GETTING MORE EGGS FROM THE GOLDEN GOOSE: “Nobody in this Country got Rich on their Own.”

February 11, 2014

It takes resources to run a city. Of course, the most important resource is people: the capabilities and creativity of its work force, the strength and resiliency of its families and neighborhoods, the civic engagement of its residents – and if Mayor Walsh is really smart he will find many ways to encourage city volunteerism in every segment of government and social life.

But money also counts.  Transportation, parks, social services, fire, police, housing, schools, and everything else: all cost money – inescapably (and legitimately) more today than yesterday, more tomorrow than today.  State law makes cities’ revenue overwhelmingly dependent on property taxes; they provide about two-thirds of Boston’s operating budget.  And (in Massachusetts) the Prop. 2½ limits on increasing the rates on pre-1982 buildings make local governments desperate for new development, particularly commercial development which has higher tax rates than residential buildings.  (The Boston Business Journal complains that “commercial properties downtown, in the Back Bay, and the Seaport… are taxed at nearly three times the residential rate …and generate more than half of Boston’s total tax levy….”)

HANDLING THE GOLDEN GOOSE

In the absence of other sources of revenue, new development provides the budget space for public needs.  But growth has its own costs, from gentrification to traffic congestion.  A recent study of major US cities found that nearly 61% of Boston’s low-priced neighborhoods were affected by gentrification – the highest percentage in the nation.

Conservatives always warn against “killing the goose that lays the golden eggs” and it is possible for a city to make it so difficult for developers to operate that they go elsewhere.  But we (and our leaders) need to humbly remember that local action has only secondary influence on the most significant economic tides.  It’s exactly when business is growing that it is most possible to require that they contribute a bit more to the health of the surrounding society that allows them to exist and prosper.  And a city totally transformed by development may lose the qualities that made it attractive in the first place.  Even more:  we need to remember that the real “makers” of our well-being are the population as a whole, with every sector playing an indispensable role.  Business leaders deserve to be rewarded for their accomplishments and risk, but only to the degree that their effort increases overall wellbeing as well as their own.

TIMIDITY IS THE BIGGEST DANGER

Rather than endangering business growth, the bigger danger is that city leaders are too timid, not imaginative enough, and therefore unable to harness business energy for the common good.  It turns out that rising tides don’t lift all boats – a better metaphor is trying to lift a house:  pulling on the roof only raises the top floor; you have to raise it from the foundation if you want to elevate every room.  In any case, the current development tide will eventually ebb, as business booms always do, leaving a lot less to be shared and making it much harder to demand additional concessions.  Now is the time!

The best approaches are those that integrate a broader range of public benefits into the businesses’ every-day operations:  inclusionary zoning, job training and hiring preferences.  It is also easy to make a case for requiring the developer to make improvements to the surrounding environment through mitigation fees or requiring that they upgrade nearby parks, roads, or other public facilities. (Why not require new developments to also construct some nearby portion of the city’s Bicycle Network, or a section of the Greenway Network that advocates are beginning to work for?)   Less obvious but equally appropriate are the linkages – housing linkage, for example – that require payment into a fund for use city-wide.  (Boston would also be smart to adopt the Community Preservation Act that imposes a surcharge on every property sale.)

Mayor Walsh is faced with an immediate budget crisis, potentially requiring short-term cuts, ultimately because of limits on the city’s revenue sources and amounts but immediately due to political unwillingness to rein-in police and firefighter pay raises.  But Boston currently ranks fourth nationally in the amount of commercial space under construction.  A “surge of wealth has flooded Boston in recent years…[and] muchof the new housing is made up of high end residences, with many apartments renting for $4,000 or more per month….Boston was among the top 30 [cities] with the highest projected demand for luxury goods over the next five years.”  In the long term, the growth and money is there and advocates should not be shy about pushing the Mayor to keep squeezing the development goose.

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THE LIMITS OF GROWTH

How far do you go to promote economic growth?  How much do you demand that developers give back to the host community?  How much do you want your city to change, and in what ways?  Who profits, in what ways, and who loses?

Unregulated markets tend towards boom and bust cycles, and almost invariably provide the biggest benefits to those with the greatest resources and power.  But cities are full of people with limited resources whose welfare is, in fact, the societal base on which successful businesses are able to grow – the absence of disruptive social unrest is key to stability.   How do you develop the underlying human assets that make business possible?  How do you keep the golden goose healthy enough to continue laying those valuable eggs without ending up with it eating through (or pooping over) the very qualities of life and neighborhood that make your city what it is – and worth investing in?

“About 90 percent of the GDP of the United States and about 86 percent of the jobs are generated on 3 percent of the landmass…our cities,” says urbanist Vishaan Chakrabarti.  The increasing importance of cities as economic and population centers, the growing complexity of urban life, the commercial economy’s inherent tendency towards inequality coupled with boom-bust cycles, and our rising expectations for justice and sustenance all continually push us to legitimately need and demand more from our governments.  Even to simply keep doing what was done in the past, the cost of running a city almost always goes up.  (This is partly because public services, like sports, education, and the arts, have an inherently lower rate of productivity increase than most other economic activities, a reality known as “Baumol’s Cost Disease.”)  But past actions are seldom sufficient – old problems seldom disappear even when new problems appear.  It is possible to find money for new programs by eliminating something less essential or doing current activities more cost-effectively.  Evaluating, re-sizing, and reforming are essential strategies even if often politically difficult.  But they are seldom sufficient.  Not all great new ideas are expensive; but they are almost never free.

REVENUE REALITIES

It is possible to raise taxes and fees.  This is a particularly good approach when there are additional non-revenue advantages: raising taxes on cigarettes has been shown to reduce smoking rates, eliminating soda’s sale-tax exception by no longer defining it as food will improve personal health and lower public medical costs.   But these are primarily under state, rather than city, control:  cities are confined to a very limited range of revenue sources, primarily the narrow and distorted sliver of family wealth represented by real property – land and buildings – whose tax rates are themselves limited by the 1980 Prop. 2½ referendum.  Still, the higher rates allowed for commercial versus residential levies gives a small progressive tilt to this source.  In Boston, as business supporters point out, “owner-occupied residences are taxed at a lower rate and also qualify for a 30-percent tax exemption, thus cutting a typical homeowner’s tax bill in half.”  However, whether on a state or city level, raising taxes is often politically difficult.

But there is a major exception to the Prop. 2½ limits  –  post-1982 new development, whose tax rate is not constrained.    Not only that, the complexities of the permitting, zoning, and neighborhood review process create enormous uncertainties that developers are happy to reduce by offering (often after some arm twisting) a variety of community benefits, mitigations to the negative impacts of their projects, or payments.  Tax breaks or permission to build a higher structure are exchanged for various public benefits – affordable housing, street improvements, or public space, although the overwhelming pro-business tilt of our political system usually makes public officials very cautious in their demands.

MANAGING THE TRADE-OFFS

If the concessions made to developers are strategically selected and kept in check, the benefits can be large.  The continuing flow of digital- and bio-tech university spin-offs gives Cambridge a steadily growing tax base that local government has used to support extensive social, cultural, and educational services as well as the state’s lowest residential property tax rate.  (How effectively those services are provided is another question; as is the issue of allowing Kendal Square’s high-rise luxury to spread into Central Square and elsewhere.)

This strategy is not without peril.  The flipside of growth is change, a side effect of capitalism’s famous creative destruction.  Pushing new development into established neighborhoods is difficult – people already live or work there and the more powerful they are the more effective their protest.  But it’s not random change:  the more upscale and professional the developing economy the more disruptive the impact on surrounding neighborhoods.  Which is why, in addition to their relatively lower land prices, development (followed, usually, by upscale gentrification) targets desirably-located low-income, less powerful neighborhoods.  This is not inevitable – a recent study of major US cities found that nearly 3/4 had a neighborhood gentrification rate below 10%.  But Boston’s 61% rate was even higher than Seattle’s 55%, NYC’s 46%, San Francisco’s 42%, and Washington, D.C.’s 35%.  Whatever the possible positives associated with upgrading, displacement is upsetting and contentious to those lives are being disrupted.

Therefore, a less disruptive strategy is to direct development towards “empty” areas, preferably those accessible by public transit.    Smart, and lucky, city leaders push growth into “empty” areas where it’s “only” artists who get displaced. In Cambridge that means around Alewife, Kendall Square, and North Point.  In Somerville it’s the old Inner Belt Industrial Area.  In Boston it’s the Seaport, but there explosive growth in the absence of subway service has created massive transportation problems.

MARKETS ARE CREATED NOT BORN

Shaping the real estate development market, making it clear what kinds of building (e.g. affordable housing) is needed or not wanted (e.g. isolating luxury high-rises) in what neighborhoods, and requiring that developers – and big landlords – contribute more to the overall health of the city will not change the underlying forces driving the Boston building boom:  our universities and medical institutions have what both high-tech and bio-tech most need – smart people.  As Mayor Walsh redirects the BRA, we can only hope that his union backers’ legitimate desire for jobs does not interfere with his mayoral imperative to get the most possible for his city.

But what Boston, and the entire region, needs to do is make sure that it remains the kind of place that people want to (and can) live in.  Mayor Menino has been widely criticized for using the Boston Redevelopment Authority (BRA) to force concessions from developers (as well as to punish his enemies and reward his friends).  However, when it comes to pressuring developers for concessions, Menino was on the right track.  Rather than cut budgets, in the long run Bostonians will do better by investing in the things and services that make our entire population stronger, more educated, healthier, and more united – and that make our area more livable.  Our schools, housing, and safety net services are probably the most important because they not only help keep new families in town but they are also the key for keeping our crime rates low and our levels of social cohesion high.  But right behind those core investments are infrastructure issues:  parks, roads, and a host of state-funded programs from water quality to mass transit.

WHO ARE THE “MAKERS”

Of course, conservatives argue that when times are good you shouldn’t do anything to rock the boat or discourage your growth leaders –– and they’re half right in that the collateral effects of new development, usually jobs and sometimes momentum for more development, are very important.  But, also of course, these are often the same people who say, when times are bad, that you shouldn’t burden anyone with additional costs – and, again, they’re half right.  During a crisis the better move is to rely on borrowing (a city’s version of deficit spending) and to push for systemic change (within your own scope of control) to address the underlying structural market problems that led to the downturn in the first place, as FDR did after the Great Depression (and Obama was not able to do after our most recent fiscal collapse).

The reality is that for all the campaign talk about being “development friendly” – and acknowledging that there are many ways that governments can be more transparent, efficient, and predictable in their relationship with businesses – sustained growth is largely dependent on trends and factors beyond immediate local control: physical facts such as location (location, location) and weather, and human/social capital such as intellectual resources, an available and properly skilled labor force, investment capital flow, and the accidents of history.  If you are able to take advantage of these (usually inherited) assets, and if the surrounding regional/national economic system is doing well, your city grows; otherwise usually not.

And business development doesn’t happen in a vacuum.  Contrary to the Libertarian line that real wealth is only created by private investment, almost every business in today’s world is totally dependent on the surrounding presence of “public goods” – the often invisible parts of our lives that are not universally-enough provided by commercial markets:  clean air and rivers, sanitation and potable water, safe food and drugs, parks, culture, education, roads, social trust, and much more.  In addition, there is no such thing as a “free” or “unregulated” market.  Every commercial interaction is shaped by the surrounding context and governed by the rules of the enabling society.  Without social rules, cultural or legal, commerce turns into pillage as the strong simply take what they want from everyone else.  Without society, business doesn’t exist.  The question is not whether or not to impose constraints but how to apportion the costs and benefits of the transactions, how to assure maximum social value from every aspect of the transaction.

As Senator Elizabeth Warren famously said that “There is nobody in this country who got rich on his own — nobody. You built a factory out there? Good for you. But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police-forces and fire-forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory — and hire someone to protect against this — because of the work the rest of us did. Now look, you built a factory and it turned into something terrific, or a great idea. God bless — keep a big hunk of it. But part of the underlying social contract is, you take a hunk of that and pay forward for the next kid who comes along.”

Or, as Benjamin Franklin more radically said a long time ago, “Private Property is a Creature of Society, and is subject to the Calls of that Society, whenever its Necessities shall require it, even to its last Farthing; its Contributions therefore to the public Exigencies are not to be considered as conferring a Benefit on the Publick, entitling the Contributors to the Distinctions of Honour and Power, but as the Return of an Obligation previously received, or the Payment of a just Debt.”

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Thanks to Arthur MacEwen, Jim Campen, and Larry Rosenberg for comments on previous versions; I’m responsible for all opinions and remaining errors!

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Related previous posts:

> THE NEXT MAYOR’S BIGGEST CHALLENGE: Creating Prosperity by Lifting the Basement Instead of Raising the Roof

> IMPROVING LIVABILITY, CONTROLING DISPLACEMENT: Can You Upgrade a Neighborhood Without Destroying it’s Community?

> LIVABILITY, PUBLIC HEALTH, AND MOVING AROUND: A Healthy Society Requires Healthy People

> PUBLIC PRIVATE PARTNERSHIPS The Priority Must Be Enhancing Public Value

> NON-MOTORIZED HIGHWAYS: A Regional Green Routes System To Connect Municipal Bike Networks, Sidewalks, and Parks

> THE ART OF TRANSPORTATION (AND URBAN) PLANNING: Going Beyond the Technical Specs

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posted in CREATING SUSTAINABLE CHANGE by Steve Miller

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3 Comments to "GETTING MORE EGGS FROM THE GOLDEN GOOSE: “Nobody in this Country got Rich on their Own.”"

  1. Matthew wrote:

    That study has a bunch of issues. For one thing, it’s using old data: measuring 2000-2007. For another, it considers gentrification to be “going from 49th to 51st percentile” in affordability. Screwy.

    But my question for you is: why do you believe growth causes gentrification? In my view, it’s the opposite.

    Severely restrictive zoning laws make it impossible to build much new housing. Then as an area becomes more in demand, prices are forced to rise. Eventually, sale price per square foot becomes high enough to support new construction, and also overcoming the institutional obstacles to growth.

    But this all starts with anti-growth activism and laws. I believe that the anti-growth activists and zoning laws in Cambridge are more responsible for the unaffordable housing than anything else. Rent control did not help either. As a result, the slow incremental growth that should have happened over decades did not happen, and now we are in a pickle.

    What is frustrating to me is that many anti-growth activists do not realize the damage they are causing, and when I try to talk to them about it, we just go in circles.

  2. Steve Miller wrote:

    Matthew:
    Certain kinds of overly restrictive zoning (for example, the kind that forbids mixed uses or three-decker buildings, or set minimal parking, etc) do constrict supply in distorted ways. But unregulated, totally market-shaped housing can be just as destructive to both neighborhoods and equity. Not all growth causes gentrification — we need a good balance and combination of regulation and anarchy to keep cities vibrant and evolving. Steve

  3. Steve Miller wrote:

    Matt: Saying “all this starts with anti-growth” is way too simple. It’s true that many of our zoning and other regulations create as many problems as they solve. But most of them were passed for real reasons (pollution, safety, shoddy construction, unwanted uses, neighborhood nature, etc.) and unless we have ways to address those concerns it ill behooves us to advocate for their removal. As for rent control, its repeal — due to a state-wide vote that overruled the clear desires of the people in the three places who were actually living under it — has been devastating to the middle class and working class population of the cities where it used to be. Cambridge has become a bipolar place of rich and poor rather than the income-diverse place it was when my kids were in public school. Steve

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