Release: Towards a New System of Community Wealth

By Ross Baird and Bruce Katz
October 27, 2019

The United States is witnessing a quiet revolution in its approach to the revitalization of distressed urban communities. Most urban neighborhoods, even those blocks away from reviving downtowns and robust waterfronts and university areas, have high poverty, low social mobility, a lack of entrepreneurial activity, and major wealth disparities. These communities are also past and present victims of institutional racism. They sit on the “wrong side of the color line;” access to quality capital and mentoring to help residents purchase homes and build businesses remains scarce while parasitic capital for dollar stores, payday lenders and check cashers is plentiful.

For almost sixty years, governments, foundations, and banks in the U.S. have tried to solve issues of urban policy by dutifully delivering a top-down “Community Development” system. The goal: use large federal grants, big philanthropy, and subsidized bank debt to build units of low-income rental housing.

While there has been some constructive impact, the system of Community Development has largely failed to turn around the macro trends that plague American neighborhoods. The government and philanthropic sectors have largely ignored the collapse of economic dynamism and the growing wealth gap in American families. And the private sector has largely ignored the distinctive characteristics and potential of poor neighborhoods and encouraged mergers, monopolization, and poor quality service retail that often undermines the producers and entrepreneurs that create wealth in poor and middle-class communities.

The bottom line: income inequality today is the largest it has been since the government began measuring it in 1967. America’s poorer neighborhoods are largely recipients of aid and top-down investment, often more akin to the approach used in emerging markets rather than mature economies. That’s the bad news.

The good news: over the past decade, a new system has begun to emerge. This system, which we label “Community Wealth” in a just released paper, is a radical shift in how private capital invests in distressed neighborhoods.

Where Community Development elicits top-down programs led by big government and philanthropic grants, Community Wealth relies on bottom-up efforts by entrepreneurs, local real estate developers, and private investors. Where Community Development is focused on new buildings, Community Wealth is focused on people. Where Community Development is focused on philanthropy and government solving the problem, Community Wealth is focused on building equity and new entrepreneurial activity in poor neighborhoods. Where Community Development relies on the federal government and national foundations, the practitioners of Community Wealth are a bottom-up mix of mayors, local entrepreneurs, and idiosyncratic investors that are actually more similar than different.

Today, the green shoots of community wealth seem like one-off experiments, led by exciting and often odd people in their own hometowns. Yet, if codified and routinized, this system has the potential to bring hundreds of billions of market and civic capital off the sidelines into productive use, and drive transformative outcomes for disadvantaged communities across the country.

The revolution is being led by a blend of old and new actors. Living Cities, Enterprise, and LISC, three large national organizations that were cornerstones of the system of Community Development, are evolving to support entrepreneurs, growing businesses, and anchor institutions like grocery stores and health clinics in poor neighborhoods and in communities of color. And philanthropies who have significantly funded aspects of Community Development are now investing in Community Wealth strategies: the Kresge Foundation is using its balance sheet to support national community wealth funds, and the Kauffman, Rockefeller, and Abell Foundations are three examples supporting local efforts in places like Kansas City, Atlanta, and Baltimore.

At the same time, a new class of investors is also investing in distressed communities. Corporations, universities and philanthropies in cities like Cincinnati, Erie, Philadelphia and Saint Louis are creating institutions with the capacity and patient capital necessary to regenerate neighborhoods at scale in a way that is locally authentic and inclusive in operation and outcome, and cities like Austin, Baltimore, and Louisville are employing bottom-up efforts to invest in “street corners” that restore dense nodes of commercial activity, build local businesses, hire local residents and revive a sense of community pride and connection. And local and national funders like the Irvine Foundation and the Mastercard Center for Inclusive Growth are launching new initiatives to put people, money, and data towards the common effort of building community wealth.

This evolution has been massively accelerated through the creation of the latest federal tool, Opportunity Zones. This tax incentive is an imperfect tool, but it has focused sharp attention on what’s going wrong with our economy at the neighborhood level (too much parasitic capital seeking to extract value) and what’s going right (a constellation of local leaders building a new system of Community Wealth).

We define Community Wealth as “a broad-based effort to build equity for low-income residents of disadvantaged communities.” Going deeper, Community Wealth aims to build equity by:

• Growing the individual incomes and assets of neighborhood residents by equipping them with marketable skills and enabling ownership of homes, properties, and businesses;

• Growing the collective assets of neighborhood residents by endowing locally-run organizations with the ability to create, capture, and deploy value for local priorities and purposes;

• Improving access to private capital that has high standards, fair terms, a long-term commitment to the neighborhood, and reasonable expectations around returns and impact; and

• Enhancing inclusion by bringing fairness and transparency to neighborhood revitalization so that community voices are heard and respected and trust is restored, and local residents have the opportunity to participate in wealth that is created.

We need systemic changes in policy, practice and institutions to make this definition real. Community Wealth ultimately requires a shift from today’s “two-pocket” capitalist system: where within wealthy families, endowments, institutions, and pension funds, the vast majority of money seeks to make as much profit as possible, without regard to any harm or negative externalities, and the other (much smaller) pocket gives money away, to a “one pocket” mentality, where capital works to both achieve financial success and broader success for the community.

No one sector or level of society is able today to deliver the transformation that America’s poor communities require. Rather, a mix of actors – community development entities, philanthropies, corporations and financial institutions, the government, communities themselves -- must spearhead new thinking and take action to build equity in our communities.

In the end, Community Wealth is made for our times. Deeply entrenched spatial disparities demand it. An evolving network of innovators and investors define it. An abundance of motivated (but dormant or misallocated) capital enable it. And a new method of spreading innovation – via local financial, institutional and legal norms rather than top-down federal programs – amplify it. The Community Wealth revolution is here to be seized and scaled.

This piece is an excerpt from a recent paper entitled Towards a New System of Community Wealth, which can be found here. The paper is part of a broader series co-published by Accelerator for America and the Nowak Metro Finance Lab at Drexel University.

Ross Baird is the founder of Blueprint Local and the founder and 10-year President of Village Capital, one of the world’s most active venture firms. He is the author of The Innovation Blind Spot: Why We Back the Wrong Ideas and What to Do About It.

Bruce Katz is the Founding Director of the Nowak Metro Finance Lab at Drexel University and a Partner with Accelerator for America to scale and replicate innovative economic development finance tools across the country. Bruce is the coauthor (with the late Jeremy Nowak) of The New Localism: How Cities Can Thrive in the Age of Populism.

Towards a New System of Community Wealth was produced through the collaboration of Accelerator for America, Drexel's Nowak Metro Finance Lab, and BluePrint Local.