Are Economic Developers Still Held Hostage to the Mobility of Capital?
Economic development’s most deep-seated axiom is that capital is mobile, people can exit, and business can move to greener pastures. These are bone-crushing realities for “place-based”economic developers who work for a city, county, metropolitan area or a state. If capital, people and business can pack up and move whenever they perceive sufficient reward for doing so, it’s our job to nail them down or attract replacements. How do we get our collective hands around the sad fact nothing is tied down, and our job description/paycheck require us to wave some magic wand and make the problem go away? Paul Peterson’s classic City Limits (1881) questions whether a city can overcome the mobility of capital. Peterson’s local government can’t tax or regulate local firms without driving them out of the city or risking urban fiscal instability. Let’s update Peterson and see if, or how, times have changed.
If you think about it, a great deal of what we do follows from our bedrock belief that capital is mobile (and the other factors of production as well). Attraction, retention and state business climate are prominent economic development strategies which are intended to counter the mobility of capital. Our incentive and business assistance programs rest upon the notion that if you don’t provide them, they’ll get them someplace else. Old codgers like the Curmudgeon, remember the days when the residents of states and entire regions (the Sunbelt, Midwest and Eastern states) moved around. And did I mention immigration and migration which appear in the news daily? Free trade agreements abound as does foreign direct investment (a two way street we might remember). Currency fluctuations and “carry trade” move currency exchanges. Commodities prices affect local prosperity. This mobility thing is fundamental to our profession and the communities we serve.
It’s probably scant comfort to know mobility is not new to economic development. Sure, many a young whippersnapper thinks it all began with the Internet. Sorry. Everything was already in ?motion long before the Internet–the Internet just made it faster and easier–compounded the problem, but didn’t really create it. In 1840, Boston had about 93,000 folk living in the city; by 1860 nearly twice that (178,000) and by 1880 more than twice 1860 (363,000)–which averages out to about 100% growth for each decade over forty years. Forty years later (1920) it doubled yet again. The point is capital, labor, and business firms were pretty mobile without the Internet and the modern post-industrial economy. We won’t even mention transcontinental railroads, the Great Migration and “Go West Young Man”, the Panama Canal, St Lawrence Seaway, National Highway system, and airports. Capital, labor, people and business firms have always moved about and made the life of now-departed economic developers impossible. That is lesson number one–don’t get hooked onto technology, apps, and smartphones as the cause and solution to a dynamic that has been around forever.
The factors of production move about for two sets of reasons: (1) they are “pulled” to locations which offer better perceived opportunities, or, (2) they are pushed out by stuff they don’t like (parents) or can’t afford (because they have no job). So economic development programs tend to deal with one or the other. It’s pretty hard to deal with both at the same time. Business climate strategies stress opportunity and, surprise, retention programs solve issues which push people away.
In the 1950’s a geographer-economist Charles Tiebout wrote his classic article, “A Pure Theory on Local Expenditures” (Journal of Political Economy, 1956), in which, among other concepts, Tiebout explained why people “exited” from communities into communities whose services and taxes better suited their preferences. In Tiebout’s world tax payers (residents) were consumers who purchased a variety of goods (different public services) for prices (taxes) they were willing to pay. Cities competed, therefore on these baskets of services and range of taxes necessary to pay for them. From Tiebout, we got the theoretical defense or rationale for present day business climate programs. Tiebout’s model wasn’t perfect, and sadly, he died prematurely before developing it further–but a literature followed, mostly rational-actor, public choice political-economic-geographic models which demonstrated how this methodology explained push-pull mobility. Baskets of services and tax level were the key factors. Hint: people didn’t like taxes all that much in this literature.
Paul Peterson’s City Limits, published back in 1981, picked up where Tiebout left off. City Limits was a classic as well. Peterson’s way of thinking about cities, factor mobility and city politics continues to the present. Peterson’s bottom line questions whether a city can overcome the mobility of capital, while simultaneously regulating or taxing local firms too much . Say it another way, local government couldn’t tax and regulate local firms without driving them out of the city. Moreover, Peterson asserted that cities and their governance had to cozy up with business elites and incentivize them to make investments in the city–investments which grew the tax base and prevented fiscal collapse.
Peterson developed a rational choice, Tiebout-like argument that conceives urban politics as politics dominated by land use, business investment and tax generation–with cities competing with one another to maximize their economic position (p. 25-28). Limited fiscal resources require cities to compete among themselves to attract private development in order to pay for normal services necessary to any municipality. Cities are dependent upon private investment and physical development to financially survive, and from this mutuality of interests a close relationship of government with the private sector becomes both desirable and necessary. Peterson accordingly characterizes urban politics as governmental and business elite-dominated. The enhanced role of business in local politics is therefore a by-product from the competition among cities for business investment and a consequence of the mobility of capital. The 1981 voter seemed more or less on board with business-dominated politics that would help pay the bill for public services and lower taxes–but that might have been because Peterson wrote when many felt the Big Central Cities of the North and Midwest seemed like they might actually die.
Peterson reflected the fears of early 1980’s politics which had just witnessed the 1970’s fiscal-political-economic implosion of central cities. This was an era made famous by articles like Sternlieb’s, “The City as Sandbox” which questioned whether Northern and Mid-western central cities could survive. Cleveland had defaulted and New York City got an uninvited guest named “Big Mac”; most other large cities were simply in fiscal crisis, shedding jobs, people and taxes, and mayors. These years were the nadir of central city urban politics. They were also the years the “charismatic mayors” (Koch, White, Young, Schaffer) along with real estate developer Rouse renamed urban renewal. They called it waterfront development or festival retail, and rebuilt the core areas of the central city. Coleman Young bulldozed Poletown and General Motors constructed a factory. In other words, Peterson fairly accurately described the 1980 dependence central city mayors and urban tax payers had on land use, physical redevelopment and business investment. Regulatory and high cost cities could not compete, and could not function in this environment.
In this horrible atmosphere, Peterson inserted one more important element into his model. He classified urban public policies according to their perceived effect on the “city’s economic interests”(p. 131) and created a typology of three program styles: developmental, redistributive-regulatory and allocational . He asserted cities in order to be fiscally self-sufficient must successfully implement “development”-style policies, and that to the extent a city implemented anti-business regulatory or redistributive programs that city would drive itself into bankruptcy–which he said was already in process in several cities as he was writing City Limits.
Developmental policies are those that contribute to the economic well-being of the city. Implementation of a developmental proposal can be expected to yield economic benefits that will protect the community’s fiscal resources. The policy may lead to growth and expansion. Plans to attract industry to a community, to extend the transportation system, or to renew the depressed areas within the city are characteristic types of developmental policies. Such policies are often promulgated through highly centralized decision-making processes involving prestigious businessmen and professionals. Conflict within the city tends to be minimal, decision-making processes tend to be closed until the project is about to be consummated, local support is broad and continuous, and, if any group objects, that group is unlikely to gain much support; only through lawsuits can it delay or forestall action. If there is more important opposition, it is usually generated by agencies or organizations external to the city or by a federal agency or by a private firm trying to achieve better terms in its negotiations with the cities.
Redistributive policies are those policies, which though they have a negative impact on the community’s economic growth, still can gain some political support because the programs service needy members of society. Also given the large number of low income residents in central cities, many redistributive programs are politically popular….But because redistributive policies are usually at odds with the economic interests of the city, proponents will find difficulty in gathering support for them. (p. 132) Fiscal crises in New York, Cleveland, Chicago and elsewhere demonstrate with special clarity one of my central contentions: redistribution is not and cannot ordinarily be a constituent part of local government policy. If a city expands its services to needy citizens, it only increases its attractiveness as a residence for the poor. Other things being equal, consistent, concentrated pursuit of such a policy leads to bankruptcy. Most localities therefore resist the temptation to redistribute …. By contrast, over one-half of the domestic federal budget is spent on programs of redistribution. (p. 210). “The limits on cities, therefore, constrain but do not eliminate local politics. Where cities have more resources, redistributive politics becomes more likely. Even when economic constraints increase, both bureaucratic and group politics can retard needed policy adjustments. Yet, as the New York City case makes clear, once economic and fiscal limits have been reached, the political system accommodates itself to them. (p. 214).
Since Peterson wrote City Limits in 1981 many economic developers have assumed his iron law of developmental policy requires an economic developer to work closely with her business community and to provide what assistance is necessary, including and especially physical redevelopment in waterfronts, stadiums, “eds and meds”, and the perennial favorite, downtown redevelopment. But developmental programs aside, above all, they try to avoid redistributive and business regulatory programs which inevitably drive business and their investment out of the city. Are these prescriptions as true today more than thirty years later as they were in 1981?
Update on City Limits
Well, capital may be mobile, but another truism is “times change”. In the nineties, the central cities recovered somewhat, and if one believes Richard Florida a new generation preferred the lifestyle and opportunities of downtown and diversity. The literature made reference to “cool cities” and central city gentrification; we also noticed poverty in the formerly lily white rich suburbs. We started to talk about technology, clusters, transit-oriented-density, innovation, knowledge economics and all that good stuff. By 2000, the crisis years of the seventies were distant in our memory–but what about mobility of capital–had it also gone away? Not really, but it was under attack. The ideas expressed in City Limits were described as “neo-liberal”, and where explicitly practiced, in Bloomberg’s New York City’s “luxury city” for example, they were under attack and quite out of step with the perceived needs of the hour. Development policies were recast as incentive wars, “racing to the bottom”, and many forms of physical redevelopment. Especially development linked to sports was regarded by many as abusive–and doomed to failure in promoting economic revitalization.
But. it wasn’t so much that mobility of capital had been repudiated, or that capital (and the other factors of production) had finally settled down. I think most everyone agreed that–capital mobility, immigration, worker mobility were still very much in evidence in the pre-Great Recession days–but the effects/consequences of factor mobility just didn’t seem so bad. The city no longer needed to beg for business investment and development. In fact, alternative policies and strategies arrived on the scene (cluster development, knowledge-based and innovation economics, small business/entrepreneurship, and lifestyle amenities for the creative class) that did not quite fit the spirit of what Peterson required. These newer approaches mostly ignored private firms and physical redevelopment. Moreover, Peterson’s link of developmental policies with city prosperity and survival no longer seemed relevant. For instance, Moretti wrote the Geography of Jobs in which he asserted that those cities that had chased/captured technology and “the educated” were now in semi-permanent lift off. Those, however, that were based on brawn (high school educated) and temporary sector exuberance were likely destined to fail and were candidates for semi-permanent decline. Moretti suggested that these new technocratic/educated elites were innovation personified and the geographies where they resided could launch wave after wave of successful innovation (and prosperity) for the indefinite future. This was the closest we have come to suggesting that mobility of the factors of production had finally been tied down.
These alternative strategies potentially freed cities from Peterson’s required development programs and an urban politics dominated business elites joined at the hip with mayoral politics. No longer did cities need to blindly implement incentive-driven business programs or enter into business climate competition with low cost, low tax little regulation, right to work states. Could a city could now do the unspeakable– stop redevelopment, regulate private capital to achieve socially desirable ends, and pursue local redistribution to assist the disadvantaged, reduce climate change, or protect local mom and pop business from chains and big business?
A reaction has set in against Peterson. In recent years not for profits are now targeted for economic development. The old private sector-relevant stuff was labeled “first and second wave”, declared obsolete, ineffective and frankly downright repugnant. “Third wave”, entrepreneurial states pursuing the alternative strategies have became commonplace. Cities (even suburbs) issued smart growth regulations, living wage legislation, minimum wage, green, anti-chain store, community benefit agreements, clawbacks, “good jobs” are reported constantly in the media. Urban regulation seemed in style with a certain measure of redistribution tossed in as well. Times had seemingly changed and many cities seemed to be oblivious of Peterson’s supposedly “limits” on its politics and permitted policy-making.
Also few talked about municipal bankruptcies any more. But now Detroit has broken our momentum. And if there were “winning communities”, there were loser metropolitan areas for which no one with any humility and common sense had solutions.
Had Peterson’s iron laws of limited city politics really fallen off the table? Or was it more that the American macro-economy was booming and now it isn’t? In other words, times–“they were good”–and when the good times roll, maybe so do economic development strategy paradigms? And when the good times stop rolling, well … ? Perhaps, things had not changed after all? For example, the business climate incentive wars between the red and blue states were, if anything, increasing (according to Good Jobs First); maybe we never really abandoned Peterson’s business development policies? And while few felt the urban fiscal crisis had completely disappeared, the increased awareness of unfunded pension and retiree health care benefits revived fears of fiscal crisis. Finally, the “winning” cities, San Francisco for example, were still winning, but Great Lakes chronic decline gave little evidence of abating and San Jose, heart of the Silicon Valley was deep in fiscal crisis. Cities (especially central cities) had stabilized, but now we might be politically and economically more polarized, more unequal? Had times changed that much since Peterson and 1981?
An explanation to this bi-modal dilemma, as well as update to City Limits, is provided by Richard Schragger, “Mobile Capital, Local Economic Regulation, and the Democratic City” Harvard Law Review, 2009. Schragger acknowledges that “despite a century of political reforms, capital continues to exert significant political and economic influence: debt limitations are avoided, subsidies are granted, economic development takings are encouraged. The problem of mobile capital for territorially based local governments has seemingly become only more acute“. (pp.505-506 Schragger) Yet Schragger knows he has to account for all this very evident municipal level regulation of private capital occurring post-1990. He offers three reasons why things have seemingly changed creating an opportunity to construct a “localist regulatory order”: “first, that order seeks to leverage the economics of place dependence by taking advantage of the relative immobility of certain kinds of capital; second, it tends to bypass the traditional routes of city-business power, creating a third player–national and local non profits and community groups–in the local political economy; and third, it is animated in part by a longstanding, but more recently emergent discourse of economic localism (an ideology which asserts the need for community control over global capital.(p. 520).
In my English, Schragger argues that an unintended benefit of the shift from manufacturing to the service sector (which happened while Peterson was writing) is that service sector firms often must establish a local presence to secure the advantages (market demand and greater sales) of a metropolitan or central city geography. Wal-Mart, for example, needs a physical presence, as do the chain stores, if they are to access local sales. Service sector capital, then, by definition is less mobile than either manufacturing or technology-related capital. Nobody is putting regulation on Google or a data center–they are subsidizing them as always. Secondly, many regulations such as community benefit agreements, are advocated for, and negotiated, not by public authorities, but by community and national groups (labor unions, for example). Such agreements are often private contracts engineered by non profits with significant external (to the municipality) expertise and resources–in alliance with local community and neighborhood groups. These groups are mobilized by a more assertive ideology that global capital is in need of community restraint and taking on Wal-Mart is as good a way as any to do it. Put it all together, and Schragger suggests there are indeed some limits to Peterson’s City Limits approach. But Peterson’s Limited City had not been substantially altered.
Well, Schragger’s modifications to City Limits seem quite reasonable to the old Curmudgeon. Service sector firms in particular are dependent upon establishing a facility in the jurisdiction–no facility, no revenues and less profit. And so they must “pay to play”. Ipso facto, this logically checks the dependence of economic development on mobile business investment and reduces the need for incentives. Community benefit agreements involve planning departments more than the EDO. The entry of new players into the jurisdictional policy process (unions, ex-municipal policy groups) and their alliance with more traditional players such as neighborhood and community groups “privatizes” municipal regulatory/redistributive action and takes the heat off of public players. So, communities can redistribute and regulate–and not affect their fiscal affairs so that deficits and possible bankruptcy are not threatened. Really? I think not!
Google is not a MacDonald’s franchise or a Wal-Mart. You can’t treat Google quite the same way (unless of course you are San Francisco). I’m not sure this “privatized regulation/redistribution” (the localist regulatory order) would work well with Caterpillar or Boeing, or Microsoft, or Amazon. If you want to throw the book at hamburger flippers go right ahead–but I’m not sure you want to mess with the Big Boys. And if its still true that new business formation provides the most new jobs each year, then small business would likely escape Schragger’s localist regulatory order.
Something else has changed since City Limits was published; pensions/retiree medical benefits have become a new, and very expensive, form of municipal redistribution. Detroit discovered that sad fact. From an economic development perspective, who is going to pay for these pension/medical benefit obligations? New business moving in (i.e. Peterson’s business investment) or the general tax payer? Given the huge pension/medical benefit deficits that some municipalities have accumulated, the deficits are way too large for new business investment to make much of a dent. If so, then increases in general tax rates, fees, and service cutbacks await the city resident–and most likely the existing as well as new firms in the jurisdiction. The old business climate routine is back in business–now it appears that states and municipalities who don’t have to pay off retirement liabilities will have the edge over those that do for new investment. Those communities that have to redistribute city resources to former city employees are in potential trouble in this competition. Redistribution, at least, is as dangerous at the municipal level as it always was.
In short, don’t kid yourself. Peterson’s bottom line axiom is still in play.