Rethinking Economic Development

On Monday I wrote about the famous Kelo versus New London Supreme Court decision as a bridge to discuss the failed approach most of our towns take to economic development. That approach, which is sometimes called "Chasing Smokestacks", is characterized by three components:

1. Extend new infrastructure.
2. Subsidize new development.
3. Hope it works.

So what would a different, Strong Town approach look like?

It would look a lot like the world envisioned by one of the great economic thinkers of modern times, Jane Jacobs. Last month I referenced a great article on how economists are starting to embrace Jacob's notions on how to grow communities. From the article:

In the landmark The Death and Life of Great American Cities, Jacobs called out the folly of urban "improvement" projects that left city districts barren. (Who guessed that people liked to see their neighbors, and that vacant courtyards and hallways invited crime?) In the same way, her 1984 book, Cities and the Wealth of Nations, zeroes in on how well-intended subsidies can deplete growth and block innovation. Wealth, she argues, is not merely a matter of assets but rather the capacity to 1) engage those assets in production and 2) adapt to changing circumstances and needs.

In other words, the most successful communities are the ones that make the maximum use of their strengths while remaining nimble enough to react to a fast-changing, global economy. Today towns build massive amounts of infrastructure to induce new development. They do this while their existing infrastructure is underutilized and deteriorating. The current mindset also leads towns to seek the big payoff, as I discussed Monday (as New London did with Pfizer). Towns are ever tempted to tie their future to a big entity, diminishing their ability to change and respond to the market (just ask all those towns that were former "winners" with GM factories now closing).

The key is not "chasing smokestacks" but organically growing businesses, a process that Jacobs refers to as "import-replacement". Import-replacement is an incredibly powerful concept where locals constantly seek to provide for themselves the things they currently bring in (import) from outside the community. In Cities and the Wealth of Nations, Jacobs used an example of how one Japanese town grew over time from bicycle repair to large-scale manufacturing and exporting of bikes, all organically and all with very real, very positive secondary and tertiary impacts on the local economy. Judith Schwartz, author of the article, had her own example:

For example, much of New England, where I live, is rich in hardwood forest. But there is no large-scale furniture manufacturing here. Aside from what a few artisans produce for a mostly upscale market, it's imported: Our tables, chairs and bed frames are made from fast-growing trees in Southeast Asia, shipped over and stained to look like oak, maple or cherry. If made here, we'd no longer be dependent on furniture from elsewhere; workers here would apply their own innovations to create their own products and techniques and we'd have more products to trade with other places.

This process, replicated over and over and on a large or small scale, invigorates the economy. Workers gain skills, capital gets invested in new equipment, trading partners emerge, consumer taste gets more sophisticated, etc.

In some of the small towns we work in, I will often use the example of getting a haircut. Everyone needs one, but some towns are too small to support a full-time barber or beautician. Instead of giving up and having everyone drive to the nearby, larger town (and do their shopping while they are there), perhaps there could be a way the local community could support a barber or beautician just one day a week. Keep that money in town, along with the secondary spending that accompanies the trip to the barber (stop at the coffee shop, gas station, etc...) and over time it grows more demand. 

This is not sexy stuff. And nobody is going to get rich quick with this approach. But it is realistically within the grasp of any town and, better yet, it is financially sustainable over the long-term.

"Jacobs pointed out that to boost an area's economy, the normal plan is to bring in a branch of some big business. But then you have an industry without roots. They're not using local accountants and local printers," says Susan Witt, executive director of the E.F. Schumacher Society in Great Barrington, Mass., which, since its inception in 1980, maintained a close working relationship with Jane Jacobs. "It's through those roots that you get the economic multiplier effect of small businesses. And a branch or factory based elsewhere can leave as easily as it arrived."

It is those subtle little things - like using "local accountants and printers" - that adds up to real returns. We don't gratuitously bash Wal-Mart and other big box brokers here at Strong Towns, but they are the easiest example to frame this particular discussion. I see communities all the time bending over backwards to accommodate these out-of-town big boxers as job-creating saviors. In the end, the locals get mostly low-paying jobs while the real professional work is shopped out to "corporate" in some other city. That approach does not empower a community.

What empowers a community is real, sustainable growth. This is true even when - especially when - that growth is merely incremental over time. It does not require new infrastructure investments. It does not require massive subsidies. It simply requires a Strong Towns approach - look at your assets, see where you can do more with what you have and develop a framework to create the opportunities that will make it happen.

So, if this is so easy - just work together to apply some good old-fashioned American ingenuity (Jacobs was Canadian, but close enough) - why don't more cities embrace this approach? The reason is as predictable as it is tragic in the era of large-government solutions to neighborhood problems. 

"The economic developers I speak to no longer even try to defend these subsidy strategies," [Michael] Shuman [of the Business Alliance for Local Living Economies] says. "They've run out of excuses except for the fact that the politicians like them. Politicians get more mileage from one big deal that brings 1,000 jobs than an entrepreneurship program that generates 10 jobs in 100 local businesses. Even when the rhetoric has shifted to the importance of local, in terms of where the money goes, it's still following an old and entirely discredited mode of economic development."

Why do we insist on spending ourselves into decline? It is perhaps the most frustrating part of American domestic policy today. We spend trillions trying to create prosperity, yet with each dollar we seem to be digging the hole deeper and deeper for ourselves. It is especially frustrating knowing that we seem unable to do it any other way.

As for the stimulus bill, Shuman says it has "the worst features of economic development on steroids. If in a typical year, millions [are] spent on pork, this year more than a trillion is spent on pork." Even if the stimulus package is a success, he says, the program "could have been more successful with less money if we had followed Jane Jacobs' ideas" of local resilience through import-replacement.

Spend less money. Grow more jobs. Build communities with prosperity that lasts.

Sounds like a Strong Towns type of approach.

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Some Brilliance from Brookings

On this off-day for the Strong Towns blog (we make it our goal to publish fresh content Mondays, Wednesdays and Fridays), I wanted to pass along a brilliant article written by Bruce Katz and Robert Puentes of the Brookings Institute. The piece, titled "Rethinking the way on infrastructure", is practically a manifesto on the Strong Towns approach. We highly recommend you take a couple minutes and read this piece over.

And to ensure our investments are opportunity-rich they can no longer subsidize the excessive decentralization of people and jobs.  Sprawl has a sticker shock. Household spending on transportation has risen across the board and is now the second largest expense for most American households, eating up 19 cents out of every dollar. Utilities such as electricity and natural gas consume 7 percent but are a disproportionately larger burden for low-income families.

So at the precise time that the nation desperately needs to prioritize its limited resources, the federal response has been mostly to keep throwing money at the problem, without any meaningful attempt to update our policies to the realities of today.

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Kelo, Pfizer and Economic Development

Four years ago the United States Supreme Court ruled in favor of the City of New London, Connecticut, in a controversial case brought by Susette Kelo and some of her neighbors over the extent of the power of eminent domain. By ruling that New London had the right to condemn Ms. Kelo's property in the name of economic development, the Court set off a predictable reaction amongst lawmakers who were incensed at the notion that the government had the power to take private property for such a cause. What the political knee-jerk overshadowed was a rational discussion of just how ridiculous the New London approach was from an economic standpoint.

There is a reason that discussion did not take place. New London, population roughly 26,000, was doing what almost all towns do to one degree or another: they were chasing the big payoff. They were putting all their chips on the table - including the social capital of their community - in search of one big-time jobs and tax base jackpot. In this case, New London was wooing Pfizer, a pharmaceutical company. Not only were they willing to condemn property, level neighborhoods and install infrastructure, but the deal included millions of dollars of tax subsidies. Sans the heavy-handed condemnation, this is the stuff that towns do all the time. From the NY Times:

Economic development officials in Connecticut used that [Pfizer development] plan — and a package of financial incentives — to lure Pfizer to build a headquarters for its research division on 26 acres nearby. With an agreement that it would pay just one-fifth of its property taxes for the first 10 years, Pfizer spent $294 million on a 750,000-square-foot complex that opened in 2001.

We can look in retrospect at the folly of this adventure as Pfizer has now announced that they are pulling out of New London. As a cost-cutting measure, they are moving the jobs to the nearby city of Groton, Connecticut. 

“Basically, our economy lost a thousand jobs, but we still have a building,” [councilor] Mr. [Robert] Pero said. 

Optimism or delusion?

The problem here is not that Pfizer moved out. The problem is that New London embarked on a speculative strategy of growth-inducement that was destined to fail. Putting so much of their efforts, focus and capital into this one gigantic undertaking, they ultimately attempted to lure a facility that was not well matched for the community. How do we know that? Well, if New London was the perfect fit for Pfzer, then why was all the subsidy, condemnation and massive infrastructure improvements necessary to make the deal work? And why have they moved out now?

"Professionals" involved in traditional economic development would call that last statement naive. "Come on, Chuck," they would say. "This is what you do to land the deal. You can't really expect us to walk away from all those jobs?"

"What jobs," is my response.

That is not a cheap shot made after-the-fact. Go around the country and look at places where towns give huge incentives and build massive amounts of infrastructure to dislocate businesses. The new locations typically are geographically less advantageous, but short-term are financially lucrative. How many of these ventures are sustained for a generation or more?

And the problem doesn't only arise when these schemes fail. For every city that lands the big fish, there are countless others that spend their energies, hopes and capital trying to do the same, yet come up empty. I don't have any firm numbers to analyze the degree of failure from this approach, although each day seems to bring more and more examples. Ponder all of the towns you know and see if you can put them into one of these categories:

1. Those that have spent the money on infrastructure, given the subsidy to new businesses and had it result in decades of prosperity (sustained growth, lower taxes, increased opportunities) for their community.
2. Those that have spent the money on infrastructure, given the subsidy to new businesses and had it result in some near-term growth, but long-term experienced stagnation or decline.
3. Those that have spent the money on infrastructure, given the subsidy to new businesses and gotten nothing for it.
4. Those that have spent their time looking for a chance to spend the money on infrastructure and give the subsidy but have not had that opportunity present itself.

My experience tells me that almost all towns would fall into one of the last two categories. There are a countless number of communities that have built infrastructure to induce growth and gotten little or no return on that investment. There are even more that are paralyzed economically waiting for the chance to play this game.

If all we know how to do in terms of economic development is build more infrastructure and give more tax subsidy, yet we clearly see that this has failed to lower taxes, grow jobs and provide prosperity to most towns, what do we do?

I'll try and answer that question, and more, in my posting this Wednesday.

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