City Competition and Economic Growth

The populations of America’s cities are constantly changing. Some cities are growing rapidly—Austin, Dallas, Orlando, Columbus, OH—while others continue to lose people—Detroit, St. Louis, Youngstown, OH—and have been for decades. The decline of some cities and growth of others is due to a variety of factors, including government policies, geographic amenities, and climate. Cities that want to attract new residents can’t change their location, but they can alter their policies to better compete with other cities, an idea I explore in a paper recently published in the Journal of Regional Analysis and Policy.

Some cities have natural advantages over others. For example, San Diego’s climate and proximity to the ocean are two things that Buffalo lacks. For most people, these features give San Diego an edge over Buffalo as a place to live. Some natural amenities—such as New York City’s harbor—also provide production benefits that help cities grow.

But Buffalo and similar cities that lack San Diego’s beachfront location can do other things to compete, and many of them are trying. A quick Google search reveals that nearly every state and local government has some sort of economic development office tasked with attracting companies via various incentives and spreading information about the local economy. Additionally, the website Good Jobs First tracks the incentives awarded by many of these economic development offices and has amassed over 330,000 entries from over 800 state and local programs.

The existence of economic development offices shows that city officials and residents recognize that they often compete with one another for businesses and people. The variety fostered by such competition allows people to “vote with their feet” i.e. choose the location that best fits their preferences.

But many of the things cities typically do to compete aren’t very effective. While efforts to generate urban development in America’s cities take a variety of forms, many focus on building or renovating things. City officials try to outdo one another by creating the fanciest stadium, downtown park, or convention center with the hope that such investments will spark an urban renewal. However, there is little evidence that these types of projects can turn cities around on their own.

Another common strategy is tax incentives for specific companies or industries. In addition to being narrowly applied, the tax incentives are often temporary. The recent competition among cities for Amazon’s HQ2 is an example of this strategy. But like the stadium and convention center strategy, there is little evidence that narrow, temporary tax incentives can revitalize struggling cities. After all, if a company is attracted by a temporary tax break it may decide to move again once the tax break expires.

In contrast with new stadiums or temporary tax breaks, research consistently shows that certain institutions and rules are important for economic development. Institutions that are commonly accepted as being pro-growth are well-defined property rights, rule of law, and a market economy with a well-functioning price system. Such institutional features are typically set at the national level and America is widely regarded as having them in place.

Just below the institutional level are the administrative rules and policies in place, and this is where cities can differentiate themselves. At the municipal level these rules consist of tax policy, business regulations, land-use regulations, and other local ordinances. The rules and laws of a municipality also impact the provision of government goods and services, such as roads, police protection, fire protection, and water and sewage services.

Cities without attractive natural amenities can compete with those that have them by implementing different policies. For example, a tax system with lower rates that’s easier to comply with is one option for attracting businesses.

Cities can also streamline their regulations so that it’s easier for entrepreneurs to start or expand businesses. Some regulation is important, but many cities have rules in place that do little to benefit consumers and instead protect incumbents from competition. Taxi cab and limousine regulations provide some examples.

And even when regulations are worthwhile they may be arbitrarily enforced, which creates uncertainty and makes it difficult for business owners to plan ahead. In addition to reducing uncertainty, cities that want more economic development should consider periodically cleaning up their regulatory codes so that outdated or ineffective regulations don’t needlessly accumulate and bog entrepreneurs down with paperwork.

Competition between governments generates different types of cities and helps us figure out which policies effectively accomplish their goals. Some people may want to live in a high-tax city that provides many government goods and services, like New York City, while others prefer a lower-tax city where the government does less. Similarly, some people may value the benefits of some regulations more than others, which leads to variation in regulation across cities.

Economists have studied the effects of regulation on economic activity for decades, but early work is largely anecdotal or relies on simple measures of regulation such as page counts of the federal registrar or state regulatory codes. Today, there is software that can read government regulatory codes and then quantify the amount of regulation they contain, which makes it easier to include regulation in statistical analyses. The methods for quantifying regulation are improving and over time they should help us develop a better understanding of how regulation impacts competition among governments and economic growth at the national, state, and local level.


Adam Millsap is the Assistant Director of the L. Charles Hilton Jr. Center. 




The featured image is from the Mississippi Business Journal.

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