Urban economics ; Employment (Economic theory)

Adrianne R. Pena

Keith R. Phillips

English

Research Papers in Economics

The U.S. economic expansion
in the 1990s has been remarkable,
not only in length but also in the
broad-based participation across
U.S. metropolitan areas and regions.
Many cities fought hard to attract
jobs during the rolling recessions
of the 1980s, but by the end of the
1990s they were focusing on the
headaches accompanying those
jobs—growing traffic congestion
and increased air pollution. How
cities try to attract new jobs and
how they deal with the social
costs of rapid growth can signifi-
cantly influence the quality of life
in urban areas.
This article summarizes research
on these topics presented at the
August 1999 conference “Can Cities
Control Their Destiny?” hosted by
the San Antonio Branch of the
Federal Reserve Bank of Dallas.
(For background information on
the speakers and some of their
research, see the boxes.)
Strategies to Encourage Growth
The competition for industries
can lead cities to offer big compa-
nies lucrative deals. For example,
Dell Computer Corp., headquar-
tered near Austin, announced in
the summer of 1999 that it would
build a second facility in Nashville,
Tenn. The city of Nashville report-
edly offered Dell a package in
excess of $100 million, including
free land and site preparation,
infrastructure and transportation
improvements, and recruitment
and training assistance. Such large
tax incentives up the ante for cities
vying for new growth and raise
the question of how much is too
much.
Melvin L. Burstein, an attorney,
contends that tax incentives are
not the most efficient way to pro-
mote growth. He says the use of
subsidies and preferential taxes to 
lure businesses creates a war
among cities—both interstate and
intrastate. According to Burstein,
subsidies act as a negative tariff;
hence they are illegal under the
U.S. Constitution, which prohibits
restrictions on trade among states.
Traditionally, subsidies have not
been held accountable to the com-
merce clause of the Constitution. If
subsidies are not ruled illegal,
Burstein suggests ending the war
among cities through federal legis-
lation that taxes subsidies. In other
words, the federal government
should penalize businesses that
receive selective tax and public-
service abatements.
Tax subsidies can result in
heavier taxes on small businesses
to offset lost revenue from the 
tax breaks to large businesses.
William Testa, a Federal Reserve
economist, says the competition
for jobs can also cause a reduction
in basic public goods—such as
education—crucial to productivity,
welfare and growth. Testa sup-
ports the “benefit principle,” which
Federal Reserve
Bank of Dallas
San Antonio
Branch
May 2000 South Texas
Economic Trends and Issues Vista
Can Cities
Control Their
Destiny?
The use of subsidies
and preferential taxes 
to lure businesses creates
a war among cities.seeks to equate the taxes
charged to a business with the
costs of government services re-
ceived. “Through this approach,
business taxes become location-
ally neutral with respect to
where businesses are most pro-
ductive, rather than having lo-
cation decisions whipsawed by
capricious tax incentives.”
The Internet’s proliferation
means companies are no longer
geographically defined or re-
stricted by infrastructure or local
markets. Jeff Moseley of the
Texas Department of Economic
Development asserts that this in-
creased competition among cities
and states forces the practice of
subsidizing. While he favors pro-
hibiting incentives, he recognizes
that fierce competition may have
positive attributes if it forces
regional governments to create a
climate conducive to free enter-
prise business.
Strategies other than tax in-
centives offer a broader approach
to attracting economic growth to
cities. The idea that “you can’t
manage what you can’t measure”
challenged economics professor
Paul Coomes to perform a study
focusing on measurable vari-
ables a city can use to define its
strengths and weaknesses. Using
such a strategy, a city can iden-
tify specific goals and objectives
to improve the quality of life and
define specific criteria to see if 
it is succeeding. In developing
such a plan for Louisville, Ky.,
Coomes looked at a wide range
of data—including the cost of
business and living, human and
physical capital, and the quality
of life—for Louisville and for
competing cities. More specifi-
cally, Coomes included measures
such as high school completion
rates, property taxes, education
performance measures, number
of museums, and hospital beds
per capita. Louisville then imple-
mented plans to improve many
of the human capital measures,
such as the quality of education,
in an effort to raise incomes. The
city will monitor the human cap-
ital measures about every five
years to see if it is reaching its
goals. Coomes’ findings offered
a strategy to improve economic
development, which is the foun-
dation for growth.
Likewise, innovative market-
Can Cities Control Their Destiny?
Conference Speakers
Angelos G. Angelou, Principal, Angelou Economic Advisors Inc., Austin
Melvin L. Burstein, Attorney, Burstein, Hertogs & McFarland, Minneapolis
Paul Coomes, Professor of Economics and National City Bank Research
Fellow, University of Louisville
Robert C. Lanier, Former Mayor of Houston and President and CEO,
Landar Corp., Houston
Susan McLain, Deputy Presiding Officer, Metro Council, Portland, Oregon
Jeff Moseley, Executive Director, Texas Department of Economic
Development, Austin
Randal O’Toole, Senior Economist, Thoreau Institute and Visiting Scholar,
University of California at Berkeley
Samuel R. Staley, Director, Urban Futures Program, Reason Public Policy
Institute, Los Angeles
William Testa, Vice President and Senior Economist, Federal Reserve
Bank of Chicago
Brett Van Akkeren, Deputy Director for Research and Policy,
Environmental Protection Agency, Washington, D.C. Strategies other than
tax incentives offer a
broader approach to
attracting economic
growth to cities.single-family home on an indi-
vidual lot in an outlying subur-
ban market rather than a smaller
townhouse near the urban core.
The survey also reports that peo-
ple prefer to drive their own
vehicles rather than use public
transportation when it is avail-
able (Chart 2). Given these pref-
erences, it may be difficult for
public policy to combat urban
sprawl.
Brett Van Akkeren of the
Environmental Protection Agency
refers to urban sprawl as con-
ventional suburban development.
He expresses concern about land-
use expansion, such as wasted
resources, consumed green space
and a lack of interconnectivity
between the city and the sub-
urbs. The concept of “smart
growth” has developed out of
these concerns. Smart growth
involves long-term planning to
sustain the demand for housing
while protecting the environ-
ment and preserving open space.
Van Akkeren suggests that smart
growth is about a balance be-
tween growth at the edge and
growth at the center.
Samuel Staley, an urban pol-
icy analyst, proposes that the
real estate markets can better
manage land development than
can comprehensive land-use plan-
have established growth man-
agement laws to protect farm-
land and open space. Dozens of
cities have embraced urban
growth boundaries to contain
development in existing areas. A
clear understanding of urban
sprawl would help determine
what issues to address in land-
use policies; however, academics
and urban planners struggle for a
generally accepted definition.
Most commonly, urban sprawl
encompasses the following: low-
density development consisting
of single-family homes on large
lots, strip commercial and leapfrog
development, development that
invades lands important to envi-
ronmental and natural resource
protection, and automobile de-
pendency, which leads to more
traffic and air pollution.
Clearly, the housing and
commercial development mar-
kets are reflecting the changes in
household preferences and life-
styles over time: first, the desire
to move from the farms to the
cities during the early 20th cen-
tury, then the shift from the cities
to the suburbs in the mid-1930s
to mid-1960s. As shown in Chart
1, the 1999 Consumer Survey on
Growth Issues by the National
Association of Home Builders
reports that Americans prefer a
ing tactics succeed in attracting
businesses. While working for the
Austin Chamber of Commerce,
Angelos Angelou developed cre-
ative strategies to encourage
growth in Austin on a conserva-
tive annual budget of $350,000.
With an innovative media plan,
Angelou was able to market
Austin and receive free publicity
around the world. Businesses
throughout the city helped with
recruitment, and volunteers en-
couraged development within
the community. For successful
growth, Angelou says, economic
development officials should
know their communities inside
and out. Once they understand
their community’s needs, offi-
cials can develop an appealing
marketing campaign. A commu-
nity marketing strategy requires
business, education and govern-
ment entities to work together to
create economic development.
Angelou emphasizes that “suc-
cessful economic development is
a marathon, not a sprint.”
Urban Sprawl
While most cities strive to
attract industry, the other side of
the coin is managing rapid
growth that can strain the city’s
infrastructure. Nearly 20 states
Chart 2
Private Vehicles Preferred Over Public Transportation
Do not commute
Drive own car
Bus/trolley
Car pool
Train or light rail
Van pool
Subway
Other
None
0 1 02 03 04 05 06 07 08 09 0 1 0 0
Percent of respondents
Form of transportation used for commuting
Have access to these forms of transportation
SOURCE: National Association of Home Builders.
Chart 1
Suburbs Preferred to City Living
Prefer townhouse in city, 17%
Prefer detached home in
suburban area, 83%
SOURCE: National Association of Home
Builders.a tiny fraction of all undeveloped
land. Staley’s research shows 
that less than 5 percent of the
nation’s land is developed, and
acreage in protected wildlife
areas and rural parks exceeds
urbanized areas by 50 percent. 
Staley also notes that de-
clining inner cities suffer from
“push factors,” including low-
quality public education, high
crime, high tax rates and fewer
housing opportunities. These
negative factors threaten a city’s
ability to compete for middle-
income families and households.
The revitalization of inner cities
will come from identifying and
correcting these push factors.
Former Houston Mayor Robert
C. Lanier also recognizes that
problems like high crime con-
tribute to the trend of people
moving away from the city.
Lanier’s first priority as mayor
was to “cancel the billion-dollar
monorail system, which peaked
at boondoggle, and take a por-
ning. His alternative, market-
oriented approach maintains that
the land-development market is
not random or irregular but com-
pelled by consumer behavior
and production costs. Staley says
the market is demanding low-
density, single-family housing,
leading to recent development
trends that “require accommo-
dating, rather than restricting
growth and regulating it through
market-oriented institutions.”
While acknowledging the
demand for suburban develop-
ment, Staley also points out that
cities often subsidize the devel-
opment of public services to the
suburbs, such as roads and water
service, and he thinks this type
of government subsidy should
be eliminated. He emphasizes
that current development pat-
terns pose little threat to the
environment and open space.
While city expansion appears to
waste resources and consume
green space, the land involved is
Can Cities Control Their Destiny?
Papers and Readings
Burstein, Melvin L., and Arthur J. Rolnick, “Congress Should End the
Economic War Among the States,” The Region, 1994 Annual Report
Essay, Federal Reserve Bank of Minneapolis, March 1995,
woodrow.mpls.frb.fed.us/pubs/ar/ar1994.html.
Coomes, Paul, and Barry Kornstein, “Macro Performance Indicators for
the Louisvile, KY–IN Metropolitan Statistical Area,” March 1996.
For a copy of this publication, contact Paul A. Coomes, Ph.D., at
pacoom01@ulkyvm.louisville.edu.
Oakland, William H., and William A. Testa, “The Benefit Principle as a
Preferred Approach to Taxing Business in the Midwest,” Economic
Development Quarterly, vol. 14, no. 2, May 2000, pp. 154–64.
O’Toole, Randal, “Dense Thinkers,” The Reason Magazine, January 1999,
www.reason.com/9901/fe.ro.densethinkers.html.
Portland, Oregon, Metro web site: www.metro.dst.or.us.
The Smart Growth Network web site: www.smartgrowth.org.
Staley, Samuel R., “The Sprawling of America: In Defense of the 
Dynamic City,” Reason Public Policy Institute, Policy Study no. 251,
www.rppi.org/ps251.html.
“1999 Smart Growth Report,” National Association of Home 
Builders, www.nahb.com/main_features/smartpdf.htm.
w hile city expansion
appears to waste
resources and consume
green space, the land
involved is a tiny
fraction of all
undeveloped land.tion of that money and spend it
rebuilding the city’s police force,
which had been depleted, and
rebuilding the city’s infrastruc-
ture and thus trying to reverse
the outflow of people.” He says
that making central Houston a
better place to live is the key to
reversing the trend of people
moving to the suburbs. 
Portland, Oregon 
As cities extend into outlying
counties, governing jurisdictions
become a more difficult issue.
The Portland metropolitan area
in northwestern Oregon devel-
oped the Metro Council as an
elected, interregional government
to serve more than 1.3 million
residents of the urban portions
of three counties, including 24
cities. Metro’s primary responsi-
bilities are regional land-use and
transportation planning, the solid
waste industry and regional facil-
ities such as the Oregon Zoo and
the Oregon Convention Center.
The Portland metropolitan
region has received national
attention for its unique approach
to long-range growth planning.
The region’s growth plans have
created land-use tools to achieve
targeted goals: allowing more
efficient development of land,
reducing parking in future devel-
opments, protecting stream cor-
ridors, managing future retail
store locations, keeping roads
accessible and creating afford-
able housing. Susan McClain,
deputy presiding officer of the
Metro Council, says Portland is
writing a success story on long-
range growth planning. She
asserts the importance of in-
tegrating land-use and trans-
portation planning. “You cannot
manage growth if you do those
two functions in a void,” she
says.  “Transportation and land
use have to be done together.
They have to be integrated in a
way that’s real.” 
In response to a growing
population and in an effort to
maintain the region’s current
urban growth boundary, Metro
encourages more compact urban
development, such as accessory
apartments above existing garages
and single-family, detached houses
on smaller lots. New commercial
and retail developments are
being built around light rail and
bus corridors. A recent commu-
nity-building project has devel-
oped apartments so that some
residents can step out their front
doors and catch the Interstate
MAX light-rail line. Members of
the Metro Council acknowledge
the critical role transportation
plays in the continued economic
health and livability of their
region. They advocate develop-
ment offering a pedestrian-
oriented environment, easy access
to transit and a mix of residen-
tial, civic and commercial uses.
Randal O’Toole, an econo-
mist who lives in Portland, dis-
putes smart growth programs’
promises of less congestion, less
air pollution, lower infrastructure
costs, affordable housing, more
open space and a sense of com-
munity. O’Toole argues that
Metro’s plan to restrict develop-
ment outside of the urban
growth boundary and to double
the population density of its
region will lead to more pollu-
tion and congestion. In fact, he
finds that these goals will create
a city much like Los Angeles,
which has one of the highest
population densities in the
United States. He predicts that
the promise to reduce conges-
tion and air pollution will be
abandoned in 50 years when the
The Portland
metropolitan region
has received national
attention for its unique
approach to long-range
growth planning.
To purchase an audiotape of the 
conference “Can Cities Control 
Their Destiny?” call Rachel Peña 
at (210) 978-1663 or e-mail
rachel.pena@dal.frb.org.population increases by 75 per-
cent, which means there will be
five cars for every three cars dri-
ving around today. He also
argues that light rail takes away
funds from buses, which are
more flexible and better able to
serve the community’s needs. 
Summary
Cities today face difficult
questions about how to attract
and manage growth. Planners
and city officials want to enact
policies to control their des-
tiny—to create a higher standard
of living for their citizens. At the
“Can Cities Control Their Destiny?”
conference, experts from various
fields presented arguments that
highlight the impact policies
have on growth and living stan-
dards. It is clear, however, that
there are always two sides to an
argument. While tax incentives
may force cities to offer a more
competitive business tax, they
may also subsidize large busi-
nesses at the expense of small
ones and lead to less spending
on infrastructure necessary for
long-term growth. In addition,
while urban sprawl policies seek
to reduce traffic and air pollution
and improve the quality of life,
some studies suggest that the
policies will have the opposite
effects. City officials and citizens
must decide what is best for their
communities. This article briefly
touches on some of the speak-
ers’ analyses; the publications in
the reading list give much more
depth to these important issues.
—Adrianne R. Peña
Keith Phillips
Federal Reserve Bank of Dallas
P.O. Box 655906
Dallas, TX 75265-5906
ADDRESS SERVICE REQUESTED
BULK RATE
U.S. POSTAGE
PAID
DALLAS, TEXAS
PERMIT NO. 151
For more information, contact 
Keith Phillips at (210) 978-1409 or
e-mail keith.r.phillips@dal.frb.org.
For a copy of this publication, call
Rachel Peña at (210) 978-1663 or
e-mail rachel.pena@dal.frb.org.
Vista is published by the San
Antonio Branch, Federal Reserve
Bank of Dallas, P.O. Box 1471,
San Antonio, TX 78295-1471.
The views expressed are those of
the authors and do not necessarily
reflect the positions of the Federal
Reserve Bank of Dallas or the
Federal Reserve System.
Editor: Keith Phillips
Copy Editor: Jennifer Afflerbach
Design: Gene Autry
Layout & Production:
Ellah Piña, Laura Bell
This publication is available on the
Internet at www.dallasfed.org.
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