Opinion: Carolina Journal Opinions

Walters Finds Cities Need Free-Market Atmosphere To Thrive

• Stephen J.K. Walters, Boom Towns: Restoring the Urban American Dream, Stanford University Press, 2014, 210 pages, $27.95.

Why are some American cities thriving, growing in population, investment, and incomes, while others are in decline with shrinking populations, crumbling buildings, and fleeing businesses?

For answers, read Boom Towns by Loyola of Maryland economics professor Stephen Walters. Based on years of studying cities, he concludes that the key to a successful city is to leave people alone to invest and prosper. “The record is clear,” he writes, “cities grow and prosper when they encourage the formation of capital in its many forms by securing the returns that flow from it.”

And what causes cities to go into decline is equally clear — it happens when government stops protecting property rights. People and capital don’t stay where they are poorly treated. Walters proceeds to defend his thesis with cases that show the various ways politicians, sometimes in league with private interests, have turned growth into decay.

Probably the most widespread threat to a city’s continuing success is redistributive taxation. Accumulated wealth in the hands of business people and professionals is a tempting target for politicians who figure they’ll gain far more votes than they’ll lose by imposing high property taxes. The wealthy owners will have no choice but to pay and the revenues can be used for projects and programs most of the voters like and to buy favor with important interest groups.

One of America’s most notorious practitioners of that strategy was former Boston Mayor Michael Curley. The masses adored this “man of the people” who kept increasing property taxes on the rich, but few could see the slow-motion decline of the city his redistributive policies caused. High taxes repelled new investment or even maintenance. Population began to fall, as did median incomes.

Boston kept sinking until Massachusetts voters enacted a property tax limitation measure (called Proposition 2.5) in 1980. It received frantic opposition from the governing elite, city and state, because the elites were certain that tax limits would starve the city. But instead of starving the city, Prop 2.5 breathed new life into it. Ambitious people and investment quickly returned.

Walters emphasizes that Boston’s revival didn’t occur because politicians had solved any of the usual problems that are blamed for urban decay: racism, poor education, crime, and so on. All that happened was a tax limitation measure that kept Boston from strangling itself with high taxes.

Is that a unique case? No — the same scenario has played out elsewhere, and San Francisco is a good example. “Progressive” politicians there had played the same redistributive game Curley had in Boston, with the same results. By the 1970s, San Francisco was a dysfunctional (mainly due to militant unions that kept striking for higher pay, which the politicians gave them through higher taxes) and decaying city.

But in 1978 California voters passed Howard Jarvis’ tax limitation amendment (Proposition 13). California liberals declared that it would be utterly ruinous. Voters didn’t listen to them and passed it anyway. Almost immediately, capital began flowing back into San Francisco and other cities. As Walters writes, “Prop. 13 increased the return on investments and protected them against further Robin Hood raids.”

Redistributive taxation isn’t the only way that cities fail to secure property rights. Another enemy of prosperity is the union movement, which deploy shortsighted actions setting in motion counter moves that slowly erode a city’s capital base to the detriment of the workers and other residents.

Detroit is, of course, the prime example. Walters gives readers an intriguing history of the city that became the center of the auto industry. It grew at a dazzling pace from 1900 to 1950, by which time it was the nation’s fourth largest city, boasting a median family income second only to Chicago. A true boom town, the good wages available in its many industries attracted people of all races.

Growth and income turned downward, however, after the United Auto Workers used its muscle to organize the auto industry. Property rights for investors no longer were secure, owing to the National Labor Relations Act’s tilting of the law to favor unions. GM and Chrysler were unionized in 1937, Ford in 1941 (and read the book for the back story on Henry Ford’s capitulation). Unionism was embraced as an easy way for workers to get better wages, and it spread rapidly in Detroit.

The long-run effect, however, was similar to the impact of high tax rates. Investors stopped putting money where the returns were expropriated. Detroit went into a tailspin from which it never has recovered.

Walters includes an analysis of the effects of right-to-work laws. He argues that their main function is a signal to businesses that they will find a welcoming climate in right-to-work jurisdictions. States allowing compulsory unionism hurt their cities’ ability to compete for investment.

Another way cities can damage themselves is by caving in to “green” interests. Portland, Ore., is the best illustration, with its Urban Growth Boundary. The theory behind this meddlesome law was that setting aside space for nature was much more important than allowing the city to grow. The consequences might have pleased environmentalists, but affordable housing in Portland for lower income families has disappeared.

Walters concludes with a list of do’s and don’ts for successful cities. In short, they boil down to this: Leave the spontaneous order of the free market alone.

George Leef is director of research at the John W. Pope Center for Higher Education Policy.