Essays on People, Place & Purpose

Investing in What Works for America's Communities

Rules, Not Resources

by Mark Calabria

Federal housing and community development statutes are littered with various requirements for community input into how state and local governments will use federal dollars. For instance, Section 104 of the Housing and Community Development Act of 1974, which governs the community development block grant (CDBG) program, requires grantees to prepare “a final statement of community development objectives and projected use of funds” and to make that statement available to the public. In addition, grantees are required to hold public hearings and take public comment on the statement. Grantees, in some instances, must also develop a “detailed citizen participant plan,” which may provide technical assistance to “groups representative of persons of low and moderate income” so that said groups are able to participate. Clearly, there are multiple opportunities for “citizen participation” in federal housing and community development programs.

Despite these multiple opportunities to offer input, there is little evidence of widespread participation. Of course, participation increases when there is a reasonable probability that government will be responsive. Otherwise, the citizen investment required is likely to be prohibitive.11

Regardless of the desired impact of the regulatory language and requirements for greater participation and accountability, it is likely that those with the largest financial interests in the proposed projects will dominate community participation. A review of community participation efforts in economic development conducted by the World Bank found that:

Projects that rely on community participation have not been particularly effective at targeting the poor. There is some evidence that such projects create effective community infrastructure, but not a single study establishes a causal relationship between any outcome and participatory elements of a community-based development project. Most such projects are dominated by elites, and both targeting and project quality tend to be markedly worse in more unequal communities.12

Early research on the impact of the CDBG program has also found that the “elite” drove community participation in the planning process.13 In fact, there is some evidence that urban governments in the United States have reduced the quality of public services in order to encourage specific segments of the population to move out of the city, with the intent of solidifying political control.14 Even when local elites feel they have the best interests of the local community in mind, those trade-offs might not reflect the desires of those most in need. For instance, Matthew Kahn has found that California cities that are more liberal approve fewer housing permits, all else equal, including income.15 While elites may place more value on an additional dog park or open spaces in which to play Frisbee golf, it is far from obvious that these uses of space are more valuable than, say, the provision of additional market-rate housing.

INFORMATION, THE MARKET, AND PUBLIC POLICY

While determining who benefits is certainly critical with any public policy, and federal development programs have had, at best, mixed results, a more important question with respect to the long-run health of a community is how is knowledge incorporated into policy.

From the 1930s until the 1970s, community development was largely top-down and expert-driven. Perhaps the best-known and worst-case example is Robert Moses’ remaking of New York City and the surrounding environs. Robert Caro’s masterful narrative of Moses in The Power Broker leaves one both impressed at the feats accomplished and horrified at the lack of accountability and transparency, not to mention the destruction of vibrant neighborhoods in the name of urban renewal. Such was the horror that Jane Jacobs was motivated both to protect her own neighborhood from Moses’s path and to start writing what eventually became The Death and Life of Great American Cities.

Popular writers and community activists were not the only ones to spot the failure of this top-down model of community development. Academics began to argue for “collaborative planning”16 and “communicative action”17 to correct the imbalance between the experts and the communities affected. The emphasis of these theorists was the use of citizen participation as a method to convey information to professional planners. Their proposed method was public discourse and debate, hence the increased calls for public hearings, along with the requirement that comprehensive plans be subject to notice and comment.

The limit of increased citizen participation is, however, that some knowledge cannot be communicated via testimony, comment, and debate.18 As Nobel laureate F.A. Hayek observed, it is only the price system, embedded in a general system of private property, that is able to convey the subjective value judgments of numerous individuals into a simple and easy-to-understand measure.19 Without the guidance of market prices based on relative scarcity, a community that must allocate its available resources to competing demands has little guidance, other than politics, on what it should prioritize. Determining which public goods should be produced—for example, a park versus a pool— is an arbitrary decision without knowing what the community values more. Given the evidence that the citizen participation process is often captured by elites, or the governing coalition, we clearly need market-based mechanisms instead. These would allow all community members to make their subjective value judgments count as well as reduce the ability to discriminate in providing public goods.

Even if citizen participation could functionally convey all relevant information, such a process depends on all necessary knowledge actually being known ahead of the decision. As Hayek20 and fellow Nobel laureate James Buchanan21 have emphasized, the market process is not simply one of allocation, but also of discovery. Economic development is not an engineering problem, where one just adds more investment to X or allocates more capital to Y. The appropriate variables and their optimal quantities and combinations are simply not knowable ahead of time and must be discovered via trial and error, a process not particularly amenable to any sort of government intervention.

While it is difficult (if not impossible) to know the optimal amount of community development funding that should be spent annually on new activities, such an amount could serve as a useful proxy for the ability of local governments to respond to changing community circumstances. It is unlikely that a community faces the exact same set of needs from one year to the next, and this is even more unlikely over the course of several years. Even if this were the case, it is more unlikely still that a community would place the exact same relative priorities on these needs over time. Despite all these facts, what little evidence we have suggests a high degree of rigidity in spending over time. Typically, how a city spends its community development funds bears a strong resemblance to how it spent funds in the previous year, all the way down to the same projects. A group of researchers in Michigan examined the CDBG expenditures for a handful of Michigan communities over a five-year period and found it was quite rare for those subsidies to be used for new projects.22 Cities like Pontiac were representative, which spent 9 percent of its CDBG funding on new activities over five years. Some cities, such as Saginaw, spent even smaller shares, at 5 percent. Although these data are not conclusive, they do suggest that, even with extensive community participation requirements, local government community spending doesn’t adjust well to changing community needs or preferences.

It could be tempting to respond to such concerns with “so what?” Even if policies do not reflect the preferences of the overall community, assist members most in need, or accurately reflect the community’s relative needs, at least some good is being done, right? Community development and urban renewal programs of the 1950s and 1960s most likely did more harm than good, eliminating far more affordable housing than they created and destroying vibrant working-class neighborhoods. One could argue we have since learned our lesson: we include the communities in question, hold public hearings and, in general, no longer demolish large tracts of housing. Without a doubt, current community development programs are a major improvement over their predecessors.

That said, moving from truly harmful to perhaps less harmful public policy is hardly inspiring. Despite our having spent hundreds of billions (in excess of $120 billion for CDBG alone)— and as Eileen Norcross reminds us, “CDBG [having] awarded funds to the most depressed cities for over thirty years”—many of these same cities remain depressed. Norcross raises the possibility that “the steady and expected infusion of federal dollars may act as a ‘signal buffer’ in city governments, encouraging less efficient management of public dollars, or forestalling more significant policy reforms that might stimulate economic development.”23 This, I believe, is the real harm from federal community development programs: they insulate local governments from local accountability and hence reduce the pace of community learning and adaptation.

Some scholars have argued that earlier urban renewal and developments plans failed because they were actually too inclusive. Jon Teaford, for instance, claims that “the inclusiveness of urban renewal proved a weakness.”24 Teaford argues that, because the program goals were “ambiguous and ill-defined,” each interest could see the goals in its own desired light. Residents could demand more affordable housing, commercial developers and business leaders could envision new hotels and conference centers, while mayors and city council members could savor the prospect of new property tax revenues. While Teaford sees this broad inclusiveness as a fatal flaw, believing that a strong, centralized figure (such as Robert Moses) is needed, the true flaw is that a participatory process based on debate has no way of reconciling and comparing these competing demands. Even Teaford’s claimed successes were less than effective: Detroit’s Lafayette Park did not turn around Detroit’s population loss, as he himself recognizes.

Although the available evidence can be characterized as mixed, there is sufficient support for concluding that federal participatory requirements may have changed the composition of the governing coalition but have done little to change the nature of the game. In fact, the shift away from coalitional redistribution and toward an emphasis on the general welfare has occurred in an environment of both reduced federal support for cities and a reduced share of city expenditures on redistribution. In addition, the use of community participation, regardless of the composition of the governing coalition, still suffers from knowledge problems that plague any system of nonmarket allocation.

BEHIND THE GAME THEORY MATRIX

Although models by their nature are a simplification of reality, they do need to bear some resemblance to provide useful analysis. Is it realistic to believe that losses from rent-seeking can be so large as to push cities into decline? The late Mancur Olson provided substantial theoretical and empirical evidence that rent-seeking drives national decline.25 Several researchers have found fairly large negative effects on economic growth from rent-seeking activities. Estimates have been as high as 45 percent of economic output, certainly large enough to push communities into decline.26 Similar results have been found across U.S. states. For instance both the raw number of interest groups in a state and the number compared to the size of a state’s economy have large negative effects on state economic growth.27

Empirical results, however strong they may be, can fail to convince in the absence of a theory. The theory here is that community members invest resources into capturing existing resources from others, rather than investing in productive activities that would spur economic growth. In addition to rent-seeking representing a loss of community resources, it can also drive community members on the losing end to exit the community, further reducing the productive capacity of the community. Rent-seeking can also divert government resources away from physical capital investment and public services that could potentially boost long-term growth, and toward short-term consumption on the part of governing coalitions. Rent-seeking can also reduce growth by skewing the career choices of talented and creative individuals.28 Much has been made recently about the graduates seeking jobs on Wall Street rather than pursuing other activities that might contribute more to economic growth and community development. Similar patterns can be expected at the local level.

CONCLUSION

This essay has argued that many cities are essentially stuck in a bad political trap, where coalitional politics have reduced the overall pie. Moving toward a situation in which local governance fosters the general welfare will not be easy, but implementing rules that minimize, if not eliminate, discrimination across citizens, on both the tax and benefit sides of government, could help shift communities to a position that increases the total welfare of community members.


Endnotes

  1. The seminal works on rent-seeking are Anne Krueger, “The Political Economy of the Rent-Seeking Society,” American Economic Review 64 (3) (1974): 291–303; and Gordon Tullock, “The Welfare Costs of Tariffs, Monopolies, and Theft,” Western Economic Journal 5 (3) (1967): 224–232.
  2. For a recent example, see Abby Sewell and Jessica Garrison, “Corruption Can Leave Cities with Enormous Legal Bills,” Los Angeles Times, April 18, 2012, available at http://latimes.com/news/local/la-me-city-attorney-spending-20120418,0,1261390.story.
  3. John F. Nash, “Equilibrium Points in N-Person Games,” Proceedings of the National Academy of Sciences 36 (1) (1950): 48–49. See more generally Martin Osborne and Ariel Rubinstein, A Course in Game Theory (Cambridge, MA: MIT Press, 1994).
  4. The classic text on Tammany Hall is William Riordan, Plunkitt of Tammany Hall: A Series of Plain Talks on Very Practical Politics (New York: E.P. Dutton, 1963). See also Alfred Connable and Edward Silberfarb, Tigers of Tammany: Nine Men Who Ran New York (New York: Holt, Rinehart and Winston, 1967).
  5. James Buchanan and Roger Congleton, Politics by Principle, Not Interest: Toward Nondiscriminatory Democracy (Cambridge, UK: Cambridge University Press, 1998).
  6. See William Fischel, The Homevoter Hypothesis: How Home Values Influence Local Government Taxation, School Finance, and Land-Use Policies (Cambridge, MA: Harvard University Press 2005).
  7. Harris Kenny and Adam Summers, “Privatization and Public-Private Partnership Trends in Local Government.” Annual Privatization Report 2011 (Washington, DC: Reason Foundation, 2012).
  8. See Paolo Mauro, “Corruption and Growth,” Quarterly Journal of Economics 110 (3) (1995): 681–712.
  9. Simeon Djankov et al., “The Regulation of Entry,” Quarterly Journal of Economics 117 (1) (2002): 1–37.
  10. Early examples include Lincoln Steffens, The Shame of the Cities (Dover, UK: Dover Publications, 1904) and Harold Zink, City Bosses in the United States: A Study of Twenty Municipal Bosses (Durham, NC: Duke University Press, 1930). For more recent work in context of replacing politics with experts, see Kenneth Finegold, Experts and Politicians: Reform Challenges to Machine Politics in New York, Cleveland, and Chicago (Princeton, NJ: Princeton University Press, 1995).
  11. Samuel Paul, “Accountability in Public Services: Exit, Voice and Control,” World Development 20 (7) (1992): 1047–1060.
  12. Ghazala Mansuri and Vijayendra Rao, “Community-Based and -Driven Development: A Critical Review,” World Bank Research Observer 19 (1) (Spring 2004): 1–39.
  13. Donald E. Voth, “An Evaluation of Community Development Programs in Illinois,” Social Forces 53 (4) (1975): 635–647.
  14. Edward Glaeser and Andrei Schleifer, “The Curley Effect: The Economics of Shaping the Electorate,” Journal of Law, Economics, and Organizations 21 (2005): 1–19.
  15. Matthew Kahn, “Do Liberal Cities Limit New Housing Development? Evidence from California,” Journal of Urban Economics 69 (2) (March 2011): 223–228.
  16. See generally Patsy Healy, Collaborative Planning (London: Macmillian, 1997).
  17. Jurgen Habermas, The Theory of Communicative Action (Boston: Beacon Press, 1984).
  18. See generally Mark Pennington, “Citizen Participation, the ‘Knowledge Problem’ and Urban Land Use Planning: An Austrian Perspective on Institutional Choice,” Review of Austrian Economics 17 (2/3) (2004): 213–231.
  19. F.A. Hayek, “The Use of Knowledge in Society,” American Economic Review 35 (4) (1945): 519–530.
  20. F.A. Hayek, “Competition as a Discovery Procedure.” In New Studies in Politics, Economics and the History of Ideas, edited by F.A. Hayek (London: Routledge, 1978).
  21. James Buchanan and G. Vanberg, “The Market as a Creative Process,” Economics and Philosophy 7 (1991): 167–186.
  22. Raymond Rosenfeld et al., “Community Development Block Grant Spending Revisited: Patterns of Benefit and Program Institutionalization,” Publius 25 (4) (1995): 55–72.
  23. Eileen Norcross, The Community Development Block Grant: Does It Work? (Fairfax, VA: Mercatus Center, George Mason University, November 2007), available at http://mercatus.org/publication/community-development-block-grant-does-it-work.
  24. Jon Teaford, “Urban Renewal and Its Aftermath,” Housing Policy Debate 11 (2) (2000): 443–466.
  25. Mancur Olson, The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities (New Haven, CT: Yale University Press, 1982).
  26. David N. Laband and John P. Sophocleus, “The Social Cost of Rent-Seeking: First Estimates,” Public Choice 58 (3) (1988): 269–275; see also William Dougan, “The Cost of Rent Seeking: Is GNP Negative?” Journal of Political Economy 99 (3) (1991): 660–664; Kevin Murphy, Andrei Shleifer, and Robert W. Vishny, “Why Is Rent-Seeking So Costly to Growth?” American Economic Review 83 (2) (1993): 409–414.
  27. Ismail Cole and M. Arshad Chawdhry, “Rent Seeking and Economic Growth: Evidence from a Panel of U.S. States,” Cato Journal 22 (2) (2002).
  28. Kevin Murphy, Andrei Shleifer, and Robert W. Vishny, “The Allocation of Talent: Implications for Growth,” Quarterly Journal of Economics 106 (2) (1991): 503–530.

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