Eliminate Community Development Block Grants

By Anthony Randazzo and Victor Nava

When it comes to crony capitalism in Washington, there are the usual suspects: farm subsidies, housing finance, the U.S tax code. But crony capitalism exists in the small ways the government distributes money, too. Consider a $4.4 million "Community Development Block Grant" presented to Fairfax County, Va., by the Department of Housing and Urban Development (HUD) in 2012. This particular grant wasn’t massive in the grand scheme of government spending, but if you follow the money and put many of these grants together, "community development" spending starts to look more like a welfare program for government cronies. 

Community Development Block Grants (CDBGs) are the largest subsidy program run by HUD, providing funds to over 1,200 state and local governments. HUD claims the grants support low-income individuals, prevent slums and blight, and address immediate threats to community welfare where "no local funding is available." Strange then that Fairfax County -- the second-wealthiest county in America, with a median income of $103,000 (double the national average) and more than $3 billion in tax revenues each year -- would receive $4.4 million through the CDBG program. 

If poorer areas of the country were receiving even bigger grants, perhaps our suspicion would be unjustified. But that's not the case, even though the grants are awarded according to a formula: In 2012, not one of the nation’s ten poorest counties received funding through the program, while eight of the ten richest counties did receive money. Not only does this suggest that CDBG fund distribution is highly inefficient, but it smacks of the crony capitalism that has come to disease Washington, D.C., for years now.

Crony capitalism is best defined as private interests colluding with government to acquire special privileges in the marketplace. Sometimes the cronyism takes place at a local level -- see, for example, a grant for Bell’s Brewery in Michigan. 

In 2011, Comstock Township gave $220,000 in federal CDBG funds to Bell's to expand its facilities; supposedly, this benefited the community by supporting job creation. But Bell's Brewery was already among the top ten craft breweries in the country based on sales, and it certainly could have expanded without subsidies if the additional capacity had warranted investment. 

The brewery not only benefits from the government subsidies at taxpayers' expense, but it also benefits from the financial advantage over competing breweries. Smaller craft breweries struggle to compete with a brewery like Bell's when the government is subsidizing its expansion.

Other times, the cronyism takes place at a national level, where the funds are initially distributed, and the grant to Fairfax County is just the tip of the iceberg. Nearby Loudon County, Va., is the wealthiest county in America; its residents, who include many federal employees and contractors, have a median household income of $119,540. The county's visitor's bureau describes Loudon as a pastoral landscape nestled in suburban D.C.'s wine country, where you can "enjoy a perfectly preserved glimpse into a simpler time . . . from sporting and trailblazing along the tumbling hills of horse country, to tasting and romancing in quaint towns and storied villages." Not exactly the kind of place you'd think is dealing with slums, blight, or a shortage of community-development funds. Nevertheless, Loudon received $908,498 in CDBG funds in 2012 -- ironically, to fund affordable housing projects. Loudon, the richest county in the country, apparently needs help from the federal government to build cheaper housing developments because poor people can't afford to live there. 

The bottom line is that in 2012, more than 85 percent of all CDBG money given to county governments went to counties with median household incomes higher than the national median household income. This suggests the CDBG program is more of a welfare program for well-off communities than a system specifically aimed at fixing blight and providing essential social welfare and safety-net programs. 

CDBG grants cannot be reformed, however. Any attempt to simply redirect funds away from rich Virginia counties to the nation's poorest counties ignores that crony capitalism is built into the program's DNA.

In Los Angeles, Marlton Square was once a thriving shopping plaza in South L.A., and according to residents it showed little evidence of blight in the late 1980s before it was scheduled for redevelopment with CDBG funds. The developer ended up defaulting on the loans it received as a redevelopment incentive, and Marlton Square turned from a vibrant shopping plaza to a desolate wasteland of vacant storefronts and dilapidated buildings -- after more than $21.8 million in funds from HUD alone went into "redevelopment."

Unsurprisingly, HUD has not updated its CDBG formula, which factors in things like population, poverty, and pre-1940s housing, in over 30 years. That has led to questionable grants in the past few years, such as $200,000 for a Mark Twain museum in Connecticut, $588,000 for a marina in Louisiana, and $245,000 for awnings at a historical market in Virginia. Not only are these projects considered non-essential by HUD guidelines for CDBGs, but they are examples of private organizations collecting government subsidies to gain a competitive advantage.

Last week, House Republicans rolled out a $44.1 billion transportation and housing bill that includes a $1.3 billion cut to the CDBG program, which would slice the program's budget nearly in half. This doesn't go far enough. The CDBG program is a wasteful, crony-capitalist system that is inherently broken and should be eliminated in full.

Anthony Randazzo is director of economic research, and Victor Nava is a policy analyst, at the Reason Foundation. Their recent policy brief is “Crony Capitalism and Community Development Subsidies.”

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