Economics of Urban Development

This article focuses on the economics of urban development. It provides an overview of the connection between urban decline and urban development. This article examines how economic policy solutions address and remedy the problems of economic disinvestment, economic underdevelopment, and urban decline in urban neighborhoods and communities. The main urban development strategies, public policies, and programs, including impact fees, congestion pricing, tax-base sharing, special taxing districts, concurrency planning, reverse commuting, affordable housing strategies, regional government, and growth management are described. A case study of urban development in the United States is included as an opportunity to explore how the federal government structures its efforts to halt urban decline and promote urban development in American cities.

Keywords Community Reinvestment Act; Congestion Pricing; Economic Development; Economic Disinvestment; Economic Underdevelopment; Federal Government; Fiscal Policy; Impact Fees; Private Sector; Public Policy; Public Sector; Taxation; Urban Decline; Urban Development

Economics > Economics of Urban Development

Overview

Cites are considered to be the engines of national economies worldwide. In the United States, the majority of Americans live in metropolitan regions or areas. The U.S. Census Bureau recognizes 381 metropolitan areas in the United States. Despite the prominence of American cities, urban communities in the United States, and around the world, have struggled with urban flight, poverty, housing discrimination, isolation, budget deficits, declining tax bases, and rising public sector costs (Stegman, 1996). Factors that shaped U.S. metropolitan cities in the twentieth century include generational shifts, demographic shifts, sociopolitical orientations, real estate economics, income inequality, technology, social divisions, housing, zoning, and transportation (McDonogh, 2004). American cities, such as Washington DC and Detroit, are suffering from the negative externalities created by urbanization such as unemployment or underemployment, economic and social inequalities, challenges to social cohesion, urban sprawl and congestion, environmental problems, and housing shortages. Numerous American cities are suffering from urban decline and do not have the local or federal fiscal support to fix the situation. Urban decline is characterized by problems such as unemployment, underinvestment in physical infrastructure, homelessness, decrease in local population, and decrease in private sector presence and investment (Freudenberg, 2006).

Policymakers address the problem of urban decline through urban fiscal policy and urban development.

• Urban fiscal policy, negotiated and carried out at the federal, state, and local levels, affects the ability of cities to meet the economic and social needs of diverse resident and business populations. Urban fiscal policy refers to a wide range of tax, budget, and economic and other related public policy issues that affect the quality of life and the economic wellbeing of people in cities. Areas of concern and influence for urban fiscal policy makers include the causes and future consequences of the urban fiscal crisis, the optimal tax and spending rate for local governments, and public infrastructure funding. The goal of urban fiscal policy is a strong urban economy and a thriving populous. Urban fiscal policy promotes, supports, and facilitates urban development efforts.
• Urban development refers to largely government initiated and sponsored enterprises focused on redeveloping derelict urban land and communities. Urban development includes multiple efforts such as job programs, housing initiatives, reverse-commuting efforts, tax-sharing, regional governance, and congestion fees. The economics of urban development is complex. Stakeholders debate the following issues and questions: Who should fund economic development? How should economic development resources be allocated? Who is responsible for urban decline? In most cities, funding for urban development comes from both public and private sources.

This article explores the economics of urban development. The article examines how economic and fiscal policy solutions address and remedy the problems of economic disinvestment, economic underdevelopment, and urban decline in urban neighborhoods and communities. The following section provides an overview of the connection between urban decline and urban development. This section serves as a foundation for later discussion of many prominent urban development strategies and programs. A case study of urban development in the United States is included at the end of the article as an opportunity to explore how the federal government structures its efforts to halt urban decline and promote urban development in American cities.

Urban Decline & Urban Development

America's Urban Crisis

Many economists, urban studies experts, and policymakers consider America's urban metropolises to be in crisis. Throughout the twentieth century, centers of industry moved from highly industrialized cities to urban-suburban hubs. As a result of industry transformations, population switches from urban to suburban living, and globalization, American cities experience uneven development and, in many instances, urban decline. Different parts of metropolitan regions experience disparities in standards of living, housing options, employment opportunities, and quality of public services. The economic health of American cities influences the physical infrastructures and services provided in a city. The fiscal issues facing local governments in the United States are complex. Local governments that serve urban areas in the United States receive funds from the federal government (in the form of grants) and the local populations (in the form of taxes). Local governments must use funds as specified by the grants given by the federal government and must meet the needs of the local population.

Budget Imbalance

Urban decline effects industry, quality of life, availability of services, and infrastructure. Numerous urban regions in the United States face large structural budget imbalances in which there exists a persistent gap between the regional government's ability to raise revenues and the cost of providing basic services. Large budget expenditures include the high cost of living, public safety, and social service needs. One result of this fiscal imbalance is a long-term under-investment in city physical infrastructures. In the interest of a balanced budget, local governments are often forced to defer infrastructure maintenance, improvement, and expansion. Federal contributions are necessary to address structural budget imbalances that cannot be addressed or remedied at the local level (Lazere, 2005). Urban revenue sources are, in many instances, shrinking. Revenue sources, including income tax and corporate profit tax, are not growing in proportion with the needs of urban areas. Direct federal aid to local governments is also decreasing or leveling off. For example, the Community Development Block Grant (CDBG), a federal program that serves over 1,000 communities and provides fiscal flexibility to local officials, was cut from $4.45 billion in 2010 to $3.5 billion in 2013; the budget was due to be cut even more in fiscal year 2014 (Cohen, 2013).

The problem of budget deficits in state and local governments affects the economic health of the whole country. The non-profit Center on Budget and Policy Priorities (CBPP) makes recommendations for how state policymakers can make substantial improvements to their state fiscal systems in upcoming legislative sessions. Proposed strategies for fixing state and local revenue problems, addressing budget gaps, and financing new initiatives include the following (Johnson, 2007):

• Expand the corporate income tax flaws.
• Modernize state sales taxes.
• Separate state tax codes from the federal tax code.
• Raise state cigarette taxes.

Ultimately, American urban areas may be understood as economic organizations similar to public corporations. While a corporation has shareholders, a board of directors, and a chief executive officer, a city has landowners, city council, and a mayor. The main economic purpose of a city is to offer resources and services such as infrastructure, safety, and schools. Cities must provide the services that its residents need or the residents will leave creating falling real estate prices and unemployment. Efficient cities attract investment and development. Inefficient cities go bankrupt. In fact, Detroit, once the center of the American auto industry, filed for bankruptcy in 2013. American cities in fiscal crisis will need to rely on urban fiscal policy, drafted at the federal, state, and local levels, and private sector urban investment to provide resources for urban change and growth.

Suburban Growth

In the United States, the postindustrial urbanization and restructuring processes have been effected by significant economic and sociocultural change. Since the 1950s, low-density suburban environments have grown around most American cities. The residential structure of American cities has changed (Wyly, 1999). Contemporary urban change has resulted in uneven development and disparities between metropolitan regions. The urban and suburban regions of New York, Chicago, Philadelphia, Detroit, Boston, Washington, DC, Cleveland, and St. Louis expanded faster than their populations. Policies are now being developed and implemented to accomplish the following pro-development goals (Wiewel, 1999):

• Reduce urban decline, suburban sprawl, and resulting costs and inequalities.
• Make the city more attractive to investors.
• Allocate costs more effectively so those who create them are responsible for them.
• Redistribute the benefits of growth more equitably.

Urban development efforts include multiple stakeholders: Government, business, city residents, and suburban residents. The fields of urban economics and land use, as well as urban studies, urban geography, economic geography, social geography, and central planning, combine to help understand and guide the economics of urban growth and urban restructuring.

Applications

Urban Development Programs

Policymakers use public policy to address the imbalance in distribution of costs and benefits between the public and private sectors and different parts of the population. Public policies address inequities and correct growth patterns; slow deconcentration in the future; and redistribute the benefits of growth (Wiewel, 1999). Examples of public policies that attempt to address and halt urban decline include impact fees, congestion pricing, tax-base sharing, special taxing districts, concurrency planning, reverse commuting, affordable housing strategies, regional government, and growth management. These policies, described below, are classified as economic urban development policies.

• Congestion Pricing: Congestion pricing is a mechanism that accounts for traffic related costs and imposes them on local businesses and commuters. One of the main examples of congestion pricing is peak hour road pricing during which drivers have to pay higher toll amounts if driving on congested highways during peak hours.
• Impact Fees: Impact fees refer to charges that localities levy on developers to produce revenue rather than make existing residents pay for capital projects necessitated by development. Examples of impact fees include schools, roads, or other public infrastructure.
• Concurrency Planning: Concurrency planning refers to situations where public services and infrastructure must be provided at the same rate as new development is being built
• Reverse Commuting: Reverse commuting programs promote and in some cases provide inner-city residents with transportation to and from suburban jobs.
• Affordable Suburban Housing: Affordable housing programs aid city residents in moving to the outer suburbs without losing access or proximity to job growth centers. These programs may include loans, information, zoning changes, grants, and subsidized suburban housing.
• Tax-Base Sharing: Tax-base sharing programs refer to a tax system in which urban and suburban municipalities share revenue with each other rather than keeping it for the exclusive use of their area. Tax-sharing programs address the problem of unequal taxable property and businesses.
• Growth Management: Growth management refers to a specific plan with future goals that involves shaping and controlling growth through certain procedures and policies. Examples of growth management programs include limits on development density allowed through zoning or restrictions on subdivisions; architectural design and human capacity standards for buildings; requirements to provide adequate public facilities or imposition of impact fees; urban growth boundaries; greenbelts; and regional review.
• Regional Governance: Regional governance refers to a governance model that includes greater geographic scope. Under this model, cities and their suburbs share governance and resources. The regional governance model reduces public resources inequalities and disparities between the central city and its outer suburbs. Local governments that have previously tried many of the strategies described above to address the problems of urban decline and the need for urban development are increasingly turning to new forms of urban governance. New forms of urban governance are being tried in urban regions worldwide (Keil, 2006).

Cities around the world have incorporated these development strategies to address the economic problems of urban decline and promote urban development. These strategies and programs vary in revenue sources and wide-scale applicability.

Case Study: Urban Development in the United States

Urban problems, including poverty, isolation, declining tax base, and crime, are public problems that require policy solutions. The U.S. government addresses urban problems with urban development initiatives. Urban development initiatives, often a form of public policy, are closely connected to economic policy. Important urban development policies of the twentieth century included the following:

• The U.S. Housing Act of 1937 established the United States Housing Administration.
• The Housing and Urban Development Act of 1965 established the Department of Housing and Urban Development (HUD).
• The Housing Act of 1968 established Government National Mortgage Association.
• The Housing and Urban Development Act of 1970 established the Federal Experimental Housing Allowance Program and Community Development Corporation.
• The Housing and Community Development Act of 1974 consolidated numerous urban development programs into the Community Development Block Grant program.
• The Housing and Urban-Rural Recovery Act of 1983 established the Housing Development Action Grant and Rental Rehabilitation program.
• The Indian Housing Act of 1988 established the connection between HUD and Native Americans and Alaskan Indians.
• The Federal Housing Enterprises' Financial Safety and Soundness Act of 1992 created HUD Office of Federal Housing Enterprise Oversight.

All of the policies described above include economic and social components. In the twenty-first century, the federal government actively promotes urban development through two large-scale economic programs:

• The Department of Housing and Urban Development (HUD).
• Community reinvestment policy.

The Department of Housing and Urban Development Act

The Department of Housing and Urban Development Act, established in 1965, is the part of the government most responsible for national urban development. The Department of Housing and Urban Development’s stated mission is “to increase homeownership, support community development, and increase access to affordable housing free from discrimination” (Pennisi, 2010, ¶1). The efforts of the Department of Housing and Urban Development to strengthen communities are led by economic development efforts. The Department of Housing and Urban Development’s economic development focus is on creating and retaining jobs in our urban communities. The Department of Housing and Urban Development promotes urban development through the designation of Renewal Communities and Urban Empowerment Zones.

The Department of Housing and Urban Development’s Renewal Communities and Urban Empowerment Zones are designed to redress urban decline. The Renewal Communities program includes a tax incentive program for all businesses of all sizes in the Renewal Communities area. Examples of tax incentives include employment credits, a 0% tax on capital gains, and accelerated depreciation through Commercial Revitalization Deductions. The tax incentives are intended to encourage businesses to open, expand, and hire local residents. The Empowerment Zone program also includes a tax incentive program for small and large businesses in Empowerment Zones. These incentives, which include employment credits, low-interest loans through EZ facility bonds, and reduced taxation on capital gains, gives businesses incentives to expand and hire local residents. As of 2013, there were 30 communities designated Urban Empowerment Zones.

The Department of Housing and Urban Development's Renewal Communities and Urban Empowerment Zones programs are part of the federal government's larger urban development efforts. The federal government requires active community reinvestment nationwide. Community reinvestment refers to the practice in which depository institutions, such as federally insured banks and thrifts, help to meet the credit needs of the communities in which they operate through with safe and sound business practices and operations. Community reinvestment, as a form of urban development, combines and addresses the fiscal and social needs of urban dwellers.

Community Reinvestment Act

Minority communities in the United States have experienced unequal and lagging economic growth and development throughout the twentieth century. The existing economic inequality experienced by minority communities was exacerbated by the reluctance of banks to fully service minority communities. The federal government responded to the reported bias and neglect by banks in low and moderate-income neighborhoods by passing the Community Reinvestment Act. The Community Reinvestment Act, enacted by Congress in 1977, encourages economic development in low and moderate-income neighborhoods. The Community Reinvestment Act requires depository institutions, such as federally insured banks and thrifts, to help meet the credit needs of the communities in which they operate through providing safe and sound business practices and operations. The federal government passed the Community Reinvestment Act to ensure that banks and thrifts were meeting the lending and credit needs of all people and groups within their communities regardless of income, age, or race.

The Community Reinvestment Act was enacted to eliminate the practice of redlining and the resulting disinvestment that occurs when banks export deposits from one community in order to increase available credit in another community. The practice of redlining creates a flow of funds from low to moderate-income neighborhoods to middle to high-income communities. Redlining refers to the act of refusing to offer services or increasing the cost of services, such as banking and insurance, to residents in low-income areas. Mortgage discrimination is one of the forms of redlining most responsible for lagging economic development. The Community Reinvestment Act, along with the Fair Housing Act of 1968, which prohibited housing discrimination based on race, religion, gender, familial status, disability, or ethnic origin, effectively stopped the practices of redlining and mortgage discrimination in many minority neighborhoods. The Community Reinvestment Act has facilitated and promoted urban development in the United States for decades.

The Community Reinvestment Act has effected private sector urban development practices in numerous ways. For example, the Community Reinvestment Act has affected lending institutions and the communities in which they operate in equal measure. Lending institutions, their practices, procedures, goals, and objectives, are altered by increased Community Reinvestment Act regulatory oversight, the public release of Community Reinvestment Act performance ratings, and the relationship between Community Reinvestment Act performance and possible denial or delay of an institution's application for a merger or acquisition (Bostic & Robinson, 2003). The Community Reinvestment Act has changed banking practices and communities throughout America. The Community Reinvestment Act has resulted in significant economic growth and opportunity for underserved and underdeveloped communities as well as strengthened relationships between banks and the communities they serve. The Community Reinvestment Act has encouraged banks to open new branches, provide expanded services, adopt more flexible credit underwriting standards, and increase lending to underserved segments of local economies and populations. The Community Reinvestment Act has begun to remedy the problems of economic disinvestment and economic underdevelopment in urban neighborhoods and communities (Matasar & Pavelka, 2004).

Conclusion

In the final analysis, urban decline requires creative economic and social solutions. Urban development, initiated and funded by both the public sector and private sector, combines economic and social programs to address negative externalities created by urbanization such as unemployment or underemployment, economic and social inequalities, challenges to social cohesion, urban sprawl, congestion, environmental problems, and housing shortages.

Terms & Concepts

Community Reinvestment Act: The 1977 law which requires depository institutions, such as federally insured banks and thrifts, to help meet the credit needs of the communities in which they operate through with safe and sound business practices and operations.

Economic Disinvestment: The decision of a company not to replenish depleted capital goods in a region.

Economic Underdevelopment: A historical process that creates poverty often with lack of access to adequate health care, food, education and housing.

Economic Development: Programs and strategies aimed at promoting growth in a part or whole of an economy.

Federal Government: A form of government in which a group of states recognizes the sovereignty and leadership of a central authority while retaining certain powers of government.

Fiscal Policy: The expenditures by federal, state, and local governments and the taxes levied to finance these expenditures.

Private Sector: All enterprises that are outside of government control including micro, small, medium, and large enterprises.

Public Policy: The basic policy or set of policies that serve as the foundation for public laws.

Public Sector: The economic and administrative enterprises of a local, regional, or national government.

Taxation: The practice of imposing a tax.

Urban Decline: The worsening social and economic problems of urban regions.

Urban Development: Largely government initiated and sponsored enterprises focused on redeveloping derelict urban land and communities.

Bibliography

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Suggested Reading

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Stokes, C., Mintz, P., & VanGelder, H. (1965). Economic criteria for urban redevelopment. American Journal of Economics & Sociology, 24, 249-255. Retrieved November 4, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=4513924&site=ehost-live

Vitkien?, E. (2011). Relationship between urban and regional development in global context. Human Resources: The Main Factor of Regional Development, , 311–320. Retrieved November 20, 2013 from EBSCO online database, Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=77845926&site=ehost-live