The Misalignment Between The Economic Success of Local Government and Their Residents
As you can see from some of the other posts here, at the request of the US Conference of Mayors, I’ve been focusing on an economic development strategy that will work in the future. As a result of that work, I’ve been presenting my ideas in many places and before many audiences, generally including mayors or other senior officials of local government.
Without going into the whole line of reasoning, I discuss the combined effects of (1) a future with ubiquitous high quality communications and (2) the shift of the labor force to providing ideas and other intangible services. One implication of these trends is the disaggregation of the monolithic big company that would concentrate jobs in a city and, as an alternative, the empowerment of fluid teams of individuals.
To drive the point home, I argue that the true measure of the economic success of a city is the sum (or the median?) of the income and wealth of its residents — and not the total sales of companies that might have a local postal address there.
In what sometimes comes across as a provocative statement, but isn’t, I put up an equation: economic growth does not equal real estate development. I say that because a large part of the economic development expenditures of local governments have been about real estate development.
A few times in recent weeks, I’ve met with mayors or economic development directors who understand exactly what I’m talking about and see the future as I present it. Then comes the response: “We should be thinking about the amount of money in the pockets of our residents, but you’re missing something here. Our business — the city government — is mostly dependent upon property taxes and commercial real estate is the golden goose that lays most of those tax eggs. We focus on real estate development because that’s where we get the return in the form of taxes later.”
That’s a fair argument for the year 2011, as far as it goes. Of course, often what is a key part of the incentive package is a reduced property tax bill. More important, commercial real estate will have a hard time maintaining itself in the face of the trends that I discuss. Indeed, over the last ten years, many big companies have found that they need half the square footage per employee that they used to. Even now, many employees telecommute or operate remotely somewhere out of the office. So in the long run, this equation between real estate development and economic growth will break down.
This raises a more serious public policy question, though. How did we get into such a situation where a smart mayor realizes that the economic success of the city government is misaligned with the success of the city’s residents? And, for the viability of our democracy, how do we align these?
Or, if you want to ask a related and more pragmatic question: if the goose that laid the golden eggs — commercial real estate — is getting ready to retire, what replaces it?
Either way you look at it, local governments in the United States need to shift away from their dependence on commercial property taxes. There are various alternatives that cities have been forced to pursue and may have to depend on more. Some examples: income taxes, property taxes on residences (which the Internet has now also made places of work and shopping) or even sales taxes on the goods/services that are sold directly into residences. I’m not suggesting that any of these is perfect or even good, but they all share one characteristic — the revenue base grows as the city’s residents have more money in their pockets.
Whichever of these or other possibilities is selected, cities and counties will be forced to align their financial success with the economic success of their residents. This is a good thing for their residents because their local government will then emphasize the development of each resident’s income potential. Even from the narrow interest of the government as a business, this is a good thing because government will have a more assured revenue stream that is appropriate for a 21st century economy.