Essays on People, Place & Purpose

Investing in What Works for America's Communities

Rules, Not Resources

by Mark Calabria

Community development policy, at least at the federal level, has continued to approach poverty as if it were the result of a lack of resources: if communities are poor, give them income, and if infrastructure is lacking, have higher levels of government fund more of it. Here, by contrast, I take the approach that the fundamental problem facing poor communities in America is poor governance and not a lack of resources. In other words, the existing resources available to community development would be more than enough to revitalize struggling communities across the country if local governments were run better, allowing the market to work more efficiently to provide the goods and services communities need.

The existing framework of community development programs focuses more on the redistribution of wealth, rather than wealth creation. Yet we have examples of some cities that have shifted their emphasis toward responsible management and away from redistribution. These cities have witnessed some renaissance, while those that have continued to function largely as transfer states have fallen behind.

There is a tendency in American politics to associate governmental redistribution of wealth with transfers from the wealthy to the poor. That happens sometimes (e.g., the Earned Income Tax Credit), but too often temporary majorities transfer wealth to themselves from temporary minorities. In the parlance of economics and political science, the concern of this essay is with redistribution that is “rent-seeking” rather than the provision of a social safety net.1 Not to be confused with “rents” in the housing sense, rent-seeking is comprised of expending resources to capture wealth rather than create wealth. Examples could include activities intended to influence government officials (lobbying) or limiting the access of occupations or other lines of business in order to create monopoly “rents.” And the sums of government funds that are subject to rent-seeking are massive. Consider that the budget of the U.S. Department of Housing and Urban Development (HUD) has totaled more than $1 trillion over the nearly 50-year life of the agency (nominal dollars). That’s enough to have purchased outright more than one-third of the existing rental stock in the country.

The point of the preceding is not to argue that federal community development and housing funding have been well-spent or that such subsidies have even flowed thorough to their ultimate intended recipients, but to show that we have expended a tremendous amount of resources toward this effort with, at best, questionable results. Given these staggering amounts, the burden of proof should rest on those who advocate for even more spending.

BEYOND MAJORITARIAN POLITICS

Despite a long history of urban scandals and corruption,2 community development continues as largely an engineering exercise to some. Once the right answer is properly formulated, good government only need implement it, the argument goes. What I claim here is that policy on the ground is rarely that clean and neat. It often involves political coalitions and special interests, jockeying for advantage.

To illuminate, one can conceive of local government as individuals, or coalitions, coming together to provide a basket of public goods, which could include a social safety net. The game matrix below, although highly stylized, displays the choice environment.

If both coalitions cooperate and choose action A, then social welfare is maximized. Collective action will have improved social well-being. In the context of local government, this would represent a situation in which public officials provide a high-quality bundle of services in a nondiscriminatory manner at a reasonable cost. All citizens, or in the game matrix members of both coalitions I and II, have equal and fair access to locally provided public goods.

The problem is that the outcome of both coalitions choosing action A is not a stable situation (or “Nash” equilibrium).3 One can think of each coalition taking a set turn at governing. Coalition I governs for one period, then coalition II governs the next, and so on. If both coalitions choose A, which we can call the “broader public interest” position, then social welfare is again maximized over time. The temptation, however, for a coalition to instead choose action B dominates the choice of action A. Think of B as using their term at governance to enrich members of their coalition at the expense of the public good. The out-of-power, or minority, coalition may still receive positive benefits, as illustrated in the payoff matrix, but now the distribution of public benefits is grossly unequal. When the other coalition gains control, its incentives are also to choose action B. Whereas action A was called the “broader public interest” choice, we can think of B as the “Tammany Hall” choice, where governing coalitions use power to enrich themselves at the expense of the out-coalitions.4

The above results could continue to hold even in the face of entrenched coalitions without turnover. For instance, throughout much of U.S. history, southern cities and states were governed for the benefit of white citizens, while African Americans were largely exploited in order to benefit the governing coalitions. If African Americans had not attained the ability to move out of the South or if external pressure had not been placed on the governing coalitions of the South, the off-diagonal outcome of (A, B) would likely have lasted considerably longer. Therefore, to generalize the game matrix, action B could be seen as either exit or exploit. One could also envision the opening up of governance in southern cities to African Americans as a belated recognition by the governing coalition that they were stuck in a (B, B) situation.

While all parties recognize that (A, A) is superior choice to (B, B), the incentives facing governing coalitions make (B, B) the only stable outcome. It is my contention that many declining or depressed American cities are essentially stuck in (B, B). The question facing citizens is how to move from (B, B) to (A, A) or in the parlance of Buchanan and Congleton, how to “eliminate the off-diagonals.”5 This is where the need for “rules” comes in.

CREATING A RULES-BASED GOVERNANCE THAT ALLOWS FOR GREATER EFFICIENCY AND LESS RENT-SEEKING

Rules can take a variety of forms, not all of which are embedded in written laws or constitutions. Attitudes, for example, can reflect the rules of social norms. While certainly changes in federal and state laws pushed the governance of southern cities to be more inclusive, attitudes also changed, which have also helped local governments move from (B, B) to something more closely resembling (A, A). Several northeastern cities, in particular New York, have moved away from coalitional redistribution and toward a more technocratic city manager model of governance. Examples such as New York’s Rudy Giuliani or Philadelphia’s Ed Rendell illustrate the trend. While such cities continue to engage in some degree of insider-outsider redistribution, greater emphasis toward providing broadly available and quality public goods has helped such cities move to a superior position.

Attitudes can and do change. The question becomes how to institute durable mechanisms that focus government toward the common good while reducing its use for coalitional advantage. In a general sense, one solution is to move toward reducing the scope of discretion on the part of local government. Consider real estate construction permits. Although most urban land is zoned for one use or another, such use is rarely by right. That is, even if land is zoned “multifamily,” a proposed apartment complex still must run a maze of regulatory approvals, most of which are characterized by considerable discretion. Such discretion, besides adding considerable cost to developments, also opens up government to the coalitional redistribution discussed above. Approvals may only come after political donations or payoffs to various constituencies of the governing coalition. To increase the value of such regulatory discretion, governments would rationally choose to limit the supply of such approvals as well. In addition to leading to greater levels of corruption, such a structure also reduces the supply of goods and services available to residents of the community. Similar schemes are evident in other locally licensed businesses, from taxicabs to hair salons.

Reducing discriminatory treatment of businesses and potential businesses would be a significant first step in moving local government away from the Tammany Hall outcome. Governments should also embrace a variety of mechanisms that would reduce coalitional redistribution in the domain of individual citizens. In regard to taxation, and regardless of the base rate, local governments can institute single flat taxes with few, if any, exemptions or deductions. The same would hold for property taxes. For instance, property taxes on rentals tend to be higher than for single-family homes in many cities, with little evidence that renters consume a greater share of public goods. The likely rationale lies in homeowners’ greater propensity to vote and the varying transparency in taxation between rental and owner-occupied units.6 Similar uniformity would hold across property types, whether residential, industrial, or commercial.

No discrimination is likely easier to achieve on both the taxation and regulatory sides of government than on the benefits side only. Issuance of permits and differences in tax rates are generally observable and verifiable, whereas differences in the provision of public goods may be more subjective. Nevertheless, provisions should be implemented that minimize varied public good provision among residents. This would minimize the ability to use public goods as hidden transfers to members of the governing coalition. Local public goods should be available to all members of the community, even if such goods are provided neighborhood by neighborhood. Separate will never be equal. Public goods should also be limited to those goods that actually are public in nature. As a general rule, keeping government out of the provision of purely private goods would greatly reduce the potential for coalitional redistribution.

While few American cities truly embrace market delivery for public services and while every city likely suffers from some amount of public corruption, some of the biggest innovators have been cities that were once the poster-children for corruption. One of the biggest surprises has been Chicago under Mayor Rahm Emanuel.7 One of Mayor Emanuel’s steps in the direction of market-based delivery has been changing the city’s Blue Cart recycling program into one of “managed competition.” Under this system, the city is divided into six service areas. Private companies manage four of those areas while public employees manage the other two. By injecting some degree of competition into the provision of public services, Chicago can reduce costs while also minimizing the temptation to use public services as a hidden transfer to specific interests, such as city employees. While monitoring these contracts will be critical, the differing contract pricing of numerous providers offers an important benchmark of cost. These efforts build on earlier steps by Mayor Emanuel’s immediate predecessor, such as the privatization of Chicago’s parking meters.

Reducing discriminatory and discretionary provision of local public goods also helps to increase both a community’s wealth and level of innovation. Instead of resources, including human capital, being used simply for the capture of existing wealth, those resources can be used to create new wealth. Not having to run the maze at City Hall in order to get a building permit or business license is time that can instead be spent on running a business. Money not spent on lawyers and lobbyists is money that is invested back into the community, and done in a way that increases the productivity of workers in the community, ultimately increasing wealth. Reducing political discretion also allows workers and entrepreneurs to devote their efforts to activities where they have a comparative advantage. It is a sad reflection of the residential construction industry that so many developers are lawyers by training, the result of the highly politicized atmosphere surrounding real estate.

Minimizing opportunities for corruption at the local level can also increase the level of investment and ultimately wealth in the community. Researchers have found, unsurprisingly, that greater corruption reduces investment, partly by acting as a tax on investment but also by increasing uncertainty.8 One of the most important areas of local government regulation is the entry of new business, particularly via the issuance of new business licensing. The more difficult it is for new businesses to start, the lower will be both wealth and employment in a community. When looking at data across countries, researchers from Harvard, Yale, and the World Bank found that countries with greater regulation of new business entry have higher corruption but do not have better quality of public or private goods.9 Countries with more democratic and limited governments have less regulation of entry and accordingly higher quality public and private goods. The same is expected to hold across American cities. Places that make it easier to start a business, particularly by removing the political discretion surrounding the granting of new business licenses, are likely to see greater growth, more opportunity, and less corruption. Areas such as taxicab licenses, restaurants, and beauty salons can offer tremendous opportunities for entrepreneurship by low- and moderate-income individuals if those industries had lower barriers to entry.

WHY CAN’T POLITICS SOLVE DISCRIMINATORY GOVERNMENT?

The general approach to limiting coalitional redistribution, at least in the community development context, has been to institute mechanisms that include a greater share of the community in political decision making. Initial efforts also focused on reducing the influence of “politics” and instead having “experts” drive urban policy. Whatever the direction taken, urban reformers have long recognized that coalitional redistribution, or “machine politics,” came at a considerable cost to the community.10

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