“It was a situation where all income disappeared,” remembers James Connor, chief executive of the Manhattan branding and marketing agency the James Group. It was a second shock wave following September 11, 2001: His four-person business ground to a halt. Deals in the works, deals that had closed, even money he was already owed–none of it came through.

He didn’t want to lay anyone off. So Connor stopped paying himself, and his was one of the few businesses to succeed in getting a disaster loan from the Small Business Administration.

But in the mess, Connor also came to realize there was a major opportunity. A lot of companies out there needed to reinvent themselves to stay competitive, and the James Group could help them do it.

Through volunteer work he was doing to help downtown companies get back in action, Connor learned about the Center for Workforce and Economic Development, a disaster relief program run by the Consortium for Worker Education. The Center wouldn’t just help him hold onto his staff, Connor found, but help him expand. When the James Group signed on, he received more than $38,000 in subsidies to his payroll, allowing him to add an office manager and a creative director. Connor had to put up the money first, then submit time sheets to the consortium. For the next three months, he received cash back, equivalent to about 50 to 60 percent of the new staffers’ wages.

Hundreds of other companies got the same deal. By the time it wrapped up earlier this year, CWE’s wage subsidy program–paid for with $32.5 million from Congress, secured through joint lobbying by New York City business and labor groups–kept more than 2,800 workers employed following 9/11. The program helped nonprofits, too, like the tenant advocacy group Good Old Lower East Side, which found itself in a $30,000 hole. “We didn’t want to let people go,” says GOLES Executive Director Margaret Hughes, “but the money wasn’t there in the short term.”

Consortium staff specializing in sectors of the city’s economy–from information technology to food services–recruited companies and made sure that the dollars got spent quickly and effectively on jobs that carried decent wages and benefits. “It’s structured to privilege the best jobs in the community,” says Bruce Herman, director and architect of the CWE program.

The investment appears to have paid off. Three months after their subsidies ended, three out of every four companies were able to hold on to all of their formerly subsidized employees, and most of the rest were able to retain at least half. The wage subsidies made entrepreneur Connor a born-again believer in government’s power to help, not hinder, small business: “It was a beautiful education process.”

It was also the sort of success story New York desperately needs more of. From the very early days following September 11, economists predicted a second disaster: a wave of mass joblessness. They proved all too prophetic. After 9/11, an emerging recession snowballed. The city has lost more than 230,000 jobs since December 2000, and an estimated 300,000 residents are unemployed. The Independent Budget Office projects the city will lose 38,000 more jobs this year. New York City’s official unemployment rate is now 8.6 percent–2.2 points higher than the rest of the nation.

This spring, Herman and allies sought more funding for wage subsidies. CWE found enthusiastic private support: $1 million from the September 11 Fund to subsidize about a hundred more workers.

But they’ve had no luck so far with public money. New York’s congressional delegation has still not succeeded in renewing the initial funding. Now CWE plans to turn to what should be a natural source of support: the Lower Manhattan Development Corporation. Jointly governed by the city and state, the LMDC oversees more than $2.7 billion in federal redevelopment funds, channeled through the U.S. Department of Housing and Urban Development’s Community Development Block Grant program. A little over $1.1 billion remains to be allocated.

In theory, the LMDC is giving that money away for projects like Herman’s. In May 2002, it issued a broadly worded solicitation for proposals, including projects helping lower Manhattan’s economy. LMDC won’t detail how many proposals it has received since then. But in January, an executive from the agency told a meeting of business owners that it had received more applications than it had funding for, according to a source present at the meeting.

Numerous organizations like CWE–established groups with track records in community and economic development–say they have submitted ideas aimed specifically at tackling the jobs crisis. Many of those projects focus on Chinatown, which is still reeling from the double whammy of 9/11 and SARS hysteria.

But over a year later, the LMDC has approved few grants. Most recently, it gave $25 million to the Battery Conservancy for improvements to Battery Park; LMDC also helped fund the River to River Festival and the Listening to the City rebuilding forum. It has not approved any of the economic redevelopment proposals.

LMDC told one applicant that it won’t be considering any until at least this November, and suggested to others that the agency will eventually issue a new set of solicitations looking for specific projects. But the LMDC has not even indicated whether, in the end, it will commit to funding programs to aid employment and the economy. “There are lots of proposals pending, and no clarity on the process,” says Herman. “It’s not clear whether they’re interested in near-term programs or squirreling money away for infrastructure.”

“From what we understand, everything’s been put on hold,” says Cao O, executive director of the Asian American Federation, which has submitted a proposal for a Chinatown Rebuilding Partnership. The plan, drafted in conjunction with local business and arts groups, seeks to invest in developing Chinatown’s leading economic sectors, including the import, jewelry and tourism industries. It would market the neighborhood to tourists, launch a Business Improvement District, and make improvements to the area’s strained infrastructure, repairing sidewalks. “People are frustrated,” says O. “Almost two years have gone by and Chinatown is still struggling.”

Robert Weber, director of policy for Asian Americans for Equality, is involved, along with the New York Industrial Retention Network and the union UNITE, in planning another project seeking LMDC funds, a major center offering affordable real estate and support services for the struggling garment industry. “For large businesses, some of them would have stayed anyway–they need to be at the heart of Manhattan’s financial district, and they weren’t going anywhere,” says Weber. “The small businesses, where the margin for failure is greater–that’s where the help should be targeted. There are over 4,000 small businesses in Chinatown alone–they’re the backbone of our economy.”

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The idea that LMDC is neglecting lower Manhattan’s economy might sound strange at first. After all, the agency has spent $650 million so far on grants assisting enterprises south of Canal Street.

But the bulk of that money, $485 million, was intended simply to help companies survive in the short term: 12,400 small businesses got compensation for business they lost in the weeks following September 11.

With LMDC dollars, the city and state economic development agencies have also given more than $130 million so far to 34 large companies, each with more than 200 employees, in exchange for their promise to remain in lower Manhattan for at least seven years. These Job Creation and Retention grants include penalties for companies that don’t follow through on their commitments–should they leave lower Manhattan prematurely, they will have to return twice the amount of their grant, and they’re also penalized for shifting jobs out of the area. (If they downsize as a result of “economic problems,” says EDC spokeswoman Janel Paterson, companies are not obligated to repay: “We don’t punish them for that.”)

Twelve of the companies stand to receive additional payments of up to $900,000 each for adding new employees. But a number of others–including American Express, which received $25 million, and institutions and businesses like NYU Downtown Hospital, the Municipal Credit Union, Pace University, the Legal Aid Society, J&R Music and Computer World, Medical and Health Research Association and the American Stock Exchange–are either anchored to New York City or have made clear that they never intended to leave. Others relocated from midtown. What they didn’t do was create jobs for New Yorkers.

Business leaders concede as much. “In terms of the city’s tax base, you’re right, it does not make a difference. From the standpoint of not wanting to see a hollowing out of downtown Manhattan, yes it does make a difference,” says Patty Noonan, vice-president of research and policy at the Partnership for New York City, which advocates on behalf of the city’s leading corporations. “The dollar value is important, but so is the symbolic value, to other firms whose leases are expiring, and small firms that are dependent on them.”

That’s the idea that underpins the EDC/ESDC strategy, and it has a compelling rationale. Retail or food or printing businesses located in lower Manhattan will be viable in the long term only if they have enough customers to keep them going. High-paid, large-staffed Wall Street firms are their main sustenance.

The LMDC program to help small businesses hold onto their staff is accordingly modest. Its Small Firm Attraction and Retention Grant was available only to firms whose leases expire prior to September 31, 2004, without an option to renew. As a result, many firms are not even eligible: just 952 have received a total of $31.3 million, most of them getting $1,750 per employee. They’ll receive a second installment in 18 months for each staff member they hold onto.

“We told ESDC, there isn’t enough money,” says Jeannine Chanes, an attorney assisting From the Ground Up, a group of lower Manhattan businesses agitating to make relief programs more responsive to their needs. “They said, ‘We’re not going to help businesses that are going to go under anyway.'”

Small businesses that have managed to get the small firm subsidy dollars say the money has helped them hold on to their employees. “I don’t know how I’d be in business without it,” says Arthur Gregory, a Community Board 1 member who owns the A&M Roadhouse restaurant on Murray Street. But Gregory got the aid only because, at the suggestion of an ESDC representative, he signed a new lease for basement space. He still doesn’t have the money to equip it–and as a result, ESDC now wants its $24,000 back. “I said, ‘What the hell are you talking about?'” recalls Gregory. “They said, ‘What are you doing with the additional space?'”

Chanes’ group is yet another applicant for the phantom LMDC funding. “The silence was deafening,” says Chanes, who applied nearly a year ago for money to help fund her group and its activities to help downtown businesses obtain loans and other aid. When asked how long it would take to process applications, LMDC told her it would happen soon. “Soon like this month, this year, this decade?” she recalls responding. Chanes says LMDC officials told her they needed to do more outreach to different groups before making funding decisions.

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Two years after September 11, Chinatown is still New York’s other ground zero. Virtually every business reports a permanent decline in sales, and one in 10 workers has lost his or her job. Even before then, one-third of families in the area lived below the poverty line. Every job here is precious.

Not only were its small businesses and garment factories slammed economically–the neighborhood has seen little in the way of redevelopment dollars. Of the projects LMDC is funding directly, only two, the renovation of Columbus Park and a transportation study, focus on reviving Chinatown. A survey by the Asian American Business Development Center found that just 11 percent of businesses got LMDC job retention aid, an average of $7,000 each; grants under the lost-business program added up to under $1,900 per firm.

A number of the reinvestment pitches languishing at LMDC focus on rebuilding Chinatown and stabilizing jobs to the area. The Asian American Business Development Center, which started its conversations with LMDC last year, has been trying to convince the agency to support an initiative to bring in more tourism and help upgrade companies’ business operations.

Another, the New York Fashion Space, proposes to help revive the area’s battered garment industry by opening several workspaces as affordable homes for businesses, keeping them near their workers, suppliers and customers in Manhattan. It would also offer marketing services and cutting-edge production facilities, to give shops occupying the spaces a competitive advantage.

In attempting to convince LMDC to invest $25 million in the Fashion Space, AAFE is also trying to get the agency to target its economic recovery dollars more carefully. Says Weber, “One of the things we’d like LMDC and [Deputy Mayor for Economic Development Daniel] Doctoroff to do is examine strategy, rather than focus on individual businesses–to take a sector-by-sector approach.” Floating the possibility that the garment center model could be expanded to benefit other kinds of businesses too, Weber proposes: “Why not, say, look at the jewelry sector–what does that sector need to stabilize and grow again? We’re looking at manufacturing. We want to bring tourists back, connect tourists visiting ground zero, make it easier to go from there to Chinatown.”

But the prospects of getting funding for the Chinatown projects remain fuzzy. In the maelstrom of competing demands for lower Manhattan redevelopment, the dollars are quickly running out. Mayor Bloomberg has an ambitious plan for rejuvenating lower Manhattan and building and rebuilding parks, the FDR Drive and other infrastructure.

For its part, the Pataki administration has come out with a major study that identifies the remaining money as a likely source of funding for major transportation improvements.

Some activists are still holding out for direct investment in job growth. Labor and neighborhood groups, under the umbrella of the Labor Community Advocacy Network to Rebuild New York (LCAN), issued a call this spring for an ambitious package of wage subsidies for both business and public sector jobs. They want rebuilding to focus on supporting good wages for well-trained workers, and met in May with Deputy Mayor Doctoroff. “He took it seriously,” says LCAN coordinator David Dysegaard Kallick. “His response was, ‘This is very big. Let’s talk about particular things.'” In June, Mayor Bloomberg proposed legislation requiring big construction contractors working on ground zero to have apprenticeship programs that bring new minority workers into the field at decent wages.

But any chance labor and community groups had to influence the political decision-making on lower Manhattan funds was most likely lost last year, when most big labor unions decided to endorse George Pataki for governor. The February replacement of former LMDC director Lou Tomson with Pataki appointee Kevin Rampe has only strengthened the governor’s role. “The governor was rolling into office with an endorsement from everyone,” notes Jonathan Rosen, until recently the director of the New York Unemployment Project, an organizing group advocating for the jobless. “We couldn’t even have a conversation about subway fares–the idea that we could talk about New Deal-level strategies was preposterous!”

Rosen suggests it’s time for labor advocates to leave behind the battle over rebuilding dollars and to set their sights instead on major new subsidized development projects as they emerge around the city, such as the Potamkin car dealership slated to open in East Harlem. The Unemployment Project, Rosen says, “is looking at organizing successes” in Los Angeles and other cities where labor-affiliated groups got elected officials to require developers receiving government incentives to provide community benefits in return, such as apprenticeships, jobs and affordable housing. “It’s a long conversation, over a long period of time. Rebuilding lower Manhattan is not the place to start,” says Rosen.

Others in the labor movement are adamant that unemployed New Yorkers still have plenty at stake in the downtown dollars. “We’ve been trying to have a policy conversation about how to shape economic development,” says Kallick. “We’re not applying for a billion dollars. We’re saying they should have a policy for jobs.”

Research assistance by John Tozzi.