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Stop Bailing Out Cities

February 13, 2013 by Carl J. Schramm

“Cities come and go.” That’s the message from Rupert Murdoch, who spoke recently about immigration at an event hosted by the New England Council in Boston. This view found disagreement from Mayor Michael Bloomberg, who advanced a vision of giving citizenship to any foreigner who would move to Detroit and homestead, reasoning that immigrants would establish a new economy and revive the city. Mayor Bloomberg was being guided by the prevailing sense that government can solve the problem of dying cities; it’s just a matter of finding the right solution. Detroit cannot be revived to the economic power it once was — ever. It has gone from being a fast city to a slow city. Indeed, a very slow city. And, Detroit is not alone. Turning to immigration to save all of America’s major declining cities would require that upwards of 30 million non-Americans move in! At least Mayor Bloomberg is not in the implicit camp of most city experts, who believe the answer is preventing people from leaving the cities in which they live. Billions of dollars will be spent this year to do a myriad of things to entice people to stay in cities that hold little in the way of economic promise. Governor Andrew Cuomo recently announced that New York State is sending a billion dollars to resuscitate Buffalo. (He forgot to mention the state has to borrow the money.) It is a near certainty that the new monies will make matters worse, as Steven Malanga has explained in the Wall Street Journal. Bureaucrats, experts to be sure in urban planning, will make the decisions in Albany, and inevitably will put the money into physical things — infrastructure and buildings. “If we build it, they will stay.” Think of the cost of this misdirected expert impulse. Millions of people whose economic livelihoods might be greatly improved if they move are the focus of spending to make them stay put. Rebuilding city centers will not bring jobs, there is no evidence that this strategy ever works. Cities grow and shrink organically. Government policy does affect this process, but urban redevelopment or public housing strategies generally accelerate a city’s decline. Governments must tax to fund their efforts to physically revitalize cities. As the tax burden goes up, inevitably on businesses and business owners, the cost of doing business in a state or city grows as well. To pursue public redevelopment is to employ a tax strategy that will drive business away. It’s tautological. New business is the only way for cities to revitalize themselves. Mayor Bloomberg is right in this regard: Immigrants in a burned-out shell of a city would be innovative, imaginative, and industrious as a matter of necessity. An economy would happen, but it would not be a scale economy that would produce the wealth that we would all love to see return to Detroit. Scale wealth comes from innovative human capital, and as long as government tax policy drives people away, entrepreneurs will leave. But it is through the creation of new businesses, which grow at the hands of entrepreneurs, that cities can be rebirthed. Recently the New York Times reported on the extraordinary growth of Austin, Texas. Even a casual reader can sense that private developers are doing all the construction. The new physical city is being built to house the new businesses that are already growing in Texas — a state whose public policy, especially its tax policy, expressly encourages business growth. Consider a tale of two cities. In 1960 Buffalo was the 20th largest U.S. city with 532,000 inhabitants. Prosperity was a hallmark of this first city in America to be lighted at night. Austin was a frontier town with 185,000 people, ranked 67th in size. Today Austin, with a population of 820,000 is our 13th largest city while Buffalo is 72nd having lost more than half its population. It is no surprise that only 13% of Austin families are in poverty, while 27% are in Buffalo. The only new building going on in Buffalo is sponsored by the state. To walk its streets one knows what a slow city feels like. To read the Times’s account of Austin, one can virtually feel the vibrancy. Rational policy might suggest that rather than consider heroic means to save our cities — turning to immigrants to bail them out or sending in piles of borrowed money to rebuild a veneer of a city to entice people not to leave — we might just let people move to where markets are pulling them. As long as places like New York believe that taxing and spending are the way to shape the future, their residents will continue to move to places like Texas, where the cost of government is much lower because the government doesn’t try to solve all problems. Instead of trying to “bail out” cities like Buffalo or Detroit that lose more than half their populations, the federal government might initiate a downsizing program to retire municipal debt, close schools, shut down physical infrastructure, reforest parts of the city, and help people, including city workers, find jobs elsewhere.


Author

Carl J. Schramm
Carl J. Schramm

2012 Economic Growth Fellow

Carl J. Schramm is recognized internationally as a leading authority on entrepreneurship, innovation, and economic growth. Currently he is university professor at Syracuse University. For 10 years he served as president of the Kauffman Foundation, making it into the world’s premier organization dedicated to the development of high-growth firms and understanding the role they play in economic growth. He serves as a visiting scientist at MIT and as a fellow of the Bush Institute. He is a Batten Fellow at the University of Virginia’s Darden School of Business and is a member of the Council on Foreign Relations. Schramm's most recent book, "Better Capitalism" (co-authored with Robert Litan) was published by the Yale University Press in September 2012. He has written several other books, including “Good Capitalism, Bad Capitalism” and “The Entrepreneurial Imperative.”

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