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Why Local Governments Need to Compete to Offer Citizens What They Want

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Why Local Governments Need to Compete to Offer Citizens What They Want

Governing September 20, 2022
EconomicsOtherEmployment
Urban PolicyOther

For decades, superstar cities could thrive and grow despite high taxes, expensive housing and poor policy choices. The pandemic’s surge in remote work has changed that for good. Governance matters more than ever.

At least when it comes to domestic migration, red states have been the big winners from America’s pandemic: Texas’ and Florida’s gains were California’s and New York’s losses. Given the degree to which states were allowed to set their own COVID-19 policies and how divergent the paths of red and blue America were — from business and school closures to masking and vaccine stances — where we have been choosing to move to seems inextricably linked to policy choices. “Americans are fleeing to places where political views match their own,” declared NPR earlier this year.

The very Americanness of moving to the frontier, of federalism and states as laboratories of democracy would make saying that we “vote with our feet” seem plainly obvious. But it’s not. That phrase was coined in the 1950s by the economist Charles Tiebout, and it’s been contested ever since. Contested not just because Tiebout’s theory seemed inherently political, but because there was another theory with seemingly more explanatory power: “agglomeration economics,” the idea that people and businesses derive major benefits from locating near one another. But in the end, it’s Tiebout having the laugh.

In his terse nine-page paper titled “A Pure Theory of Local Expenditures,” Tiebout presented a model where we sort ourselves into places that offer the bundle of services we want at the tax levels we want to pay. In Tiebout’s foot-voting world, tax rates function for voters much like prices for consumers, and local governments become more efficient as they compete for our “business.” This is why homes can be more expensive on the side of a street assigned to a better public school than on the other side of the street. Of course, we know Americans have a long history of moving to new frontiers, but no economist had previously connected mobility with demand for the services of local government.

Tiebout’s 1956 paper went on to become one of the most-cited articles in the social sciences, and for good reason: It’s as if Americans were being told that the policy frontier was alive and well. Don’t like city hall? Go west, young man!

Spillovers of Knowledge and Know-How

There’s just one problem: For decades, pure and simple Tiebout theory mostly didn't pan out. Since World War II, Americans have been moving less every year. Policies seemed to have little correlation to the migration that actually occurred. Indeed, when it comes to the core functions of local government — schooling, policing, housing — local governments proved to be anything but efficient or effective.

Instead, another body of work, agglomeration economics, has developed over the past few decades to help explain why cities develop and grow despite higher labor and real estate costs and even clear governance failures. Scholars from Edward Glaeser to Paul Krugman have shown that people and firms decide where to locate based on where other people and firms locate. It turns out that agglomerating around lots of other people generates enormous spillovers of knowledge and know-how, leading to the sort of innovation that make us better off.

In Tiebout’s world, people move to get better local policies. But in a world of agglomeration, we move for good jobs, good pay and good fun. Crucially, we often value those more than we hate taxes or high rents or trash on the street. “Agglomeration gains at the local level give otherwise mobile residents a reason not to move, even when governmental policies affect them in a negative way,” explains Yale Law’s David Schleicher.

This is why cities that try to compete with low taxes and good public services still could get beat out by superstar cities with, well, neither of those things. New York City in the 1970s could raise taxes, cut services and nearly go bankrupt, but white-shoe law firms and high-flying financiers still called the Big Apple home. In fact, New York has become even more dependent on these elite firms in the decades since. A similar concentration of top-flight industry occurred across the country: tech in the Bay Area, entertainment in Los Angeles, government in D.C., biotech in Boston, and so on. Their one-of-a-kind networks of firms and talent made the cost of moving anywhere else far higher than ever before.

In fact, America’s top regions look more like oligopolies. Rather than Tiebout’s perfect competition, we get the Bay Area and the Acela Corridor accounting for three-quarters of all venture capital dollars in the nation in 2017. Sure, you could move elsewhere to start a tech company, but no other metro outside the top five got more than 3 percent of VC investments. Indeed, considering that West Coasters tend to stay on the West Coast, southerners in the South, and so on, the actual competition cities face — economically and politically — is even lower.

But wait, there’s more: Local governments compete even less given the strings attached to state and federal dollars. From health care and homelessness to education and infrastructure, fiscal transfers drastically reduce the scope for local policy variation. Worse, it’s the truly local spending — say, on parks or libraries — that’s often the first cut in a downturn rather than give up state and federal “free money.” And even if cities offered the “right” mix of policies for you, what are the chances you would even know this, given the abysmal state of local journalism and election turnout? Tiebout, it would seem, was a dead theory.

Tiebout’s Revenge

Then the pandemic hit, and everything changed. People moved, and local policies suddenly counted for where they moved to. They mattered for whether your child could get a decent education, whether you feared for your safety, or whether you could afford a home. Roughly half of all workers went remote, which suddenly gave them the freedom to pack up their bags and move to where they’d like. More than half of the rise in home prices during the pandemic came from these newly mobile workers no longer moving for a job but for a lower cost of living and a better life and lifestyle. Americans really did vote with their feet during the pandemic, and places with fewer COVID-19 restrictions, as well as lower taxes, housing costs and crime, won out.

Call it “Tiebout’s revenge.” Three trends stand out now: For one thing, remote work is making it easier to move to the places best competing for you to live there. Second, high housing costs are not only making the agglomeration gains of big cities more rootless and less attractive but are making it harder for new residents to afford the price of entry to superstar cities in the first place. And with the increasing salience of policy preferences, we will likely see the ongoing rise of sorting by political preferences as well.

Rather than remote technologies fading away in workaday life as the pandemic’s hold eases, work-from-home rates seem to have stabilized at an extraordinarily high level: About 30 percent of work was done remotely between April and August of this year. This matters because remote work enables agglomeration’s essential ingredient, physical proximity, to be re-created virtually. Disentangling labor markets from location — you can get that Silicon Valley job without paying to live there — means more agglomeration gains also going virtual. So far, we have seen Zoom’s centrifugal force away from superstar cities and city centers increasing with the cost of living and commute times, which are themselves the result of policy choices. Given that the share working remotely at least part of the week is wildly concentrated among higher-income workers who pay a disproportionate share of state and local taxes, this further incentivizes jurisdictions to adopt policies competing for this talent.

Further, high housing costs are a tax on urban agglomeration that fewer workers and companies are willing to pay. For a while now, rapidly rising costs fueled by restrictions on housing have been centered on the highest-productivity parts of the country, such as New York City, the Bay Area, Boston and Los Angeles. Large increases in housing costs have long priced out superstar cities for non-college-educated workers, and now it appears to be the case for college-educated workers as well. It turns out that a large portion of urban agglomeration gains have been captured in rents rather than in consumer surplus or wages. All of this helps explain why cross-state migration toward higher-productivity states — which should be happening given the draw of agglomeration gains — has been negative since 1990 for college- and non-college workers alike.

The Disunited States of America

Local agglomeration gains have for the past generation or so afforded a mismatch between local preferences and local policies, and this lock-in of labor has arguably been bad for governance. But given the pull of remote work and the push of living costs, crime and poor educational outcomes, we’re seeing local leaders in cities like San Francisco suddenly being forced to respond — or being given the boot. What is more, with many aspects of political life today, from attitudes toward COVID-19 to business climate and abortion, we are seeing more state variation in policy and politics than we have in most of our lifetimes (even if some of that variation is in reference to their stances on national issues). This divergence is likely to grow, given that 37 of the 50 states are ruled by a single party today.

Charles Tiebout’s vision anticipates these increasingly disunited states of America. In a world with fewer localized gains from agglomeration concentrated in superstar cities — because they’re spreading elsewhere, going virtual or getting eaten up by high costs — Americans will be likelier to move to places with governments boasting policies and politics that match their preferences. And they don’t even have to relocate to make a difference: Simply having more people and businesses willing to move can discipline local government policies and motivate politicians.

Localities should be competing to offer what citizens want, whether it’s with their level of taxes, services, schools or more. Indeed, we may see more localities emerging, each offering a government to match people’s preferences, much as we saw with the recent “Buckxit” secession movement by the well-off Atlanta neighborhood of Buckhead. States will have a key role to play in ensuring that localities remain open to newcomers in housing, schooling and the like in this game of municipal musical chairs.

Don’t expect everyone to be sorting everywhere overnight, though. People’s local ties are sticky. Millions of Americans locked in low-interest mortgages during the pandemic that they will be loath to give up. And young twenty-somethings still care more about being around lots of other young singles than what policies a mayor is passing. For now, it’s mainly the well-educated, the well-off, and new families and households who seem to be blazing a trail to the suburbs of their choosing or to booming regional hubs such as Atlanta, Miami, Nashville or Phoenix. These Americans, their children and their prosperity are voting with their feet, and more may follow.

Right up until the pandemic, it seemed there was no tax bill too high or apartment too small to dissuade tens of thousands of people from all over the world to move to superstar cities with every passing year. The gains from agglomeration were simply too good. But we forget the importance of governing at our peril.

This piece originally appeared on the Governing

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Michael Hendrix is the director of state & local policy at the Manhattan Institute.

Photo by Chris Ryan/iStock

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