From the article:
"Since introducing the plan Community Development has been able to leverage a $450,000 grant from the state to target blight downtown and has begun to build critical mass around the corner of Third Street and Main Street — one of the programs stated goals."
The idea behind the program seems to be that if these downtown communities can attract enough young people to liven the place up a tipping point can be reached such that more people will be attracted to the location without the subsidies. Leaving aside the fact that a large portion of the money is coming from the state, i.e. taxpayers who do not live in Niagara Falls and may never go there are helping to pay the bill, there are some other potential problems with the program.
I mentioned in an earlier blog post that cities that want to succeed in making themselves more attractive places to live have to solve both the supply and demand problem of employment; they need high capital workers and employers for those workers. This is often a catch 22 since firms do not want to locate in a city with no workers and workers do not want to locate in a city with no jobs. Niagara Falls is trying to stimulate the supply side of the labor market by bringing in more high capital workers and then hoping that employers will eventually follow. But is this program the best way to do that?
Lets think about the decision of an individual person. For simplicity we will divide a person's expenditures into two goods; student loans and all other goods (AOG). This makes it easier to use a graph. Thus this person's budget constraint is
(Price of Loans x Loans) + (Price of AOG x AOG) = Income
The price of loans is the payment made every month to the lender. If a person has loans they will spend some of their income on their loans and some on everything else; food, apartment, clothes, etc. Suppose a person took out a lot of loans relative to their income and so they make large payments to their lender or they hate being in debt and so they make large payments to pay off their loans quicker. This person will be represented by the red indifference curves below.
The original budget constraint is the black one and the person is on the red indifference curve 1. Suppose another person took out a small amount of loans or just doesn't mind being in debt and so they make the minimum payment on their loans. This person's preferences are represented by the green indifference curves and they are on the green indifference curve 1 on the black budget constraint.
The program offered by Niagara Falls provides a lump sum that reimburses a person for payments on their student loans. This lump sum acts like an increase in income, so it shifts the budget constraint out to the blue one. But because the money has to be used for loans, if the person wanted to spend all of their income on all other goods (AOG) the money wouldn't help them. Thus the new budget constraint in blue does not extend all the way to the AOG axis. If you chose to spend all of your money on AOG you would not be able to buy any more than you could before the program since the money can only be used for loans. But if you spent all of your money on student loans, you would be able to pay off more of them with the program and so the intercept on the loans axis goes up. This will have different effects on people depending on their preferences.
In the graph below, the person with red preferences moves to red indifference curve 2 and is better off than they were before. Because they use a lot of their money on loans the entire benefit of the subsidy is reflected in their utility gain.
The person with the green preferences, however, would like to be on the green indifference curve 3. But because the budget constraint doesn't extend to the AOG axis they will have to settle for being on a lower indifference curve. The in kind payment of a loan subsidy does not allow them to be on the same indifference curve that they would have been able to be on with a cash gift. A cash gift that could be used on loans or AOG would have allowed the person with green preferences to be on indifference curve 3.
What this means is that the Niagara Falls program will be more attractive to people with preferences similar to the red curves rather than the green. If there are no differences between the two types of people on average then this won't make much of a difference in the type of person that moves to Niagara Falls. But if people with smaller amounts of loans, or at the extreme no loans, are different in a desirable way than people with a lot of loans then Niagara Falls will not be attracting the best people. I am not sure that is the case, but if Niagara Falls really wanted to keep their options open and be able to attract the best people regardless of loans they would simply offer a cash payment to people who locate there rather than a loan subsidy.
My hunch is that a loan subsidy is much more politically feasible than a simple cash payment and that is one reason it was implemented. But that does not mean that it is the better policy from a results standpoint. In kind payments only attract certain people while cash will attract everyone. Time will tell if Niagara Falls' plan works but if it doesn't I wonder if anyone in the community development office will recommend a simple cash subsidy for people with college degrees.