ADAM MEYERSON:

Welcome to The Heritage Foundation. I am Adam Meyerson, Vice President for Educational Affairs, and we are delighted you could join us for a discussion of how to save the American city. Our keynote speaker is the governor of the Keystone State, the great state of Pennsylvania, Tom Ridge. We will be hearing comments from Henry Olsen and Stuart Butler.

Conservatives haven't paid much attention to cities in the past 60 years. We focused on winning the Cold War, on saving our economy from regulation, exorbitant federal and state taxes. We let the liberals run the cities, and the result has been disaster.

• Cities have historically been the center of education and knowledge. Indeed, our word civilization comes from the Latin word for city, civitas. In American cities today, 57 percent of fourth grade students can't read.

• As recently as 40 or 50 years ago, most urban neighborhoods were relatively safe for their inhabitants. The astronomic rise of crime in the past 40 years has been concentrated in central cities. Today, urban families and businesses suffer four times as much violent crime as suburban families and businesses.

• Cities have historically been the great centers of opportunity and economic dynamism, but the incredible entrepreneurial boom of the American economy is mostly passing cities by. Businesses have followed people out to the suburbs, especially the small and medium-sized businesses that are the growth engine of our economy. Almost 90 percent of the new jobs in our economy are created outside of cities.

• Most large cities in the Midwest, the Northeast, and the South have seen enormous population declines even as their metropolitan areas have been flourishing. Cleveland has lost 44 percent of its people since 1960; Philadelphia, 24 percent; Chicago, 25 percent; Pittsburgh, 41 percent; St. Louis, 51 percent. It goes on and on. In our own city of Washington, D.C., 10,000 people a year are voting with their feet against Marion Barry by moving to the suburbs. Most of those leaving are in the black middle class.

Now conservatives have the opportunity to clean up the mess left by liberalism in the cities. We're deeply honored to have with us a governor who is thinking seriously about how to do this.

Tom Ridge is well positioned to be a leader on urban issues. He grew up in public housing in Erie, Pennsylvania, at a time when working-class neighborhoods were strong communities with a sense of hope. He lived in that kind of community, and he knows what cities can be. He earned a scholarship to Harvard. He fought in Vietnam, where he earned a bronze star for his bravery. He came back to Erie as a prosecutor, and then he served in Congress, as a Member of Congress for 12 years before his election as governor in Pennsylvania in 1994.

As governor, Tom Ridge is nationally known for his tough anti-crime measures and his leadership on behalf of school choice. We're delighted that he's joining us today to talk about his project for community building and his Keystone Opportunity Zone initiative. Please join me in welcoming Governor Tom Ridge of the great state of Pennsylvania.

--Adam Meyerson is former Vice President of Educational Affairs and Editor of Policy Review: The Journal of American Citizenship at The Heritage Foundation.

GOVERNOR THOMAS RIDGE:

Thank you very much for that wonderful introduction. I'm very pleased to be back at The Heritage Foundation.

Obviously, I am a friend of the Foundation. But perhaps more important, I am a student of much of what you teach. Washington is a better city and America is a better place because of the Foundation's teachings. I thank you for the invaluable work that you do. As Lincoln reminded us, from time to time we must think and act anew. Clearly, some of the boldest, most provocative ideas in the public policy arena have emanated from the Foundation.

I am here to talk about a very serious subject today, although I do so with the wife of Supreme Court Justice Felix Frankfurter in mind. When asked about her husband's speaking style and ability, she responded, "Felix has but two problems: First, he digresses from the text, and, secondly, he returns to it." I am not sure what the middle ground is, but I will try to seek it for your sake.

Few things are as serious for the future as the question we are here to explore today. I think that issues dealing with inner-city, urban policy and social problems are the key issues for the coming generation. I will present the well-known, well-documented, and tragic facts.

Our cities are broken, and many of those who live in them are hurting, some desperately. The question of the day is whether government and free markets can work together to rebuild these cities and, more important, these people.

That question might be slightly misstated. We really do not have a choice here; there is no other option. The question is not government or the private sector. I think we are beyond either/or solutions. To build this new city will require us to use both hands, not just one. Some on the left would argue that the only hand needed is that of government. Some on the right suggest that the free-market hand will suffice. I believe we need both hands to work together.

Why do I believe this? Simply because of what I see in our cities, not just in Pennsylvania but in all cities across America. Obviously, if you doubt what I say, you can go across the river from here. It is a place few folks on Capitol Hill visit. It is Anacostia.

There are many Anacostias in urban America with just a different name. You can find them in Pittsburgh, Philadelphia, Cleveland, Baltimore, Boston, anywhere. You name the urban area and you can find a center like that. Take a photograph, show it to a Congressman, a Senator, or anybody else, and say, "That could be in one of our cities."

In that photograph you will see streets that often look like war zones. You will see young children roaming the streets at all hours of the night because they have no one who cares where they are. You will see men, young and old, gathered around street corners, convenience stores, or liquor stores wasting their God-given lives because they have nowhere else to be. You will see the youngest old women on the planet, 17, 18, and 19-year-old girls who are mothers of two or three children already.

That is the daily reality for millions of Americans. Yet deep within everyone here, and I believe deep within everyone in America, is the knowledge that this is not America and this is not the America we long to be.

There are pockets of urban decay in cities throughout this great country, and I believe that these cities are American tragedies. I also believe very strongly that unless we as conservatives, unless we as Republicans, make the reformation of these cities and the lives of the people who live in them one of our top priorities, we will continue to find ourselves on the wrong side of history. I say continue to find ourselves on the wrong side because I believe that is where we are right now.

Be it perception or reality, we are widely regarded as a movement and a party of callous indifference to the plight of those in need. We are perceived to be the party of the cotillion and the country club. We obviously reject that perception. In many instances, we know it is wrong. However, in the world of politics, perception can be reality; and in some instances what we say and how we act confirm the worst suspicion of many of our critics.

Many of the elite have equated government spending with compassion, and we also know nothing could be further from the truth. We seek less governmental regulation that will lead to fewer impediments and fewer obstacles to people fulfilling their God-given potential. We seek to emphasize work in welfare because work--all work--has value. All work--I do not care what you do--has dignity. We seek a thriving economy because we believe it will lift all people.

When we as individuals or as a party talk only about economics and numbers, as well as trying to eliminate government involvement and rely exclusively on the marketplace or the private sector, we appear as though we are not in touch with the plight of those men, women, children, families, and communities that are in need.

We need to shift our focus. We need to realize that we face a crisis in our urban centers. It is a crisis that has the potential to impact everyone regardless of whether you live there or not. Teamwork between the government, the market system, and the free enterprise system is the key to solving the problems that have for so long proven vexing.

If there were another choice, we would take it. There is not. We have seen what happens when one side is too heavily emphasized; it was known as the Great Society experiment. There was nothing "great" about it. It certainly did not create a "great society." For much of the past two generations, we have had a government that was, in the words of Margaret Thatcher, a "nanny state." It was a state that took too much from us to do too much for us.

With all respect and admiration for Lady Thatcher, she might have had it slightly wrong. We did not just have a nanny state; we had a nanny state, a mommy state, a daddy state, a maid state, and a crazy uncle state. Government's duty was to fill all roles and meet all needs. We know it has not, for the sole reason that it cannot.

Then there are some who say we do not need government at all. It is seen as just too big, too burdensome, and too meddlesome. Obviously, at times I agree with that assessment. I agree that government cannot do everything, nor should it. However, this does not exempt government from the obligation to try to do things differently. The simple fact of the matter is that the private sector is simply not ready and not equipped to handle the problems without government in certain areas.

In fact, parts of the private sector are just as bad as government ever was. There are some organizations out there that reflect the mission, means, and orientation of government. Sometimes their recommendations and their solutions lead us to more government. As we have seen before, that has been a very unsuccessful experiment in our urban communities. They are anything but the kind of genuinely compassionate, efficient charities that are, in Professor Marvin Olasky's words, "challenging, personal and spiritual."

The idea of government and the free market working together sounds either like a love song or a novel title. It is neither, but it is what we are trying to do in Pennsylvania. Our Keystone Opportunity Zone initiative is simple but very serious. We are striving to take Pennsylvania's most distressed urban locations and both reinvigorate and reinvent them. We want to make them enticing to employers and developers by declaring them tax-free zones.

William Julius Wilson, the great American sociologist, writes in When Work Disappears that "America's urban centers are a ghost-town of joblessness, hopelessness, and despair." He is right. Remember those photographs? In looking at those photographs, one easily sees families with absent fathers, illegitimacy, the ever-apparent culture of crime and drugs, inferior schools, few jobs, and--probably most important--no hope.

We must do better, and the Keystone Opportunity Zone is an initiative we think can help us do better. Working in a public-private partnership, our goals are clear: We want to stimulate jobs and community development by making certain blighted urban areas so attractive to employers and developers that they cannot afford not to come in.

We will waive taxes for up to 12 years--all taxes. If one chooses to live in one of these opportunity zones, we will waive personal income tax for the residents. We will waive corporate net-income tax, the capital stock, and franchise tax. We will also waive the sales tax for goods used and consumed by businesses in the area. By waiving local, real estate, business, sales, and income taxes, this will be a tax-free zone for its residents.

Admittedly, these are dramatic measures, but I think we have to be bold and innovative. Within these Keystone Opportunity Zones we will target many of our programs, including our Project for Community Building. Our community development financial institutions, community development credit unions, crime prevention grants, charter school grants, abstinence education programs, and family savings accounts are all under our Project for Community Building, which is targeted for the Keystone Opportunity Zones.

We believe in the free market and the free enterprise system. In times of great opportunity, we have demonstrated great results. But it is important to keep in mind that the free market and enterprise systems are not perfect. There are imperfections that have had, in my state and across this country, a disproportionate impact. For too long, government and some conservatives have ignored the reality of those imperfections. That cannot continue. Government must understand and embrace the free market. This is America, not the old Soviet Union. Our government must help those who want to help themselves in the same manner as it has used incentives to help businesses get ahead.

I am not talking here about charity. Our people and our communities do not want handouts or charity. Therefore, we should not give it to them. What they really want is the chance to make it on their own and find their own solutions. It is silly for government to do anything else.

In Pennsylvania, we are trying to do this together. It is not simply the job of the state government and the free market. It is state government, local government, big business, small companies, houses of worship, and community-based organizations which must work together to make this possible. In other words, it is the entire community of Pennsylvania. Whether you live in the urban community or not, we have a stake in the future of these communities and their citizens. It will work because it is not simply economically based, but it has an entire culture of values associated with it.

It is clear that the Keystone Opportunity Zone rewards work. It says, both to those with jobs and to those without jobs, that work matters in life. We define ourselves by our work. It says that we will do everything in our power as the community of Pennsylvania to create a system under which you will be able to work, and therefore able to thrive. The final step is ultimately up to the individual. We know and understand that concept. It is as it should be. We cannot guarantee outcomes, but certainly government and the market can work to point the way.

What I like most about the Keystone Opportunity Zones is what they say about us as a community called Pennsylvania. They are the reflection of some of the best and most original thinking in urban policy. They reflect what we know works and what we believe is true. I believe they reflect an entrepreneurial approach to urban policy, and that, too, is truly exciting.

I think there are many hopeful and positive things happening around our state and around our country. As many have said before me, there is not a social problem that is not being solved somewhere by someone. Our job in government is to do what government can do to help these miracle workers. This means making their lives easier by reducing government regulations. It also means using and supporting community-based organizations that have demonstrated their ability to solve local problems. All of this means creating opportunities to lift people up. That is what the Keystone Opportunity Zone is all about.

More than 30 years ago, a young senator named Robert Kennedy gave a speech in Ithaca, New York. In it he said, "Opponents of welfare have always said that welfare was harmful. That it encouraged dependency and discouraged work. In our enthusiasm to help, we disregarded these criticisms." His words also stood disregarded for nearly two generations, and untold millions suffered because of it. A well-intentioned, inherently flawed system failed. It failed those who paid for it, and it failed those whom it was designed to serve.

I think we have turned the corner. Now I believe we are on the path to real solutions. That is not to say that change will happen overnight. Neither will it come without hard work and many thorough debates.

Independence means risk and the sacrifice of security. Economic mobility means work--hard work. But history has shown us that no nation and no people who have ever tasted the sweet fruit of freedom wished for a return to captivity. In Pennsylvania, with our Project for Community Building and our Keystone Opportunity Zones, we make it our business to help people set themselves free. We believe this is a glorious goal for government to seek.

--The Honorable Thomas Ridge is the Governor of Pennsylvania.

ADAM MEYERSON:

Thank you, Governor Ridge, for that thoughtful talk. Thank you for urging conservatives to make the repair of our cities one of our top priorities. Thank you for reminding us that both government and the market have a very important role in that repair.

One of the key questions our next two commentators will talk about is what is the right balance of government and the marketplace, and what does government do best? What role does the marketplace, including private charitable institutions and other organizations, play?

Our first commentator is president of a Pennsylvania version of The Heritage Foundation, the Commonwealth Foundation. Henry Olsen is a graduate of Claremont McKenna College and the University of Chicago Law School. He practiced law in Philadelphia and served as a staffer for the California State Assembly. He and his colleagues at the Commonwealth Foundation have been architects of the charity tax credit that has now been adopted by the Renewal Alliance in the U.S. Congress and the Commonwealth Foundation. He has also been a leader on many issues, including welfare reform and community renewal. Please join me in welcoming Henry Olsen.

HENRY OLSEN:

Flying out of San Diego airport taught me a lot about America. When you fly east from San Diego and sit on the right side of the plane, you can clearly see the U.S.-Mexican border. From the air, it is a broad strip of dirt about a half-mile wide with a fence running down the middle.

On the American side, all is well: The streets are paved, the houses are neat and painted, and the developments are orderly. The Mexican side is far different: There are unpaved streets, houses placed everywhere without regard to order, and the houses are neither painted nor washed. On the American side, Manuel Arrillaga expects a good life. On the Mexican side, however, his fondest dream is to go to America. Such is life on each side of the wall on our southern border.

Living in Chicago's inner city taught me more about America. In 1989, I was driving west from Lake Michigan, on the South side of Chicago, to Midway airport. An energetic mayoral primary was underway at the time between the black incumbent mayor, Eugene Sawyer, and his white challenger, Mayor Richard Daley, who currently holds the position.

As I drove, I passed through a crumbling neighborhood. The old, decaying houses were multistory, multi-unit complexes. Vacant lots containing weeds growing two or three feet high were common. Many middle-aged men were on the street even though it was the middle of the working day. Every person I saw in that community was black, and every sign on the telephone poles was for Sawyer.

Then I reached a north-south street and stopped at the light. Just across that street everything changed. The single-story houses were solid and well-kept. Almost no one was on the street, and everyone I did see was white. Immediately across the street on the corner pole was the first Daley sign. As I drove to the airport, I saw only white people, well-maintained single-story houses, and Daley signs.

I had just crossed America's wall of shame, the wall that separates every inner-city resident from the American dream. It is a wall that, for many reasons, disproportionately affects our African-American citizens. It stands in mute, stark defiance of our founding ideal that every American has the right to the pursuit of happiness.

This is the wall that your Keystone Opportunity Zones proposal seeks to break down. It is well-intentioned and certainly will do some good in its current construct. Ultimately, however, it will not succeed in breaking down this wall unless it does more than simply provide tax breaks for business.

For America's wall is not physical, as the Mexican border is; it is psychological. Until inner-city residents live in a community that nourishes their potential and gives them hope for the future, all the small businesses in the world will not change the despair that grasps inner-city residents. It is a despair that persuades them that their lives are determined at birth and that the promise of a
better future is only a cruel hoax.

You have correctly stated today that the problem with inner cities is not merely material. I would suggest that your initiatives, including the Zones Program, the Main Street Program, and the Community Development Bank, have focused on material solutions to essentially spiritual problems. Your solutions should focus on breaking down the spiritual wall separating inner-city residents from the rest of America. The Zones, as currently constituted, may attract developers and businesses, but they will not entice inner-city residents to break out of those walls.

There are many reasons why this inner-city psychology exists and, hence, why our inner-city problems seem so insoluble. They are explained in a great article published in a recent issue of Policy Review written by Steve Hayward, a Bradley Fellow at Heritage. It is a short article that will take you only 20 minutes to read, Governor, and I heartily recommend it. Let me try to summarize the article's conclusions in my own words in the short time allotted today.

Virtually every social pathology, which contributes to sustained poverty is financially underwritten, if not encouraged, by government policy.

• Government regulations prevent poverty-stricken residents from entering into business because they require small capital start-up costs. Taxi driving is an example of this.

• Government-operated schools deliver an astonishingly poor education, and poor people are unable to receive vouchers which would allow them to attend better schools. Also, they cannot afford to move to more affluent suburbs, which could at least offer adequate public schools.

• Government monopolies on police and corrections have often failed to keep poor neighborhoods even minimally safe.

• Government building codes have escalated the cost of housing to the point of virtually drying up the construction of new low-income dwellings.

• Perhaps most damaging have been the government income support mechanisms which, until very recently, gave young mothers life-sustaining benefits on two conditions: Do not work and do not marry. This occurred despite study after study which showed that unemployed, unmarried motherhood strongly correlates with lifelong poverty for both the mother and her children.

Together, these policies make it extremely difficult for residents to improve themselves, thereby creating the psychology of despair which characterizes American inner cities. Sadly, in their decrepitude and ugliness, our inner cities are world-class.

Your plan, Governor, has an element that will let you change this vicious cycle of dependence forever. Your proposal requires municipalities to submit detailed plans on how they will combat many of the root causes of poverty. These plans include improving poor local schools, implementing local crime-reduction measures, and reforming local regulations which unnecessarily depress economic activity.

These plans could become the vehicles for addressing many of the government-underwritten causes of poverty. Regulations which both prevent the formation of new businesses and low-income housing construction could be swept away, school choice or other meaningful educational reforms could be insisted upon, and law enforcement could be required to adopt some of the techniques which have cut New York's crime rate so precipitously. If these non-tax components of the proposal are taken seriously, your plan could make Pennsylvania the national leader in devising an urban policy that works for the 21st century.

To make this opportunity a reality, three things are necessary: It must be a solid bill, there must be dedicated personnel implementing the bill, and it is crucial to have solid political commitment to ensure its success.

Turning first to the bill, I would suggest three amendments. First, extend the time deadlines for approval of the plan by six months. The current time deadlines, requiring submission by the fall and approval by November, are really too strict to allow for the type of innovative, far-reaching plans our cities need if they are to really break free from their failed urban policies. For other reasons, many organizations of our state's local governments have also asked for loosening of the time limits.

The second amendment I suggest is perhaps the most important. It would require approved Zones to have a credible plan to address the issues of crime, education, and regulatory burden which they characterize as the roots of poverty. These must be addressed with quantifiable goals, such as crime reduced x percent by year z. Currently, the existence and/or the strength of such opportunity plans need only be considered by the department when reviewing Zone applications (Section 304 [b][7-9]). This amendment will be necessary to ensure that the government life-support mechanisms for poverty are removed, thereby dramatically enhancing the permanent effects of the Zones.

In light of this, my third suggestion is that the Zones should be reviewed, either annually or biannually, to ascertain whether they are meeting the goals set forth in their opportunity plan. Amendments should be added to provide that those Zones which are not meeting their opportunity plan goals will lose their Zone designation if they do not comply by the end of a set period of time.

This provision is crucial if the state is serious about removing the governmental barriers to self-sufficiency described above. As the massive success of our recent welfare reform shows, people will change their behavior only if they are presented with clear and certain negative consequences for failing to change. If communities want the tax exemptions and preferential subsidy treatment which Zone status conveys, they must be required to change those policies which unintentionally operate to keep an area and its people impoverished.

More important than the structural changes is the commitment of the people directly tasked with reviewing and approving the plans, and then carrying through with their implementation. As every conservative in this town knows, personnel is policy. Lincoln could not have won the Civil War without a general who could make use of the manpower and material Lincoln provided. There are many conservative urban policy experts whom you could look to for assistance. But whoever is placed in charge of the Zones must be committed to bringing about real change in urban policy, not simply administering tax breaks.

Ultimately, though, Grant depended on Lincoln more than Lincoln did on Grant. Lincoln's political skills and unwavering commitment to the Union supplied the raw material necessary for Grant's victories. Lincoln's speeches explained why the victory was both necessary and just, persuading his fellow citizens that their sacrifices were noble. Bill amendments and proper personnel will come to naught unless you, Governor, make recovery of our inner cities your legacy, the achievement of which will define your life in Pennsylvania's public square.

Lincoln's achievement was great not because he won a great war, but because the cause for which the war was fought was great. Lincoln understood that America could not endure half slave, half free. This was so because slavery denied its captives the promise of our Declaration of Independence to the rights of life, liberty, and the pursuit of happiness available to all, everywhere.

With the fall of the Berlin Wall, these ideals are animating and changing the entire world. It is the moral light of these ideals, not our economic might, which has given us world leadership. NAFTA is breaking down the wall I saw in San Diego because it is the economic manifestation of our founding ideals of equal opportunity for all, regardless of race or place of residence.

We cannot remain the guardians of the eternal flame of freedom, nor can we lead the world in breaking down their Berlin Walls or Bamboo Curtains, if we continue to turn a blind eye to our own. Governor Ridge, tear down these walls.

--Henry Olsen is the Executive Director of the Commonwealth Foundation

ADAM MEYERSON:

We will now hear from my Heritage colleague, Stuart Butler, who is our vice president for domestic and economic policy. When you see Stuart on national TV or see him quoted on the front page of the Wall Street Journal or New York Times, it is usually on health care or Social Security reform. But he is a national expert on many subjects, including urban revitalization. His 1987 book, Out of the Poverty Trap, helped lay the conservative strategy for welfare reform. In the early 1980s, he wrote the seminal book on enterprise zones and has become one of the architects of conservative thinking on that subject. Please join me in welcoming my colleague, Stuart Butler.

STUART M. BUTLER:

It is a great privilege to be on a platform not only with Henry, but of course with Governor Ridge. My wife comes, as I mentioned to the Governor earlier, from New Kensington, Pennsylvania, a very depressed neighborhood just outside of Pittsburgh, and I've spent many a long hour on the Pennsylvania Turnpike, so I feel almost a native of your state.

I live within the District of Columbia. I have children in public schools in D.C. Like many conservatives, I am very committed to the idea of turning around America's cities. I agree with you very strongly not only that conservative ideas on this issue are necessary, but that conservative ideas strike a chord with the very people who have most to gain from the kinds of proposals that you put forward.

Let me say at the outset that not just your opportunity zone proposal, but your general package of proposals is a bold and very wise approach to dealing with the problems of the cities, not just of Pennsylvania, but cities in general. I wanted to take a few minutes to say why I think that, and then also to make a couple of comments about the specific proposal that you have.

If you look at all we know about the cities--and there are many people who have a lot of experience of looking at the problems of urban America over many, many years--there are certain things we know or have come to know about what it takes to encourage real economic and social development within the inner cities.

One of the things we know is that very often there is the enormous potential for development that is latent. It's dormant, but it's there. In many cases there are people, there are buildings, there are ideas that, if only given a spark, a catalyst to encourage them to come forward, can bring about incredible development in some of the most unlikely places. If you go to areas like the South Bronx and South Central LA, you find these factors that are there and ready. What we need to do is to create an environment where those dormant resources and others can come to fruition and can lead to real change. We need to create that climate.

Almost always, we find that the ideas that are most likely to be successful on the ground in these neighborhoods are the ideas not of people from Harvard or anywhere else from outside, but of people from within those neighborhoods. That is why it's very important in creating a climate not to try to micromanage what is going to happen. It's important to take a chance, and it's important to give people the freedom to innovate even in ways that you don't think necessarily will succeed. I just draw a contrast here with the way President Clinton has approached the whole enterprise zone, opportunity zone idea, which is "Send us your proposal and we'll tell you if it's the right thing to do."

The third point is that, as you well recognize, many, many factors are involved in bringing about real economic change in neighborhoods. It isn't just taxes and strictly economic issues, as you wisely pointed out. It is such issues as a safe neighborhood where people can feel that they can go about their work and they can try ideas without threat. Taking firm action, through government as well as local institutions, on crime is as extremely important as is looking at the social stability of the neighborhood itself and the organizations that lead to that stability. It is crucial to do that, and your wider proposal certainly focuses on that.

If you look at why so many people are leaving so many cities, here in the District of Columbia, for example, it is the condition of the schools as well as crime and other factors that I mentioned. Those who do have a commitment to the public schools have to fight against the odds in these areas. Therefore, looking at schools and looking at the issue of education choice and also improving the public schools is so crucial to turning around these neighborhoods.

Many large companies have entire departments of lawyers to deal with regulations. If you're trying to set up a business yourself, simply getting a permit can be the death knell to your vision of how to start a business. Dealing with regulation is extremely important, as we know.

We must also understand the proper role of taxes in encouraging economic development. If you ask small businesses and would-be businesses what are the main things of an economic nature that stand in the way of their being successful in starting out, they say the cost. The day-to-day cost of operation and access to capital are the main economic factors that tend to stand in their way. It is very important to look at those issues of direct costs and access to capital.

When you look at access to capital, it's important to recognize that virtually all small businesses, first-time businesses, tend to get capital not from big banks, and certainly not from the SBA in Washington. It tends to be from capital they have accumulated or from loans from friends and neighbors. That informal process of capital is very important. And that is why the whole issue of capital taxes, and particularly capital gains taxes, is so crucial to encouraging people to take a stake in a small new business. All of these things are extremely important, and I see this understanding very much reflected in the design of your proposal.

First, it is comprehensive. It is not just strictly economic. You look at the issues of crime. You look at the issues of home ownership, the importance of people having a stake in their neighborhood by actually owning their own home.

We certainly have found at Heritage that encouraging tenant management and ownership in public housing has struck a real chord in those neighborhoods and has helped. It leads to people having a real long-term stake in their neighborhood, and therefore in addressing the issues. I would certainly encourage you to move even further in that area if you look at some of the things that have happened in New York City and elsewhere, various kinds of proposals to make it easier for people to have a stake in their neighborhood by ownership.

Look also at the impediments, in terms of regulation, to housing and housing development. I served on then-HUD Secretary Jack Kemp's Commission on Regulatory Barriers to Affordable Housing, and we looked at all the huge numbers of regulations that stand in the way of people wanting to create housing and own housing. I would certainly suggest you look very carefully at that report.

Second, you are looking very seriously, in terms of the tax measures and other features, at reducing the direct everyday cost that businesses would face, by addressing real estate taxes and taxes on inventory and so on. I think that's a very sensible step.

You also include an elimination of capital gains tax on investments within those areas. I think that is absolutely crucial. The biggest deficiency in federal legislation on opportunity zones and enterprise zones is a failure to recognize the importance of the elimination of capital gains taxes. Most people who are running a business, a first-time business in a poor neighborhood, are not making money. They are not interested in reductions in corporate taxes. They would love to be paying corporate taxes. What they need to do is to be able to say to an investor, "Here's an opportunity for you." That is why capital gains tax relief is so important, and it's so crucial in your bill.

I would suggest that while you're here in Washington, you see some of your friends back in Congress and maybe go down to the White House and urge them to incorporate capital gains tax relief in the federal measure on enterprise zones. If you do that, it will reinforce what you're trying to do in Pennsylvania.

Finally, it is extremely important to foster innovation by local governments. Henry has pointed out, as your bill does, the need to have a constructive competition within neighborhoods. I think probably the worst thing you can do is to indicate to an area or municipality that they will be chosen ahead of time. Make them compete. Make them come up with innovative ideas. Force that competition.

That was something that Ronald Reagan understood very well when he introduced his first enterprise zone measure back in the early 1980s, to force that competition, to encourage bureaucrats and government officials at all levels to think differently about their neighborhoods. Henry has emphasized that is important, and you should certainly focus on that.

One word of caution about the design of the bill: I do worry a little about the notion of giving residents complete freedom from personal taxes in those areas. That may seem rather strange coming from somebody from The Heritage Foundation, and also somebody who, like Milton Friedman, is in favor of reducing anybody's taxes for any purpose in any situation.

I think one of the things that can harm the whole idea of a tax-based enterprise zone is the idea that they become a convenient tax haven for people who don't really have a stake in the area themselves. If you wander just a few blocks from this building you will see plenty of license plates from places other than the District of Columbia or Maryland or Virginia. These are very often people who keep their residence conveniently in another part of the country, which has lower taxes, and yet actually live here. Be aware that you will have plenty of people looking for that kind of convenient residency requirement in your enterprise zones. Maybe you don't want those people. Maybe you should look at the tax cost of that, applying it in some other way within your area.

Let me end by echoing what Henry said: that this is a bold and comprehensive plan, and I think it is very important that you recognize, as I think you do, that this is a proposal, an idea, that sells well in the areas that you're aiming at. One of the first things I did when I was here at The Heritage Foundation working on enterprise zones, was to go to Anacostia. I was stunned, quite frankly, at how what I thought were very radical, conservative ideas seemed to make a lot of sense to people there.

People in public housing in Anacostia had very good ideas about how to improve the basic concepts that I had, and we found that was so in enterprise zones. We found it was true in our work on public housing and the privatization of public housing, that you will get good revisions of your basic proposal. You will find that the basic ideas, the philosophy and the vision behind your proposal are exactly in line with what the vision is within the neighborhoods that you want to improve.

Each of us has talked about walls collapsing. The Berlin Wall--the wall that divided East and West Germany--collapsed, but not because of well-intended liberal proposals to get together and find all kinds of new subsidy programs. The Berlin Wall collapsed because of strong conservative principles, applied directly, which struck a chord behind the Iron Curtain and forced those governments to collapse.

I believe that we can do that in the inner cities, and I wish you well. You will certainly have our support for what you are trying to accomplish.

Stuart M. Butler, Ph.D., is the Vice President of Domestic and Economic Policy Studies at The Heritage Foundation