Should Economic Development Focus on People or Places?

Cities tend to favor building stadiums and convention centers over investing in education or human services. It's an understandable but troublesome trend.
by | March 2016

Aaron M. Renn

Aaron is a Governing columnist and a Senior Fellow at the Manhattan Institute.

Cities tend to favor place-based strategies, such as building stadiums, to spur economic growth. (Flickr/Travis Wise)

There’s a raging debate about whether the focus of our economic development efforts should be on people or on places. That is, should we make investments in people, hoping to see them succeed regardless of where they end up? Or should we focus on investments in particular cities, towns and rural areas in order to bring jobs and growth, thus helping the people who live there?

Many in the know think that the focus should be on people. Rather than trying to resurrect struggling locales with various speculative endeavors, they think we should invest more in things like education. I myself have critiqued the place-based economic development strategy of trying to stop the so-called brain drain.

Most local government leaders, however, seem uninterested in people-based strategies, at least insofar as they are seen as ingredients in economic development. These leaders tend to prefer place-based approaches such as stadiums, casinos and convention center projects that so often are panned as boondoggles.

Even if this may be less than ideal from a theoretical perspective, it is understandable. After all, localities are inherently place-based entities. One thing that makes a local government distinct from a corporation or other organization is its status as a territorial entity. Cities and towns can expand, but it’s rare that they ever get rid of territory once they’ve acquired and incorporated it.

A city’s territory is much more tightly bound to it than its citizens are. People can move. They can choose to affiliate themselves with another town. But cities cannot exchange one geography for another.

This produces some bad incentives. For example, the fiscal liabilities of a locality attach to its territory, not to its citizens. So voters have every incentive to pull the lever for politicians who will minimize costs in the present at the expense of the future. Politicians can sign bad union deals with future pension promises that are hard to fulfill. They can go into debt to spend money now.

But the citizens who voted for those politicians can then simply move to another town, often to a suburb (or a different suburb) within the same region, to avoid paying off those debts. In many cases they don’t even need to change jobs. It’s like being able to run up big debts on a credit card in someone else’s name. If cities were people-based entities and the debts run up during the time citizens lived there followed them wherever they went, we’d surely see much more fiscal sanity.

Given their fundamental territoriality, however, cities can never really be people-based entities in that sense. Harvard economist Edward Glaeser, an advocate for policies that are first about people, is realistic about the choices facing local policymakers. As he put it in an article for City Journal, “No mayor ever got re-elected by making it easy for his citizens to move to Atlanta, of course, even when that might be a pretty good outcome for the movers themselves.” In other words, we should understand that local leaders will always be place-focused. It’s inherent in the job.

For their parts, state and federal governments need to recognize and shape the right oversight and incentive structures around localities to account for this. First, this would mean reducing incentives for local governments to rack up huge debts and liabilities. While I am a strong proponent of greater local autonomy in many areas, there should be strict state oversight to prevent the accumulation of excess debt or unfunded liabilities by local government.

Second, state and federal place-oriented aid should, as often as possible, be directed to relieving burdens rather than to speculative “build it and they will come” endeavors. Rather than subsidizing real estate projects and the like to try to restart growth, another approach to fiscal stabilization is to deal with some of the major liability issues directly.

One example is combined sewer overflows. In many older cities, both stormwater runoff and sanitary sewage flow through the same pipes. In heavy rains, these can overflow into local waterways. Under the Clean Water Act, cities and sewer districts are required to substantially eliminate these. But that can cost billions of dollars. For the most part, this will fall on the citizens living in that service territory in the form of higher rates.

If aid were directed to helping pay for these costs instead of going to more speculative projects, this would hold down utility rates that hit low-income people the hardest, and it would contribute to improving the cost profiles of these places that have driven people to the suburbs or out of the region entirely.

States and the federal government, by changing incentive structures and helping localities that face true place-based challenges, can hopefully produce an environment in which the focus of local leadership shifts toward the more people-based endeavors, such as education and other human services.

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