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OCR for page 135
7
Stabilizing Metropolitan
E.
conomles
In the two preceding chapters we have examined two major facets of
national policy affecting the fortunes of urban areas: capital investments
and investments in human capital. The aim of both is to reinforce main
currents of the economy and to facilitate the rapid and smooth adjustment
of urban economies to new roles. We have commented on the implications
of various policy options for urban areas and on how particular policies,
such as those that leverage private capital, improve urban infrastructure,
increase worker mobility and training, and improve the urban educational
system, can be used in local and regional economic development strategies.
All of these policies, however, contain elements that are inherently de-
stabilizing to urban areas because they deliberately promote change. In
this chapter and the one that follows, we turn more directly to the other
realm of policy of concern to us throughout this report: policies for those
left behind places and people who have a hard time making a fast
adjustment.
Specifically, this chapter addresses some of the options that are available
to help urban areas stabilize their economies during the period of transition
when established economic and community relationships are endangered.
Three major areas of policy are explored: (l) strategies that promote local
employment and development of the local work force; (2) the selective
use of public employment to enhance services and to provide work; and
(3) policies aimed at equalizing the fiscal capacity of communities, ena-
bling them to maintain a reasonable level of public services when their
economies are under stress.
135
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136
Rethinking Urban Policy
STRATEGIES FOR PRESERVING COMMUNITY INTEGRITY
As we have pointed out, every worker who might benefit economically
from moving to a new job in a new location will not do so. Even in
communities with substantial unemployment, most workers will not mi-
grate, and other people will arrive. Some new businesses and jobs will
be created, and most of the labor force and the existing firms will remain.
Efforts will be made by local government and community leaders to
stimulate new activities and to improve the quality of neighborhoods,
working places, and services. In light of these realities, measures designed
to encourage local economic development and employment opportunities
and to stabilize the economy and fiscal system are an integral part of any
national urban development strategy.
Mobility is not without cost to the individuals, firms, and communities
concerned at either end of the migration stream (Bluestone and Harrison,
1982:67-721. We should also remember that the sense of community
remains a powerful value in modern society; in many cases it offsets
economic values when individual and group choices are made. Many
people are less exclusively career-oriented than in the past, even in profes-
sional and technical groups. They often seek community values and qual-
ities as well as career and income advancement. This kind of choice is
easier, of course, when modern communications makes it possible to
change functions without moving to a different place.
Even in declining communities, resistance to moving remains strong.
It is not surprising, therefore, to find that local governments in states in
which unemployment is high and lost jobs are not likely to be restored
are devoting considerable resources to revitalizing the local economy rather
than accepting the inevitability of economic decline. This is a natural
response of people who value their community and do not wish to leave
it. The same resistance to moving can be seen at the neighborhood level.
Mobility works reasonably well for professional and technical workers
whose skills are in demand and who are generally the leading edge of
migrations, pulling the market for less skilled jobs behind them. It does
not work as well for those less skilled, for older workers, for minorities,
and for those who must be retrained at the same time they relocate. When
other constraints, such as those imposed by housing markets and two-
earner households are added, it is clear that mobility and training strategies
combined are unlikely to address many of the problems of urban labor
markets. There is still a need for strategies that strengthen local com-
munities and their economies by stimulating the creation of jobs.
Labor mobility strategies presuppose capital mobility and assume that
there are compelling reasons for capital to locate where it does. In some
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Stabilizing Metropolitan Economies
137
cases this is of course true. Extractive industries are a good example; they
have no choice but to be where the resources they use are found. As we
have seen, however, many modern firms are not constrained to locate in
specific places, although certain local factors are clearly important in
attracting them and in providing benefits from the presence of similar and
supporting activities. The industrial parks of Silicon Valley and the con-
verted textile mills of New England both house computer firms, but there
is a labor force in each region that can adapt to the needs of the industry,
a strong university-related research and development complex, good air
transportation, and the presence of related industries and services.
In some cases the decision of a firm to close a facility or to move to a
new location can be made without having to take account of the full social
costs and benefits involved. Market prices rarely reflect such impacts. In
a few cases mergers, for example relocation may reflect an admin-
istrative more than an economic rationale. In such cases the interests of
the firm more clearly conflict with those of its employees and their com-
munity. Serious questions can be raised about the responsibility of such
firms to the community that has supplied them with infrastructure, ser-
vices, and labor, in some cases for generations (Bluestone and Harrison,
19821. The host community or nation pays a part of the cost of relocation
when, for example, the still-operable capital stock in one community is
forsaken only to have to be replaced with a new stock in another. Thus,
what appears rational from one firm's calculus may not be so in a larger
context.
The point is that capital can locate in many places and, to the extent
that it is genuinely free to do so, there may be substantial advantages from
both national and regional perspectives in encouraging it to remain or to
locate in places where it can strengthen the integrity of existing com-
munities rather than impel the construction of new urban settlements.
We do not urge the propping up of enterprises that are unable to compete
because of obsolete products, technology, or management. Rather, we
are suggesting that there may be opportunities for both capital and labor
to adapt efficiently to changing markets without moving to another area.
Where such opportunities are taken, community integrity can be preserved
and enhanced. Workers gain a greater range of choices, and communities
are stabilized. Substantial waste because of the underuse of existing capital
stock in older communities and the duplication of it elsewhere can also
be avoided. Some of this waste may be borne by the firm, as when it
abandons a factory. Part may be passed on to taxpayers through various
tax write-offs for both old and new facilities. Waste may involve home-
owners, through depressed property values, and local governments, through
underuse of public facilities.
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Rethinking Urban Policy
Recognizing the Value of Community in Public Policy
That all communities are not destined to become new centers of high
technology and producer services does not mean that many communities
cannot retain or develop jobs. In some situations it may be possible-
through cooperative work by an endangered firm, its employees, the
community, and others to adjust production processes or enter a new
product line. Plant expansion or modernization, with some community
assistance, may be a viable approach if the enterprise is basically sound
but needs more space, needs to improve its technology and productivity,
and needs to lower its operating costs. In the enthusiasm for technological
change, it is often easy to forget that there is still a need for many jobs
using routine manual skills. These jobs can be important to a community,
both in their own right and as essential links in the chain of jobs in a
worker's career, particularly if they are viewed as a way for more local
workers to enter the mainstream of the economy. A good example of how
such jobs serve this function is the Selby Bindery in St. Paul.
The bindery was established in an inner-city neighborhood in 1971. It
employed 300 workers in 1979, almost three-fourths of whom were res-
idents of the immediate neighborhood, the result of a deliberate corporate
policy to prefer such employees. Two-thirds were women, over 60 percent
were less than 21 years old, and a majority were black; 65 percent had
not completed high school. Many of the jobs are part-time, reflecting the
tedious nature of the work and the fact that many workers, such as young
women with children, can more easily work a part-time schedule. An
important feature of the plant's operation is that pay is keyed to the
productivity and opportunities for upward mobility and out-placement in
jobs in the parent company and other industries in the St. Paul metropolitan
area. This employment policy includes the opportunity to transfer to full-
time jobs and gives special attention to employee training, including work
with computers. Special educational programs are also provided, including
scholarships for training in skilled occupations. When Bendick and Egan
compared the bindery's performance with that of the rest of the industry,
they found the company to be financially sound, although it was not as
attractive to investors as some other firms because of its relatively low
return on investment.
The Selby Bindery and similar inner-city enterprises are not models to
be specifically copied, but they demonstrate that careful selection of ac-
tivities geared to local labor force characteristics, when combined with
~ The discussion of the Selby Bindery is based on Bendick and Egan (1982).
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Stabilizing Metropolitan Economies 139
effective management and community relations, can produce profitable
enterprises that contribute materially to the economic well-being of the
residents of a neighborhood. A substantial underemployed labor force
resides in such areas and could be made more productive. The inner city
can be competitive with other locations for some kinds of industry. The
primary significance of such jobs is that they provide entry into the labor
market and access for workers to better opportunities in a wider labor
market. Such enterprises are often essential if the labor force is to gain
the basic working skills and habits necessary for upward mobility.
The Selby Bindery also illustrates how public policy is important in
leveraging private capital to create jobs that otherwise would have located
elsewhere at substantial social cost in unemployment in the inner city.
Inner-city businesses often are less profitable and take longer to become
profitable as in the case of the bindery than similar businesses in other
locations. Policy needs to recognize these facts. In St. Paul, public powers
were used to write down land costs to make the site competitive with
suburban sites. While some tax credits were available, they do not seem
to have figured in the business decision. Thus, by combining public action
with private entrepreneurship, capital located in a distressed area, pro-
ductively employed local labor, developed human resources, and helped
to stabilize a neighborhood while returning a profit to its owners. Although
the bindery is to some extent sheltered by its parent company, it is no
example of corporate charity. It arguably is an example of corporate
advertising, since it has produced substantial favorable publicity for the
company.
Development projects in Boston, Baltimore, Toledo, and Norfolk il-
lustrate a somewhat different approach to preserving community integrity.
These projects involve revitalization of downtown or waterfront areas of
the central city. Each has used a site advantage or a historic association
to heighten the city's self-image as a center of culture, variety, and com-
merce. These new centers of commerce and entertainment generate some
employment in themselves, but more important, they tend to have a mul-
tiplier effect on other businesses and encourage additional development.
They are particularly attractive to both producer and consumer services
and help to establish a new economic base for the core area of a city.
Other policies can also strengthen community integrity. There is good
reason to require recipients of federal grants for new development, such
as those provided in the Urban Development Action Grant or the Urban
Mass Transportation programs, to set aside some of the new jobs for local
disadvantaged or structurally unemployed workers. Boston and Cambridge
have begun to apply this principle at the local level, coordinating their
unemployment and economic development programs. Both have enacted
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140 Rethinking Urban Policy
first-source agreements as a means of increasing job opportunities for their
citizens. These agreements between cities and private companies receiving
development assistance from or through the government require the com-
panies to set aside a fixed portion of their jobs for city residents and for
disadvantaged groups. These agreements require that both economic de-
velopment and unemployment programs look beyond the raw numbers of
new jobs created to the characteristics of the people who are actually
employed (G. Clark, 19831.2
The Use of Public Employment
While community integrity strategies emphasize private employment,
selective use of public service employment can also play an important
role. Historically, public service employment has been used as a coun-
tercyclical measure to alleviate short-term unemployment. As an alter-
. ~ . . . . . . . A. ... .
native to welfare and extended unemployment benefits, public service
employment has the added advantage of maintaining services that other-
wise are likely to languish, adding to a city's unattractiveness for new
economic growth.
Beyond its use in recessions, public service employment has been an
important route to upward mobility for minorities and the urban poor. In
part this is because wage levels in the lower ranks of public service are
relatively higher than for similar private sector jobs and because of policies
that strongly favor promotion from within the ranks. Public service em-
ployment also offers higher status or dignity and greater security than
many jobs in the private sector. Moving from private to public employment
increases the earnings of urban ghetto residents from one to three times
(Harrison, 1972:193~. In every occupation, blacks, both men and women,
earn more working for government than for privately owned firms (Jones,
19791.
The increased number of people displaced from jobs by technological
change and structural shifts in the economy raises new questions about
the role that public service employment should play in both the transitional
period and in the long run, when a larger proportion of the labor force
will be employed in service occupations. Many of the dislocated workers
will eventually be reemployed in private firms. A large number, however,
could be relegated to a persistent underclass because of the mismatch
between their abilities and the new skill requirements of the labor market.
2 These agreements were upheld by the U.S. Supreme Court in White v. Massachusetts Council
of Construction, U.S. , 103 S.Ct. 1 (1983).
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Stabilizing Metropolitan Economies
141
To deal with the relative immobility of such people, the government may
have to respond with more than mobility programs, temporary counter-
cyclical employment, and retraining opportunities. An expansion of both
direct public service employment and indirect creation of private jobs that
provide similar services or facilities may be needed. A strong argument
can be made for preferring the indirect approach over direct public em-
ployment. It would provide jobs in private firms and would encourage
some competition in the provision of services.
By whatever means, an expanded public service and public works pro-
gram could be beneficial in several ways. It could channel the urban poor
and the structurally unemployed who do not find new jobs in the private
sector into productive activities. It could increase the supply of badly
needed public services. And it could help stem the deterioration of the
nation's infrastructure and capital plant.
Publicly sponsored employment need not take away from the generation
of national wealth. It produces services that are consumed collectively
rather than individually. It also recognizes that community services and
capital investment by government are often prerequisites to private eco-
nomic development and growth (Sheppard, 1969~. Of course, government
services, like any others, can be produced inefficiently, and there are
special risks in providing temporary services that do not meet the test of
market demand. It is important, therefore, to examine carefully the kind
of services to be provided and the effect they may have on other em-
ployment and businesses in the community.
After several decades of experience in using public sector employment
to achieve social objectives of equalizing opportunity and redistributing
income, any recommendations for a public employment strategy must be
approached with caution. Clearly, there is room for political abuse. Public
jobs can become make-work activities that provide little in the way of
tangible services to the community beyond providing taxable income to
those who would otherwise be unemployed. Idle or unproductive em-
ployees on the public payroll can also undermine respect and support for
other important government programs. Care must be taken to ensure that
the efficiency of the local public sector is not overly sacrificed to worth-
while complementary social goals.
Fortunately, the science of public management has progressed to a point
at which effective incentives and performance standards can be built into
a strategy of using public service to achieve upward mobility for minorities
and disadvantaged workers and to contribute to economic development.
Imposing such standards is no easy task in many localities. The demands
on management are enormous when one objective of public service is to
employ and develop marginal workers. It is a task we have not been
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Rethinking Urban Policy
willing to impose on the private sector. For local governments to succeed
in such a strategy, they must recruit the most able people to use produc-
tively those who are the least able.
The nation has had enough experience with public works employment
and countercyclical government employment programs to understand both
the benefits and problems associated with such efforts. New Deal public
works employment programs produced impressive and lasting achieve-
ments: 651,000 miles of roads, 16,000 miles of water and sewer lines,
78,000 bridges, 2,300 stadiums, 35,000 public buildings, and 353 airport
landing fields (Levitan, 19751. The economic and social utility of the
works themselves and the employment they generated now seem beyond
dispute.
In more recent times, smaller and more controversial public employment
programs have been carried out. The Public Employment Program (PEP)
under the Emergency Employment Act of 1971 spent $2.5 billion to
provide 325,000 man years of employment to jobless workers. No public
works were constructed, but government service workers were hired through
grants to state and local governments. The evaluation of the program
found that two of every three PEP workers indicated that their public
service work helped thern find other employment. Their incidence of
unemployment and dependence on public assistance declined and, two
years after termination of the program, their annual earnings had increased
by 86 percent over their earnings the year before they entered it (Westat,
19811. About a third of the program's cost was recovered in tax receipts
from those working in it and from savings in reduced welfare and other
program costs (Levitan, 1975:621.
In the mid-1970s, training and employment programs were consolidated
in the Comprehensive Employment and Training Act (CETA). By fiscal
1977, 2,361,400 people were enrolled in various CETA programs 34
percent of the unemployed. It has been estimated that, without the CETA
program, the unemployment rate would have risen by two to three per-
centage points (Jones, 1979:901. CETA's Public Service Employment
(PSE) program enrolled 750,000 of these people about 10 percent of
the unemployed- in 1978, when the program was at its peak, at a cost
of $5.66 billion. The program was viewed as not cost-effective in com-
parison with other programs, such as classroom and on-thejob training
programs, and public employment was perceived as consisting of tem-
porary dead-end jobs that were unproductive.
By 1980 the PSE program had been reduced to 328,000 jobs, and it
was abolished by Congress at the request of the administration in the 1982
budget. Disaffection from the program was also based on several admin-
istrative scandals associated with it. In addition, as the program had been
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Stabilizing Metropolitan Economies
143
amended in 1978, PSE participants were restricted to economically dis-
advantaged people, ensuring that it enrolled only the most difficult group
to develop into effective workers and, correspondingly, reducing the value
of the program to the state and local agencies that clearly used it to
supplement their ability to provide public services (Palmer and Sawhill,
1 982:254-2581.3
At a time when government spending is being drastically curtailed,
expansion of public service and public works programs may be viewed
as too expensive. However, the net real social costs of funding a job for
a structurally unemployed worker or for a chronically unemployed person
is much less than the flat expenditure. Even the CETA-PSE program had
a cost-effectiveness ratio of 0.53, which did not take into account the fact
that CETA expenditures "substituted" for services that states and local
governments would have otherwise provided from their budgets. Had these
benefits for local governments been added to the reduction in welfare costs
and the gains in wages made by participants after they left the program,
the difference betweeen the economic worth of the program and its cost
would have been small (Palmer and Sawhill, 1982:257~.
For local and state governments the choices are not likely to be between
providing public employment for a substantial number of dislocated work-
ers and otherwise unemployable people and having them find more eco-
nomically beneficial jobs in the private sector. The real choice is between
some level of public service employment and the welfare system or the
underground economy, both of which sap the public budget and the overall
economy. The issue, then, is what kind of public employment program
to have, how large it should be, and how long it should last.
From a long-term perspective, direct government employment or private
employment that provides public services through contracts or other forms
of privatization will surely increase as more and higher-quality services
such as education, recreation, and health care are demanded by citizens,
although the rate of growth promises to be much lower than in recent
decades. The current backlog of demand for infrastructure maintenance
and new facilities will also require an expanded public service work force.
In addition, there may be new quasi-public employment opportunities in
such activities as neighborhood revitalization, special transit programs,
and community safety programs. A number of these activities lend them-
selves to both part-time and temporary employment, allowing for consid-
3 Clearly, CETA had conceptual and administrative problems, in particular with eligibility stan-
dards, training and out-placement of enrollees, decentralized administration, and monitoring
(Mirengoff et al., 1980a, 1980b).
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Rethinking Urban Policy
erable flexibility in program design and administration. Some have the
potential of producing a marketable service in the private economy.
Public service employment, therefore, need not be seen as a make-work
program. It can be designed to provide important services and facilities
while offering productive work to people who would not readily find other
jobs. Public works employment, in particular, adds to the economic at-
tractiveness of a community for private investment. It can also be used
to instill productive work habits in entry-level employees. The value of
such programs must be graded over the life of the projects and in terms
of their multiplier effect on the private sector, not just in terms of the
annual cost of the payroll.
One of the virtues of public works employment is that most of it may
be done through private firms under contract to the government. There is
every reason for state and local governments to require contractors to
provide for the employment of local redundant workers and disadvantaged
persons in their work forces. While it may be argued that this will add to
the cost of projects, it is a social benefit that the government should seek.
Its cost needs to be weighed against the social costs of unemployment.
Working with contractors, unions, and community groups, government
may be able to foster training programs and placement services as a part
of its overall public works effort. Employment tax credits, if offered at
all, should probably be available to construction firms engaged in local
public works programs that require employment of the disadvantaged.
Certainly there is now enough experience with minority hiring programs
in both public and private construction to develop effective hiring and
upward mobility programs.
Public works maintenance programs operated directly by governments
or under contract to private firms could follow a similar strategy. In
addition, there is an opportunity in such programs to create community
service corporations that afford local residents opportunities for labor and
experience in jobs at different management levels. Again, many of these
jobs may be structured so as to be available to part-time workers and to
workers with only the bare minimum of marketable skills. Often they will
be supplementary jobs for workers or families, providing a margin of
income sufficient to raise a household out of poverty. Decentralizing some
service programs to neighborhoods has the additional advantage of in-
creasing participation by residents in governing their community. Expe-
rience indicates that this has additional benefits in community maintenance
and safety (Downs, 1981J. At the same time, it must be recognized that
many of the most important investments in infrastructure require highly
skilled and highly specialized labor. More attention is needed to require-
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Stabilizing Metropolitan Economies
145
meets-for specific skills of different infrastructure tasks, so that jobs and
investment priorities can be matched.
Governments should, in their public services and public works pro-
grams, accept responsibility for the future welfare of their workers in ways
that extend beyond the usual retirement and health benefits. Employee
training for advancement, inside or outside government service, should
be a primary objective of public personnel policy. Training in basic literacy
and the use of machinery and computers and improving behavior and skills
are all means of helping the short-term productivity of the public work
force and the long-term employability of workers. There is no reason why
public employment, at whatever level it exists, should not be as much a
seedbed as private employment for a more highly skilled and economically
attractive labor force. Far too often governments have not followed en-
lightened personnel development policies. We have already seen that in
a service-oriented economy, public service workers- are an important ele-
ment in both the local economy and the national economy. Governments
must therefore accept at least as much responsibility as the private sector
for the readiness of their own labor forces for participation in an advanced
economy.
The growth of the local public sector in the total economy may provide
a necessary transitional cushion for some of the structural dislocation that
occurs. For it to be so used, however, substantial state and/or federal
assistance will be necessary because of the disparities that exist in the
fiscal capacities of local governments and the strain such programs place
on jurisdictions that are losing jobs and tax base.
In discussing public service employment, we do not advance it as a
panacea. It is one element in the battery of policies that may be necessary
in some local circumstances to maintain the degree of community stability
required for a reasonably smooth change in the structure of the local
economy. Properly used, public employment programs can help a com-
munity avoid some of the most serious consequences for dislocated work-
ers who face no realistic choice but unemployment and for those who
have no other realistic point of entry into the labor force.
EQUALIZING FISCAL CAPACITY
The Need for Local Capacity
If we take seriously the admonition that no uniform approach to urban
economic development is likely to succeed because of the diversity among
the different types of urban areas, the national interest would seem best
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Rethinking Urban Policy
served by seeing to it that state, local, and private institutions have the
capacity to initiate and effectively pursue development and employment
strategies that facilitate adjustment to the new economic and urban sys-
tems. They also need a base for strategic decision making. This cannot
be done if there is no assurance that necessary resources can be made
available. Thus, one of the most important aspects of local capacity for
adjustment is its fiscal capacity the ability to finance a minimum level
of public services and facilities at effective tax rates set near the national
average (U.S. Advisory Commission on Intergovernmental Relations, 19821.
A severe erosion of fiscal capacity undermines state and local ability
to devise, much less carry out, a positive economic development strategy.
As the tax base deteriorates relative to other jurisdictions, or even in
absolute terms, services must be cut, taxes raised, or both. Either action
can inhibit the ability to retain higher-income residents and employers.
Jurisdictions in need of a stronger tax base tend to adopt beggar-thy-
neighbor policies (tax abatement for newly locating firms, for instance)
that add almost nothing to net economic growth for an area but exacerbate
interjurisdictional and regional rivalries. And the benefits are illusory
because these competitive tax concessions undermine the yield from rev-
enue sources that locate there while new costs are generated. As fiscal
disparities contribute to the migration of firms and workers, other costs
are created at both ends of the migration stream. Existing public facilities,
private plants and offices, and housing are abandoned or inefficiently
used. Much of this capital stock must then be duplicated in the places to
which capital and labor move.
Interstate fiscal disparities are widening, even though the average per-
sonal income levels of states and regions are converging (U.S. Advisory
Commission on Intergovernmental Relations, 1977, 1982a, 1982b). The
growing disparity comes about in large part from two sources: (1) structural
changes in state and regional economies and the accompanying patterns
of job and population migration and demographic change and (2) the fact
that a few states have access to revenue sources that are not available to
others. The energy-producing states, for example, can tax extraction of
resources almost without regard to the levels of personal income in their
states. States whose treasuries rely heavily on revenues from tourism may
have low personal income levels but high tax capacity. There is an im-
portant distinction between the ability of the residents of a jurisdiction to
pay taxes and the ability of a jurisdiction to raise revenues.
Within the states, disparities in fiscal capacity among units of local
government are often even more severe than those between states and
regions. These disparities are largely the result of frozen jurisdictional
boundaries that prevent an economically declining central city located in
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Stabilizing Metropolitan Economies
147
a growing metropolitan area from sharing the revenue available from the
net metropolitan growth. Over the past 25 years, city-suburban fiscal
disparities have widened rather than converged. Except for the infusion
of direct federal assistance to central cities, the disparities would have
been even greater (U.S. Advisory Commission on Intergovernmental Re-
lations, 19774.
The states possess the legal power to correct many of the disparities
among the local jurisdictions within their own borders through redrawing
local government boundaries, sharing state revenues with local govern-
ments on the basis of tax capacity and tax effort formulas, requiring
neighboring jurisdictions to share regional tax sources such as industry,
and relocating functions between the state and local levels of government.
It is exceptionally difficult, however, for these legal powers to be translated
into political action in the state legislatures, particularly when it comes
to realigning boundaries. Consequently, few states have made extensive
use of their full range of powers to equalize fiscal capacities or to aid
distressed local units (U.S. Advisory Commission on Intergovernmental
Relations, 19811.
While the use of state power to equalize fiscal capacity within a state
is of great importance, for a state that is itself in serious fiscal distress,
no amount of reshuffling of boundaries and responsibilities, revenue shar-
ing, or productivity advance will overcome the basic problem of disparity
between its major urban units and those in other, more prosperous states
that compete for the same economic activities. Without some substantial
changes in national policy, interstate disparities are likely to increase rather
than narrow during the next decade. There is also a strong probability of
a growing number of urban fiscal crises such as those faced by New York
and Cleveland in recent years (Bahl, 19811.
This condition suggests that equalizing fiscal capacity within and among
the states should be an important long-term objective of any national
strategy for urban economic development. The argument that people should
leave distressed areas for more prosperous places overlooks the fact that
while some migration is inevitable or even desirable, it can exacerbate
local economic and fiscal distress.
The more economically advantaged move; the poor and less skilled
workers are left behind. Services cannot be terminated. Old cities may
shrink but they rarely disappear. The result of such patterns of moving
and staying is an even deeper fiscal crisis caused by the higher proportion
of residents who depend on public services and the lower level of taxable
resources. In some respects this condition is almost a classic reenactment
of Gunnar Myrdal's An American Dilemma but in an urban setting. These
long-term and deepening disparities, however, could be changed. They
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Rethinking Urban Policy
are, if not created by public policy, at least greatly affected by it. Policy
changes, probably made incrementally over some period of time, could
substantially alleviate the problem.
Reallocation of the welfare functions of the federal system, discussed
in Chapter 6, is a very important step in strengthening the fiscal capacities
of state and local governments, but it does not directly address the equal-
ization issue. It essentially equalizes welfare benefits among individuals.
It relieves many governments of a fiscal burden they find difficult to carry,
but falls short of ensuring that each unit of government has the fiscal
capacity to provide services to its citizens and residents at a level near
the national average by applying an average tax rate to the resources
available to it.
Strategies for Equalizing Fiscal Capacity
Fiscal equalization does not mean that all units of government will
provide the same level of service or even the same package of services.
Central cities traditionally spend more for noneducational services than
suburbs do because of the different composition of their populations and
their interests. Some localities will choose to make a greater or lesser tax
effort than others that is, to tax the resources they have at a higher or
lower rate. Tax-rich places will undoubtedly continue to enjoy higher
levels of services with less effort than tax-poor places. Fiscal equalization
reduces the disparities; it does not eliminate them or homogenize services.
It proceeds on the assumption that it is in the national interest for all
communities to have the capacity to provide basic services at a minimum
level of service that approximates the national average, that the range of
service levels should be slight so that access to police protection, edu-
cational opportunity, or community sanitation should not vary widely
simply because of a change of residence.4
A Cost-Effective Approach to Intergovernmental Transfers
Looked at strictly as a budget issue, fiscal equalization has some promise
of providing a more effective form of intergovernmental fiscal transfer
4 Within the states, the equalization of some services, such as education, is well rooted. In recent
years, the highest courts in a number of states have ruled that their state constitutions require
equal education services (Serrano v. Priest (483 P.2d 1241 (Cal. 1971))). The U.S. Supreme
Court has held, however, that fiscal equalization of school districts is not required by the federal
Constitution (Rodriguez v. San Antonio Independent School District (411 U.S. 1 (1973))).
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149
than the current mixed system of revenue sharing and block and categorical
grants. Studies by the U.S. Advisory Commission on Intergovernmental
Relations show that a direct program of fiscal equalization could be less
costly than the traditional system. In fiscal 1980, for example, a $12.2
billion program to bring state revenues closer to the average level would
have done more to reduce fiscal disparities than the $90 billion transfer
program then in effect (Lucke, 19824. Such a program is not necessarily
a substitute for all federal aid to states and local governments, but in an
era of shrinking federal grants it could offer a more fruitful approach to
issues of equitable treatment of the states and regions than a patchwork
system of specific grants. It has the added attraction of enhancing the
capacity of state and local governments to perform more effectively those
functions for which they assume responsibility.
Fiscal Equalization: The Experiences of Canada and West Germany
Fiscal equalization is used effectively in other federal nations. In Can-
ada, where the national government has traditionally played a far smaller
role in local fiscal affairs than in the United States, equalization grants
are distributed by the federal government only to those provinces whose
fiscal capacity is below the national average. The grants are designed to
make it possible for each province to meet the average level of service at
the average level of taxation (Lucke, 1982:271.
In West Germany the federal government transfers revenues to the states
in order to bring the fiscal capacities of the poorer states up to 92 percent
of the national average (Zimmerman, 1981:381. Equalization is mandated
by the constitution of the Federal Republic and is considered essential to
the idea of local self-determination. States, accordingly, are required to
share their revenues with their political subdivisions on an equalized basis.5
The formula used for distribution of federal grants to the states combines
the fiscal capacity of the states with that of their local governments.
Adjustments are made for the size and density of cities in the formula,
since these factors are highly related to service needs. States then redis-
tribute their revenues, including the federal equalization grants, on a sim-
ilar basis (Zimmerman, 19814.
The German approach provides some latitude for encouraging states
and localities to make an extra effort of their own to raise revenues and
to reduce urban-suburban fiscal disparities. The system appears to work
s The West German system also involves directly negotiated payments by the rich states to the
poor states, an element unlikely to take root in the United States.
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150
Rethinking Urban Policy
well in achieving its objectives of dispersing decision making in urban
affairs. What to do is left to the local and state governments. The federal
government merely sees that they all have a relatively equal minimum
capacity to do as they choose. The system seems also to have greatly
reduced interjurisdictional fiscal rivalry,6 epitomized in the United States
by the "smokestack-chasing" policies of areas hoping to lure new in-
dustry.
Conclusion
The gradual introduction of fiscal equalization could be an important
means of strengthening state and local decision-making capacity. Because
of the pivotal role of the states in reducing urban-suburban disparities,
there would be value in channeling the equalization grants in the form of
general revenue sharing through the states, basing the state share on fiscal
capacity and requiring only that a substantial percentage be redistributed
to equalize local disparities. A state's unrestricted share might also be
adjusted according to the degree to which it has independently acted to
reduce local fiscal disparities, whether by consolidating local govern-
ments, sharing state revenues, or reallocating responsibilities for govern-
mental functions.
Fiscal equalization holds promise of providing a solid and understand-
able basis for long-term fiscal relationships in the federal system. It can
go a long way toward giving state and local governments the stability
they need to provide facilities and services. Equalization alone, however,
is probably insufficient as the federal response to the transition period
between the old and new urban economies. Cities in transition from
either rapid decline or rapid growth often have little capacity to manage
their transition. When major structural change is under way, there is
justification for special programs for economic development, infrastruc-
ture, technical research, training, or labor mobility programs. Such pro-
grams, again coordinated through the states, should not be for the purpose
of holding on to an industry but to assist an area in anticipating its gains
and losses and in making adjustments to them smoother (Bahl, 1981: 122~.
Such grants could also help in identifying strategic strengths and in building
on them to accelerate the emergence of new economic roles and activities.
6 As a result of the intergovernmental fiscal system, German cities are far less obsessed than
their American counterparts with the out-migration of people and jobs as a normal consequence
of the restructuring of the economy (National Research Council, 1982b: 1 1).
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151
Once again the experience of other federal systems offers useful insight
into how such programs might be structured. Canada negotiates general
development agreements with each province. These agreements provide
planning frameworks to help guide public sector investments, with the
objective of influencing private sector growth and development. Germany
also has a joint federal-state program designed to promote regional eco-
nomic development (National Research Council, 1982b:5,361. Whatever
form they take, such programs should be clearly transitional in character.
If they are to strengthen local capacity for planning and adjustment, they
might provide support for improvements of infrastructure on the basis of
a shrinkage plan rather than on the basis of an expanding system; con-
centrate on the reuse of existing capital, such as housing and factories; or
provide help in making improvements in the management and the pro-
ductivity of government.
Stabilizing metropolitan areas during a period of economic transition
does not mean that they should not change. The purpose of stabilization
policies is to permit change to occur, even to encourage change, but to
do so in a way that reduces its shock and the resistance to it. To the extent
feasible, these policies seek to replace weak sectors of local economies
with stronger sectors and to prepare the existing labor force for movement
into new occupations, industries, and, if necessary to maintain their em-
ployment, new places.
Capital investment and employment strategies are chiefly concerned
with the flow of capital and labor to promising sectors. Regional and
metropolitan stabilization strategies are concerned with making enough
capital available for investment in urban physical and human development
to help make it possible for the changes in economic structure to occur
as smoothly as possible and to avoid the inefficient abandonment of capital
stock that can serve new as well as old forms of economic activity. These
policies, of course, must be supported by national macroeconomic policies
that are conscious of their regional and local consequences.
Representative terms from entire chapter:
fiscal capacity
