For the answers, read Boom Towns by Loyola University Maryland economics professor Stephen Walters. Based on his years of study of cities, he concludes that the key to a successful city is to protect property rights and otherwise leave people alone. “The record is clear,” he writes, “cities grow and prosper when they encourage the formation of capital in its many forms by securing the returns that flow from it.”
What causes cities to go into decline is equally clear: it happens when government stops protecting property rights. People and capital don’t stay where they are poorly treated. Walters strongly argues his thesis with cases showing the various ways politicians—often in league with private interests—have turned growth into decay.
Probably the most widespread threat to a city’s continuing success is redistributive taxation. Accumulated wealth in the hands of business people and professionals is a tempting target for politicians who figure they’ll gain far more votes than they’ll lose by imposing high property taxes. The wealthy owners will have no choice but to pay and the increased revenues can be used for projects and programs most of the voters like. These programs can also help to buy favor with important interest groups.
Boston and San Francisco / One of America’s most notorious practitioners of the redistributive strategy was Boston mayor Michael Curley, who governed the city for four nonconsecutive terms (between terms in Congress, the governor’s mansion, and prison) between 1914 and 1950. The masses adored this “man of the people” who kept increasing property taxes on the rich, but few could see the slow-motion deterioration of the city produced by his redistributive policies. High taxes repelled new investment and even maintenance of the existing capital. The population began to decline, as did the median income. Curley’s political success came at the price of setting his city on a downward spiral.
Boston kept sinking until Massachusetts voters enacted a property tax limitation measure, Proposition 2.5, in 1980. The measure had been frantically opposed by both city and state politicians because they were certain that tax limits would “starve” the city. But instead of starving Boston, Prop 2.5 breathed life into it. Ambitious people and investment quickly returned.
Walters emphasizes that Boston’s revival didn’t occur because politicians had solved any of the usual problems that are blamed for urban decay: racism, poor education, crime, and so on. All that changed was a tax limitation measure that kept Boston from strangling itself with high taxes.
Is that a unique case? No; the same scenario has played out in quite a few other cities and San Francisco is a good example. “Progressive” politicians there had played the same redistributive game as Curley in Boston, with the same results. By the 1970s, San Francisco was a dysfunctional mess, mainly because of militant unions that kept striking for higher pay, which the politicians funded with higher taxes.
But in 1978 California voters passed Proposition 13, despite California liberals’ declaration that it would be utterly ruinous. Almost immediately, capital began flowing back into San Francisco and other cities in the state. As Walters writes, “Prop. 13 increased the return on investments and protected [investors] against further Robin Hood raids.” As with Boston, San Francisco’s revival had nothing to do with the discovery of “solutions” to any of the presumed causes of urban decay.
Baltimore and Detroit / Baltimore serves as an instructive case for precisely the opposite reason. It’s a city where there has never been a reduction in taxes. For decades, city leaders have placed their bets on big, splashy government-led projects to revive it, but those “investments” have been failures.
Walters writes about one of them, the Charles Center development: “Upon its completion in the early 1960s, press coverage was adulatory and opinion leaders praised those behind the thirty-three-acre project for their good intentions, brilliant vision, bold artistic sense, and deft political touch.” Over the decades, city officials kept pouring money into similar “renaissance” projects, but “few noticed that [Charles Center] is actually a failure both within its borders and beyond them.”
Because of the high-tax, government-centered philosophy that has held sway in Baltimore (and the state of Maryland), most of the city is decaying. Instead of encouraging small capital investments that really would radiate jobs and prosperity, city officials have tried to use big government as a catalyst, and failed. Baltimore’s unhappy experience strongly supports Walters’ overarching point that cities do well when spontaneous, bottom-up development is not discouraged and they do poorly when politically planned, top-down development takes over.
Redistributive taxation isn’t the only way that cities turn against the sources of prosperity. Another is to embrace the union movement, whose short-sighted actions siphon away a large portion of the return to invested capital and thereby set in motion private responses that slowly de-capitalize a city to the detriment of nearly everyone.
Detroit is, of course, the prime example. Walters gives readers an intriguing history of the city that became the center of the auto industry. It grew at a dazzling pace from 1900 to 1950, by which time it was the nation’s fourth-largest city, boasting a median family income second only to Chicago. A true boom town, the good wages available in its many industries attracted people of all races.
During Detroit’s fabulous growth, unions represented no more than 10 percent of the workers in the city’s many factories—a strong refutation to the frequently made claim that unions created America’s middle class. But that was in the days when unions were treated no differently than other voluntary organizations under the law. That changed with the enactment of the National Labor Relations Act in 1935 (upheld against constitutional challenge by the Supreme Court in 1937).
The United Auto Workers promptly used their muscle to organize General Motors and Chrysler in 1937; Ford held out until 1941. (Walters provides the intriguing back-story on the reason for Henry Ford’s capitulation.) Unionism now seemed to be an easy way for workers to get higher wages and it spread rapidly.
For decades, Baltimore leaders have bet on big, splashy, government-led projects to revive the city, but their “investments” have been failures.
The long-run effect of the alliance between unions and politicians was similar to high tax rates. Investors stopped putting money where the returns were expropriated. Between 1947 and 1958, manufacturing employment fell by 40 percent; Detroit went into a tailspin from which it has never recovered. Although Walters does not cite the work of economist W. H. Hutt (his 1973 book The Strike-Threat System [Arlington House] in particular), his argument dovetails with Hutt’s that unions can only exploit capital in the short-run, after which it departs for greener pastures. Detroit is proof of that.
Inviting signals / Walters includes an analysis of the effects of right-to-work laws. He argues that they mainly are a signal to businesses that they will find a welcoming climate. States that allow compulsory unionism hurt their cities’ ability to compete for investment by sending the opposite signal. I think he’s correct.
By themselves, right-to-work laws don’t change matters much. They can’t forbid unionization, but only allow workers to refuse to pay union dues. That doesn’t save companies any money and costs the unions only a little at the margin. But the right-to-work law is a signal that public policy is not dominated by the redistributionists, and that is a very important signal.
Speaking of signals, a bad one that cities can send is that they are willing to use eminent domain to seize property from homeowners and small businesses, and redistribute that land to big companies. Walters writes that there has been a “hundred-year war” between eminent domain and private property, with private property constantly in retreat. When cities play that game, he writes, “The mere threat of such takings will have a chilling effect on private owners’ plans to upgrade residences and businesses in areas targeted for ‘rescue’ by planners.” Also, eminent domain–based development tends to misallocate capital because it distorts price signals and substitutes the tastes of the planners for those of market participants.
Another way cities can damage themselves is by caving in to “green” interests. Portland, Ore., is the best illustration, with its Urban Growth Boundary. The rationale behind the meddlesome law is that saving space for nature is so important that the city’s growth has to be walled in. The consequences might please the environmentalists, but affordable housing for lower-income families has disappeared.
Boom Towns is full of helpful ideas for officials who would rather preside over a growing, increasingly prosperous city than one they could milk for short-run political benefits. For example, Walters focuses on the pro-competition, pro-market policies implemented by a line of mayors in Indianapolis, which is one of America’s most successful big cities.
Urban theorists in the “progressive” tradition insist that the problems that plague our cities can only be solved through massive infusions of government money and expert planning. Walters’ book persuasively makes the opposite case: protect people’s property rights, then leave things to the spontaneous order of the free market.
