The Illusion of Growth Economics: Can Cities Like Charlotte Reinvent Themselves?

Rapidly growing cities benefit from scale economics. As a city grows, it spreads the fixed costs of providing services across more units, thus lowering unit costs and enabling taxes to stay low. This is doubly true as cities spread into undeveloped "greenfields," where there are few legacy costs. This can make cities look well managed when in fact they are simply benefitting from growth.

The real question is what happens when the growth cycle ends and unit costs either flatline or start going up. Can the city find sustainability demographically, economically and fiscally without growth as a fuel?

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One city facing this challenge is Charlotte, N.C. The Charlotte Observer recently took a refreshingly candid look at how rapid population growth and annexation had enabled the city to spend more money without raising taxes. But that free ride is coming to an end. "We are in a different universe now," Republican city council member Warren Cooksey told the newspaper. "Cities have identifiable growth cycles, and Charlotte is entering into a new one."

Cities have long maintained that they needed to annex land to ensure that "people were paying their fair share," said John Hood of the conservative John Locke Foundation, based in Raleigh. "They denied it was a way to get more money. Now they say because we can't annex anymore, we have to raise taxes. That gives the game away."

Not only is Charlotte now limited in its ability to annex, but it is facing an overhang of capital upgrades to bring many areas of the city up to par in services. As a result, taxes are going up.

This is not to say that Charlotte is poorly managed. But the transition from thinking about managing rapid growth to thinking like an operator is a tricky one. Even many companies fail to make it. Retailers, for example, frequently fall on hard times when they reach the point where they can no longer simply open new stores to meet financial targets.

Cities that are benefitting from strong growth have the wind at their backs. But it would be naive to assume that they must be doing something better than everyone else just because of that. Places like Chicago and New York were the Charlottes and Houstons of their day, right down to their laissez-faire economies. But they eventually hit the limits of growth and had to wander in the wilderness while trying to reinvent themselves.

This is the mark of a great city. A London or a New York can sustain and reinvent itself across growth cycles. Too many places, particularly our Rust Belt cities, have not met this challenge. When the economy shifted and growth ended, they went into a decline that has not yet abated.

Rather than making today's Sun Belt boomtowns smug, this should serve as a cautionary tale. Even the most prosperous and seemingly invincible cities can be undone when trends shift and growth fades.

Charlotte's metro area continues to grow strongly, so its day in the sun is not yet over. But as the central city hits annexation limits and faces tax increases for the first time in 20 years, the region should treat this as a preview of what is coming and start preparing itself for the day when growth alone is no longer fiscal magic.