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A New Urban Opportunity Agenda

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A New Urban Opportunity Agenda

Rather than embrace redistribution and regulation, cities should unleash the power of free people and free markets to uplift the poor. Autumn 2015
BRENDAN MCDERMID/REUTERS/CORBIS
New businesses are key to urban economic growth. Cities need to make it easier for start-ups, like open-source electronics maker LittleBits, to get up and running.

It has been two years since a new liberal breeze swept through New York’s City Hall. After two decades of pragmatic leadership, Gotham had opted for a full-throated progressive mayor, a man who, in the hope of reducing inequality and helping the city’s poor, favored traditional public schools; steep taxes on those making more than $500,000; a $15 local minimum wage; and extensive regulatory requirements for the construction industry, imposed in the name of affordability. As Bill de Blasio may have started to learn, however, mayors with such huge expectations have often overseen urban failure. In the sixties, liberal John Lindsay’s egalitarian mayoralty left New York with more dangerous streets and less balanced books—and no more equal. As the redistributive mayor of Detroit from 1974 through 1994, Coleman Young—a hard-left politician who had supported Marxist Henry Wallace over Democrat Harry Truman in the 1948 presidential race—watched his city implode, burning itself every Devil’s Night and suffering nation-leading poverty and murder rates. The reason isn’t hard to grasp. The core deliverables of city government—safe and clean streets, good schools, a favorable economic environment—are hard enough to achieve and maintain without also seeking to eradicate locally the inequalities that abound in our highly unequal world.

Still, the social forces that brought de Blasio to office are quite real. New York is indeed a highly unequal city, and it is filled with liberal voters, many of them young. The memories of the city’s brush with bankruptcy and once-stratospheric crime rates are no longer keen. Thus, a meaningful center-right alternative to the new urban progressivism—a force not just in New York but also in many other American cities—must show how it can do more to fight poverty and promote economic mobility than can any liberal fix. This next urban agenda, which respects and draws on the power of free people and free markets, should seek to empower urban entrepreneurialism, build a competitive and regularly assessed urban education system, and unleash a vibrant market for labor and housing. Cities can lead the fight for economic opportunity but only if they’re places of private entrepreneurship and public innovation, not battlegrounds for class warfare.

In the 1930s, Mayor Fiorello La Guardia of New York appeared to illustrate how a good-government Republican could preside over a font of public largesse for the poor. Yet La Guardia’s spending was made possible by Franklin Roosevelt’s expansive New Deal agenda and federal, not city, tax dollars. When a La Guardia successor, John Lindsay, tried the same trick during the 1960s, he found that he couldn’t balance the books. Lindsay dreamed of making New York a model of fairness and public competence, but the city became a model of neither. In 1965, the year that he was elected mayor, the city had eight homicides per 100,000 inhabitants; by 1973, his last year in office, 22 homicides took place per 100,000 inhabitants. He also presided over an explosion of city spending, which rose by over 90 percent in real terms during his two terms—an increase far more dramatic than seen in other cities, like Chicago, that were led by less charismatic but more practical men. Lindsay also showed an inability to manage basic city services, such as clearing snow during a notorious 1969 nor’easter.

Lindsay left the humiliation of New York’s near-financial default to his successor, Abe Beame. Then, in the deadly summer of 1977, with the city reeling under a crime wave—especially the terrifying Son of Sam murders—and enduring hugely destructive riots after a power blackout, New Yorkers turned decidedly to the right, electing tough-talking Ed Koch. A pragmatic consensus began to emerge across America, where voters elected and reelected urban leaders known for competence rather than charisma. Some of these leaders were intrinsically liberal, like Boston’s Thomas Menino, while others were more conservative, like Rudolph Giuliani, but their ideology was almost irrelevant. All were determined to improve the quality of basic urban services, and their efforts, taken as a whole, proved highly successful.

Ironically, their success enabled the return of the liberal mayor. Not just New York, but also San Francisco, Boston, and Washington, D.C., have all elected leaders who dream of doing far more than picking up the trash more efficiently. Perhaps above all, these new urban progressives aspire to close the gaps in wealth that exist between their cities’ richest and poorest residents—and they see local redistribution as the way to do it. There’s so much money out there—they reason—that surely we can solve everything by hiking taxes on the wealthy and pouring taxpayer money into new social services. But their philosophy runs smack into a central theme of urban economics: heavily taxing the rich locally would just encourage them to move out, looking for friendlier tax environments in other cities or states. Coleman Young’s efforts to right social wrongs may have produced a more equal Detroit—but it was an equality of desperation, since wealthier Detroiters just moved outside the city limits. And how is it ethical or just for antipoverty programs to be paid for primarily by the neighbors of the poor? Why should person A, who lives in Wakefield in the Bronx, face a greater obligation to pay for poor kids in Harlem than an otherwise similar person B, who happens to live in Mount Vernon in Westchester, just 100 yards from the city border?

Yet if cities are terrible places for blunt redistribution, they’re terrific laboratories for innovation. Two decades ago, William Bratton experimented with Broken Windows policing while heading the Boston police force, before he brought this approach to New York under Mayor Rudolph Giuliani and reduced the city’s crime dramatically. Nearly a quarter-century ago, Milwaukee’s Democratic mayor John Norquist pioneered school vouchers. Today, post-Katrina New Orleans is showing what can be achieved when a dysfunctional public school system is replaced with an all-charter system.

A new urban opportunity agenda can experiment with various new ways to uplift the poor. If such experiments are carried out with limited cash outlays, they could create a model for national policy, too. After all, in the current environment, with Congress under Republican control, there’s unlikely to be much federal enthusiasm for any new taxing and spending on social problems.

Nurturing entrepreneurialism should be a fundamental component in an opportunity agenda. Full of suppliers and customers, cities have always been great places for entrepreneurs. And entrepreneurship is a potent tool in fighting urban poverty because it provides a way for poorer residents to help themselves—often by creating jobs or offering services for their own community. Think of immigrant neighborhoods, where starting a small grocery store or a nail salon has become a common path upward for many new Americans.

Fifty years ago, the economist Benjamin Chinitz argued that New York City’s resilience over time reflected the city’s rich culture of entrepreneurship. A large body of subsequent research has supported this view. Places with an abundance of entrepreneurial energy—typically measured by the number of small or new firms—have grown much more quickly than places with less entrepreneurship. This correlation holds within industries and within metropolitan areas. Private entrepreneurs, not public officials, power urban economies.

Yet while many agree that entrepreneurship is good for cities and their residents, little consensus exists about what policymakers can do to promote it, especially in high-poverty areas. Several plausible approaches present themselves, but hard evidence thus far is lacking on what actually works, or works best. We need innovation and evaluation to learn more.

The most commonly applied policy is based on public loans or loan guarantees for entrepreneurs. The federal Small Business Administration operates one such program, and states and cities often have similar initiatives. The typical rationale for these programs is that the lending market is marked by some kind of failure. Every start-up without financing complains that venture capitalists and banks are excessively conservative. Would-be entrepreneurs naturally feel that if their brilliant business models fail to attract funding, this must reflect a serious market imperfection. A more skeptical view would say that governments make bad venture capitalists and that it is surely wiser to leave early-stage business lending to professionals.

Unfortunately, we have no examples of truly randomized lending, which is what would be necessary in order to evaluate whether the government loan programs worked. Absent such experiments, the best we can do is to compare companies that received such aid with similar firms that didn’t, and see how they fared. Together with Nina Tobio, I’ve done such a comparison with a Massachusetts program that extends loans to particular businesses. Using Dun & Bradstreet data, we matched the government loan recipients with comparable firms that didn’t get loans and found that the loan recipients had slightly less employment than the non-recipients, though the results weren’t statistically significant. The findings, though, broadly support business thinker Joshua Lerner’s survey of public entrepreneurship programs, Boulevards of Broken Dreams, which found little evidence that they do much good.

Still, such loan initiatives operate all over urban America and badly need more rigorous evaluation. Here’s a suggestion that would give us some needed information. Combine various loan programs into an “Office of Urban Entrepreneurial Support,” at least on a temporary basis. The office could then solicit applications for loans and privately select a group of deserving businesses somewhat larger than the number of firms that actually get the loans. Within the overall group, which would represent a big sample size because it brings together multiple initiatives, one could randomize the loan support. You would have similar firms receiving and not receiving loans, in other words, and be able to follow the companies’ development. The effect of government loan-making to businesses could thereby be properly evaluated. In principle, this program could also determine where lending is more effective (if effective at all) by looking at subgroups of firms—to see, say, whether retail firms or tech start-ups or some other category of company produced the most employment gains.

For free-market supporters, regulatory relief is a better way to help urban entrepreneurs. Older cities, especially, they explain, have added layer upon layer of business regulations, many of which loom as obstacles when one is trying to get a business up and running. A recent report from the U.S. Chamber of Commerce Foundation shows just how hard it has become to start a business in many American metro areas. An antiquated New York City law, for example, requires entrepreneurs to purchase two advertisements in local newspapers announcing the formation of new companies within 120 days, or risk suspension of their right to transact business. Getting permission to start new construction in San Francisco can take 175 days and cost more than $100,000 in administrative fees. One would reasonably assume that these kinds of rules discourage the formation of new businesses, though here, too, there is little hard evidence.

One way to tackle regulatory relief would be for cities to set up one-stop shopping for business permits. Instead of dealing with a dozen agencies to get the needed permissions to open, as is too often the case today, an urban entrepreneur could visit just one permitting authority to get the green light for a new business. The permitting authority might still draw on the expertise of the fire department or public-health officials for safety questions, but it would significantly speed up and improve the regulatory experience of start-ups.

Two leading models exist for one-stop permitting. The first is to have a public entity that has the power to issue the permits—such as the Devens Enterprise Commission, formed in Devens, Massachusetts, after the closing of the Fort Devens military base in the mid-nineties. The alternative approach is for the entrepreneur to deal with a public agent who does the work of seeking permits from the various permitting bodies. New York City’s New Business Acceleration Team (NBAT) is an example of this model.

The Devens model is preferable. If a single entity has the power to permit, it can be held accountable if delays grow too long. Cities might require a one-stop permitting entity of this kind to render a verdict in 30 days. Such a deadline wouldn’t work with the NBAT approach, since an agent lacks the power to ensure a speedy permit delivery.

As with the government loan-support idea, cities need to evaluate permitting processes rigorously. One experiment would be to set up a one-stop permitting authority (like Devens) that firms would need to apply to in order to receive regulatory relief. Some firms would be randomly chosen to receive the one-stop permitting; others would not. Then you could follow the firms and see if the ones that got the relief were more likely to succeed—or whether moving quickly on permitting has any downsides. This wouldn’t tell you anything, however, about whether extensive regulatory barriers led potential entrepreneurs to move to other areas, where opening was easier or less expensive. One therefore might want to run a one-stop permit shop limited to a particular neighborhood, perhaps a poor one. This would allow a comparison of entrepreneurship within and outside the district, to see if the regulatory relief encouraged more business formation.

Education is perhaps the most important tool in opening up greater economic opportunity for the urban poor. The correlation between schooling and earnings is one of the best-documented facts in economics. Yet the past two decades of education reform have taught us that improving urban public schools is anything but easy. Many administrative barriers and entrenched interests—above all, powerful teachers’ unions—get in the way of fixing underperforming districts. Just throwing more money at the schools seems to do almost nothing to boost academic outcomes, as researchers—most notably, Eric Hanushek—have shown for decades.

We know that charter schools—public schools liberated from many union-derived restrictions, such as lockstep salary schedules and onerous work rules that too often deliver poor educational outcomes—can meaningfully boost student test scores and, later in life, raise the income of those students. The positive educational impact of charters has been well chronicled. In 2009, Stanford economist Caroline Hoxby compared the standardized test results of students who won spots in New York City charter schools via lottery with those who entered the lottery but didn’t get a spot (creating a naturally randomized sample). By the third grade, Hoxby found, the average New York charter student was 5.3 points ahead on state exams in English and 5.8 points ahead in math. Remarkably, by the time they entered high school, the charter students not only were outpacing their traditionally schooled peers in New York City; they were also performing nearly as well as students in the well-to-do communities of suburban Westchester. To increase the number of charters therefore seems like an obvious way forward on the school-reform front; the evidence behind them also makes that task more viable politically.

Progressives like Mayor de Blasio, who generally don’t like charters, have championed universal early-childhood education as a way to improve the life chances of the poor. Such programs, when designed right, can have beneficial effects, though the long-term impact on inequality and poverty of even the most celebrated past examples remains disputed. (See “Preschool Stories,” Summer 2015.) If we’re going to introduce universal pre-K, though, especially in big cities like New York, the programs should be run by a wide range of providers, offering many different educational models. The city could then evaluate the providers and encourage emulation and expansion of successful practices. The failures would close.

An improved version of vocational education could be another major pillar in a new opportunity agenda. The ideal of vocational ed is clear and compelling: schools should teach students—above all, those who don’t intend to go to college—economically valuable practical skills, whether carpentry or machine work or writing computer code. Forty years ago, the political scientist Edward Banfield made a forceful case for such training in his classic The Unheavenly City, contending that liberal arts education was leaving too many students without skills marketable in the modern economy. One way to explain entrenched poverty, economic immobility, and joblessness is that too many children are indeed growing up without developing much usable human capital.

But prominent vocational-education programs have shown significant downsides. In Boston, for example, Madison Park High School was an ambitious dream of the 1960s—a vast vocational school that Ed Logue, Boston’s great redeveloper, claimed “will give Latin School [the city’s premier magnet school] a run for its money.” In 2014, though, just 24 percent of the school’s tenth-graders scored proficient or higher in math—Massachusetts’s average is 79 percent—and less than 5 percent of the students were proficient or higher in science or tech. Massive administrative failures have plagued the school. Students didn’t receive their class schedules last fall until a week after school had opened; parent protests finally pushed the administration into action. Then, the principal resigned after it turned out that she had never filled out the paperwork for certification in Massachusetts. Her predecessor had been placed on administrative leave in 2013 because of a federal investigation into his alleged role in a credit-fraud ring.

These travails tell the story of only one troubled institution, but vocational training runs into structural difficulties in any traditional public school. The teacher tenure system in place in most public schools, which rewards seniority above all, is less problematic when teaching math or history, the basics of which may have changed little in 40 years, than when trying to instruct kids in, say, computer programming. To be valuable, vocational skills must constantly adapt to market conditions, and that is no easy task for the slow-moving bureaucracy of a typical public school system. Despite the good living that one can earn with in-demand vocational skills, moreover, some vocational schools acquire a stigma that causes ambitious students to avoid them. Poor test scores from those who remain can then repel good students even more, unleashing a cycle of failure.

A better model would again look to competition and evaluation, which leverage the urban assets of scale and diversity. Kids might continue to go to traditional schools, but they could also attend after-school vocational training programs, offered by independent institutions—including trade unions, for-profit schools, and employers. This would, in effect, lengthen the school day, imitating many successful charter schools, but the extra instruction would come from outside educators, not the standard teaching staff. The outside educators’ independence would facilitate specialization—a real plus in vocational training. A short-term evaluation would test whether students had gained the skill in question. A long-term analysis would track the employment earnings of program graduates—crucial data in judging whether to expand the programs.

Numerous administrative issues would need to be resolved, including the location of training and how to fund it. But the basic point is that knowledge, not money, is the scarce resource in public education. Cities can provide more knowledge, whether in charter schools, pre-K, or vocational training, by encouraging innovation. The urban genius for creativity is lost when education is delivered by a single public monopoly supplier.

For many on the left, urban ills like long-term poverty and inequality and lack of affordable housing can be fixed by regulating businesses more aggressively—after all, they argue, the bad behavior of businesses helped cause those problems. So why not require firms to pay local “living wages” of $15 per hour? Why not require developers to build affordable housing as a condition of doing other business in the city?

The reason: just as with excessive local taxes on wealthy urbanites, it’s bad economics and dubious ethics. Sky-high minimum wages make it less appealing for firms to hire less skilled workers (or to locate in areas with such elevated minimums). Given the enormously high level of American joblessness, it’s hard to see the wisdom in making it more expensive for employers to hire ordinary workers. It’s hard to see much social justice in such rules, too. It’s a coherent worldview to believe that resources should be transferred from the richest members of society to the poorer ones. Redistribution may reduce the incentives to work or save and invest in education, but if one’s taste for equality is strong enough, one can justify it. But what moral justification is there in saying that only the shareholders of Wal-Mart and other employers of low-wage workers should pay for those income transfers? And the burden of the higher mandated wages will ultimately fall on many of the customers of these businesses: less well-off urbanites. Higher wages increase production costs, and prices rise with costs. Redistributive regulation will force poorer city dwellers to pay more.

Such regulation also induces behavioral responses that often run completely counter to the intent of the regulation. Consider a fable. Imagine a magical kingdom that houses a thriving industry in which wizards compete to produce magic beans. One year, a drought reduces the supply of magic beans; prices rise for the beans that do get produced. In response, the king demands that all the wizards set aside one-quarter of their magic-bean output as affordable beans, sold at low prices to deserving friends of the king. Some wizards decide that they can do better elsewhere or by making something else, and the bean supply drops further. The king is shocked to find that, while he has managed to get some affordable beans grown, the free-market price of the beans has risen again. He responds with even stronger affordability requirements: one affordable bean shall be produced for every unregulated bean, he commands. More wizards exit the magic-bean business. Prices rise again. Finally, the fed-up king demands that five affordable magic beans be produced for every one free-market bean. By now, only one wizard is still growing the beans, and he made only six beans in all. But when he found that he couldn’t sell the free-market bean for enough money to cover the costs of producing the five affordable beans, he skipped town, too. He met a young man named Jack, who was bringing a cow to market, and swapped his six beans for the animal. Jack’s story is well known. The wizard took the cow to Vermont and started making artisanal cheese. The kingdom never again saw magic beans for sale.

The housing affordability policies that New York and other regulation-heavy cities embrace haven’t reached this extreme, but they carry the same risks. The market price of housing reflects supply and demand: less supply means higher prices. Requiring developers to set aside affordable units is implicitly a tax on development. Raising taxes on developers will reduce supply, and that will bring higher prices in the “non-affordable” sector of the housing market. And the same ethical issues arise in this context as they did with local living-wage ordinances. Why should one segment of the population—those who build and buy new housing—bear all the costs of providing affordable housing?

The solution to high housing costs isn’t more regulation but more free enterprise. A relatively unfettered construction industry is the best hope for the building of sufficient housing supply to keep real-estate prices reasonable. If local politics does mandate affordable housing, the requirements should scale down with density—that is, the more units a developer promises to construct, the fewer extra affordable units he should have to set aside. This gives him the incentive to build more. Cities also need to do a better job of making land available for high-density residential construction. (See “Preservation Follies,” Spring 2010.)

Another barrier to the building of new urban housing is the property tax. Currently, cities tax the total value of real estate on a site. If you build more, in other words, you pay more. More than a century ago, economist Henry George argued that taxing land made much more sense. He was right. A tax on the value of land can probably raise just as much money as a tax on real estate, but it doesn’t deter construction.

Urban America’s problems of poverty and joblessness are real. Progressives have been elected to address those problems, but their simple big-government solutions—updated but essentially the same as those tried in the past—are almost sure to fail. We need a more forward-looking urban-policy approach. Unleashing urban entrepreneurship, creating a richly competitive educational system providing everything from effective pre-K to up-to-date vocational training, and reducing barriers to building lower-cost housing and hiring less skilled workers should be primary elements of that approach. A brighter future for America’s cities would be the result.

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