder that no matter how much you may appreciate an idea’s intellectual lineage or conceptual clarity, no plan survives first contact with the enemy. It deserves inclusion on political science syllabi as a case study in how a billionaire’s idea can flow from a Davos brainstorming session to Washington’s halls of power and become the law of the land. Giving preferential treatment to location-specific capital investment as a form of place-based policy may have been an idea whose time had come; but the time may have come before the idea was fully ready.
Patrick T. Brown is a fellow with the Ethics and Public Policy Center.