“The Interests of the Limited ” from City Limits (1981)

Paul E. Peterson

Editors’ Introduction ■

Paul Peterson, Henry Lee Shattuck Professor of Government at Harvard University, created quite a stir among urban political scientists when his City Limits was published in 1981. His analysis of urban policy making in the contends that “local politics is not like national politics." Drawing on the traditions of mainstream public choice theories that stress the ability of people to choose their place of residence, and the neo-Marxist teaching that “the social and economic context within which the city is embedded limits choice," Peterson sets out to show that city politics and policy making take place within important institutional con­ straints. Unlike national governments, do not control their borders, allowing people and capital to move freely. As a result, cities must pursue policies that will attract residents and investments. What sorts of policies are these likely to be? He labels policies that improve the economic well-being of the entire city as development policies. Everyone in the city benefits from the infrastructure improvements and schemes that lead to the expansion of the local economy. Even those who suffer individ­ ual detriment because, perhaps, they have lost their home to a new industrial plant, also benefit as a part of the population that will enjoy the gains of a more robust base. On the other hand, cities should not engage in redistributive policies - that is, those policies that tax one group (usually the affluent) to pro­ vide services to another (usually the poor). Given the permeability of local borders, Peterson claims, such policies will convince the tax-paying population to move elsewhere, leading to the overall decline of the city's economic status. Peterson is not against welfare programs; rather, he suggests such programs should be nationally controlled. In Peterson's view, these principles are imbedded in the nature of the U.S. economic and political systems, and are not subject to change. City politics, then, is pretty marginal. The only policies open to real contesta­ tion are what he calls “allocational" policies - decisions about which groups get the public sector jobs and contracts, or whose street gets paved first. This is a far cry from the sorts of issues decided at the national level. Many urban scholars reacted harshly to these claims, in part because the suggestion that urban politics is marginal leads to the conclusion that those who study this topic are marginal as well. For some ten years after City Limits was published, nearly every new book or article on urban governance began with a critique of some part of Peterson’s argument. First, even if local government's goal is to sustain the local economy, are there not numerous ways to achieve this goal? A city can invest in job training and small business incubators, or can give tax abatements to builders of office towers and luxury housing. Even within the arena of development policy, there is much room for political contestation. Second, although Peterson describes the politics of allocation as “low stakes,” principles such as affirmative action in public sector hiring have a wider significance. INTERESTS OF THE LIMITED CITY gOT

Finally, Peterson does not make it clear whether his analysis is meant to apply beyond the United States. Many of the limiting boundary conditions he describes would not prevail in countries where national govern­ ments offer more substantial intergovernmental subsidies and more centralized regulatory structures. Much of the literature challenging Peterson sought to explore the great variety of urban policies responses found cross- nationally (see in particular John Logan and Todd Swanstrom, (eds), Beyond the City Limits, Philadelphia, PA: Temple University Press, 1990). Most of Peterson's work does not focus on urban politics. His primary fields of scholarship are U.S. public policy and federalism - indeed, City Limits may perhaps be understood as rooted in the questions about the appropriate role of different levels of government in the U.S. federal system, as discussed in such books as When Federalism Works, and The Price of Federalism (Washington, DC: Brookings 1995). His most recent work has taken up the problems of education policy and school reform. Recent titles include: No Child Left Behind? The Politics and Practice of School Accountability (Brookings, 2003); The Future of School Choice (Stanford, CA: Hoover Institution, 2003); Our Schools and our Future__ Are We Still At Risk? (Hoover, 2003); The Education Gap: Vouchers and Urban Schools (Brookings, 2002); Charters, Vouchers, and Public Education (Brookings, 2001); Earning and Learning: Flow Schools Matter (Brookings, 1999); Learning From School Choice (Brookings, 1998); and The Politics of School Reform: 1870-1940 (University of Chicago Press, 1985).

Like all social structures, cities have interests. Just others wish that municipal administration were as we can speak of union interests, judicial inter­ a gentleman’s calling. Especially in large cities, ests, and the interests of politicians, so we can speak the cacophony of competing claims by diverse of the interests of that structured system of social class, race, ethnic, and occupational groups makes interactions we call a city. Citizens, politicians, and impossible the determination of any overall city academics are all quite correct in speaking freely interest - any public interest, if you like - by com­ of the interests of cities. piling all the demands and desires of individual city residents. Some political scientists have attempted to dis­ DEFINING THE CITY INTEREST cover the overall urban public interest by summing up the wide variety of individual interests. The By a city’s interest, I do not mean the sum total of earlier work of Edward Banfield, still worth exam­ the interests of those individuals living in the city. ination, is perhaps the most persuasive effort of this For one thing, these are seldom, if ever, known. kind. He argued that urban political processes - or The wants, needs, and preferences of residents at least those in Chicago - allowed for the expres­ continually change, and few surveys of public sion of nearly all the particular interests within opinion in particular cities have ever been taken. the city. Every significant interest was represented Moreover, the residents of a city often have dis­ by some economic firm or voluntary association, cordant interests. Some want more parkland and which had a stake in trying to influence those better schools; others want better protection public policies that touched its vested interests. After and lower . Some want an elaborated high­ these various groups and firms had debated and way system; others wish to keep cars out of their contended, the political leader searched for a neighborhood. Some want more inexpensive, pub­ compromise that took into account the vital inter­ licly subsidized housing; others wish to remove ests of each, and worked out a solution all could the public housing that exists. Some citizens want accept with some satisfaction. The leader’s own improved welfare assistance for the unemployed interest in sustaining his political power dictated and dependent; others wish to cut drastically all such a strategy. such programs of public aid. Some citizens want Banfield’s argument is intriguing, but few rough-tongued ethnic politicians in public office; people would identify public policies as being in DEI PAUL E. PETERSON the interest of the city simply because they have is trying to maximize - optimum size - Tiebout been formulated according to certain procedures. identifies an overriding interest, which can account The political leader might err in his judgment; for specific policies the city adopts. He provides the interests of important but politically impotent a simple analytical tool that will account for the groups might never get expressed; or the conse­ choices cities make, without requiring complex quences of a policy might in the long run be dis­ investigations into citizen preferences and political astrous for the city. Moreover, most urban policies mechanisms for identifying and amalgamating the are not hammered out after great controversy, but same. Moreover, he provides a criterion for deter­ are the quiet product of routine decision-making. mining whether a specific policy is in the interest How does one evaluate which of these are in the of the city - does it help achieve optimum size? Will public interest? Above all, this mechanism for deter­ it help the too small city grow? Will it help the too mining the city’s interest provides no standpoint for big city contract? Will it keep the optimally sized evaluating the substantive worth of urban policies. city in equilibrium? Even though the exact deter­ Within Banfield’s framework, whatever urban gov­ mination of the optimum size cannot presently be ernments do is said to be in the interest of their scientifically determined in all cases, the criterion communities. But the concept of city interest is used does provide a most useful guide for prudential most persuasively when there are calls for reform decision-making. or innovation. It is a term used to evaluate existing The difficulty with Tiebout’s assumption is that programs and to discriminate between promising he does not give very good reasons for its having and undesirable new ones. To equate the interests of any plausibility. When most economists posit a cities with what cities are doing is to so impoverish certain form of maximizing behavior, there is usu­ the term as to make it quite worthless. ally a good commonsense reason for believing The economist Charles Tiebout employs a the person in that role will have an interest in second approach to the identification of city pursuing this strategic objective. When orthodox interests. Unlike Banfield, he does not see the economists say that businessmen maximize profits, city’s interests as a mere summation of individual it squares with our understanding in everyday life interests but as something which can be ascribed that people engage in commercial enterprises for to the entity, taken as a whole. As an economist, monetary gain. The more they make, the better Tiebout is hardly embarrassed by such an enter­ they like it. The same can be said of those welfare prise, because in ascribing interests to cities his work economists who say politicians maximize votes. parallels both those orthodox economists who The assumption, though cynical, is in accord with state that firms have an interest in maximizing popular belief - and therefore once again has a profits and those welfare economists who claim that certain plausibility. politicians have an interest in maximizing votes. [...] Of course, they state only that their model will The one reason Tiebout gives for expecting assume that firms and politicians behave in such cities to pursue optimum size is to lower the aver­ a way, but insofar as they believe their model has age cost of public goods. If public goods can be empirical validity, they in fact assert that those delivered most efficiently at some optimum size, constrained by the businessman’s or politician’s then migration of residents will occur until that role must pursue certain interests. And so does size has been reached. In one respect Tiebout is Tiebout when he says that communities seek to quite correct: local governments must concern attain the optimum size for the efficient delivery themselves with operating local services as effici­ of the bundle of services the local government ently as possible in order to protect the city’s produces. In his words, “Communities below the economic interests. But there is little evidence optimum size seek to attract new residents to that there is an optimum size at which services can lower average costs. Those above optimum size do be delivered with greatest efficiency. And even if just the opposite. Those at an optimum try to keep such an optimum did exist, it could be realized only their populations constant.” if migration occurred among residents who paid Tiebout’s approach is in many ways very attrac­ equal amounts in local taxes. In the more likely tive. By asserting a strategic objective that the city situation, residents pay variable prices for public INTERESTS OF THE LIMITED CITY services (for example, the amount paid in local recognize that teachers, pupils, principals, and board property taxes varies by the value of the property). members may have contrasting interests as mem­ Under these circumstances, increasing size to the bers of differing role-groups within the school. optimum does not reduce costs to residents unless Although social roles performed within cities are newcomers pay at least as much in taxes as the numerous and conflicting, all are structured by marginal increase in costs their arrival imposes on the fact that they take specific spatial location that city governments. Conversely, if a city needs to lose falls within the jurisdiction of some local govern­ population to reach the optimum, costs to residents ment. All members of the city thus come to share will not decline unless the exiting population paid an interest in policies that affect the well-being of less in taxes than was the marginal cost of provid­ that territory. Policies which enhance the desirabil­ ing them government services. In most big cities ity or attractiveness of the territory are in the city’s losing population, exactly the opposite is occurring. interest because they benefit all residents - in their Those who pay more in taxes than they receive in role as residents of the community. Of course, in services are the emigrants. Tiebout’s identification any of their other social roles, residents of the city of city interests with optimum size, while suggestive, may be adversely affected by the policy. The Los fails to take into account the quality as well as the Angeles dope peddler - in his role as peddler - quantity of the local population. hardly benefits from a successful drive to remove The interests of cities are neither a summation hard drugs from the city. On the other hand, as a of individual interests nor the pursuit of optimum resident of the city, he benefits from a policy that size. Instead, policies and programs can be said enhances the attractiveness of the city as a locale to be in the interest of cities whenever the policies in which to live and work. In determining whether maintain or enhance the economic position, social a policy is in the interest of a city, therefore, one prestige, or political power of the city, taken as a does not consider whether it has a positive or neg­ whole. ative effect on the total range of social interactions Cities have these interests because cities con­ of each and every individual. That is an impossible sist of a set of social interactions structured by task. To know whether a policy is in a city’s interest, their location in a particular territorial space. Any one has to consider only the impact on social rela­ time that social interactions come to be structured tionships insofar as they are structured by their into recurring patterns, the structure thus formed taking place within the city’s boundaries. develops an interest in its own maintenance and [...] enhancement. It is in that sense that we speak of To say that people understand what, generally, the interests of an organization, the interests of the is in the interest of cities does not eliminate debate system, and the like. To be sure, within cities, as over policy alternatives in specific instances. The within any other structure, one can find diverse social notion of city interest can be extremely useful, even roles, each with its own set of interests. But these though its precise application in specific contexts varying role interests, as divergent and competing may be quite problematic. In any policy context one as they may be, do not distract us from speaking of cannot easily assert that one “knows” what is in the the overall interests of the larger structural entity. interest of cities, whether or not the residents of The point can be made less abstractly. A the city agree. But city residents do know the kind school system is a structured form of social action, of evidence that must be advanced and the kinds and therefore it has an interest in maintaining and of reasons that must be adduced in order to build improving its material resources, its prestige, and a persuasive case that a policy is in the interest of its political power. Those policies or events, which cities. And so do community leaders, , and have such positive effects are said to be in the administrative elites. interest of the school system. An increase in state financial aid or the winning of the basketball tourna­ ment are events that, respectively, enhance the ECONOMIC INTERESTS material well-being and the prestige of a school system and are therefore in its interest. In ordinary Cities, like all structured social systems, seek to speech this is taken for granted, even when we also improve their position in all three of the systems BPE1 PAUL E. PETERSON

of stratification - economic, social, and political - The impact of Boeing Aircraft’s market prospects characteristic of industrial societies. In most cases, on the economy of the Seattle improved standing in any one of these systems illustrates the importance of export to regional helps enhance a city’s position in the other two. In economies. In the late sixties defense and com­ the short run, to be sure, cities may have to choose mercial aircraft contracts declined, Boeing laid off among economic gains, social prestige, and political thousands of workmen, the economy of the Pacific weight. And because different cities may choose Northwest slumped, the unemployed moved else­ alternative objectives, one cannot state any one where, and Seattle land values dropped sharply. overarching objective - such as improved property More recently, Boeing has more than recovered its values - that is always the paramount interest of former position. With rapidly expanding produc­ the city. But inasmuch as improved economic or tion at Boeing, the metropolitan area is enjoying market standing seems to be an objective of great low unemployment, rapid growth, and dramatically importance to most cities, 1 shall concentrate on this increasing land values. interest and only discuss in passing the significance The same multiplier effect is not at work in the of social status and political power. case of goods and services produced for domestic Cities constantly seek to upgrade their economic consumption within the territory. What is gained standing. Following [German sociologist Max] by a producer within the community is expended Weber, I mean by this that cities seek to improve by other community residents. Residents, in effect, their market position, their attractiveness as a locale are simply taking in one another’s laundry. Unless for economic activity. In the market economy that productivity increases, there is no capacity for characterizes Western society, an advantageous expansion. economic position means a competitive edge in the If this economic analysis is correct, it is only a production and distribution of desired commodities modest oversimplification to equate the interests relative to other localities. When this is present, cities of cities with the interest of their export industries. can export goods and/or services to those outside Whatever helps them prosper redounds to the the boundaries of the community. benefit of the community as a whole - perhaps four Some regional economists have gone so far as to and five times over. And it is just such an economic suggest that the welfare of a city is identical to the analysis that has influenced many local government welfare of its export industry. As exporters expand, policies. Especially the smaller and cities may the city grows. As they contract, the city declines and provide free land, tax concessions, and favorable decays. The economic reasoning supporting such utility rates to incoming industries. a conclusion is quite straightforward. When cities The smaller the territory and the more primit­ produce a good that can be sold in an external ive its level of economic development, the more market, labor and capital flow into the city to help persuasive is this simple export thesis. But other increase the production of that good. They continue economists have elaborated an alternative growth to do so until the external market is saturated - that thesis that is in many ways more persuasive, espe­ is, until the marginal cost of production within cially as it relates to larger urban areas. In their the city exceeds the marginal value of the good view a sophisticated local network of public and external to the city. Those engaged in the produc­ private services is the key to long-range economic tion of the exported good will themselves consume growth. Since the world economy is constantly a variety of other goods and services, which other changing, the economic viability of any particular businesses will provide. In addition, subsidiary export industry is highly variable. As a result, a industries locate in the city either because they help community dependent on any particular set of supply the exporting industry, because they can export industries will have only an episodic eco­ utilize some of its by-products, or because they nomic future. But with a well-developed infras­ benefit by some economies of scale provided by tructure of services the city becomes an attractive its presence. Already, the familiar multiplier is at locale for a wide variety of export industries. work. With every increase in the sale of exported As older exporters fade, new exporters take their commodities, there may be as much as a four- or place and the community continues to prosper. It fivefold increase in local economic activity. is in the city’s interest, therefore, to help sustain a INTERESTS OF THE LIMITED CITY

high-quality local infrastructure generally attractive commercial relations with Europe and other coastal to all commerce and industry. communities. Inland, the great industrial cities all I have no way of evaluating the merits of these were located on either the Great Lakes or the Ohio contrasting economic arguments. What is import­ River-Mississippi River system. The cities of the ant in this context is that both see exports as being West... prospered according to their proximity to of great importance to the well-being of a city. East-West trade flows. Denver became the pre­ One view suggests a need for direct support of the dominant city of the mountain states because it sat export industry; the other suggests a need only for at the crossroads of land routes through the Rocky maintaining a service infrastructure, allowing the Mountains. Duluth, Minnesota, had only limited market to determine which particular export indus­ potential, even with its Great Lakes location, because try locates in the community. Either one could be it lay north of all major routes to the West. the more correct diagnosis for a particular commun­ Access to waterways and other trade routes ity, at least in the short run. Yet both recognize that is not the only way a city’s life is structured by the future of the city depends upon exporting local its location. Its climate determines the cost and products. When a city is able to export its prod­ desirability of habitation; its soil affects food ucts, service industries prosper, labor is in greater production in the surrounding area; its terrain demand, wages increase, promotional opportunities affects drainage, rates of air pollution, and scenic widen, land values rise, tax revenues increase, city beauty. Of course, the qualities of landscape do services can be improved, donations to charitable not permanently fix a city’s fate - it is the inter­ organizations become more generous, and the section of that land and location with the larger social and cultural life of the city is enhanced. national and world economy that is critical. For To export successfully, cities must make effici­ example, cities controlling access to waterways ent use of the three main factors of production: land, by straddling natural harbors at one time mono­ labor, and capital. polized the most valuable land in the region, and from that position they dominated their hinter­ land. But since land and air transport have begun Land to supplant, not just supplement, water transport, the dominance of these once favored cities has Land is the factor of production that cities control. rapidly diminished. Yet land is the factor to which cities are bound. Although the economic future of a city is very It is the fact that cities are spatially defined units much influenced by external forces affecting the whose boundaries seldom change that gives per­ value of its land, the fact that a city has control over manence to their interests. City residents come and the use of its land gives it some capacity for influ­ go, are bom and die, and change their tastes and encing that future. Although there are constitutional preferences. But the city remains wedded to the limits to its authority, the discretion available to a land area with which it is blessed (or cursed). And local government in determining remains unless it can alter that land area, through annexa­ the greatest arena for the exercise of local auto­ tion or consolidation, it is the long-range value of nomy. Cities can plan the use of local space; cities that land which the city must secure - and which have the power of eminent domain; through gives a good approximation of how well it is laws cities can restrict all sorts of land uses; and achieving its interests. cities can regulate the size, content, and purpose Land is an economic resource. Production of buildings constructed within their boundaries. cannot occur except within some spatial location. Moreover, cities can provide public services in And because land varies in its economic potential, such a way as to encourage certain kinds of land so do the economic futures of cities. Historically, use. Sewers, gas lines, , bridges, tunnels, play­ the most important variable affecting urban growth grounds, schools, and parks all impinge on the use has been an area’s relationship to land and water of land in the surrounding area. Urban politics is routes. above all the politics of land use, and it is easy to On the eastern coast of the United States, all see why. Land is the factor of production over which the great cities h^d natural harbors that facilitated cities exercise the greatest control. EEU PAUL E. PETERSON Labor Certain sparsely populated areas, such as Alaska, occasionally advertise for unskilled labor To its land area the city must attract not only capital even today. However, competition among most but productive labor. Yet local governments in the cities is now for highly skilled workers and espe­ United States are very limited in their capacities to cially for professional and managerial talent. In a control the flow of these factors. Lacking the more less than full-employment economy, most commun­ direct controls of nation-states, they are all the more ities have a surplus of semiskilled and unskilled constrained to pursue their economic interests in labor. Increases in the supply of unskilled workers those areas where they do exercise authority. increase the cost of the community’s social services. Labor is an obvious case in point. Since nation­ Since national wage laws preclude a decline in states control migration across their boundaries, wages below a certain minimum, there may be a the industrially more advanced have formerly shortage of highly skilled technicians and various legislated that only limited numbers of outsiders - types of white collar workers. Where shortages for example, relatives of citizens or those with skills develop, the prices these workers can command needed by the host country - can enter. In a world in the labor market may climb to a level where local where it is economically feasible for great masses exports are no longer competitive with goods of the population to migrate long distances, this produced elsewhere. The economic health of a kind of restrictive legislation seems essential for community is therefore importantly affected by the keeping the nation’s social and economic integr­ availability of professional and managerial talent ity intact. Certainly, the wage levels and welfare and of highly skilled technicians. assistance programs characteristic of advanced When successfully pursuing their economic industrial societies could not be sustained were interests, cities develop a set of policies that will transnational migration unencumbered. attract the more skilled and white collar workers Unlike nation-states, cities cannot control move­ without at the same time attracting unemployables. ment across their boundaries. They no longer have Of course, there are limits on the number of things walls, guarded and defended by their inhabitants. cities can do. In contrast to nation-states they can­ And as Weber correctly noted, without walls cities no not simply forbid entry to all but the highly talented longer have the independence to make significant whose skills they desire. But through zoning laws choices in the way medieval cities once did. It is true they can ensure that adequate land is available for that local governments often try to keep vagrants, middle-class residences. They can provide parks, bums, paupers, and racial minorities out of their recreation areas, and good quality schools in areas territory. They are harassed, arrested, thrown out where the economically most productive live. They of , and generally discriminated against. But in can keep the cost of social services, little utilized most of these cases local governments act uncon­ by the middle class, to a minimum, thereby keep­ stitutionally, and even this illegal use of the police ing local taxes relatively low. In general, they can power does not control migration very efficiently. try to ensure that the benefits of public service out­ Although limited in its powers, the city seeks to weigh their costs to those highly skilled workers, obtain an appropriately skilled labor force at wages managers, and professionals who are vital for sus­ lower than its competitors so that it can profitably taining the community’s economic growth. export commodities. In larger cities a diverse work force is desirable. The service industry, which pro­ vides the infrastructure for exporters, recruits large Capital numbers of unskilled workers, and many manu­ facturing industries need only semiskilled workers. Capital is the second factor of production that When shortages in these skill levels appear, cities must be attracted to an economically productive may assist industry in advertising the work and territory. Accordingly, nation-states place powerful living opportunities of the region. In the nineteenth controls on the flow of capital across their bound­ century when unskilled labor was in short supply, aries. Many nations strictly regulate the amount frontier cities made extravagant claims to gain a of national currency that can be taken out of the competitive edge in the supply of ordinary labor. country. They place quotas and tariffs on imported INTERESTS OF THE LIMITED CITY

goods. They regulate the rate at which national fire protection. They can even offer public land currency can be exchanged with foreign currency. free of charge or at greatly reduced prices to those They regulate the money supply, increasing interest investors they are particularly anxious to attract. rates when growth is too rapid, lowering interest They can provide a context for business opera­ rates when growth slows down. Debt financing also tions free of undue harassment or regulation. For allows a nation-state to undertake capital expendi­ example, they can ignore various external costs tures and to encourage growth in the private market. of production, such as air pollution, water pollu­ At present the powers of nation-states to control tion, and the despoliation of trees, grass, and capital flow are being used more sparingly and new other features of the landscape. Finally, they can supranational institutions are developing in their discourage labor from unionizing so as to keep place. Market forces now seem more powerful than industrial labor costs competitive. official policies in establishing rates of currency This does not mean it behoves cities to allow exchange among major industrial societies. Tariffs any and all profit-maximizing action on the part and other restrictions on trade are subject to retalia­ of an industrial plant. Insofar as the city desires tion by other countries, and so they must be used diversified economic growth, no single company sparingly. The economies of industrialized nations can be allowed to pursue policies that seriously are becoming so interdependent that significant detract from the area’s overall attractiveness to changes in the international political economy seem capital or productive labor. Taxes cannot be so low imminent, signaled by numerous international that government fails to supply residents with as conferences to determine worldwide growth rates, attractive a package of services as can be found in rates of inflation, and levels of unemployment. If competitive jurisdictions. Regulation of any par­ these trends continue, nation-states may come to ticular industry cannot fall so far below nationwide look increasingly like local governments. standards that other industries must bear external But these developments at the national level have costs not encountered in other places. The city’s only begun to emerge. At the local level in the interest in attracting capital does not mean utter United States, cities are much less able to control subservience to any particular corporation, but a capital flows. In the first place, the Constitution sensitivity to the need for establishing an overall has been interpreted to mean that states cannot favorable climate. hinder the free flow of goods and monies across In sum, cities, like private firms, compete with their boundaries. And what is true of states is one another so as to maximize their economic true of their subsidiary jurisdictions as well. In the position. To achieve this objective, the city must second place, states and localities cannot regulate use the resources its land area provides by attract­ the money supply. If unemployment is low, they ing as much capital and as high a quality labor force cannot stimulate the economy by increasing the as is possible. Like a private firm, the city must entice monetary flow. If inflationary pressures adversely labor and capital resources by offering appro­ affect their competitive edge in the export market, priate inducements. Unlike the nation-state, the localities can neither restrict the money supply American city does not have regulatory powers nor directly control prices and wages. All of these to control labor and capital flows. The lack thereof powers are reserved for national governments. In sharply limits what cities can do to control their the third place, local governments cannot spend economic development, but at the same time the more than they receive in tax revenues without attempt by cities to maximize their interests within damaging their credit or even running the risk of these limits shapes policy choice. bankruptcy. Pump priming, sometimes a national disease, is certainly a national prerogative. Local governments are left with a number of LOCAL GOVERNMENT AND devices for enticing capital into the area. They can THE INTERESTS OF CITIES minimize their tax on capital and on profits from capital investment. They can reduce the costs of Local government leaders are likely to be sensitive capital investment by providing low-cost public to the economic interests of their communities. utilities, such efs roads, sewers, lights, and police and First, economic prosperity is necessary for protecting r m PAUL E. PETERSON

the fiscal base of a local government. In the CONCLUSIONS: EFFICIENCY United States, taxes on local sources and charges VERSUS EQUALITY for local services remain important components of local government revenues. Although transfers Efficiency in local government promotes city of revenue to local units from the federal and interests. By efficiency I am referring to a state in state governments increase throughout the post­ which no person can be made better off without war period, as late as 1975-76 local governments some other person being made worse off. In still were raising almost 59 percent of their own Tiebout’s world local governments operate with revenue. Raising revenue from one’s own economic perfect efficiency such that everyone receives the resources requires continuing MINE economic services for which he has an economic demand prosperity. Second, good-government is good- and no one receives services unless he has such a politics. By pursuing policies, which contribute to demand. At the same time the price paid equals the the economic prosperity of the local community, lowest average cost of producing the service. No the local politician selects policies that redound to one can be made better off without someone else his own political advantage. Local politicians, eager bearing the cost. for relief from the cross-pressures of local politics, Although this utopia is quite beyond the capa­ assiduously promote goals that have widespread city of local governments, the closer any locality benefits. And few policies are more popular than moves toward this ideal match between taxes economic growth and prosperity. Third, and most and services, the more attractive a setting it is for important, local officials usually have a sense of residents, and the more valuable its land becomes. community responsibility. They know that, unless It is thus in the interest of local governments to the economic well-being of the community can operate as efficiently - in this Pareto-optimal sense be maintained, local business will suffer, workers of the word - as possible. will lose employment opportunities, cultural life Operating efficiently hardly means operating will decline, and city land values will fall. To avoid so as to enhance quality. As many critics of such a dismal future, public officials try to develop Pareto’s definition of efficiency have pointed out, policies that assist the prosperity of their com­ an efficient distribution of resources, as Pareto munity - or, at the very least, that do not seriously defines it, is incompatible with gross inequalities. detract from it. Quite apart from any effects of On cannot redistribute wealth without making economic prosperity on government revenues or some worse off at the same time others are made local voting behavior, it is quite reasonable to posit better off. If a society has great inequalities in the that local governments are primarily interested in beginning, it does not reduce these inequalities maintaining the economic vitality of the area for merely by increasing its efficiency. Consequently, which they are responsible. the pursuit of a city’s economic interests, which Accordingly, governments can be expected to requires an efficient provision of local services, attempt to maximize this particular goal - within makes no allowance for the care of the needy the numerous environmental constraints with which and unfortunate members of the society. Indeed, they must contend. As policy alternatives are pro­ the competition among local communities all but posed, each is evaluated according to how well it precludes a concern for redistribution. will help to achieve this objective. Although informa­ Recall the finding that the benefit/tax ratio for tion is imperfect and local governments cannot the average taxpayer is always less than 1.0. The be expected to select the one best alternative on person who pays the mean dollar in taxes always every occasion, policy choices over time will be receives less in benefits than he pays in taxes (while limited to those few which can plausibly be shown at the same time having unsatisfied demands for to be conducive to the community’s economic pro­ services). Then consider the fact that this benefit/ sperity. Internal disputes and disagreements may tax ratio declines as the amount of redistributive affect policy on the margins, but the major contours activity by local governments increases. Since the of local revenue policy will be determined by this person or entity that pays the mean dollar in taxes strategic objective. is likely to be better off than the low-income resid­ [...] ents of the community, increased redistribution INTERESTS OF THE LIMITED CITY from the richer to the poorer implies a reduction ably the redistributive service-delivery system is in the services the person paying the mean tax run. If other communities provide fewer services dollar receives as a proportion of the amount he to the needy, he will see an economic advantage pays in taxes. From the point of view of this in migrating. Over time, this adversely affects the average taxpayer, the local government service- economic well-being of the community with a delivery system appears highly inefficient, however mind to redistribute.