What Makes Cities Grow?
By: Stephen Moore
Back in the 1960s, economist John Kenneth Galbraith pronounced that there was “nothing wrong with New York that doubling the city budget wouldn’t solve.” As the budget more than doubled while the city’s problems grew worse, many came to suspect that just the opposite is true.
Now there’s statistical evidence that high spending and taxes do indeed lead to urban decay. My colleague Dean Stansel and I conducted a study for the Cato Institute comparing the tax and fiscal policies of fast-growing cities with those of declining ones. We found a consistent pattern: spending and taxes were far higher in the declining cities.
Of the nation’s 75 biggest cities, the ten fastest-growing increased in population by between 34 and 89 percent between 1980 and 1990. The ten fastest-declining cities lost between 7 and 16 percent of their populations during the same period. (New York, which grew a modest 3.5 percent, was not among the cities we compared.)
The differences in fiscal policy between the two groups of cities were striking. For every $1 of per-capita expenditures in high-growth cities, the shrinking cities spent $1.71. High-growth cities spent an average of $673 per person per year, versus $1,152 in the shrinking cities. These figures don’t include expenditures on health, education, and welfare, which are difficult to compare across cities because of differences in which level of government is responsible. We found, however, that education expenditures are $1,400 per pupil higher in low-growth cities than in high-growth ones; welfare benefits are higher, too.
Shrinking cities had more than twice as large a bureaucracy as growth cities: the high-growth ten had 99 city employees per 10,000 residents; the shrinking cities, 215. City taxes averaged $304 per capita in the high-growth cities, compared with $588 in the shrinking ones. And whereas none of the 15 highest-growth cities have an income tax, ten of the 15 lowest-growth ones do. A key for urban revival, it’s clear, is to reduce spending and government employment so that existing and prospective businesses and residents don’t bear such a high tax burden.
I am not sure that the cause and effect relationship is as simple as that which is being presented. There are many other factors that are not being considered here.
I agree. Correlation is not causation.
It could be because of other factors. Maybe the cities that are already growing don’t need to tax more as the growing poplulation and economy lifts all boats.
However this is a sobering report. It is a fact that cities and states are in competition for employers and jobs and certainly one of the biggest factors for site locators and CEOs is going to be the level of taxation.
Growth lowers taxes. Take two populations each of 100 people with the same tax rate and the same services. At the end of a year 10 people from town A move to town B. The Mayor of town B is able to continue providing the same services without adding to the payroll because the 10 who moved there are entrepreneurs and do not commit crimes. The taxes for town B are now distributed over 110 homes and thus drop by 9.1% per person. The Mayor of town A is afraid to have a layoff for political reasons and keeps expenses the same. The taxes in Town A now raise by 11.1% per person. In the space of a single year the growing town now has tax rates that are 22% less than the shrinking town ((11.1-9.1)/9.1) all because 10 of their best citizens moved. This scenario works for collective IQ, for the coefficient of ambition, and for incomes. Shrinking in population especially when it is “brain drain” style shrinkage or the migration of wealth devastates the places that the brains and wealth leave. Political cowardice adds to the burden that the remaining people in the Town A’s of the country must bear.
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