Fill out the brief form below for access to the free report.

Helping Cities Fix Themselves

Article by Carl Schramm April 23, 2013 //   18 minute read

There is no compelling narrative in our public discourse today about what to do with cities that are no longer economically viable — that are losing their populations in the wake of losing their economies. In every such place, and there are dozens of them, the talk is of recovery, restoration, often “renaissance.” The alternative of seeing some of our cities as smaller, operating on a different and more diminutive scale, is never heard. Instead consultants bring bright visions that politicians and citizens know in their hearts can’t be realized. So how should we think about the re-development of cities if the reality of de-development is ever to be turned around?

Reverse Growth

In 1961 we were rich enough to fight the communists by exporting a vision of American cities, Detroit being one of them, as emblems of what our economy could make happen. Detroit’s working people paid their share of the taxes that put resources in the hands of the newly formed U.S. Agency for International Development to help other countries imagine they could have cities that looked like Detroit. A half-century ago, Detroit was an economy that grew from within by making products for the nation and the world. Today, as the nation focuses on Michigan governor Rick Snyder’s decision to appoint Kevyn Orr to manage Detroit out of its financial emergency, the giant elephant in the room is that there is little in the way of a private economy left in that city. Solving the emergency is not the same as reestablishing an economy that can grow.

Detroit has managed to walk itself, with a great deal of encouragement from federal social-welfare and labor-relations policies, backwards through the stages of economic development presented by Walter Rostow, the economist who 50 years ago posited the theory of economic “take off.” Rostow’s vision — that through investing in education and market institutions a country’s economy could experience both consequential growth and self-sustenance — serves as the theoretical basis of American aid abroad.

If modern Detroit were a nation it would have failed its citizens by no longer providing an expanding and self-sustaining economy. The result is that it has been depopulating for decades: 60% of its residents have left since 1960, and at an accelerating rate since 1990. Detroit no longer sees private capital investment to make a brighter future for its businesses. It no longer has a production economy and has fallen backwards to a point where near pre-development conditions exist.

Of the remaining 700,000 inhabitants, some 290,000 live in poverty. Its violent crime rate including murder is the highest in the nation. Taxes due on over half of all its real estate have not been paid in recent years. The city no longer has the means of collecting tax revenue. Prior to the administration of Mayor Dave Bing, the inherent corruption of Detroit’s political system looked like that of Third World failed nations. Indeed, in the throes of the current financial emergency, one member of Detroit’s city council argued against state takeover by suggesting that gangs might close down freeways as a show of protest! The rule of law no longer much operates in large parts of the city.

Detroit has demonstrated that a city can go backward, passing its “take-off” stage and thus presenting the phenomenon of what might be called “de-development.” It may just be possible that a city’s economy can fail so badly it might be said to be crossing the “turn-off” barrier, a point of no return. With a shrinking population, no capacity to generate tax revenue, and no new businesses of scale that would provide a consequential number of new jobs, the city might just find itself in a place from which there can be no self-generated recovery.

Detroit is not alone in this process of reverse growth. There are at least 25 cities in the U.S., including Buffalo, Gary, and Hartford, where indigenous economies have shown no capacity to expand for over five decades. In the 1960 census, each was counted among our 100 most populous cities. Today, each of these cities has conditions similar to those of Detroit, albeit smaller in scale, but with equally devastating impact. In each of these cities the urbanized population has been shrinking to the point of being at least one-third smaller than it was in 1960. Prosperous populations have been replaced with residents at least one-third of whom qualify as officially in poverty. Only about one-third of the workforce of these cities is employed in for-profit businesses. Infant mortality rates are roughly one-third higher than the national average. More than one-third of the city’s property generates no revenue — either because of exemptions or delinquency. These indicators might be called the “turn-off rule of thirds.”

No Model for Growth

Economic experts have little to offer by way of thinking about this phenomenon. Among policy makers there is virtually no discussion about how to revive a city’s economy apart from what might be termed “fad” solutions.  Indeed, experts promising solutions appear to take great care to avoid defining just what urban revival really means. You will never read a plan that says the current ambition of Detroit is to be home to 2 million people again. But as depopulation continues, it is equally unthinkable to even imagine urban planners suggesting parallels to the economies of undeveloped nations, even though the evidence points to this conclusion.

Instead we get fashionable but largely ineffective initiatives like building urban creative zones and art districts, incubators for urban entrepreneurship (often focused on “social” entrepreneurship, which means starting even more non-profit organizations), enclaves of the new yuppie generation. But, as Joel Kotkin has pointed out, these strategies have not yielded the results that many predicted. In fact, we have no serious policy that really speaks to economic development for contemporary urban populations, as Rostow’s model did for developing nations a half-century ago.

On the contrary, public policy over the past few decades has often hampered cities’ economic development. The retirement ages and pension benefits of civil servants alone play a large role in making city economies fail. No nation would have developed if it had existing legal obligations to its current and retired public workers that exceeded two-thirds of the country’s annual tax revenue (as they do in Stockton, Chicago, and Cleveland).

Three important lessons emerge that must be considered if America ever wants to be serious about revitalizing its failing cities. First, everywhere American policy was effective in nursing new economies to life abroad, indigenous leaders had to believe that their nations could grow and that market-based economies were the best path to expanding human welfare. By contrast, in so many of our declining cities a kind of indifference to growth appears to have settled in. Years of federal dependency may have worked the worst of all unexpected and unintended consequences — a sense among the residents that making one’s future is no longer possible.

Second, in countries that followed a growth model, learning was central to the improvement of a population. No-nonsense schools where children learned facts and skills that made them competent in life, including successful participants in labor markets, were the most important critical first steps. Not surprisingly, every failing city today has failing schools. Most have performance scores, however measured, roughly two-thirds as good as the national averages. There will be no future in these cities until the school systems are completely and totally reformed so that kids are readied to make themselves successful. The excuses our schools offer vaporize when compared to the challenges of teaching students who in 1960 lived in utter destitution as they did (and still do in many instances) in China, India, and other countries that are growing fast today. The schools in these countries managed to succeed in far worse circumstances.

Finally, cities cannot recover if political corruption is their civic culture. There is no national conversation regarding the political mismanagement of cities and economic decay. Yet no one can deny that failing cities seem home to many indicted and convicted mayors, one-party rule, and politics as one of the few remaining well-paying professions.

If we don’t have a breakthrough in our thinking about how to effectively revive the private-sector economies of our failing cities, some kind of alternative must be considered.

Forging a New Urban Perspective

Revitalizing today’s urban economies is very difficult work. While Rostow’s model provided insight into how national economies abroad could grow 50 years ago, there is no comparable theorem for solving the problems that confront America’s failing cities today. After all, Rostow’s ideas focused on countries that had never experienced anything approaching a modern economy and that operated on the most rudimentary of modern institutions — economies that, in many cases, still relied on barter. Today’s failing cities, on the other hand, have very specific, but antiquated, industrial cultures that limit the universe of possible courses for economic rebirth. Further, the pre-industrialized countries that Rostow studied never faced the burden of public employee pension debt, as all failing American cities do, many of which are teetering on the brink of formal bankruptcy. Another advantage for pre-developed countries in the past was their homogeneous populations, which had been indigenous for eons. In our failing cities today, many residents are not even native to the place. Such widely diverse populations are hard to unite behind a common aspiration. Finally, and perhaps of the greatest importance, pre-industrial economies did not have to contend with enormously entrenched, expensive, and largely failing bureaucracies wielding expansive political power to preserve the status quo.

The task facing those who would revitalize an older industrial city is, by comparison, enormous. We are in need of a new urban growth perspective. Perhaps it might emerge by considering three ideas that would strike many as radical.

The first is to reconfigure public policy so that it encourages migration from failing cities with insufficient jobs to cities where labor demand is high and expanding. Existing urban policy discourages people who are unemployed from moving in pursuit of better employment opportunities. The entire array of federal social service “safety-net” benefits depends on delivery through state agencies. The political incentives for federal and state politicians — for whom block grant funding as well as Congressional representation are determined by headcounts — militate against federal policy ever encouraging mobility. In the face of this reality, states with high labor demand may take it upon themselves to promote interstate job searching (just as Texas governor Rick Perry urges people and businesses in California to move to Texas), perhaps by issuing mobility vouchers that would pay the cost of travel or relocation. Perhaps some charitable organization or a major foundation should consider supporting the development of a system of free labor-market information on job vacancies that would be available in a friendly and accessible way to the nation’s unemployed.

Moving Detroit’s skilled but jobless workforce to Dallas or Austin might help to “rightsize” the Motor City. It may be that a period of intended downsizing might prove critical as a “reset” moment for cities with populations that far outstrip their employment opportunities. Relieved of some of its social-service responsibilities, the city government could then concentrate on rebuilding the physical and cultural assets necessary to make existing businesses commit to staying and growing. Further, a city more apparently ready to support commerce might prove inviting to new businesses as well as indigenous entrepreneurs who might start businesses in the city.

Second, states genuinely interested in economic growth might establish the equivalent of charter-city status for selected jurisdictions. This concept was developed by Professor Paul Romer to stimulate economic development in countries plagued by political corruption. In this model, certain cities would be designated as newly chartered subdivisions where the state would forego corporate taxes for all companies operating inside their borders. State regulatory regimens would be relaxed in order to speed business formation and reduce the costs of doing business. State labor regulations would be moderated to reduce the costs of employment. While minimum-wage standards might apply, industrial-relations policy might prohibit closed shops. Companies operating in these cities would be exempted from inventory and perhaps sales taxes. The city might also become one place in the state where no individual state income tax is levied. It would be hard to imagine businesses and enterprising entrepreneurs not seeing the benefit of doing business in such places.

A third approach might be to encourage market competency and commercial expansion in failing cities by empowering all citizens who are beneficiaries of government-funded “safety net” programs to operate in a market-mediated service economy. Economies that are not “owned” by their participants never stand a chance of growing, a lesson that both China and India applied to great economic success. In any city such as Detroit, where over one-third of the population is dependent on transfer payments, a very large part of the economy is “owned” by a distant government, either state or federal. Today, bureaucrats who are hundreds and thousands of miles away make decisions regarding how dependent populations are provided with goods and services.

Many local firms are effectively “vendors” to government beneficiaries and thus do not respond to true market signals regarding supply, demand, or prices. One outcome is that public beneficiaries become more and more inexperienced in dealing with market signals, starting with their own choices, many of which are not choices at all. Their decisions regarding schools, housing, health-care providers, food purchasing, etc., are effectively made for them by regulation and by public employees whose job is to make purchasing decisions for them.

An alternative would be to offer vouchers to mediate the market for social welfare and other publicly provided municipal services such as employment training, job-search help, schools, childcare, health care, transportation, etc. Thus new for-profit businesses would emerge to become an enormous part of a city’s economy. Vouchers for training in establishing and capitalizing new businesses (for example, through an enterprise-voucher bank) would encourage the creation of minority-owned enterprise. Service companies such as childcare providers would compete to offer products and services of such high quality that they might attract affluent residents from surrounding suburban markets.

In general, for any locale to prosper economically, local residents must become the owners of their economy. In our failing cities, large numbers of residents, much like the municipal governments, have become supplicants of higher-level government. This relationship, based on transfers of wealth from national and state governments to cities, holds no promise for a genuine reversal of urban economic fortune. So a large number of American cities can never expect any future other than one of de-development following the “turn-off” moment.

Worse, though seldom commented upon, failing cities will continue to hold back the national economy. Any nation’s economy is really the composite of local economies. Cities were once thought of first and foremost as places that contributed unique products to the national and world economies and only secondly as places to live. Now, federal policy is currently over weighted around the concept of cities as places to live. Economic policy has devolved to thinking about our economy as a national phenomenon that happens apart from place. But this view is not based in reality. People with ideas and capital make economies. New enterprises make economies expand. These phenomena are found in places. It is hard to avoid the evidence that the Silicon Valley thinks of itself more as a place of commerce than a place for living.

This was the old model in America and it still prevails in places like Texas where the governor can cheekily recruit smart people to leave the Golden State and move to Dallas, Houston, Galveston, and Austin to build businesses. His message is not “these are nicer places to live.” Rather he says that all of Texas is business friendly, starting with the absence of a state income tax! Think of the Governor of Michigan’s comparative task if he were crazy enough to send an embassy to California recruiting people to start business in a state with taxes and public debt just about as bad as California’s but without its redeeming weather and beaches. 

Up Next:

Time for a Carbon Tax? Ike Brannon on April 22, 2013