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Monday
Jan102011

If it creates jobs, then it must be good, right?

At the local government level our focus on jobs and growth obscures our understanding of the current financial turmoil as well as how we can actually create a sustained recovery. Jobs and growth are the results of a productive system, not a proxy for one. Until we reconfigure our places, sustained prosperity will remain elusive.

A large part of our Curbside Chat presentation is devoted to showing how our post-WW II development pattern fails to create enough revenue to financially sustain itself. We analyze real developments and compare their ongoing maintenance costs with the actual revenue they generate to show how our modern cities are financed like a classic Ponzi scheme, where revenue from new entrants is used to pay off past obligations.

From the perspective of the city or town, this is devastating. The whole is a sum of the parts, and when each part is running a deficit, it is easy to understand why municipal budgets are stretched beyond the breaking point. New growth may pay for itself, but only through one life cycle. After that, the costs to maintain the infrastructure dwarfs any tax revenue generated.

This analysis is also devastating to the cadre of professionals -- engineers, planners, economic developers, municipal financial advisors -- that make their living off of promulgating new growth. To them we blaspheme, challenging a belief that is nearly religious: more growth is always good. They'll respond to our analysis with something like the following:

But there is new investment, and that creates jobs and people buying stuff and all of that creates tax revenue. Your analysis is too simplistic. It is a bigger system and you don't take that into account.

To which my inner monologue responds, "How's that working out for ya?"

I'm going to repeat a fact that we've stated before here at Strong Towns Blog, one that makes some people -- especially economic development professionals and others vested in the current system -- quite angry: In nearly every American city, the balance sheet does not benefit from a new job.

Local economic development officials talk endlessly about creating jobs, jobs, jobs and the need to invest in job creation. Since most American cities have no income tax, these efforts produce no tangible financial return to the city. If we spend $100,000 at the local level to create jobs, there is no basis to believe that this will ever result in $100,000 being returned to the city through new tax receipts.

But what about sales tax? Again, few cities rely on the sales tax for any of their revenue. Where we are in Minnesota, cities are actually prohibited from independently enacting a local sales tax. They are only able to institute such a tax when it is approved by voters, approved by the legislature and tied for a set duration directly to a specific project. Any new jobs could generate millions and millions in sales and, except in rare instances, none of this revenue is going to be diverted to the municipal government.

Most local governments rely on property tax as their primary funding source. In a theoretical world, this should create every incentive to maximize the amount of property value while simultaneously minimizing the amount of ongoing liability -- particularly in infrastructure maintenance -- that the city assumes. In the real world, nothing like this happens. Cities fight each other -- through subsidies, waivers of regulation and other "business friendly" approaches -- for each new business, each new job, each new housing subdivision, giving little if any consideration to the long-term maintenance costs they assume.

All of this ultimately drives up local property taxes which, as any business will tell you, is not "business friendly". 

Why does this happen? How can cities pursue policies that are so clearly contrary to their own long-term interests? The answer is simple: they have the incentives to do so.

Our Mechanisms of Growth -- the ways we have funded new growth for the last two generations -- cover up the true cost of our development pattern, creating the Ponzi-scheme comfort of new revenue today while postponing the day of financial reckoning, when the local government will be faced with unfathomable maintenance obligations, at least a life-cycle into the future.

In many places, we're a life cycle or more into this pattern and the growth has now stopped. Things are getting desperate, and will only get more so with each passing day. Contrary to our federal and state approach to "recovery", the answer to this problem is not more growth. The answer is a different development pattern.

Unfortunately, the entities that provide the primary incentives for the current pattern of development -- the federal and state governments -- are dealing with their own Ponzi schemes and funding shortfalls. They desperately need to lower their costs while simultaneously creating more income and sales tax revenue, local government budgets be damned. The sooner our local leaders understand that, the sooner they can begin to shape their own future.

There is no magical mathematical formula that will allow our cities to take on more obligations than they can support, yet remain solvent and productive places. More growth and more jobs are not the magic answers for local governments. To have a real recovery, we need a new pattern of development, one from which jobs and growth will ultimately flow. It can't be the other way around. We need to start building Strong Towns.

Additional reading:

 

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Reader Comments (4)

Chuck:
Excellent article per usual. I often comment(to people who will listen) on the constant drumbeat of folks in the economic development community about jobs, jobs, jobs and tax base, tax base, tax base. The need to throw everything but the kitchen sink in the form of loans, grants, TIF agreements, etc, at any development proposal is also just assumed, otherwise you won't be "competitive". And, unlike other states, there is very limited need to show that the incentives are essential for the development project to go forward( the "but for" test). As you mentioned, much of this public investment is used to expand infrastructure such as county roads or city streets, water and sewer mains, and upgraded capacity. In my experience, little, if any, analysis is done on the long-term ifiscal mpact of maintaining and replacing said infrastructure assets in the future. Economic development is not only about jobs, jobs, jobs: It is about the creation of real new net wealth ithat benefits the local community and region.

Mark A. Baker

January 10, 2011 | Unregistered CommenterMark A. Baker

Mark: Thanks for your response. We hear the drum beat too and it's an inspiration for our work at Strong Towns. Your concluding statement says it all: Economic development is not only about jobs, jobs, jobs - It is about the creation of real new net wealth ithat benefits the local community and region.

January 10, 2011 | Unregistered CommenterJon Commers, Strong Towns

Charles,

I was turned on to your blog by a mutual friend - and I will thank him as soon as I'm done here. Your article is thought-provoking and informative. I've been reading Christopher Leinberger at The Brookings Institution's website and he writes pretty persuasively that one of the primary causes of our present landscapes temporary form is that finance has mandated it. Developers are running capital through their projects at a faster and faster pace leading to, what I would think, a never ending search for the next project. All the while, municipalities are left with "instant ghettos" of abandoned retail/commercial space with unused infrastructure.

We have a growth at all costs mentality (really this isn't new but goes back to Manifest Destiny I think) and a financial R/E structure that rewards fast recovery of initial investment - how and the heck can the municipal level drive any sort of reform.

A bit off topic, but what are your thoughts on Jane Jacob's "Cities and the Wealth of Nations". Also, check out "Zoned Out: Regulation, Markets, and Choices in Transportation and Metropolitan Land Use" by Jonathon Levine.

Mitch B.

January 11, 2011 | Unregistered CommenterMWBrown

And how much does the equation change for cities that do levy an income tax?

My particular burg, an inner-ring suburb of a larger city, is pretty much completely built out. Property values are maintained (nominally) through regular exterior inspections and mandatory point-of-sale interior inspections. Increasing property values is a slow and difficult process. Creating jobs in our business districts (small service, retail and restaurant businesses mostly) would seem to be vitally important to maintaining the income tax base. And since the 'burb is already built out, these new jobs probably require only minor (if any) upgrades to existing city infrastructure.

Although "jobs, jobs, jobs" is not the solution to all of our problems, doesn't our income tax change the equation to one where some amount of investment in job creation makes sense in our case? I would agree that infrastructure costs seem to be overlooked any time infrastructure investment is being considered in our region of the country.

January 11, 2011 | Unregistered CommenterForaker
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