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4 Basic Conceptsfor Urban Economic Strategy Before examining policy options or strategies in detail, we should ex- amine some basic concepts that might guide their selection. Our analysis of the impact of the changing economic structure on urban areas suggests that there are foreseeable differences in the economic potential of different types of cities in the urban system. Serious mismatches can be anticipated between available jobs and available labor. The most critical problems are in the subordinate centers with historically specialized manufacturing economies and labor forces. The transformation of urban areas and the emergence of a new urban system raise questions about how policies concerned with the economic change and development of urban areas can be reconciled with policies concerned primarily with the overall national economy. For some urban areas the transition to a new kind of economy is already well advanced; for others it is just beginning. For all urban areas, long-term changes in economic roles seem highly probable. Development and growth are not synonymous. Growth refers to the proportional expansion of area, population, firms, and jobs. Development implies structural change and may accompany either growth or decline. It involves adjustment to new economic roles, changes in the capital stock, development of skills in the labor force, and many other activities that change the character, appearance, and economy of a place. Each type of urban area that we have discussed has different kinds of development problems stemming from the historic mix of industries and occupations and the current state of the markets for them. These important differences 59

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60 Rethinking Urban Policy make it virtually impossible for a uniform policy or economic development strategy to work well in all types of metropolitan areas. Development strategies will need to be tailored to the resources and potential of different types of urban areas, if not to each specific area. A simple strategy of concentrating on overall national economic growth will not result, even if it is successful, in prosperity for all urban areas. The reason for this is that the growing and declining manufacturing and service sectors of the economy are often located in different places. Some of the sectors that are in decline will not be substantially revived by general economic recovery because structural changes in those sectors will per- manently eliminate many jobs that previously existed. That the conditions of each area are unique does not mean that there is no place for national policy concerned with urban economic development or that all of the problems are entirely local in nature. It means rather that there are national, regional, and local aspects of most urban problems. Accordingly, national policy might concentrate on providing a general framework and kit of tools that can be used, within a wide range of discretion, by regional and local decision makers at each level of the political system to fit their specific needs (Committee for Economic De- velopment, 1977; National Research Council, 1982b). RECONCILING NATIONAL, URBAN, AND SECTORAL INTERESTS The national economy is a composite of little economies, functioning largely through the urban system and linked by economic institutions and transactions. For an urban economic development strategy to be effective within such a system, it must operate at both national and subnational levels. While national and urban interests in economic development are not always the same, there are no rigid distinctions based on constitu- tionally proper functions. Just as national and urban interests differ, the interests of industries may diverge substantially from those of the cities that house them. Understanding these interests and where they converge or diverge is a necessary first step in devising a workable urban economic development strategy. The Formation and Flow of Capital Each component of the political economy has an interest in the formation of capital and its investment in activities that contribute to the expansion of the national economy. Making the economic pie larger eases the prob- lem of sharing it among regions and groups, although there is still a distribution problem. Traditionally, the national government has assumed

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Basic Concepts for Urban Economic Strategy 61 responsibility for policies to promote capital formation. But from the earliest days of the Republic, as exemplified by Alexander Hamilton's Report on the Subject of Manufactures, the national government has not been neutral about where the capital that is formed goes. It has regularly (if not consistently) favored investments in some sectors and activities over others. The chief instruments of national economic policy tax policy, the federal budget, monetary and credit policies, trade regulations have each played major roles in the allocation of capital to different sectors of the economy, to regions, and to urban areas (Glickman, 1980; Vaughan, 1977~. This effect is now widely acknowledged, but policies primarily concerned with the formation of capital have not been particularly sensitive to their effect on its geographic distribution (Howell, 19811. The results are substantial but often unintended and unanticipated. A recent study by the Rand Corporation (Vaughan, 1977) shows that the effects of many policies are unknown. Some policies, such as those for monetary, fiscal, and defense programs, whether intended or not, have quite different im- pacts on regions and on central cities than on their suburbs. The Distribution of Economic Opportunity Although not all policies reflect it, there has been a long-standing national interest in distributing the nation's economic growth in a manner that reduces the number of places and groups that are left outside the economic mainstream. This important national interest has been reflected in a great variety of policies throughout the nation's history. It includes policies that encouraged settlement of the frontier, developed ports and waterways, provided land grants to canal and railroad companies, regu- lated interstate transportation rates, and built a national highway system. Other policies declared the national interest in limiting business con- centrations through antitrust legislation, equalizing minimum wages and maximum hours of work, providing for secure retirements through social security, and encouraging employment opportunity for minorities. The Full Employment Act, the Tennessee Valley Authority (TVA), the Area Redevelopment Act, the Appalachian Regional Commission, the antipov- erty program, and the Model Cities program were all manifestations ex- pressed through the political system of a national interest in intergroup and interregional equity and widely distributed economic opportunity. This national interest in the distribution of opportunities and the growth of jobs and incomes for all groups and regions has been an important means of promoting social stability and of reducing the social costs of having a large, dependent population. There has generally been a rec-

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62 Rethinking Urban Policy ognition that not all places in the nation can grow fast, but there has also been a readiness either to shelter troubled areas through devices such as tariffs or to try to stimulate growth in areas that were lagging behind the rest of the economy through more direct programs, such as reclamation projects, the TVA, and the location of federal installations. The national interest in the distribution of economic activity has sought to avoid the most serious, debilitating, and damaging interregional con- flicts and competition. ~ In recent years this interest has involved providing infrastructure, such as the interstate highway system, the urban mass transportation program, capital grants for sewage treatment, and a system of fiscal transfers designed to assist states and localities in maintaining levels of public services for their residents and adequate systems of in- frastructure for the growth of local economies. Although historically the national interest in urban economic devel- opment has included a recognition that the aggregate level of growth can be materially retarded if some region or group is left substantially behind others, it has not included a systematic approach to either regional de- velopment or the flow of capital to particular sectors of the economy which may also have important regional implications (Schwartz and Choate 1 980:65-871. Economic and Social Stability Given the respect for pluralism that characterizes policy making in the federal system, the national interest recognizes that regional or local in- terests may at times be in conflict with each other and with national interests. These conflicts are permitted in the interest of diversity and experimentation, so long as there is no direct challenge to a clearly stated federal power. At the local level, interest in economic development often embodies an intensely parochial concern for economic and social stability that is in- different or even hostile to the economic fortunes of other areas. From the perspective of overall national interest, it may matter little where new or expanded economic activity occurs, but that issue is central to local interests. They will fight hard to save subsidies that favor them, even if such subsidies can be shown to be counterproductive to national interests in economic growth. ~ To some extent this was the underlying purpose of the commerce clause of the Constitution (Gibbons v. Ogden, 22 u. s . 1 [ 1 824] ) .

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Basic Concepts for Urban Economic Strategy 63 Each jurisdiction tends to maintain a competitive interest in its own economic health relative to other jurisdictions in the vicinity. Each is therefore deeply interested in maintaining and expanding the pool of capital available for investment in local businesses, housing, and consumer credit. The interest in the size of the pool, however, may be secondary to the interest in the geographical flow of capital, whether its source is the local pool or financial institutions in other places within whose sphere of in- fluence the jurisdiction lies. One of the persistent problems for older central cities, in particular, has been the flight of capital from downtown to the suburbs, even though the amount available within city institutions has been growing. The flight of private capital affects the availability of public capital, since most jurisdictions depend heavily on the growth in the assessable base of real property as the principal source of revenues for public capital investments. Thus, where private capital expansion is slow, intergovernmental fiscal transfers become increasingly important as a means of meeting budget needs (U.S. Congress, Joint Economic Committee, 1981a, 1981b). Expansion of Local Economic Opportunity While the institutional interest of local jurisdictions in the growth of the revenue base is crucial in the local political economy, there is also a strong urban interest in economic development as a source of opportunity for the upward income and occupational mobility of the local labor force and as a source of prosperity for local businesses. To a considerable extent the growth of the metropolitan or regional economy benefits these interests, wherever it occurs in the area. There are two problems with such a gen- eralization, however. The first has to do with the availability of new jobs generated by growth to the existing work force of the area. Growth in sectors for which the local labor force is not prepared can result in si- multaneous increases in the net number of jobs and in the number of unemployed workers or dependent households. There is, of course, an interdependence among job levels. The growth of jobs for highly skilled workers and the filling of them with either local residents or imported labor can generate some jobs in the local economy for less-skilled workers. The second problem has to do with physical access of the lower strata of the labor force to the new jobs. In many cases neither the public transportation nor the job information network facilitates access to lower- income members of the labor force. In other cases the jobs realistically available to such workers do not make moving to them worth the effort (G. Clark, 19831. Such conditions can frustrate both national interests in

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64 Rethinking Urban Policy labor mobility and economic efficiency and local interests in economic growth and development. LINKAGES BETWEEN THE ECONOMIC MAINSTREAM AND THE PLACES AND PEOPLE LEFT BEHIND The restructured economy has its most profound effects in those met- ropolitan areas that have been the centers for manufacturing, although the effects can be felt in almost all areas to some extent. Displaced production workers, who have enjoyed high wages and benefits in unionized indus- tries, often find that new service jobs pay less than their old jobs, and they are often reluctant to accept them. When they do, they often find that they are dead-end jobs, with little opportunity for promotion or in- creasing levels of pay. Poorly prepared young people and other unskilled workers have difficulty entering or reentering the labor market and in moving up the occupational ladder, either in the places where they cur- rently live or in new places to which they might move. The unemployment and underemployment of both groups of workers could become a sub- stantial social cost for all levels of government, particularly for local governments in the communities where redundant laborers and unem- ployed or underemployed people are concentrated. The most critical sit- uations will be in those places where the loss of firms and jobs employing manual workers cannot be offset by jobs in services and other manufac- turing industries that provide incomes and opportunities for advancement comparable to the jobs that are lost. At the same time, it is possible to foresee critical shortages of workers to fill some kinds of jobs. The challenge to public policy is to come to grips with the mismatches between the demand for labor in the growing sectors of the economy and the supply of labor that exists among occupational groups and among local or regional labor markets. Responding to this challenge involves devel- oping strategies for the education and training of the current and future labor forces. It also involves developing programs that encourage redun- dant workers and other unemployed people to redirect their interests and skills to other occupations and, in many cases, to other places. In an age of international competition and rapid technological changes, both with pervasive impacts on American economic structure, strategies seem called for to avoid future high rates of obsolescence for groups of workers by the development of transferable skills and of continuing programs of tran- sitional education and training for much of the labor force. In thinking about urban economic development, there is a tendency to focus policy on the declining parts of the economy, the most devastated neighborhoods, and the most distressed people. Certainly ameliorative

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Basic Concepts for Urban Economic Strategy 65 actions are needed for such places and people, but an exclusive emphasis on helping the "worst first" can result in overlooking important oppor- tunities that can ultimately improve the prospects of the most seriously disadvantaged groups (Schwartz, 19834. While attention is focused on the worst, higher-income residents and business firms may slip away. Urban policy should be concerned simultaneously with two realms: the mainstream and those left outside (National Research Council, 1982a). In a strategy that is concerned with how to channel the mainstream of eco- nomic growth and that builds on the strengths of the local economy, a number of factors are important: the size of the market and the quality of the producer services; the mix of industries and the skills available in the labor force; educational, health, and cultural institutions; amenities; and the quality of public facilities and other capital stock. Each factor may have comparative advantages for particular types of industries. Each affects the current role of the area in the urban system and the potential that exists for carving out a stronger position. Careful delineation of the position of an area with respect to the main- stream of economic development involves more than a casual determi- nation to offer itself as a capital for high-technology industry. As the discussion of the new urban system in Chapter 3 points out, some places have a substantial head start toward performance of certain functions in the new economy. Not every area is destined, even with intense motivation and strong public-private cooperation, to become a national or regional center for high-technology industries, corporate complexes, and producer services. There may be substantial potential, however, for other functions, such as distribution centers or specialized services or goods production. Because it is now possible to disperse parts of a service or manufacturing industry to locations distant from the headquarters, many more cities are candidates for communications, records, or training centers than in the past. Subordinate centers will need to link their strategies consciously to the economies of command and control centers and to seek activities that broaden the range of economic functions they can perform. In particular, there is a need to identify activities that can operate as accelerators of other kinds of development, such as research and development or other specialized business services (Rees, 1983~. It is important to recognize that, following the best strategies and even with the best of luck, some places will endure further disinvestment,

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66 Rethinking Urban Policy decline in personal income, and some population loss before a long-term role in the new economy is well established. In fact, assuming that role may depend on some reduction in size. A strategy that seeks to take advantage of mainstream opportunities is incomplete if it fails to address the problems of the least resilient com- munities and people. The object of such policy is to improve access to the mainstream. Policies concerned with those left outside necessarily include some elements that are primarily designed to ameliorate the impact of structural change. The principal thrust of policy, however, should be to create opportunities for people and their communities to make adjust- ments to new jobs and new functions. This may be done with measures to stimulate new jobs in existing communities as well as by enhancing the ability of other displaced workers to follow opportunities to other areas. Thus, strategies for those left behind whether they are workers whose skills are made redundant by changing markets and technology, the unskilled working poor, or members of the emerging underclass include elements of education, training or retraining, capital investment, local job creation, and mobility assistance. TRANSITIONAL AND LONG-TERM STRATEGIES Not all urban areas have reached the same point in their developments and not all are changing at the same pace. Some have already gone through a major transformation in their economic functions and have assumed new roles in the urban system. Others are in the earliest stages of structural change. In light of this, urban economic development policy must be concerned with two different time periods. First, it must be concerned with the period of transition. During this time, old familiar functions may be diminishing, and new areas of strength may be hard to identify. Second, decisions must be made to guide the longer period that follows the tran- sition, a time when a new and fairly stable pattern of economic activity has emerged. The two periods are, of course, related. Actions taken during the transition will affect the long term; choices of long-term strategies will limit options during the transition. The character of federal policy for each time period should also be different. Transitional Strategy The transition period is the most difficult, both conceptually and po- litically, for in one sense urban areas are always in transition. There usually is little hard economic information on which to base decisions. Even when

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Basic Concepts for Urban Economic Strategy 67 the leaders of an area are aware that major changes are taking place, they often fail to understand the reasons for them. It may be difficult to dis- tinguish between cyclical adjustments by local firms and more fundamental structural shifts that will extend far beyond the end of a business cycle downturn. Rapid and persistent change, as has occurred in the automobile and steel industries, may place the local economy in shock as firms that historically have been stable sources of income and employment reduce their work forces and permanently close some facilities. The ripple effect of decline in the basic industries of an area tends to induce a self-aggra- vating process of general urban decline (Bradbury et al., 19801. Disin- vestment in some sectors may discourage investment in other, potentially healthy sectors. The loss of income from jobs and sales and the reduction in property values of abandoned plants and slow or negative appreciation of private homes reduce local revenues and services, making the com- munity less attractive for new investment and for higher-income residents. Out-migration of more educated younger workers and higher-income fam- ilies tends to leave the central city with a smaller population, a higher proportion of which is heavily dependent on a diminishing public treasury (Fossett and Nathan, 1981; Government Finance Research Center, 19821. One factor that makes the formulation of transition strategies difficult is the reality that a subarea, particularly the older, more central jurisdic- tions, may lose population and jobs. This often produces stopgap rather than strategic thinking, with a fixation on the parts of the economy that are declining rather than a focus on sectors of the economy that have considerably more potential for expansion. Transitional strategies in par- ticular need to incubate new business and expand those sectors with growth potential. They also must be concerned with stabilizing the local economy and the fiscal system so that change can occur without trauma. To some degree the transition period can be likened to the triage process in emergency medicine, in which the hopeless cases are separated from those that can be saved, and priorities are assigned on the basis of the seriousness of the cases (Ylvisaker, 1981~. The problem for declining urban areas is that the triage process must often be conducted by the wounded themselves. In rapidly growing urban areas the transition period produces an entirely different impact. Sudden population growth and economic expansion in- duce a process of growth and development that seems almost self-gen- erating. For these areas the strategic problem is likely to be one of managing development to avoid future social and environmental costs and to provide public facilities and services in reasonable sequence with the development

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68 Rethinking Urban Policy of the private economy. Such areas should try to avoid externalities from one stage of growth that can strangle future development opportunities or impose high social costs.2 Long-Term Strategy Urban development is a drawn-out process. It is never complete because cities continue to change as they mature. Formulating and carrying out a long-term strategy require an enduring consensus among the principal actors in the development process on its broad elements. Long-term think- ing is impaired, moreover, by the institutional structure of urban and metropolitan politics. It is particularly difficult for those beset with im- mediate problems, such as the executives of declining businesses and the leaders of unions whose members face imminent loss of jobs, to think about the long term. Corporate thinking tends to concentrate on short- terrn profitability. The political system operates with two- to four-year time horizons. At the federal level, urban policy has been inconstant, making it virtually impossible to make long-term plans that rely on federal programs. Those places that seem to have produced the most successful economic development strategies usually have a stable political regime and an un- derlying consensus among leadership groups on overall goals. Baltimore, Dallas, Boston, Columbus, Indianapolis, Atlanta, and Pittsburgh are ex- amples of such places. Their political leadership has usually been com- plemented with a strong and cohesive economic leadership group (Foster and Berger, 19821. 2 Houston and Phoenix provide examples of alternative development strategies for fast-growing metropolitan areas. Houston, with an aversion to any public development policy, allowed de- velopment to proceed to such a point that severe traffic congestion and flash flooding problems have become common. The result is a dampening of the market for further growth. Phoenix, in contrast, has a development strategy, based on the "urban village" concept, to try to produce a more orderly pattern of development, channeling the location of the market but not attempting to reduce its overall volume. Other fast-growing communities have fashioned more detailed growth-management strategies. Among the most sophisticated are those of San Diego, California; Boulder, Colorado; and Montgomery County, Maryland. For examples of some (mostly restrictive) growth-control strat- egies and their consequences, see Scott and Brower (1976). Growth management produces its own costs. In general, restrictions on development add to the cost of housing and other con- struction. Unless operated on a fairly large geographic scale, they also tend to cause the growth in a rising regional market simply to spill over into nearby areas under less restrictive control (Frieden, 1979).

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Basic Concepts for Urban Economic Strategy 69 Long-term strategy involves some notion, however vaguely formed, of the future role of the area in the national economy and the urban system. This notion, or image, need not be expressed graphically, as in an end- state master plan; it can be fairly general, such as an intention to become a center for energy industries, robotics, or recreation, or some combination of objectives. Such idealized statements should change as experience is gained, the competition assayed, and assets counted. The value of objec- tives or goals is that they raise the more important questions of how to reach them, which are at the heart of making long-term strategy. If there is no reasonable prospect of achieving them, more realistic goals should be developed. What must be done may involve fundamental pieces of urban engi- neering, such as the provision of reliable water supplies or a workable transportation system. An urban area has little prospect of performing a role as a regional center, for example, if it cannot provide good air trans- portation to other regional and national centers. Essentially, long-term strategy involves the conscious creation of com- parative advantages. In an age in which capital is highly mobile, several places can be equally suitable, from an objective view, for many economic activities. Thus, the qualitative aspects of the urban environment are be- coming more important factors in economic development strategy phys- ical appearance, public and commercial services, the cultural atmosphere, the quality of the educational system, the proximity of research institutions, and parks and recreation resources. As employment gravitates toward service occupations, a community's success in urban development will depend on its ability to provide the kind of labor force and environment that are attractive to specific types of firms. Most of these things involve more than policy that drifts behind pure market choices. They often require market-forcing decisions. The growth of Dallas, for example, was stimulated by the creation of a major international airport and the location of a branch of the state university. Both were critical pieces of its long-term economic develop- ment strategy. Pittsburgh has begun consciously to develop capability as a center for robotics, fusing the interests of some of its industries, such as Westinghouse and Unimation, with its universities. In the Detroit area the automobile companies are engaging in joint ventures with the Uni- versity of Michigan to develop new manufacturing technologies. The point is that urban development can no longer be taken for granted. Public policy plays an important role in the process of transition and long- term reorientation and adjustment. At the local level, strategic policy making is the process through which a community goes as it learns about itself and the new economic environment within which it lives and as it

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70 Rethinking Urban Policy redefines its intentions and the steps that public and private institutions will have to take to realize them. While it is unlikely that national or local policy can change the direction of the international economic forces transforming urban areas, it can in- fluence the rate at which trends move and can affect how readily many areas anticipate and adjust to change. CONCLUSION In light of these basic concepts, a framework for urban economic de- velopment strategy seems to require, first, policies that accelerate the process of transformation, concentrating on the flow of capital to those activities on which the future of urban economies ultimately depends. By themselves, however, such policies could exacerbate disparities in the performance of cities with growing and declining economies and could destabilize both in the short term. To facilitate adjustment of urban areas to new, long-term economic roles and to smooth the transition, it would be prudent to balance actions that accelerate change in the aggregate national economy with policies that help stabilize communities as they undergo substantial change. In this context, communities and their resi- dents should be encouraged and enabled to rethink their roles and to identify and pursue appropriate functions in the urban system.