Rethinking Urban Policy Urban Development in an Advanced Economy (1983) / Chapter Skim
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5 Investing Private and Public Capital in the Urban Future
5 Investing Private and Public Capital in the Urban Future
Pages 71-96
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From page 71... ...
Such policies are significant for urban policy because they could accelerate the transformation of urban areas; they raise significant issues about the use of capital resources in urban economic development. The level and quality of public investments are other aspects of national urban policy that can 71
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From page 72... ...
Although they do not fully determine the direction of capital flows, the effect of national economic policies on the flow of capital to different sectors of the economy is increasingly recognized as a serious national problem (Schwartz and Choate, 1980:65-88; U.S. Congress, Joint Economic Committee, 19741.
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From page 73... ...
Similarly, the sectoral consequences of the 1981 Economic Recovery Tax Act are substantial, but many of them were both unanticipated and unintended (Palmer and Sawhill, 19821. In the absence of any conscious sectoral perspective, national macroeconomic policies are highly susceptible to political pressure and panicked governmental responses to industrial crises, as in the cases of Lockheed, Chrysler, Wisconsin Steel, or the thrift industry.
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From page 74... ...
The advocates of this position argue that national economic policy has been concerned primarily with the aggregate growth of capital and that, while this is necessary, it is not sufficient when the overall restructuring of the national economy is occurring simultaneously with the internal restructuring of many sectors and industries. Thus in contrast with the thrust of traditional national economic policy, sectoral policy would be more concerned with capital allocation than with aggregate capital formation.
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From page 75... ...
They point to failures in decisions or refusals of industries to follow policy and to great differences in national attitudes toward monopolies, labor relations, and banking systems as constraints on transferring cooperative approaches to industrial policy, such as those in Japan, to the United States (Eads, 198 14. Critics also argue that the market, with all its faults, is still far better at selecting competitive industries than a bureaucracy or the Congress.
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From page 76... ...
In addition to marginally influencing the flow of capital to those sectors with strong market potential, sectoral strategy should support investment in the development of the resources and systems they need to thrive. This includes support for research and development, either directly or indirectly through incentives built into macroeconomic policies (Mansfield, 19821.4 It also includes support for infrastructure (both public and private)
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From page 77... ...
It may also be important to consider changes in supporting institutional systems, such as small-business development corporations, patent law reform, university-corporate relationships (Giamatti, 1982) , and university-government relationships (National Academy of Sciences, 19831.
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From page 78... ...
Programs in which government officials tried to identify projects that would be commercial winners were the least successful (Nelson, 19821. It should be possible, however, to do a better job of coordinating national economic policies to complement or reinforce the strategies of industrial sectors as they seek to strengthen their positions in the market.
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From page 79... ...
A change in national tax policy, for example, that provides increased incentives for research and development could provide some advantages to cities in which research institutions associated with growing industries are located. Policies that make it easier to sell services abroad would help urban economies in which large-scale business service firms are concentrated, chiefly the diversified and specialized service centers.
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From page 80... ...
Because the growing and declining sectors are not evenly distributed among the regions of the country and among the different types of areas within the urban system, there is a need for a spatial as well as a sectoral perspective on national economic strategy. What happens at the level of the urban area is important to the national economic system.
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From page 81... ...
Place-oriented policies have typically been targeted on the basis of indices of "distress." Because of the politics involved in developing statutory formulas for the distribution of funds, some have argued that s The Comprehensive Employment and Training Act, however, was not strictly a place-oriented policy. 6 For example, see evaluations of the Urban Development Action Grants program conducted by the Reagan administration (Housing and Development Reporter, February 1, 1982:687)
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From page 82... ...
Urban development policy that works in concert with sectoral strategy and is aimed at improving the overall competitive position of the nation must recognize that for some places to grow stronger in their most promising new functions, they may have to lose some jobs from obsolete functions. This means not just retraining some of the labor force but relocating it (Schwartz, 19833.
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From page 83... ...
The effectiveness of federal leverage programs, particularly UDAG, has been widely accepted.8 The critical question is therefore not whether to maintain federal leverage programs but what form they should take. In addition to UDAG, two other approaches to providing leverage capital have been widely discussed in recent years: a national urban development bank and a new version of the Reconstruction Finance Corporation (RFC)
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From page 84... ...
One way of performing such a role would be to consolidate various capital leverage funds that now exist into a single national fund. Such programs as Economic Development Administration loans and grants, Small Business Administration loan and loan guarantee programs, and various other general financing programs (possibly including UDAG)
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From page 85... ...
For some cities the projects of choice may well be firms that cannot operate efficiently in an enterprise zone but could operate successfully in other locations. It might thus make more sense to extend tax credits to any firm that locates or expands in an economically distressed city and, in doing so, hires a significant number of local lower-income or structurally displaced workers and strengthens the local tax base.
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From page 86... ...
Federal involvement can be limited primarily to tax policies that encourage business investment in the facilities providing the necesary service and to regulations that deal with fair pricing and environmental protection. Most urban infrastructure is provided by state and local governments through their own capital financing systems, primarily general obligation and revenue bonds.
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From page 87... ...
The Need to Assess Need The federal government is, and is likely to continue to be, a major source of funding for key elements of urban infrastructure that are directly related to economic development, particularly transportation and urban sanitary systems. In addition to specific facility grant programs, a substantial amount of the money made available to localities through the Community Development Block Grant program is used for local public works projects.'5 Aside from the issue of the adequacy of funding for these programs, there is a fundamental problem that should be promptly addressed because its resolution will affect the future levels of expenditure |4 The exact level of need is in considerable doubt, but there is agreement that it is substantial.
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From page 88... ...
Financing Urban Capital Improvements Even if savings are possible through adopting more cost-effective standards for performance and through developing better techniques for extending the life of existing facilities and for replacing them, a major new investment in public facilities in a number of urban areas clearly is needed. Given the level of investment that will be required to provide, repair, replace, maintain, and operate urban infrastructure, many state and local governments will not be able to achieve acceptable levels of service without some form of federal assistance.
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From page 89... ...
Their resolution could be facilitated, however, and the uncertainties of the bond market and of federal assistance, which are well beyond state and local control, could be ameliorated by establishing a national infrastructure bank linked to similar banks at the state level (Peterson, 19841.~6 An infrastructure bank could be capitalized by consolidating current capital grant programs and issuing Treasury bonds. Such an approach should be preferred over a new block grant because it offers a long-term commitment to a long-term problem.
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From page 90... ...
The consolidation of all urban public facilities grants programs into a single national infrastructure bank would permit state and local governments to draw on it to help support their own capital improvements programs to aid the economic transformation of a community. Loans could encompass major maintenance and replacement programs that properly should be financed through long-term debt.
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From page 91... ...
A FRAMEWORK FOR URBAN ECONOMIC DEVELOPMENT STRATEGY Using Economic Leverage The objective of urban economic development policy is to strengthen the local economy, which usually means diversification and adjustment toward more economically competitive activities. The basic technique for achieving that objective is leverage using available resources and policies to facilitate higher levels of private investment in those activities than would otherwise occur.
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From page 92... ...
In such cases the land and facilities may be used as investments, the government retaining an equity interest through a limited partnership; the land may be leased to the developer, cutting development costs and providing larger future revenues than would be obtained through taxation of the project; or the land may be sold below market price, recovering the revenue conceded in the sale through later appreciation in the value of the property (Gladstone Associates, 19784. For these kinds of leveraging arrangements to be possible, the states' basic enabling laws governing capital programming, condemnation powers, and land management must be flexible enough to permit state and local governments to select the most workable techniques for a particular activity.
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From page 93... ...
Local tax abatement schemes, for example, have been shown to have little leverage in actually attracting investment, compared with such other measures as venture capital, high-quality services, and public facilities. Industrial revenue bonds can provide leverage capital, as can the use of tax increment financing districts to support service and facility improvements for an industrial park or business district, but these devices should be used only when the private investments they supplement or subsidize are likely to achieve local goals for jobs, tax base growth, and adjustment to new economic functions.
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From page 94... ...
Using Urban Design Finally, an urban economic development strategy should include a strong urban design element. While it need not be provided in great detail, a design concept that establishes an image, theme, or strong idea for future development can guide and stimulate both public agencies and private investors to provide the overall scale, amenities, sense of place, linkages, and sorts of activities that make a place function well as a center of economic and social life rather than as a sterile collection of buildings and facilities.
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From page 95... ...
And it is also important to leave room in designs for adjustments the market may find it necessary to make. CONCLUSION The framework that we have outlined for capital investment in the urban future is flexible.
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From page 96... ...
Finally, an important element of capital investment strategy is a policy to ensure the development of a national system of infrastructure that can attract, support, and serve an advanced economy. This does not demand that the federal government directly finance all of the needed improvements in national and nationally related urban public facilities.
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