FROM ISSUE NUMBER 24 ~ SUMMER 2015 GO TO TABLE OF CONTENTS
An Urban Agenda for the Right
If you're measuring by the square mile, most of the United States is red, electorally speaking. But as population density rises, the political landscape becomes more purple, and urban centers have long been solidly blue. In fact, in many cities, the real election is the Democratic primary, not the general election, which is not much more than a victory lap for the nominee. It's no surprise that Rick Snyder, now the Republican governor of Michigan, was told when he was campaigning in heavily Democratic Detroit that he was wasting his time.
Republicans have survived by winning rural areas and doing well enough in the exurbs and suburbs (while picking up a handful of votes in the cities) to win elections. But the result of this electoral reality is that Republicans rarely control the levers of power in some of the areas with the most people and greatest economic vitality. Of the ten biggest cities in the United States, only one has a Republican mayor — and he was elected only after his predecessor resigned amid allegations of sexual harassment. The institutions shaped by the government in these areas are, far more often than not, shaped by progressive Democrats and their ideological preferences and priorities.
The reasons for this state of affairs are not hard to see. A half-century ago, crime drove many white middle-class families out of urban areas, leaving poorer minorities, who typically vote Democratic, in urban cores. Long before that, union machines centered in big cities favored pro-labor politicians. And younger, more liberal college grads have always been drawn to the pleasures of high-density urban life — while new families flee to the suburbs in search of space to rear their children.
As a result of decades of Democratic governance and misplaced priorities, however, American cities do not offer the opportunities for success and growth that they should, especially for those looking to climb the socio-economic ladder. In many cases, city governments are utterly dysfunctional. And the reason for this dysfunction is that our cities are too often closed — closed to businesses and closed to outsiders. For the middle class and those striving to make it up the ladder, the taxes, housing, and other costs leave cities simply too expensive to afford — especially with a family. Excessive regulation makes it difficult, if not downright impossible, to get the permits necessary to start a business. Cronyism and a lack of transparency make it difficult to know whether anyone is trying to fix the situation. The reality is that American cities — with their insufficient affordability and poor governance — suffer from a profound lack of opportunity and a surplus of problems.
There is no good reason for cities to remain this way. Their problems — expensive housing, costly regulations, crony governance — call out for the policies that conservatives should and often do champion. A city that focuses on stable and open governance, clear and simple regulation, and livability is a city primed for both economic and social success, open to all newcomers and closed to none. America's urban areas, in other words, are ready for conservatives to step up with the solutions to their problems. The result would be not just a revival of cities, but a strengthening of conservatism in America, too. The lack of opportunity in America's cities is itself an enormous opportunity for conservatives who are willing to make their case to urban voters.
AN URBAN ADDRESS
Ryan Avent points out in his e-book, The Gated City, that "the best opportunities are found in one place, and for some reason Americans are opting to live in another." The reason is simple: Life in urban America has become unaffordable, and housing costs are the greatest and most visible part of this problem. At least 90 American cities have median rents exceeding 30% of median incomes, the Department of Housing and Urban Development's standard measure of affordability. Meanwhile, Jed Kolko of Trulia found that in 20 of America's 100 largest metro areas, more than half of homes are priced out of reach of the middle class. Living in the city means sacrificing most of a family's earned income and capital simply for the privilege of living there — a situation more akin to shackling oneself to the economic ladder than climbing up it.
San Francisco, in particular, stands out for its astronomical cost of living. Real housing prices increased by 385% from 1970 to 2010, while real wages rose only 38% during that same period. The city's median rent for a one-bedroom apartment was scraping $3,400 per month as of late 2014; median home prices now reach $1 million. Despite these shocking numbers, it's not hard to see why prices are so high. Housing stock grew by just 8.8% in San Francisco and barely 4% in nearby San Mateo County between 2000 and 2010. During this same time period — the decade that included the Great Recession's housing collapse — the national housing stock rose 13.6%.
The problem in San Francisco is regulation. The city mandates a strict review process for each new development and has relatively strict limits on new square-footage allowed each year, as well as minimum parking requirements for each new development. Though the city is a tenth the size of New York, San Francisco's planning department reviews nearly four times the number of projects that New York's does, taking an average of four years for each review. The standards by which projects are judged are opaque, onerous, and frequently subject to change, based more on whim than law. It's no mystery why housing growth is so limited — and rents are so high. Roughly half the price of any given housing unit in San Francisco can be attributed to land-use restrictions.
While San Francisco's situation may be extreme, many other major cities, particularly on the coasts, are following in its footsteps: choking the supply of housing as prices soar and potential new residents balk, despite the employment opportunities and prosperity on offer. One of the best examples of this tendency is New York City's rent-control policy, which prevents apartment owners from realizing the full value of their property when renting it. This heavy-handed regulation discourages new building, which could help lower the cost of rent by increasing the number of properties competing for renters.
America's Sun Belt cities absorb many of those who can't afford to live elsewhere, and they do so by allowing a flexible market for housing so that supply can better meet demand. Yet even cities with cheaper housing, such as Houston or Phoenix, are undergoing a "great inversion," where suburbs retain their affordability while losing their prosperity. The Costco middle class and the Dollar Store poor live there, and while their incomes do not reach the stratospheric potential they might hope for in the city, they are good enough to sustain a family when the low cost of living is taken into account. Meanwhile, downtowns increasingly consist of single people with disposable incomes, mostly the young and skilled, along with a smattering of wealthy empty-nesters. The poor cluster in hardened enclaves of entrenched poverty, unable to escape.
The great tragedy of segregating the poor and middle class goes beyond its simple injustice to the heart of why cities matter to the economy. Cities are complex engines of capitalism that increase in power the denser they are. A doubling of density corresponds to productivity gains of up to 10%. Variations in density alone can account for more than half of the productivity differences among states. Wages are also significantly higher in denser areas. These differences have been enhanced by the advent of the knowledge economy. Every new tech-industry job generates five more jobs locally, according to research by Enrico Morretti. Those who are deflected from living in prosperous metro areas by the cost of housing and other essentials are losing out, then, on the increased productivity and possibilities for mobility that can come with living in a dense urban center.
The Bay Area yet again provides a dramatic example of the social costs of this reality. The Bay Area is light years ahead of the rest of the country in terms of productivity. Among urban areas, it also enjoys one of the highest rates of intergenerational mobility in the country; that is, kids in the Bay Area have a better shot of getting ahead than their parents did. Much of the credit should go to the incredible technological advances produced by the region's bright minds. They in turn benefit from living in a dynamic cluster of like-minded people whose proximity to each other helps create an environment where innovative ideas are simply in the air they breathe.
With a technology-driven boom in one of the most desirable metro areas in America, people should be flocking to San Francisco. Yet population growth continues to disappoint in the Bay Area — indeed, before the Great Recession, residents were fleeing at the rate of 85,000 per year — while populations were exploding in the increasingly far-flung suburbs and in the Sun Belt cities.
The Bay Area is not alone. Along with Boston, New York, and Washington, D.C., these four metro areas lost nearly 3 million people on net between 2000 and 2009 — even as cities became increasingly fashionable places to live. Meanwhile, the ten largest destinations for internal migration in the U.S. absorbed more than 3 million new residents. In these cities, the average newcomer found his wages to be 25% lower than at the job he left behind.
Given all this, it will not come as a surprise that the densest, most productive cities are experiencing rises in wealth together with the slowest population growth. As Avent notes in The Gated City, "America has made its most productive locations ever less accessible."
FIGHTING CITY HALL
It is not only a lack of affordable housing that robs the middle class of the chance to pursue life in the largest cities. Some of the same problems that plague the housing market — onerous regulations that limit opportunity — also plague the entrepreneurs that drive cities' economies. And just as housing regulations protect residents who already live in or own property in the city, business regulations protect entrenched interests.
Permits and regulations quickly pile up for small-business owners who are not connected enough to bypass the bureaucracy. The cumulative weight of these regulations imposes enormous costs on businesses and residents, and it often snuffs out the entrepreneurial dynamism that drives cities' economies. To be sure, most city regulations grew out of legitimate concerns, such as ensuring food is safe and community resources are managed properly. But all too often, as time goes on and new issues must be addressed, the old rules are not modified to cover new concerns; instead, regulations are allowed to mount, making it difficult to navigate the city's regulatory system.
Until 2012, for example, there were 13 definitions of what constituted eating and drinking in San Francisco's Planning Code. In practice, this meant that questions such as "will your ice cream be served in a cup or a cone" assumed great importance for determining what type of establishment you owned in the eyes of the city — and thus what further combination of permitting requirements applied. It is this kind of impenetrable web of regulations that makes government so complex, inefficient, and costly, creating an environment in which only the wealthy or those with connections are able to take advantage of the opportunities in urban America.
Discovering how most American cities function is surprisingly difficult. Transparency is not often a byword for city government. City leaders are rarely open about their systems or processes. While six of America's ten largest cities have open data policies, their implementation leaves much to be desired. Finding out the status of a small-business permitting application, for instance, is hopelessly complex, let alone obtaining city-wide data on just how long the process can take from start to finish when accounting for all the necessary applications.
And such open data policies do not even include the unofficial obligations, like those that push applicants for soccer fields in San Francisco to obtain sign-offs from dozens of city officials — and that is before facing possible litigation.
What should be simple, standardized processes for starting a business vary significantly in time and complexity across cities. While only limited national data exist on the burden that local regulations place on entrepreneurs, we know that the cost of starting a professional service LLC in New York City is more than 18 times higher than in Los Angeles. What's more, the potential business owner in New York must declare his intention of opening a business in two local newspapers for six consecutive weeks.
Regulatory burdens on business can be direct, such as with construction permits, or indirect, as with rent-control. Yet no single regulation hurts as much as their collective complexity and the uncertainty it creates. Obtaining a building permit in Chicago may officially take three months, but in practice it can consume years of costly labor. Simply setting up, say, a frozen yogurt shop in most cities requires a zoning clearance, sign permit, business license, food-handler training, building permit, and seller's permit.
The number of so-called "expediters" is a valuable signal for how complex and damaging a city's regulations have become. These middlemen manage the constantly changing rules and endless delays in processing that come with doing business with the city. New York City's expediters once numbered between 300 and 400; today they total more than 8,300 strong. This complexity generates a new business opportunity for regulatory experts. Larger, incumbent businesses can manage to navigate this process, but it is much harder for the small businessman, particularly if he is working a 9-to-5 job or if English is his second language.
These regulations won't stop the next Facebook, but they may halt an immigrant hoping to set up a corner shop or an aspiring chef's food truck. These mundane forms of entrepreneurship are the lifeblood of America's cities, and they are slowly being choked by endless red tape. When an entrepreneur needs a miniature army of lobbyists to simply establish his business or develop a property, something is wrong.
In the 1990s and early 2000s, some cities and states tried to lower the cost of starting businesses in struggling areas through a mechanism called "enterprise zones." Relying mostly on tax credits, these zones sought to encourage businesses to locate in particular areas and to hire particular people. Studies of these zones generally revealed disappointing results, with little job growth overall or in the targeted populations. The zones demonstrate the importance of improving the whole economic ecosystem of an area with regulatory and governance reform instead of simply pumping money into an area and hoping to see sustainable growth.
Just as access to city life is effectively restricted by harsh economics to only the wealthy, access to city government is limited to only the connected. Power in the city is too often a family affair operating on the power of personal relationships and political patronage. The evidence need not be as extreme as the Daley family's influence on Chicago politics, and there is nothing quite as bad today as Tammany Hall. But it is clear that, in many cities, human capital is being replaced by relational capital as the currency of advancement in city politics. As the networks of power grow tighter and tighter, the city around them grows larger and more complex, leaving city governments caught in their own webs of influence, regulation, and bureaucracy — hopelessly inefficient and behind the times.
Corruption is likely to grow wherever large gaps in efficiency exist between the public and private sectors, combined with tight personal networks where power is transferred through relationships. Detroit is a prime example. Kwame Kilpatrick, mayor of the Motor City from 2002 to 2008 and the son of a prominent local politician, was found to have employed nearly 30 family members and friends while in office. He obstructed investigations, funneled grant money to his wife, and likely ordered a hit on a stripper, among other allegations and convictions. (Detroit isn't the only city with problems. Washington, D.C., has also had its share of scandal in recent decades; from 1976 to 2010, the district produced the nation's highest number of federal public-corruption convictions per capita.)
More recently, Detroit replaced its system of tax liens with a foreclosure process that allowed the city to seize the homes of tens of thousands of residents who had failed to pay its exorbitant property taxes. These homes were then sold off to help pay for the now-bankrupt city's obligations — primarily payments on pension contracts its unionized employees had negotiated through their political machine. More than 62,000 properties are subject to foreclosure this year alone; over half of them are currently occupied by soon-to-be-homeless families.
Thankfully, few cities witness such spectacular examples of unmitigated corruption and morally (and literally) bankrupt governance, but they are nevertheless prone to it. City politics is necessarily limited in its scope and number of actors and interests, putting a premium on relationships and making it much easier for a few to gain control. James Madison based his argument in Federalist No. 10 for an extended republic on precisely this observation. Thus, whether through graft or patronage or any other form of heedless self-service, cities are prone to corruption. There are also the deeper problems of cronyism and insider dealing, which aren't necessarily instances of outright corruption but of favoritism that walks the thin line of legality, particularly in contracting.
Additionally, public-sector unions often have a stranglehold on local government offices through which they negotiate large, increasingly burdensome pensions from their friends in power. Chicago is perhaps the most egregious example of what this cronyism does to citizens. Taxpayers face unfunded liabilities of roughly $20 billion, or twice the city's annual operating budget. Just 35% of the cash needed to cover pensions has been set aside. Each dollar spent covering this gaping hole — dug by promises made through cronyist deals — is another dollar not spent on local services, schools, and the economy.
AN OPENING FOR CONSERVATIVES
As a result of cronyism and excessive regulation, along with the high cost of living, the promise of America's cities seems out of reach for many. The good news is that conservatives have solutions for many of these problems, if they can only seize the opportunity to offer them.
The extremely high cost of living has an obvious cause and an obvious conservative solution. The problem is one of simple economics: An increase in demand for a good will cause its price to rise until supply rises to meet it — unless it is constrained by some outside force. The outside force in this case is the noxious combination of overly restrictive land-use regulation, byzantine permitting processes, and a rampant fear of development in one's own backyard.
Chang-Tai Hsieh and Enrico Moretti found that lowering city regulation in just three cities — New York, San Jose, and San Francisco — would expand the national economy by nearly 10%. The authors also found that three-quarters of America's aggregate GDP growth from 1964 to 2009 came from cities with lower regulation, primarily in the South. The average worker earns nearly $9,000 less annually and has fewer choices on where to live because America's most productive cities are cut off to opportunity. Since the authors primarily focus on housing regulation, the effect of overall regulation is likely much greater.
Addressing damaging regulations will require a two-pronged approach: creating zones for experimental policymaking and implementing a city-level apparatus for regulatory review. While the wholesale reform of a city's regulatory apparatus is unlikely, zones for experimentation create the space necessary to prove that simplifying the permitting process and making it more transparent can work. For example, Devens, Massachusetts, a 4,400-acre community on the outskirts of Boston, was built on a military base that was closed in 1996. Because it was more or less started from scratch, Devens has provided a chance to experiment with better regulatory processes, including the implementation of a one-stop permitting process guaranteed to last no more than 75 days.
More established areas can use the lessons learned in Devens to reform their own permitting regimes. Boston's Dudley Square, for instance, has made headway toward encouraging business development by creating an entrepreneurship zone friendly to new ideas. The focus remains on reducing the barriers to people advancing rather than on subsidizing place. While the zone is new and precise policies have not been implemented yet, the talk is of encouraging enterprise through one-stop permitting shops, merging existing business support programs into a single office, and connecting networks of entrepreneurially minded individuals with community platforms such as incubators. The focus appears to be less on chasing the smokestacks of industry than on empowering the community, particularly through education; a central piece of the zone will be an "innovation center" that provides physical space for start-ups in the same building as the Boston public school system's headquarters. By taking small steps and focusing efforts on lowering the barriers facing the poor around Dudley Square, the zone has a chance of infecting change. Boston luminaries, including Harvard's Edward Glaeser, are also pushing the city to unify state and local business grant programs into a single funding office, implement entrepreneur mentorship programs focused on the poor, and much more.
Glaeser has written with Cass Sunstein in these pages about the need for regulatory review at the local level, primarily through a system of cost-benefit analysis, with the goal of reducing unnecessary regulatory burdens (for more, see "Regulatory Review for the States" in the Summer 2014 issue). This focus on removing unnecessary regulation is a natural role for conservatives, but the idea is gaining some traction on the left as well. Michael Mandel and Diana Carew made a similar argument in a recent paper for the Progressive Policy Institute. Targeting the steady accumulation of regulations that, like pebbles in a stream, alone may be harmless but together block the normal flow of business, they call for an independent "regulatory improvement commission," subject to annual Congressional reauthorization. The commission would formally review existing regulations suggested by the public and produce a list of 15 to 20 regulatory changes for an up-or-down vote by Congress. City lawmakers would benefit from having a similar commission at the local level. Sunset clauses built into policies could also help ensure that regulations are not allowed to outlive their usefulness by forcing them to be re-examined periodically. Regular reviews are crucial to ensure that the local economy is not suffering from regulatory blockages.
Relaxing regulation would certainly help housing costs and businesses. But reformers need not stop there. Even relatively lightly regulated cities, such as those in Texas, have high property taxes that fill the local government's coffers. Developing property leads to a higher tax bill, so owners have significant incentives to leave land underdeveloped or vacant to avoid the taxman's take. The notion of a land-value tax is an old one, favored by the likes of Adam Smith and Milton Friedman, but rarely implemented due to its novelty and the complexity inherent in assessing land. The basic premise of a land-value tax is that a property's location and size bestow value on the property that precedes any human development of it, and so a land-value tax assesses this value instead of the overall value of the property as a whole after development. Implementing this idea comes with several difficulties, both political (landowners are often wealthy and well-connected) and practical (assessing the value of developed urban land could be difficult). Yet in the age of Big Data and tightened fiscal belts, there's a richer opportunity than ever to try something new.
By taxing land instead of property, cities would be encouraging the productive use of land. Because land value is affected by the development around it, increasing the city's tax revenue would be a function of community-wide improvement, not the whims of any single actor who wants to develop a particular piece of land, which would also help reduce the political influence of wealthy developers.
Beyond regulations and taxes, there remains the issue of how and where decisions are made to place more restrictions on the city or to open it up to new opportunity. Process and politics matter as much as rules in property development. As William Stern, a former chairman and chief executive of the New York State Urban Development Corporation, once noted, "Complying with New York's Kafkaesque zoning code and its banana-republic process for approving building projects requires first and foremost a Herculean exercise in politics."
Decisions about re-zoning, for instance, are more often than not battled out at the neighborhood level, because this is precisely where the costs of development are most concentrated. Meanwhile, the benefits of development accrue to the city as a whole. That is why many city residents acknowledge the need for city-wide growth, yet may rationally prefer that it not occur in their own backyards.
The best balance of these interests elevates development approval to the metropolitan level while maintaining local input on implementation. Roderick Hills, Jr., and David Schleicher suggest adopting city-wide annual development goals that trump zoning concerns. Once a plan is drawn up by an independent commission and approved by the city council on an up-or-down vote, it's up to each neighborhood's stakeholders to bargain with other neighborhoods over just how this development is to be distributed. They argue that "land use law should embrace a version of plans as a procedural tool that packages together policies and sets of zoning changes in a number of neighborhoods simultaneously through procedures that make such packages difficult to unwind."
Businesses already seek to settle in cities, which offer a rich array of networks and capital, and reforming municipal government could make cities even better homes for business than they already are. Businesses crave stability and clarity, and city governments too often do not provide much of either. One of the biggest problems facing many cities is a pension-funding gap, and this fiscal hole leaves open the very real possibility of rising taxes, sucking away businesses' (and individuals') hard-earned money. Cities must right their financial balances, and Detroit's bankruptcy provides hope that this is possible. Both pension-holders and bondholders took losses to allow the city to regain some financial stability, and, while the city is still in the red, it is a much better place to start a business than it used to be. To prevent the spread of municipal bankruptcy, other cities should move quickly to change city-employee contracts to defined-contribution benefit plans, instead of the often much more costly defined-benefit pensions that did so much harm to Detroit's finances.
More transparency, too, would make cities much more desirable places to run a business. There is no reason, in the age of the internet, why city finances should not be visible to all. Government data should be made easily available; the same goes for contracts and project bids, permitting requests, facility maintenance schedules, and every other form of service or interaction with the public. Implementing such transparency measures will not be easy or cheap — cities will have to prioritize openness in their budgets — but the cost of inaction is worse, because it facilitates continued waste and cronyism at the expense of economic growth.
This openness will help advance another conservative priority: local input and self-government. As noted earlier, hyper-localism can have drawbacks; namely, it can prevent changes that could benefit the city as a whole. But a more open government would allow individual citizens to stay informed about what is going on in their city and contribute valuable local knowledge to city decision-making — knowledge that can improve city projects tremendously.
City leaders should also work to cultivate the richness of civil society, from families on up. Because cities tend to have more than their share of poor and broken families, city governments often dedicate significant resources to social services. But these families need far more support than public social services could ever supply. What they really need is a community and a moral framework — exactly the benefits that civil society is best equipped to provide.
An emphasis on civil society could mean leaning on private charity, even private religious charity, for the delivery of social services for the poor. Congressman Paul Ryan's "opportunity grant" proposal, for example, which bundles several federal anti-poverty programs into a single block grant to states, could be tried, even in modified form, most easily in cities where there is a high concentration of both poverty and non-profit organizations. The grant's purpose is to foster competition between private groups and public agencies attacking the same problems and to give civil society more space and opportunity to work toward alleviating our most pressing social problems.
Other urban reforms also harness the power of civil society to open up closed systems. The school reform initiatives that have been implemented in many cities across the country ask private actors in civil society to produce an education that is equal or superior to traditional public schools. Charter schools and voucher programs for private schools have sprung up in most major cities — and the results have been impressive. Housing vouchers, which give poor renters money to rent wherever they want, are another example of a government program that is superior to the more typical and heavy-handed alternative. Unlike large, often publicly owned housing projects that house many of the poor in cities, vouchers give individuals and families more flexibility and avoid creating pockets of poverty by allowing low-income families to move into more attractive neighborhoods with better schools and lower crime. Housing vouchers have been around for some time, and studies have shown their effects to be positive, but housing projects are still more common.
The same solutions that make a city more affordable — more openness and a rebalancing of power from entrenched interests to a free and open marketplace for property and power — are ones that make it better governed. It comes down to the process by which decisions are made and revenue is collected.
The solution should be based on the problem: Since cities are closed, conservatives should seek to make them open. There are several clear, discrete steps conservatives can take toward making cities more welcoming for people wishing to live and work there. Together, these solutions could lead to the revitalization of our cities, making them open centers of life and opportunity again.
While people may be moving away from some of America's largest cities, America as a whole is becoming increasingly urban, as individuals and families move in search of jobs. Republicans would do well to attempt to influence those cities that are seeing rapid growth. And they should learn to address urban concerns so they can win the political power they need to help those cities that are suffering.
After years of over-regulation and over-spending, America's cities have been left to struggle and sometimes even go bankrupt under Democratic rule. A lack of affordable housing and miles of red tape have kept the middle class — the true driver of economic growth — out of cities, leaving the wealthy and influential behind to make deals, while social services try (and largely fail) to help those trapped in poverty. America's cities are closed — closed to conservatives and, more importantly, closed to the middle class and the striving.
Conservatives can, and should, re-engage the cities, and right now is a particularly auspicious time for them to think about urban life and how conservative principles apply there. Liberalism is increasingly showing itself to be bankrupt intellectually and fiscally, and the challenges facing cities call out for conservative solutions. It is conservatives who could point the way to strengthening America's cities and making them the greatest in the world once again.
Michael Hendrix is the director of emerging issues and research at the U.S. Chamber of Commerce Foundation.
Andrew Evans is an assistant editor at National Affairs.