Author: Aaron M. Renn

This piece is reprinted from a Kauffman Foundation series focusing on the role of cities in a new entrepreneurial growth agenda. Read the entire cities series here.

Most cities are economically weak actors with limited ability to affect the critical forces driving their economies. Furthermore, changes in the structure of the economy often have changed the composition of urban leadership in ways that break the link between personal and community success and create an additional bias in favor of subsidized real estate development as a civic strategy. Less dependent on the local market, this local leadership increasingly identifies with a global community and its concerns in ways that have lowered the civic priority placed on inclusive economic development and entrepreneurship. To change these trends, local leadership should focus on inclusive local economic success first and make policies that reflect that priority and address areas where local government can make an impact. Creating an entrepreneur- and business-friendly local regulatory environment is a key piece of this effort, and the delivery of high-quality basic public services is vital.

Cities as economically weak actors

One of the most important preliminary steps to designing and implementing policies that promote entrepreneurial growth is understanding the economic and competitive context within which such policies are made. The STEEP (Social, Technological, Economic, Environmental, and Political) forces model is one method of inventorying and categorizing a business’s or community’s external context. The table below summarizes some of the key STEEP forces that create both challenges and opportunities for communities today.

This list includes quite an array of profound and powerful forces that are difficult to understand and even more challenging to address. They are also primarily large macro forces that cities are not in a position to influence in a significant way, leaving most cities in a weak market position. Generally, local governments are weak actors and are more often market takers than market makers; they typically have limited scope for fundamentally transformative actions. Local policymakers must undertake efforts that respond to the economic context where there is a possibility of making an impact with the tools available.

Ramsin Canon, a progressive political commentator in Chicago, describes this challenge and Chicago’s lack of pricing power in an article about his city, titled, “Entrepreneur-in-Chief: The New Model City:”1

Why not raise property or luxury taxes, or institute a city income tax, to make up the deficit? Why not divert money from the TIF districts? …. Chicago is no longer a political community, it is an economic entity that is in competition with other cities in the region, in the state, across the world. In that mental framework, tax is cost, or price. You raise prices, you drive away your clients. In the case of the neoliberal city, the client is the developer, the investor, the employer. The federal government and the state are not going to give the city any real money; they are not investing in infrastructure, or education, or social welfare in any real way, the way they did up through the late 1970s and 1980s. The name of the game is “growth” through enticement of capital.— Ramsin Canon

While one may not agree with Canon’s politics, his economic analysis insightfully illustrates how even many large cities today have become structurally weak players in the economic market.

Most of the STEEP forces above have been discussed extensively elsewhere, but there are two under-appreciated and related items that deserve more consideration because of the impact they’ve had on local leadership: (1) the change in composition of local leadership resulting from the nationalization of the industrial base, and (2) the elite identification with global rather than local concerns.

Changes in local leadership resulting from the nationalization of industry

While talk of globalization is ubiquitous, less appreciated is the intermediate nationalization of many industries. Up until the 1980s, most cities’ commercial activities were conducted by local entities across a wide range of industries. In banking, for example, local banks dominated each city because state laws heavily restricted expansion. These banks were all independently owned, restricted to their home markets by branch banking rules, and limited in their activities by the Glass-Steagall Act. Similarly, most electric and gas utilities were local concerns due to restrictions from the Public Utilities Holding Company Act. And local and regional retailers, particularly department stores, were prominent and, often, dominant.

This industrial structure produced a class of leaders whose business and personal successes were tied closely to the economic success of the local community. The only way to make more loans or sell more electricity, for example, was to grow the local market. There was, therefore, a high degree of alignment between business leadership and community interest.

Beginning in the 1980s and especially the 1990s, however, deregulation and a wave of industrial rollups created a very different landscape ruled in many places by national players. The four largest banks in the country now hold about 45 percent of total national banking assets.2 There also has been significant utility consolidation. And, in retail and other industries, we have seen consolidation into a de facto “two towers” model, in which there are two large, national, primary players (e.g., Wal-Mart and Target, Home Depot and Lowe’s, Walgreens and CVS, and AT&T and Verizon).

As a result, there is no longer local ownership over these key businesses in most markets, and the executives running local markets are effectively branch managers. Even where local firms survived, they did so largely by becoming larger national or global entities themselves. There is now, therefore, less overlap between the interests of business leadership and community economic growth; the nationalization of industry weakened the linkage between personal success and community success for local civic leadership.

This broken link is exacerbated by the imbalance it created in the mindset of local business leadership. In the past, the business leadership was made up of a significant number of executives of operational-type businesses, such as banks and utilities, whose successes were tied closely to the success of the local market. Today, however, the businesses that continue to operate at the local level are primarily transactional businesses, including law firms (which are currently in early-stage consolidation), construction firms, architects, developers, and the “business” of politics. There are significant differences between operational and transactional businesses and their relationships to the community. While banks make money on the spread between what they pay for funding and what they charge for loans, lawyers, by contrast, get paid by the hour for work on specific matters. Bankers are making money while they are playing golf in the afternoon. Lawyers are only making money on the golf course if they are closing deals. Transactional business leaders’ interests are less closely aligned with the success of their communities.

Lawyers and other local transactional business leaders always have been very influential, but there are no longer as many powerful bankers and other operating industry executives to balance their perspective. This imbalance has led to a transactional growth mindset among local leaders, which leads to a theory of change for the local economies that favors real estate development. The change from an operational to a transactional mindset, in other words, has introduced an additional bias in favor of publicly subsidized real estate projects as a strategy for growth. These projects satisfy the needs of a large segment of the transactional leadership class of the community, as well as the politicians who love cranes and ribbon cuttings. More broadly, real estate development is now seen as economic development.

To be sure, major downtown development-type real estate projects, such as stadiums, malls, and convention centers, long have been popular for cities and may even be seen as populist projects. Mayors are under pressure to be seen as taking action to create jobs and growth, and, as this type of land development is within local control, it always will retain some popularity. Increasingly, however, these projects appear to be more pure play cronyism, with enormous subsidies bringing dubious public benefit. Cincinnati’s NFL stadium deal, for example, was described by The Wall Street Journal in a news (not editorial) item as “one of the worst professional sports deals ever struck by a local government.”3

Identification of local elites with global, rather than local, interests

In addition to weakening the link between the success of business leaders and that of their broader communities, the consolidation and globalization we’ve seen in many industries has resulted in a new affinity between the local elite and those who hold similar positions throughout the world. As business leaders and other elites are no longer as invested in their communities and have fewer economic ties to them, they identify primarily with their global class and have more loyalty to their global brethren in other places than to those who live in the same local region.

Saskia Sassen, a pioneer in research on what are now called “global cities,” identified this trend in her description of the bifurcation of these regions. The global city, in this view, is a kind of city within a city. Richard Longworth at the Chicago Council on Global Affairs noted a similar trend: “Globalization is disconnecting a city from its hinterland.”4 The global city of the Chicago Loop and North Side, for example, exists in an almost parallel universe to those left behind in the South and West Sides.

The term “elite” may seem inherently pejorative, but all systems have a group of leaders and agenda setters. At the local level, the elite includes prominent business, political, civic, academic, religious, and philanthropic leadership, as well as members of the media and cultural communities. The most educated strata of the community, or, more broadly, the upper middle class, also may be included. This group has best adapted to new economic realities and represents roughly the top 10 percent to15 percent of most communities, though higher in the largest urban centers.

While this elite group is now more disconnected from the rest of a community, attracting and retaining this stratum is now often seen as critical to a region’s success. Richard Florida’s “creative class” theory maintains the importance of this group to local economic growth. Similarly, CEOs for Cities, an urbanist organization, released a report called “The Young and the Restless,” which suggests that the youth portion of this group is fickle, demanding, and highly mobile. A failure to cater to their desires, the report indicates, might harm a city’s economic future severely.5 This phenomenon is the human capital side of Canon’s description of the city as an economic entity.

In this worldview, servicing the needs of the community’s elite and attracting more people like them is paramount to a particularly desired form of economic success. This strategy is not necessarily rooted in elitism or snobbery. Rather, communities facing enormous pressure from the STEEP forces above are looking to replicate models of success and finding their models in places like New York and San Francisco. While gentrification has been criticized, one can point to plenty of places where it has happened successfully. Meanwhile, there is little track record of success turning around non-elite portions of post-industrial cities. No wonder, then, that cities look to strategies that appear to offer the prospect of success, with the added benefit of some glamour, instead of going against the grain and trying to tackle problems that are much harder and lack obvious solutions.

The consequence of this worldview, however, is that local leadership prefers to implement policies that show that their city belongs in the global club, rather than focusing on primarily local concerns. The priorities of the global community are set in the world’s major cities, including London, New York, San Francisco, Paris, and Hong Kong, among many others. These communities are very different from workaday American cities. It’s difficult to see how the same policies would suit such diverse places as Los Angeles, Buffalo, Oklahoma City, and Portland equally. While there is a clear need to spend more money on transit in New York City, for example, spending large sums to attempt to retrofit smaller and entirely auto-oriented cities to transit makes little sense.

Furthermore, these major cities have, to some extent, market-making power, at least to a far greater degree than smaller localities do. A place like New York, for example, can implement the tactics that Canon says even Chicago cannot. It is no surprise that New York has far higher taxes than Chicago does, since New York has more marketplace leverage.

Following a global, rather than a local, piper works well in many cases. For example, most local tech startups around the country are following the same script that appears to be effective, including open collaboration, co-working, meetups and events, angel investors, local venture capital funds, and local marketing groups. Similarly, aspirational locals opening top-quality coffee shops and microbreweries legitimately enhance their communities.

This strategy can cause problems, however, as smaller cities may see quite different results when they try to prove their global bona fides by implementing the policies and priorities of global cities, especially those related to economic regulation and those that do not align with local needs. For example, America’s coastal cities are adopting very high minimum wages, and local progressives in cities with far less leverage than San Francisco often want to implement the same policy. Furthermore, it should be noted that global cities themselves are not without challenges, including growing inequality, which is an enormous problem in these places. In Chicago, we saw the juxtaposition of the opening of a gorgeous Riverwalk downtown on a Memorial Day weekend in which fifty-six people were shot and twelve of them killed.6

Perhaps the greatest disconnect between the elites’ concerns and the localities’ needs is in the area of climate change. The quintessential global problem, climate change is particularly ill-suited to be addressed at the local level. No city alone could make a material impact on climate change, even if it eliminated all of its carbon emissions. Nonetheless, climate change is a core concern of the global class, and the fact that this issue drives policy and regulatory mandates in many cities is a powerful illustration of city elites’ global identification. These policies don’t align well with many smaller cities’ weak market power, and, more importantly, these smaller cities are poorly positioned to thrive under these policies.

Even the global cities, in fact, have very particular economic structures and participate in specific global networks. Although globalization has produced a type of surface homogeneity among cities, Sassen points out that each city is truly unique. Similarly, Berkeley economist Enrico Moretti has identified a “great divergence” between cities.7 America’s cities are said to all look basically the same, but there are many different typologies, and each place has its own particular characteristics.

Ultimately, the identification of community elites with global communities rather than local communities leads policymakers to imitate other localities’ efforts instead of thinking about the unique policy priorities for a particular city that are based on its own indigenous history, economy, culture, demographics, and geography. Civic policy at the local level is dominated by “school solutions” that promote the same characteristics everywhere, often as a way of signaling that a city belongs in the “club.” While companies try very hard to convince their audiences that they are different and better than other companies in their industries,8 most cities try to look exactly the same as other cities that are considered cool, including offering bike lanes, coffee shops, microbreweries, a creative class, a food scene, and a startup culture. Even most cluster analysis seems to produce primarily a collection of the same five basic focus areas in every region (high tech, life sciences, green industry, advanced manufacturing, and logistics). Instead, local thinking should play a critical role in policy setting. Copying some good attributes can be helpful, but it’s hard to be successful with a collection of borrowed ideas. Cities need locally tailored policies and unique, indigenous thinking based on the cities’ singular histories, economies, cultures, demographics, and geographies.

How to think about local entrepreneurship and economic growth

In light of all these factors, it is unsurprising that economic results have been meager in the aggregate, but good in select high-end sectors. To improve results throughout the country, I propose that local governments should apply the guidelines listed below to their economic development policies.

Because cities are all distinct, there is no one-size-fits-all solution. Some focus areas, however, do appear to be broadly applicable. For example, local communities can’t do much to affect global trade policy, but they largely can control local regulations and zoning. Reducing red tape is frequently discussed, but seldom accomplished to any significant degree. Rather than solely focusing on cutting regulations, local governments should make sure the operations of the regulatory structure are clear, predictable, transparent in their operations (not politicized), and timely. The most important factor of production in almost any business is management time and attention; owners and managers want to be able to get through compliance quickly so that they can focus on—or even simply start—their businesses.

Local governments also are directly responsible for delivering an array of basic and critical services, including parks, libraries, policing, and streets, among many others. Getting these basics right throughout a city or region, rather than simply having a few select world-class districts, is important to inclusive success. These core services provide the basic platform on which businesses operate and are the actual business of local government. They must be performed well.

There may be other appropriate actions, depending on each city’s particular local needs and opportunities. The key is to determine what policies and actions to undertake with a high priority on inclusive economic success for the local community based on where the best opportunities are for local actors to make a difference.

The most important shift that needs to occur in cities is one of mindset. The civic elite and upper middle class of our cities need to see their communities as the places where they live, not see themselves primarily as part of a community of their peers in other cities and around the world. They must ask themselves the oldest questions: Who is my brother? Who is my neighbor? And, local leadership needs to see all of the people of their community, not just the upscale portion of them, as those to whom they owe first allegiance.

Aaron M. Renn is a senior fellow at the Manhattan Institute, a contributing editor of City Journal, and an economic development columnist for Governing magazine. He focuses on ways to help America’s cities thrive in an ever more complex, competitive, globalized, and diverse twenty-first century. During Renn’s 15-year career in management and technology consulting, he was a partner at Accenture and held several technology strategy roles and directed multimillion-dollar global technology implementations. He has contributed to The Guardian, Forbes.com, and numerous other publications. Renn holds a B.S. from Indiana University, where he coauthored an early social-networking platform in 1991.

Endnotes

Photo by caruba