Marie Howland’s paper, “Measuring the Cost and Accomplishments of Capital Subsidies: The Case of Rural UDAG Grants,” examines the effectiveness and cost of low-interest loan programs for economic development, focusing on the rural component of the Urban Development Action Grant (UDAG) program.
The paper highlights several challenges in evaluating capital subsidy programs, including:
- Measuring true economic costs: It’s difficult to determine the market interest rate a firm would have paid without the subsidy, especially since many recipients lack access to private capital.
- Selecting appropriate discount rates: The suitable discount rate varies depending on whether the program is funded by tax revenues or public borrowing.
- Quantifying job creation: It’s hard to ascertain how many jobs would have been created without the subsidy, and determining the timeframe for counting jobs is also problematic.
- Measuring secondary employment effects: The impact on suppliers and related services is difficult to measure.
Howland proposes a new methodology to calculate the “explicit subsidy,” which represents the direct cost of the program to the government. This method, outlined in detail with equations, aims to provide a more accurate and comparable measure of program costs.
The study applies this methodology to the rural UDAG program, which provided federal grants to localities for low-interest loans to private businesses in distressed rural communities. Key findings from the evaluation of rural UDAG grants include:
- Cost-effectiveness: The cost of creating rural manufacturing jobs through the UDAG program was relatively low, ranging from $1,963 to $4,216 per job created. This is compared favorably to other public works programs with higher per-job costs.
- Job creation timing: Job estimates varied significantly based on when data was collected, with later surveys (Fall 1987) showing more than double the jobs reported at project closeout (1978-1983).
- Beyond job counts: Case studies reveal that capital subsidies can improve firm competitiveness and contribute to local economic stability even without immediately creating new jobs. For example, a bicycle pedal manufacturer survived by investing in plastic pedal machinery due to the UDAG grant, and a craft yarn manufacturer was able to purchase modern equipment, ensuring its survival in a declining market.
- Displacement of private capital: While firms might claim the subsidy was crucial, the study found evidence of private capital displacement in 28% of projects through telephone surveys, aligning with other research findings (HUD found 13% with evidence, Kwass and Seigel found 19% for EDA projects, and Sazama found 50% for state loans).
The paper concludes with lessons for urban planners, emphasizing the importance of carefully screening firms, understanding that job creation estimates can vary, and recognizing that program effectiveness extends beyond simple job counts to include factors like firm competitiveness and economic stability.
