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III. IMPACTS OF THE NEW REGIONALIST POLICIES

Would regional governance reduce central city blight and would it limit the process of employment and population decentralization without creating other undesirable side effects?

The answer clearly depends on the form of regional governance which is advocated. The new regionalism espouses a variety of possible policy approaches. It is, therefore, impossible to define it precisely. To the extent that regional governance means the fostering of voluntary agreements among local governments so that regional or inter-jurisdictional problems can be tackled jointly, I cannot see anything wrong with that. Truly voluntary agreements are always mutually beneficial and anything which is mutually beneficial to the parties involved can only improve economic efficiency. Thus, for example, if inner-ring suburbs voluntarily decide to cost-share in the mitigation of the blight of those central city neighborhoods which border them and if the voters of those inner-city suburbs supported the idea, it must be assumed that it would benefit at least the majority of the residents.

But the forms of grand regional governance which are advocated go much beyond voluntary agreements among local governments. I will deal with two examples: one existing, the other proposed. The existing example is the law in the State of Oregon which prescribes that all urban areas institute growth boundaries. The second is the currently proposed Smart Growth Economic Competitiveness Act of 1999 (Hoyt and Rath, 1999) which may be enacted in New York State and is an example of similar concepts and existing legislation implemented in other states. The Act calls for the direction of "...future state infrastructure investments toward existing population centers and/or existing public infrastructure" by means of a regional compact of local governments.

The language in the proposed legislature states explicitly that redirecting funds in the manner proposed, can address the problems of "...rising property taxes; decentralization of employment centers; air and water pollution; congestion of public ways; isolation of older cities and suburbs, and the consequent abandonment of substantial public infrastructure investments; diminishment of agricultural lands; and the reduction of public services."

How does New York State's SGECA, differ from what is being practiced in Portland, Oregon? Both policies designate the central parts of metropolitan areas as locations to which future development should be attracted, while indicating that peripheral areas, which were the growth areas of the recent past, should not attract additional growth. Beyond that, the two approaches differ as to the means employed: Portland attempts to direct development to the center by means of direct land use controls at the metropolitan level, while SGECA proposes to do it by targeting subsidies to the central area and denying them or reducing them to the periphery.

In the case of Portland, there is a precise growth boundary beyond which certain types of development are not allowed to occur and other types of development are allowed if they provide their own infrastructure. For example, families that do not wish to live within the growth boundary can set up single family homes in the rural areas outside the boundary but they must provide their own septic tanks and some other services. If members of such families continue to hold jobs within the boundary, they are forced to endure longer commutes for the luxury of choosing their preferred residential density outside the boundary.

In the case of New York State, as I understand the proposed legislation, there would be no strict growth boundary. However, many peripheral areas would not be eligible to receive state subsidies for the development of certain kinds of public infrastructure. Presumably, they would be able to build the same or substitute infrastructure with private capital. Meanwhile, the close-in areas targeted for future development would presumably operate as a regional compact, sharing infrastructure subsidies according to a formula which would direct funds toward existing population centers or toward areas of existing infrastructure. What this means, for example, is that the City of Buffalo would find it easy to get money from the state to upgrade streets or to replace old wooden water pipes, while the rural suburb of Newstead would find it impossible (or, perhaps, very difficult) to get money to build more local streets or to install sewer lines. This would raise the private cost of development in Newstead, lowering it in Buffalo and would thus induce development destined for Newstead to go to Buffalo instead.

What happened in Portland is by now pretty well known (see, for example, Knaap 1985; Knaap and Nelson, 1988, 1992). The strict growth boundary limited the area in which development could occur. Because Portland was a rapidly growing area, the price of land within the boundary increased sharply, by 400% by some accounts (National Association of Home Builders, 1997). A 400% increase in the price of land, if true, translates into an 40%-80% increase in the price of a housing unit on average assuming that land costs were on average 10%-20% of housing costs before the growth boundary was instituted.

What did Portland area residents get for such a sharp increase in their housing costs? Those who owned land inside the boundary clearly made exceptional windfall gains, but these gains came at the expense of those who owned land outside the growth boundary: their land lost value because future development prospects were either wiped out or greatly diminished. Thus, the growth boundary acted as a device which distributed wealth away from peripheral land owners (including farmers) and in favor of centrally located land owners (including homeowners and city landlords). The property rights of the peripheral owners of land were taken without compensation.

What about tenants? If the above estimates are correct, businesses and households who rented buildings within the growth boundary are on average paying 40%-80% more than they would be paying. This is exceptionally harmful to those who have low incomes. Many such households were forced to move out of the boundary and into surrounding rural towns, where the cost of housing remained quite reasonable relative to the areas inside the boundary. Others moved out because they could not afford a large enough home at the high land prices inside the boundary. Such households located in the peripheral towns and rural areas where they could install their own septic tanks. To the extent that they continued to work inside the boundary, they incurred longer commutes than they would have in the absence of the growth boundary. A hidden cost, difficult to quantify but real, was also borne by those households and businesses which would have located in Portland but decided not to do so because of the high land prices there. By the same reasoning, some businesses must have moved out of Portland or out of state, while others are considering doing the same: Intel, for example (see National Association of Home Builders, 1997). But cost increases were not confined to just land. Businesses and households buy a variety of things (restaurant meals, theater visits and all kinds of other shopping goods) which are produced or sold locally. To the extent that land is an input in the production or sale of these goods and services, their prices must have increased as well. Wages must have increased in Portland because of the higher cost of living there induced by the growth boundary. But labor is a mobile factor, whereas land is immobile, and the increase in wages could come nowhere near offsetting the sharp increase in land prices caused by the boundary.

I have included a supply-demand diagram for the land market in the Portland metropolitan area. Figure 1 illustrates how the limitation in the use of land defines the effective land supply function SS which is completely inelastic in its binding portion. The demand curve DD represents the aggregate quantity of land all users would demand at any given price for the land. The supply function, SS, is that which would hold were there no growth boundary. Then, the equilibrium price of land would have been P1, whereas now the equilibrium price is P2, reportedly five times higher. If there were no growth boundary, the total benefits in dollars to the users of land would be measured by the triangular area adf and the benefits in dollars to the owners of land by the triangular area dfh. The growth boundary regulation causes the benefits to the users of land to shrink from adf to just abc, while the benefits to the owners of land shrink by egf and increase by bced. The loss efg is incurred by those who cannot develop their land while the gain bced is a transfer from the users of land to those owners of land who are within the boundary. Note that total benefits (to users and owners alike) have decreased by the area cgf. This measures the deadweight loss of the growth boundary regulation in Portland exclusive of the costs of thinking up, implementing and monitoring the growth boundary.

New York State's SGECA legislation would operate in a different manner but with some similar effects. The infrastructure subsidies to the central areas would reduce the cost of development in those areas relative to the outlying areas, to the extent that these improvement costs would be otherwise borne by developers. To the extent that the improvement costs would be otherwise borne by local governments, the subsidies would stimulate the demand for land by improving the infrastructure and by reducing the local tax rates. Developers would now demand a higher aggregate quantity of land, because it is cheaper to build on it on an after-subsidy basis and because the land has been made more desirable by the infrastructure investment or the lower tax rates. This is illustrated in Figure 2 by the outward shift in the demand curve for land from position DD, prior to the infrastructure subsidies, to position D'D' after the infrastructure subsidies. That causes land prices to increase and the developed quantity of land to expand. To the extent that subsidies would not be forthcoming, the opposite would occur outside the targeted areas, with the demand curve for land in those areas shifting inward. The effects of this would be similar along general lines to what happened in Portland, although the same effects would likely be much milder because there would not be a gross limitation on land development. The diagram shows that, without the subsidy, the benefits from land development are equal to the area abc (split up as abd to users of land and dbc to owners of land). After the subsidy, the benefits are now given by efc and are higher by efba. Correspondingly, the benefits would be lowered outside the targeted area. But this is not the whole story. The cost of the subsidy itself needs to be deducted from the increase in the benefits to land use and ownership in order to arrive at a final measure of total net benefit. If the infrastructure subsidies cost the taxpayer more than efba less the amount by which the benefits are lowered outside the targeted area, then the program generates a net loss. Also, to the extent that existing subsidies to peripheral areas are cut back, there will be economic losses in those areas as well.

Figure 1: Effects of Portland's Growth Boundary on the Land Market
Figure 1

Figure 2: Effects of SGECA on the Land Market
Figure 2

What is unclear about the proposed New York legislation is the likely effectiveness of the centrally targeted infrastructure subsidies. The poor quality of infrastructure is only one of the reasons that residents and businesses and, hence, developers have flown from the central cities. The other more important reasons are that neighborhoods are blighted, that crime rates are too high, that streets are too congested, that building densities are too high and that city governments are not business friendly. To correct all these ills sufficiently to attract development back into the central cities might be so expensive that state income taxes would have to go up and the state would regress in its economic competitiveness even as it tries to improve that of its central cities. Finally, it is not clear that the withholding of public infrastructure subsidies from peripheral areas would discourage development in those places. Americans have shown a strong desire to move away from the cores of urban areas. This desire seems to be getting stronger as new forms of communication such as telecommuting, teleshopping and other forms of Internet communication become easier to employ, reducing the need for physical accessibility. Much of the infrastructure in peripheral areas is privately provided and does not rely on subsidies. Developers will provide the infrastructure as long as they know that they can pass on the cost to willing buyers.

Finally, any program which relies on subsidies may be regarded with at least some skepticism. Such a program would have to be designed very carefully. Surely it would be wasteful if all it did was to cause central cities to chase after newly available subsidies. Lessons from the past are not very encouraging: when the federal government was subsidizing the construction of fixed rail transit systems, planners in Houston did studies which greatly overestimated land use densities in Houston. Houston got a transit system but it was not an efficient investment. Subsidies could cause central cities and other central areas to become complacent and less competitive. If so, the problem of decline could be exacerbated not mitigated by the new regionalist programs of revenue sharing.

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