Salvaging Our Cities

Instead of massive urban renewal programs, why not create pockets of prosperity by repealing taxes and regulations?

Inner-city decay is an international problem. It is rare to find a major city in western Europe or the United States without a district that is totally run-down and lacking in amenities, industry, and even adequate population. In some cases these districts cover the very heart of the city and are symptomatic of the decline of an entire region. The economic and social consequences of this inner-city decline are everywhere severe.

Legislators have not been unaware of this problem. On both sides of the Atlantic various controls, subsidies, and government projects have been implemented in an effort to revitalize industry in the inner cities and to improve the standards of housing and other necessities. Few observers would dispute, however, that these programs have rarely been effective in dealing with the problem. Invariably, large amounts of taxpayers' money are spent to set up urban renewal agencies and development committees, who then proceed to allocate larger amounts of money to subsidize construction projects that do little even to slow down the decline, let alone reverse it.

Minimum-wage laws and other controls, intended to keep the working population within the cities, have produced no better results. In the case of minimum-wage laws, the only effect has been to make young, unskilled workers less attractive to employers, leading to an increase in unemployment among young blacks and hence to a worsening of the economic and social structure within the poorer areas of the major cities.

Rent control has also made the problem more acute. The intention of the policy has been to make it more economical for low-income families to live in the cities, by holding rents below the market level and giving tenants better security of tenure. Yet the result of the legislation has simply been to make private renting uneconomical for the landlord, thus reducing the supply of housing coming onto the market. Not only does a shortage develop, but the low rents deny landlords the income required to maintain housing units at a reasonable standard—and this contributes to the spiral of urban decay.

The traditional response to the failure of these programs and controls has varied little—whether it be in London, Naples, or New York. If the present level of aid to the cities does not achieve the desired results, the argument goes, then obviously more aid and more programs are required.

But recently a totally different—indeed opposite—approach was put forward in Britain by two men of widely differing political views. The first is a socialist academic, Prof. Peter Hall, of Reading University. The second is Sir Geoffrey Howe, chancellor of the exchequer in Margaret Thatcher's Conservative government.

The proposal is very interesting for two reasons. It emanates from a country where orthodox opinion normally calls for increasing government intervention in an effort to solve urban problems. For a leading authority on planning and urban economics and the economics spokesman for a major political party both to support a roll-back of the State is an important development. In addition, the causes of urban decay in Britain and America are sufficiently similar to allow possible solutions voiced in Britain to be given serious consideration in the United States.

FLEEING THE US CITIES Several factors have contributed to the inner-city crisis experienced by many cities on the eastern seaboard and elsewhere. The decline of the older, heavier industries and their replacement by high- technology businesses has been a significant influence. This development has been accompanied by massive government programs to expand and improve road facilities, leading to industrial decentralization and an exodus of workers from the centers of the older cities. This trend has been very marked and very damaging to the inner-city areas. Between 1970 and 1977 the population of the major US cities dropped by 4.6 percent compared with a growth in the suburban population of 12 percent and a 10.7 percent increase in those living outside the metropolitan areas.

The population leaving the cities tends to be more skilled and affluent, seeking the opportunities and quality of life available in the suburbs and beyond. In consequence, the population remaining in the inner-urban districts consists of a higher proportion of unskilled workers and low-income families. Families headed by women, for example (a group that tends to have low income and social problems), reached 20.7 percent within the cities by 1977, compared with just over 10 percent in the suburbs. And of the total population of poor people in the United States, the proportion living within the major cities rose from 34 percent to 38 percent between 1970 and 1977.

Other factors have accelerated the decline of the older cities. Finance has become a chronic problem in New York, Cleveland, and elsewhere—aggravated by the erosion of the tax base due to the movement of population to the suburbs. This has usually forced city governments to cut back basic services and protection in the inner areas, which has, in turn, led to the attractiveness of the districts declining even further and hence to further depopulation. The social problems produced by this vicious circle have now created a picture, in the minds of many people abroad, of American cities as synonymous with squalor, chaos, and crime.

BRITISH GHOST TOWNS Cities in Britain and the rest of Europe face difficulties very similar to those in the United States. It is true that the city population in Europe has been traditionally more stable and immobile and that this, together with the more steady growth they have experienced, has enabled them to escape some of the unpleasant side-effects of immigration and rapid social change felt in America. Nevertheless, the decline of major sections within cities that were once the powerhouses of Europe's economy has given rise to increasing study and concern.

The situation in Britain's cities is typical of Europe and starkly similar to that in the United States. Industrial change lies at the heart of urban decay. The key industries of earlier times—shipbuilding, heavy manufacturing, etc.—have suffered substantial cutbacks during this century, and so have the older service industries, such as railroads and the docks. In some cases, as in Liverpool and Glasgow, the decline of these industries has depressed the whole region. Elsewhere, the older industries have been replaced by new ones outside the central urban area, drawing resources and skilled labor from the inner districts. These new industries (such as automobile manufacturing, electronics, and chemicals) have no economic need to be based at the heart of major centers of population. Indeed, the superior communications and other facilities available elsewhere contrast with the congestion and other drawbacks of the older cities.

Disturbing though the decline of the heavy industries has been, an even more damaging trend has been the loss of small companies from the center of Britain's cities. In the East End of London, and at the heart of many other cities, a small workshop district was once a common sight. This is no longer the case.

As in the United States, these industrial developments have resulted in a movement of skilled workers to the suburbs and smaller towns, and so the inner-city areas now have a high proportion of semiskilled, unskilled, or unemployed people. In 1971, for instance, unskilled and semiskilled men accounted for 38 percent of the labor force in inner Birmingham, 35 percent in inner Manchester, and 34 percent in inner Glasgow, compared with 23 percent nationally. A very high proportion of those leaving these areas continues to be skilled or managerial workers. Between 1966 and 1971, for example, only 16 percent of net migrants from Manchester were semiskilled or unskilled; from Birmingham the figure was only 15 percent.

The economic decline of the inner cities in Britain has led to serious social problems. Population movements have resulted in the collapse of many local communities. The overcrowding evident during London's tourist season masks the fact that between 1966 and 1976 inner London lost 16 percent of its population. The same trend is noticeable in other major cities. During the same period Manchester lost 18 percent of its population, Liverpool 22 percent, and Glasgow 21 percent.

Large areas within the inner cities are now virtually devoid of population. In Liverpool, for instance, some 11,000 acres, or 15 percent of the total inner-city land, lay vacant by the end of 1976. A decline in the standard of housing has accompanied the loss of population, as has an increase in vandalism and violent crime. Statistics for violent crimes show an alarming increase in Britain, and there is pressure on the authorities to allow policemen to carry firearms on more numerous occasions. It has been a source of pride in Britain that the police do not carry guns on regular duty, but the use of guns by policemen on special duty tackling violent crimes has been increasing in recent years. As an American journalist noted recently, the change in the atmosphere in London is quite distinct:

The old feeling that people could wander anywhere at any hour without risk is no longer true. Many residents regard some districts populated by immigrants as "no go" areas after dark.

The causes of this violence are complex, but the frustration resulting from high unemployment and poor housing has undoubtedly been a major factor. And racial intolerance has also increased, as the traditional population finds itself in competition with colored immigrants for housing and a decreasing number of jobs.

COSTLY FAILURES Local and national government have proven themselves singularly ineffective in dealing with inner-city decline in Britain. All too often the policy has consisted merely of tearing down whole areas of poor housing and then leaving it derelict for want of money or decisive action. New projects funded by the government invariably become enmeshed in red tape and the conflicting goals of rival departments, and when they are completed they rarely achieve the desired results. As Sir Geoffrey Howe has commented:

Successive governments have introduced Bill after Bill and shuffled the same amount of money from one new, fashionably-named urban program to another. But all attempts at reform seem only to multiply the bureaucracy. The Department of the Environment Report on Birmingham's Inner Area is at its most characteristic with its proposal "to give initial momentum to industrial investment" by the establishment of a "multi-authority interdepartmental steering committee under the chairmanship of the Department of Industry, the county, or district as appropriate."

The national government in Britain now provides over $12 billion a year in financial assistance to local governments, meeting well over half their budgets, and much of this is directed into the cities. In addition to this form of revenue sharing, various subsidies are provided to encourage industry to move to the decaying areas. Yet this level of expenditure has had little noticeable impact on the inner cities. In particular, it has failed totally to encourage any significant number of small, innovative businesses back into the cities. Many claim that the principal reason for the failure is that, for every piece of legislation designed to lure businesses into the cities, there are several others which serve only to tax, control, or otherwise drive them out again. Sadly, this has meant that the small entrepreneurs—the businessmen who take the lead in the generation of new ideas—remain a dying breed in the areas where they are needed most.

Perhaps the only "effective" policy undertaken to deal with the urban problem has been rent control, but unfortunately its effect has been the exact opposite of that intended. Conceived in part as a means of enabling working people of low incomes to afford accommodation in the inner cities by enforcing a rigid ceiling on rents, the policy has only resulted in the total collapse of the private rental market and the acceleration of the physical decay of inner-city housing.

American attempts to solve the urban crisis have been similar to those undertaken in Britain, and they have been just as expensive and ineffective. Fortunately for the United States, rent control is not as pervasive as it is in Britain, but in cities where it has been introduced, the results have been the same.

As in the case of Britain, the reaction to urban decline has been ever-louder demands for government intervention. And when such intervention has resulted in failure, the cry, as ever, has been for more money, more regulation.

President Carter's urban policy, announced in March 1978, is sadly typical of a well-meaning approach that has already met with little success in many other countries. The assumption throughout is that a sufficiently large amount of money targeted sufficiently accurately must surely solve the problem. Yet federal aid to the cities had already reached $5.4 billion by 1977 with little impact on urban decline. Just how much is required?

ENTREPRENEURIAL OPENING Although the orthodox view continues to be that the solution to the urban problem must involve finding just the right mix of controls, subsidies, and plans, a growing number of authorities is arguing that what is really required is a complete reversal in the whole direction of policy. These authorities contend that the bureaucratic approach to inner-city problems drives away the very people who are most likely to revive the depressed areas—the entrepreneurs.

One of these experts is Prof. Peter Hall, a distinguished socialist academic and a specialist in urban affairs. As Professor Hall has argued:

What is necessary is to find new sources of innovation and enterprise, to replace that which is gone forever.…The city was always a seedbed for innovation, for new development impulses. Some entrepreneurs succeeded and grew large. As they did they (often) took their business out of the city in search of larger scale, rationalized production processes. Others stagnated or even died; but there were always others to take their place, and again some of those would succeed. Now we have succeeded in killing off an abnormal proportion, and too little innovation is happening to fill the gap. The job is to discover how to get the innovation going again.

Hall contends that the failure of current inner-city policy is due in large part to a tendency of bureaucrats to concentrate on preserving ailing, outmoded industries and to their insistence on constructing low-income housing in a vain attempt to retain workers within the cities. Paradoxically, he argues, the best way to give new life to many cities would be to encourage small, science-based companies employing highly skilled people, who would in turn create a demand for a wide range of jobs (in the service sector, especially) for large numbers of semiskilled and unskilled workers.

Hall points out that at the turn of the century many of the technically most advanced precision and scientific industries were small-scale inner-city workshop concerns. But these industries are highly footloose and are attracted to amenity-rich areas, suitable for a well-educated and cultured workforce—hardly the environment to be found in most contemporary inner-city districts. As Hall notes, science-based industry

has recently shown very little affinity for urban areas, especially inner ones. It may go to the outer fringes of the more attractive and growing metropolitan areas—Los Angeles, San Diego, Dallas, Atlanta. Or it may go into the smaller towns. The people who are needed to man it are both scarce and mobile, and they go where they please; industry follows them. The only way we are going to tempt it back into the cities, if at all, is through a very imaginative program that deliberately caters to the whims of such people. That means the creation of high-amenity environments…plus adjacent high income housing schemes, plus motorways for them to drive their cars from the outer suburbs. All of which is rather a long way from the policies of many local councils in British cities.

HONG KONG TRANSPLANTED Hall readily concedes that the creation of the amenities required to attract such high-technology industries may not be feasible in many British (and American) cities. The social structure and cultural framework of the city might make it very difficult to construct a more attractive inner-city district without social disruption and political opposition. For cases where there are such obstacles, he suggests another, and more radical and imaginative, approach that would have its greatest effect in the most depressed and culturally depressed areas. This is the so-called freeport solution. According to Hall, this would be, in essence,

an essay in non-plan. Small, selected areas would be simply thrown open to all kinds of initiative with minimum control. In other words we would aim to recreate the Hong Kong of the 1950s and 1960s inside inner Liverpool or inner Glasgow.

The freeport concept would involve three key elements:

• The encouragement of entrepreneurship and capital formation. The specified areas would be made free of national-exchange and customs control, and foreign capital would be welcomed. All goods could be imported and sold free of duty, and it would be legal to export them from the freeport area also free of duty (perhaps after reprocessing and assembly). Areas of this kind do already exist in, for example, the Canary Islands and Shannon airport in the Republic of Ireland.

• These areas, he argues "would be based on fairly shameless free enterprise." They would be free of taxes, social services, and industrial and other regulations. Trade unions would be allowed, but the closed shop would be banned. Wages would reach their own level by the normal processes of bargaining.

• Residence in the area would be based on free choice. Existing residents would be free to leave or to stay under the new system of deregulation, low taxation, and low social benefits.

Hall sees the freeport approach as "an extremely drastic last-ditch solution to urban problems," which should be adopted only on a small scale in "inner-city areas that are largely abandoned and denuded of people, or alternatively areas with very grave social and economic problems."

The solution undoubtedly merits serious consideration in the case of certain American cities—for instance, New York. There is little doubt, of course, that any move to make part of New York City into a freeport area would encounter fierce opposition from competing business centers, but then any selective assistance would meet criticism from cities that were denied help. Yet from a cost-benefit standpoint, it is certain that the freeport solution would provide a far more dramatic and lasting boost to the economy of cities such as New York than any amount of grudgingly given state and federal handouts.

FREE-MARKET EXPERIMENT An alternative idea to the freeport concept—and one that might have more general attraction—was put forward recently by the British Conservative Party's chief economic spokesman, who is now chancellor of the exchequer, Sir Geoffrey Howe. Sir Geoffrey's proposal would not involve an emphasis on international trade.

Rather the idea would be to set up test market areas or laboratories in which to enable fresh policies to prime the pump of prosperity, and to establish their potential for doing so elsewhere.

The enterprise zone, as Sir Geoffrey has called the areas he proposes, could be combined with a freeport in suitable cases, but it would not be a necessary condition. The idea would be to designate four or five depressed inner-city areas to begin with and to relax controls with a view to giving the zones as much freedom as possible, so that businesses within them could make profits and create new employment. The aim, then, would be to set aside areas where the innovative capabilities of free enterprise would be given an opportunity to tackle the problems that the bureaucracy has failed to solve and where it could do so under what would be, in effect, laboratory conditions.

The basic features of an enterprise zone would be as follows:

• Planning controls of almost every kind would cease to apply in the designated areas. Providing the building met the most basic regulations regarding pollution, health, and structural safety and was for a legal purpose, it would automatically be allowed.

• The city council would be required to sell, by auction, all land it owned within the designated area of the city.

• Entrepreneurs moving into a zone might be granted a reduction in their property taxes; they might even be given an exemption from such taxes for a specified period.

• Businesses in the zones would be given a guarantee that tax laws affecting investment, depreciation, etc., would not be changed to their disadvantage.

• Certain legal obligations on companies would be suspended within the zones. For example, legislation controlling prices or wages would no longer have effect. Similarly, rent control would cease. On the other hand, no company entering a zone would be eligible for any subsidy, grant, or any other form of government assistance whatsoever.

• All the conditions mentioned would be guaranteed for a stated and substantial number of years.

Sir Geoffrey's concept of enterprise zones is arguably the most important proposal on urban problems to be put forward in many years. It is an idea with several very significant implications.

FREEDOM IN COMPETITION The existence of small zones where new approaches would meet no obstacles would give a major stimulus to the development of new ideas to recreate prosperity in the older cities. It would become worthwhile for those with innovative minds to turn to the problem of the inner cities.

The enterprise zone would enable trial and error, the creative mechanism of the free-enterprise system, to address the complex problem of urban decline. History has shown that bureaucratic planning is unsuited to the task. It is impossible for an urban plan, no matter how carefully or brilliantly conceived, to allow for all the contributory factors or to deal with all unexpected changes in circumstances and patterns of choice (the very fact that they are unexpected will rule out the inclusion of corrective features in the plan).

The enterprise zone, however, does not depend for its success on the perfect analysis of the factors at work. Instead, it depends on the foresight, hunches, and inspired guesses that form the basis of entrepreneurship. By this process, where the reward of success is profit, the prosperity of a community arises from continuous experimentation within a competitive framework. The potential of this process as a means of solving problems is logically superior to bureaucratic planning.

Enterprise zones would provide a valuable testing ground for comparing different economic and social systems. As Sir Geoffrey points out, there would be no reason why various groups, such as communists, anarchists, libertarians, or religious sects, should not put their philosophies into practice in areas within the enterprise zones. The outside observer would then be able to judge which is the most efficient in dealing with the problem of the city—or, for that matter, other issues. Such practical testing would provide a far better comparison between rival approaches than any number of debates in our universities.

There can be little doubt that those who oppose the steady encroachment of government into every aspect of life would welcome the opportunity to demonstrate the benefits of free enterprise under the "test-tube" conditions of an enterprise zone. And if the zones did, indeed, result in major improvement in the cities where they were introduced, pressure would mount in other cities for the creation of enterprise zones, with their accompanying decontrol. As the London Daily Telegraph noted in an editorial:

What is likely to be the fiercest objection to Sir Geoffrey's scheme best exposes its attraction. Other parts of the country, it will be said, would immediately clamour for similar treatment.…Indeed they would. But whereas competition for development area status means competing for more subsidy and more bureaucratic manipulation, competition for "enterprise zone" status would mean competing for the enjoyment of less of both, making freedom infectious. What could be wrong with that?

GETTING STARTED The notion of the enterprise zone is well suited to the United States. The philosophy of experimentation and reliance on individual initiative is well rooted in the American way of life. Not surprisingly, there has been considerable interest in the idea since first introduced in a Heritage Foundation publication last year. A bill was introduced in Illinois, for example, that would have created enterprise zones along the lines discussed above. It passed the lower house comfortably and was only narrowly defeated in the senate after intense opposition by the city council of Chicago, which evidently did not relish the possibility of losing control over parts of its domain. A similar bill will be introduced again soon, aimed at dealing with the principal objections without removing the essential features of the enterprise zone concept. The Illinois episode is particularly interesting, since it involved a northern, industrial, and heavily unionized state. If a bill were to be introduced in a southern state there might well be a favorable outcome.

On the national level, measures are being introduced in Congress to facilitate the creation of zones and to suspend the appropriate federal laws. For the most part, zoning restrictions, property taxes, and certain business taxes and regulations are purely state and local responsibilities. The states would specify the geographic limits of each zone and pass legislation dealing with property and state business taxes, zoning, and state minimum wages. Congress, on the other hand, would pass more general measures, suspending federal laws and agency regulations within the areas designated by the states. Federal action would, in each case, be contingent upon the state complying with criteria concerning the location of enterprise zones and the state and local laws to be suspended. Only if the zones created by the states met these necessary requirements would the federal exemptions apply.

The enterprise zone concept is a bold and exciting departure from the usual approach to the problems of inner-city decline. No new bureaucratic monster would be created, nor would it be the start of yet another flood of taxpayers' dollars with very little tangible effect. Instead, it would at last allow the innovative genius of the small entrepreneur to be turned to the problem. Private money would be risked, and real, productive jobs would be created. And it would provide another opportunity for private enterprise to step in and clear up a situation where government action has been a dismal failure.

Stuart Butler, an economist, taught at Hillsdale College from 1975 to 1977 and now is a policy analyst with the Heritage Foundation. An earlier version of this article was published by the Heritage Foundation.