Adding LGBTQ to Baltimore’s Minority Set-Aside Program Raises Important Questions That Ought to Concern Us

Baltimore Mayor Catherine Pugh recently signed an executive order adding LGBTQ businesses to those eligible to receive special consideration in the awarding of city contracts. Although the Baltimore Sun criticized Pugh for the way she went about it––failing to conduct a study first to justify the need, this incident is a good opportunity to re-examine the justification for these programs.

In 1989, the U.S. Supreme Court declared such programs unconstitutional if they are not based on a “disparity study,” showing each group is actually being discriminated against. In that decision Justice Sandra Day O’Connor wrote “The dream of a Nation of equal citizens in a society where race is irrelevant to personal opportunity and achievement would be lost in a mosaic of shifting preferences based on inherently unmeasurable claims of past wrongs.” Her concern speaks to what has happened since––namely, programs run on slim justification haunted by occasional cheating and a burden on taxpayers

Business ownership is fungible. Instances have been uncovered where a woman or minority was named owner of a company solely for the purpose of being placed on the approved list when the true owner was neither. One infamous case involved a man who identified as Navajo moving from Arizona to Maryland for the express purpose of becoming the “owner” of a company that he never owned. (See https://www.washingtontimes.com/news/2010/jul/27/minority-contract-set-aside-program-exploited/)

In addition to minority set asides, some states have small business set-asides. Combining all these programs leaves few opportunities for older companies that might have more to offer on the basis of experience and capital. The result is likely to mean work not done on time or at the desired level of quality and it can cost taxpayers more.

Another potential problem with these programs is setting the percentage of contracts that are to be awarded to minority-owned companies. The rational for a specific percentage ought to be based on current practices as well as the percentage of minority and women owned companies that are eligible to participate. Those numbers are likely to change from year to year and thus regular testing seems to be necessary to avoid favoritism and the exclusion of companies from bidding simply because they are not minority owned.

What O’Connor questions is whether the jurisdictions that offer these programs have the resources to evaluate the qualifications of the applicants and the quality of their work. Does adequate vetting taking place to determine whether a minority company has the management leadership, workforce experience, and capital to undertake the project?

Do they properly monitor minority contract winners to determine that they are carrying out their work in a proper manner, successfully achieving the expected results in the mandated time period?

There are dozens of opportunities for these programs to fail. The intent may be good, but does the results match the expectation?

Finally, do these programs bring us any closer to the day when such programs are no longer needed? I have my doubts. It seems that government bureaucracies generate built-in inertia in matters such as this. It is to the advantage of the employees in the offices that manage these programs to justify the need for their continuation and to overlook any discrepancies in a company’s application in order to give the mayor or governor numbers to show she or he is doing a good job.

A good way to avoid exchanging problems based on discrimination with ones reflecting poor oversight and poor work quality would be to sunset the programs, requiring a diversity study every two or three years before they are renewed.

Rescuing Baltimore: Help the residents rescue themselves

The absolute wrong way to rescue Baltimore is to throw more money at the problem in the manner sought by Mayor Stephanie Rawlings-Blake. That solution not only creates dependency and smacks of paternalism, but it has also been tried and failed. The answer is a modern expression of an old parable.

Everyone knows the saying ‘Give a hungry man a fish and he’s satisfied for one day; teach him to fish and he’ll no longer go hungry.” Here’s my modern version. “Teach a man to fish and he’ll not only feed himself, but his entire family. Help him buy fishing equipment and he’ll be able to sell what he can’t eat to restaurants, buy a second boat, hire people to catch and clean the fish, hire more people to make the deliveries, keep his books, etc.

Baltimore needs a plan to foster entrepreneurship, not more hand-outs from the State or federal government. Rawlings-Blake did a presser with the Small Business Administration (SBA) that is offering assistance and microloans. That’s a step in the right direction, but one that needs to be multiplied tenfold. The mayor also needs to learn the lessons of the past mistakes, for example when $130 million spent on rehabilitating housing in Baltimore failed to turn around a neighborhood because the people didn’t have jobs to keep up their houses. (See Why Couldn’t $130 million transform one of Baltimore’s poorest places?)

A coalition of colleges, the chamber of commerce, city, and state government should be assembled to provide free entrepreneurship classes and small business support in the worst neighborhoods.

Here’s how that could work. Mary Jones, a licensed beauty technician, attends an introductory workshop where she learns if she wants to start a beauty salon—something she’s always wanted to do, she can get help developing a business plan, and submitting that plan to a microlending agency.

Most small businesses don’t qualify for bank funding and therefore people who want to start a business may never get the chance. Banks can’t fund lawn care firms, beauty salons, or small contractors, etc. not because of redlining or discrimination, but due to structural impediments. They are too big to lend. Microlenders use crowd-sourcing to raise the money, which has the benefit of being democratic as well as keeping down overhead costs.

A microlending agency might receive business plans for one hundred businesses (existing and new) that want loans under $25,000. They notify people willing to invest. Here’s how that works with Kiva where I’ve invested in dozens of businesses all over the world. I decide I have $100 to invest in small businesses. I scan through the list of companies needing a loan and pick four to get $25 each. One of them might be Mary’s beauty salon. She needs $2,500 to rehab the vacant storefront where she’d like to locate her business and $2,500 for equipment. She plans to have four chairs; three for other licensed practitioners each of whom will pay her rent to meet their customers in her salon.

My investment doesn’t even begin to meet her needs, but I post on Facebook that I’ve lent Mary Jones $25 and invite my 500 friends to consider loaning her $25. Say 50 of them think this is something they’d like to do, which raises $1,250, but each of them notifies their FB friends who notify their friends and eventually we have $5,000. Only then does Mary get her loan.

That’s not the end of the story. Mary’s business plan shows that she should be able to start repaying the loan after one month. As she starts repaying her loan, that money goes into the accounts of the two hundred people who financed her. Pretty soon she’s repaid her loan and I can invest my $25 in Joe’s fishing company.

Not all businesses will be funded; not all that get funded will succeed, but enough will to start building an economy that will allow people to fix up their homes, to raise families, buy a cars, go on vacations, etc.

Pretty soon you have a self-supporting, self-sustaining community instead of a dependent one. Which community do you think will have the higher crime rate? Which will deepen the racial divide? Which will attract businesses outside the region to come in to open stores, restaurants, and offices?

Kiva relies on local NGOs to help select and manage their microloans in places like Guatemala and Kenya. In Baltimore there could be more than one microlending agency authorized by the State of Maryland and City of Baltimore or one organization, such as the Chamber of Commerce, which could do that job, taking a tiny fee out of every loan to pay for the people who run the program.

Compare that model with welfare systems that require hundreds of bureaucrats to hand out money to people who are disincentivized to find a way to escape their impoverished existence.

Baltimore can be saved by the residents of the poorest neighborhoods. Encourage their innate desire to help themselves. Give them a hand instead of a hand out. We’ve tried the other way. It’s time to let the people rescue themselves.