BACKGROUND PAPER

Barriers to

Urban Economic

Development

May 1978

Congress of the United States

Congressional Budget Office

BARRIERS TO URBAN ECONOMIC DEVELOPMENT

The Congress of the United States

Congressional Budget Office

For sale by the Superintendent of Documents, U.S. Government Printing Oftlce

Washington, D.C. 20402

PREFACE

On March 27, 1978, the Administration submitted to the Congress

legislation which focuses on the current economic development ills

of major urban areas. This paper, which was requested by the

Chairman of the Housing and Community Development Subcommittee of

the House Banking, Finance, and Urban Affairs Committee, provides

background information for the Congress as it debates the

Administration's proposals. In keeping with the Congressional

Budget Office mandate to provide nonpartisan objective analysis,

this paper makes no recommendations.

The study was prepared by Reid Ewing under the general direction

of Raymond Scheppach of CBO's Natural Resources and Commerce

Division. The report was edited by Marion F. Houstoun and was

prepared for publication by Angela Evans.

Alice M. Rivlin

Director

May 1978

111

CONTENTS

Page

PREFACE iii

SUMMARY vii

CHAPTER I. INTRODUCTION 1

Purpose and Focus 1

CHAPTER II. PRIMARY BARRIERS TO URBAN ECONOMIC

DEVELOPMENT 4

Land As A Barrier to Urban Economic Development . . 5

Labor As A Barrier to Urban Economic Development.. . 7

Finance And Management As Barriers to Urban Economic

Development 11

Market Potential As A Barrier to Urban Economic

Development 14

Transportation As A Barrier to Urban Economic

Development 17

CHAPTER III. SECONDARY BARRIERS TO URBAN ECONOMIC

DEVELOPMENT 25

CHAPTER IV. CONCLUSIONS 33

FOOTNOTES 35

SUMMARY

There are various causes of central city economic decline and

one or more proposed remedies for each. This paper, by design,

focuses on only one cause—loss of industry and commerce—and only

one proposed remedy—expansion of industry and commerce.

New industry and commerce would reduce rates of unemployment in

central cities, strengthen central city tax bases, and have at least

some multiplying effect on income. Thus, though central city

economic expansion runs counter to strong market forces, federal

policy changes to encourage it may still be justified. In cases

where federal policy has reinforced market forces detrimental to

central cities, policy changes may be justified on a purely economic

basis. In other cases, justification may be social or political.

As an aid to policymakers, this paper identifies the most

significant barriers to central city industrial and commercial

development, and assesses the impact of federal policies on each. It

makes three major points:

o Despite differences in the economic, demographic, and

political character of cities, most find their ability to

retain old or attract new industry and commerce limited by

the same factors.

o Those factors can be mitigated by federal action, but only at

substantial social and economic costs.

o Federal policies and programs capable of mitigating most

factors already exist, but they are hindered by countervailing policies and programmatic flaws.

PRIMARY BARRIERS TO URBAN ECONOMIC DEVELOPMENT

Available evidence indicates that five factors have been

particularly inhibiting to the growth of industry and commerce in

central cities. Federal policy has both actual and potential impacts

on each factor.

VII
Availability and Cost of Land

Effects on Industrial and Commercial Location. The limited

availability and high cost of central city land as compared with

suburban and nonmetropolitan land do not significantly inhibit

stores and offices from locating in central cities because they can

and do economize on land through multistory development. As

continuous process and automatic material handling have made singlestory plants the norm, however, new industry has been discouraged

from locating in central cities by land-related factors. Many cities

cannot provide land in lots large enough for modern industrial

plants, and even when such land is available, it costs several times

as much as comparable land in outlying areas. Similarly, many

central cities cannot provide additional land for plants, already

located in central cities, that wish to expand their operations. In

either case, central cities lose industry to jurisdictions with more

abundant or less expensive industrial land.

The Influence of Federal Policy. The federal government has

helped cities overcome land-related barriers to industrial and

commercial development by subsidizing land assembly and clearance

under the urban renewal program and, to some extent, the economic

development program. This approach was so costly in social and

economic terms, however, that it was virtually abandoned several

years ago. As substantial funding for economic development in

central cities becomes available again, more intensive uses of land

will have to be encouraged if neighborhood disruption and federal

subsidies are to be kept within reasonable bounds.

Availability and Quality of Labor

Effects on Industrial and Commercial Location. Automation of

production processes and the growing importance of services in our

economy have increased the demand for skilled and professional labor

relative to the demand for unskilled and semiskilled labor. The

movement of more affluent households to the suburbs has made skilled

and professional labor more readily available in suburbs than in

central cities. These two circumstances have combined to divert

high-skill—and some low-skill—industry and commerce from cities to

suburbs.

The Influence of Federal Policy. The federal government,

through its manpower training programs, has helped cities overcome

the primary labor-related barrier to economic development—lack of

skilled labor. The success of those programs has been limited,

Vlll
however, by the conflicting social and fiscal objectives of manpower

policy, and by the ready availability of skilled labor outside

central cities. Until manpower training is more heavily targeted to

central cities, restructured to match the needs of central city

industry, and coordinated with job-creation efforts, industry will

have little incentive to locate in central cities.

Availability of Capital and Managerial Expertise

Effects on Industrial and Commercial Location. Capital and

managerial expertise are readily available to major U.S. corporations, but they are not available to many small or minority-owned

businesses, which represent the great majority of all businesses

located in central cities. Many small or minority-owned businesses

are undercapitalized to begin with, and they find lending institutions, which can afford to be selective because regulation insulates

them from competition for clients, unwilling to take a chance on

long-term profitability. Many are run by persons who lack basic

business skills or prior experience in the same line of business.

Though not unique to central cities, lack of capital and managerial

expertise is nevertheless tremendously inhibiting to the growth of

industry and commerce in central cities.

The Influence of Federal Policy. The federal government makes

capital available to businesses primarily through loan guarantee

programs; managerial expertise is made available primarily through

short-term training and counseling programs. Unfortunately, those

programs tend to miss the kinds of businesses most in need of help

from the federal government. New businesses need debt-free

financing until they reach the financial breakeven point.

Businesses in declining areas need more federal involvement as a loan

guarantor or loan maker. Businesses with inexperienced management

need more intensive training and counseling than are generally

available.

Proximity of Markets

Effects on Industrial and Commercial Location. Suburbanization

has cost the nation's cities billions of dollars per year in

purchasing power, much of it at the expense of central city commerce.

With shopping trips shorter than trips for any other purpose,

commercial establishments cannot afford to locate too far from

markets; thus, they have followed population out of cities. Interregional migration has reduced the market for goods produced in the

IX

27-861 O - 78 - 2
Northeast and the Midwest, largely at the expense of central city

industry in those regions. About half of all industrial firms serve

regional or local markets; thus, they are seriously affected by

interregional migration.

The Influence of Federal Policy. Decentralization of population (thatis, movement away from urbanized areas and urbanized

regions) is a product of strong market forces, reinforced by federal

highway and water projects, defense spending, waste treatment

grants, mortgage insurance, and tax subsidies for homeowners.

Federal programs to improve city services and housing have only

slightly offset these forces, and the much-heralded "back-to-thecity" movement has remained insignificant on a national scale. To

expand central city markets, the federal government would have to

provide the affluent with stronger incentives to live in central

cities or give central city industry an edge in federal procurements.

Quality and Cost of Transportation

Effects on Industrial and Commercial Location. Major cities

have good water and rail access, but that is no longer a great

advantage, since trucking has become the dominant mode of freight

transport in the United States. Similarly, major cities have good

transit service, but that is no longer a great advantage, since the

automobile has become the dominant mode of passenger transport in the

United States, for both employees and consumers. Because most major

cities do not have adequate roads, truck terminals, or parking

facilities, they have lost industry and commerce to areas that do.

The Influence of Federal Policy. Federal highway programs have

adversely affected the growth of industry and commerce in central

cities. Construction of high-performance federal-aid highways has

greatly improved the competitive position of trucking, which has

encouraged firms to move from central cities to suburban sites on

beltways and other high-performance highways. In order to compete

for industry and commerce, central cities need to improve and

maintain their arterial roads and, where neighborhood disruption can

be avoided, complete their limited access highways. More targeting

of federal harbor/port and transit expenditures would also help.

SECONDARY BARRIERS TO URBAN ECONOMIC DEVELOPMENT

Other location factors generally have only a limited effect on

the growth of business in central cities; that is, their influence is
restricted to certain industries or geographic areas. These factors

typically act as "tie-breakers," helping businesses choose among

otherwise comparable sites.

Federal Taxes

Federal business tax provisions can indirectly affect business

location patterns in ways that are detrimental to central cities, but

since those provisions apply to all locations, they are not

responsible for the trends themselves, and they do not appear to

exacerbate them greatly. This conclusion applies, most notably, to

the investment tax credit on machinery and equipment and to

accelerated depreciation on new buildings.

State and Local Taxes

Taxes are often substantially higher in predominantly urban

than rural states and higher in central cities than in suburbs.

Nonetheless, the evidence indicates that they have little effect on

business location patterns, both because state and local taxes

constitute a small fraction of business costs and because they are

partially recovered in the form of public services to business and

deductions from federal corporate income tax liability.

Crime

Crime is more prevalent in central cities than in suburbs, but

not enough to alter the basic economics of business location.

Whatever the effect of crime on business location patterns, it is

certainly more psychological than economic. Unfortunately, no

federal program, including a better federal crime insurance program,

can eliminate the anxiety of businessmen in cities with high crime

rates.

Air Pollution

With the Environmental Protection Agency's offset policy (under

which new pollution sources are allowed in certain areas only if

offsetting reductions in existing sources are accomplished) in

effect, air quality controls have yet to significantly deter

industry from locating in central cities. New industrial pollution

sources have either been exempt from the offset requirement, have had

XI
an automatic offset, or have received an offset from state or local

government as a locational inducement. All of this is changing,

however, and air quality controls could emerge as a significant

barrier to central city industrial development.

Financial Incentives

There is no reason to believe that financial incentives are

requisite for industrial development: relatively few firms ask for

or receive them, and most doing so indicate that they would locate in

the same spot: and invest to the same extent without any incentives.

Even at its peak, industrial bond financing—the financial incentive

with the greatest potential impact on industrial location patterns—

represented an infinitesimal fraction of new plant and equipment

expenditures nationwide, and the figure has fallen sharply since

restrictions on the value of tax-exempt bonds went into effect.

Water and Waste Treatment

Municipal water and waste treatment service is essential to

industry and commerce only when the height of the water table, the

permeability of land, or the nature of industrial discharges makes

wells and septic tanks or cesspools impractical. In such cases,

federal grants for water and waste treatment facilities and infrastructure have facilitated the decentralization of industry and

commerce.

Natural Resources

Federal policies and technological innovations have tended to

neutralize whatever advantage certain regions once had over others

in terms of natural resource availability. The impact of natural

resource availability on industrial location is limited today to a

handful of industries, and is diffused throughout regions rather

than concentrated in cities.
CHAPTER I. INTRODUCTION

As central cities began losing substantial industry and

commerce around 1970, they suffered a corresponding loss of jobs,

particularly jobs suitable for their unskilled and semi-skilled

residents. Between 1973 and 1976, central cities of metropolitan

areas lost 2.5 percent of their total employment, and a much higher

percentage of their manufacturing jobs. During that same period,

suburbs of metropolitan areas experienced a 7.9 percent increase in

employment.

Loss of industry and commerce has contributed to three

principal problems facing central cities. One is high unemployment.

In 1976, central cities collectively had an unemployment rate of 9.2

percent, about 2 percent higher than their suburbs. Another problem

is poverty. In 1976, some 14 percent of central city residents were

below the poverty level, as compared with 7 percent of suburban

residents. The third problem is a shortage of tax revenue. Between

1970 and 1975, central cities of 150,000 or more residents logged

annual average increases in assessed property value of only 3

percent, well below the rate of inflation and even further below the

rate of increase in per capita costs of city services.

PURPOSE AND FOCUS

There are various causes of central city economic decline and

one or more remedies for each cause. _!_/ Population movements have

left central cities with a disproportionate share of the socially and

economically disadvantaged, leading some observers to recommend

population dispersal as a remedy for central city decline.

Technological changes have left central cities with obsolete

physical plants, causing other observers to recommend modernization

of physical plants, particularly housing, as a remedy for central

city decline. Governmental fragmentation has left central cities

inadequately compensated for functions performed and services

rendered, leading still other observers to recommend revenue sharing

or governmental consolidation as a remedy for central city decline.
This paper considers only one cause of central city decline—

the loss of industry and commerce. It is possible to compensate for

the resulting loss of employment opportunities for central city

residents in a variety of ways, ranging from creation of public

service jobs to improvement of access to suburban jobs. But only

expansion of central city industry and commerce would provide jobs

for central city residents, strengthen central city tax bases, and

have at least some "multiplying" effect on income. Some kinds of

industry and commerce would provide more jobs, more tax dollars, and

more income than others, but all kinds, whether capital- or laborintensive, corporate- or community-based, basic or service-oriented,

and so forth, would provide multiple benefits. Hence, even though

the expansion of central city industry and commerce runs counter to

strong market forces, it deserves serious consideration as a

response to the economic decline of cities.

As an aid to policy makers, this paper identifies the most

significant barriers to central city economic development and

assesses the impact of past and present federal policies on each.

While all major barriers are reviewed below, the emphasis is on:

o Barriers specific to manufacturing establishments. Because

most manufacturing establishments do not serve local

markets, they have been able to decentralize to a greater

extent than establishments in any other economic sector, and

in so doing have contributed to the decentralization of

population, and with it, commerce. "I]

o Barriers specific to large establishments. Despite their

fewer numbers, large establishments determine patterns of

industrial and commercial location by attracting small

establishments to nearby sites. Further, since large

establishments are able to internalize such functions as

marketing and legal services, they have spearheaded

decentralization. _3/

o Barriers specific to new establishments. Reviewing all of

the evidence, some of it contradictory, the siting of new

establishments appears to have contributed more to

decentralization of economic activity than has the closing,

movement, or differential growth of existing establishments.

4/
o Barriers specific to suburban establishments. While a few

cities have lost more jobs through inter- than through

intra-regional shifts in economic activity, a vast majority

have had the opposite experience. Competition for industry

and commerce is more intense between cities and their

suburbs than between cities and nonmetropolitan areas or

cities in different regions. 5/

To summarize, the emphasis below is on factors which have

encouraged new establishments, particularly large: ones in

manufacturing, to locate in suburbs rather than in cities. Of

course, the importance of particular factors depends on the

particular mix of industry in a given metropolitan area. Studies

have shown, for example, that proximity to highways is especially

important in metropolitan areas with a preponderance of light

industry, and in those with limited, congested highway systems.

Still, the following sections make it clear that certain barriers are

more consequential than others under a wide variety of

circumstances.
CHAPTER II. PRIMARY BARRIERS TO URBAN ECONOMIC DEVELOPMENT

Available evidence indicates that five factors have

particularly inhibited central city economic development:

o The high cost and limited availability of land in central

cities, at least in parcels large enough for modern

industrial plants. Prime industrial land is especially

limited in central cities of the Northeast.

o The limited availability of skilled and professional labor

in central cities, and real or imagined differences between

the quality of urban and suburban labor in the Northeast,

Southeast, and Midwest.

o The lack of capital and managerial expertise. These

factors, though not unique to central cities, have been

tremendously inhibiting to central city economic development

because central cities attract a large number of small and

minority-owned businesses, many undercapitalized and poorly

managed.

o Declining market potential in central cities. Suburbanization of population has been accompanied by declining demand

for goods and services in central cities, at the expense of

central city commerce in all regions but particularly the

Northeast and Midwest. Regional outmigration has been

accompanied by declining demand for products of the

Northeast and Midwest, at the expense of industry throughout

those regions, but particularly in their central cities.

o Poor access to highways in older rail, water, and mass

transit-oriented cities, most of which are in the Northeast

and Midwest. Poor access to airports also hinders

industrial and commercial development in certain cities, but

less so than poor highway access.

Those, then, are the principal factors inhibiting central city

economic development; each is discussed in detail below.
LAND AS A BARRIER TO URBAN ECONOMIC DEVELOPMENT

Availability and Cost of Land

Cities have less developable land than surrounding suburbs, and

the little land they do have is relatively expensive. Nevertheless,

those relative differences do not weigh heavily against central city

locations for commercial establishments because they can and do

economize on central city land through multistory development. A

survey of office rents in five metropolitan areas found them to be

only 10 to 15 percent higher in cities than in suburbs, a difference

which amounted to less than 1 percent of total costs. 6/ Another

survey found the cost and availability of office space to be among

the least salient reasons for corporate headquarters leaving New

York City. 7/

For industry, however, the greater availability and lower cost

of suburban land do weigh heavily against central city locations. As

industry has converted to continuous process and automatic material

handling, it has become financially advantageous, if not technologically obligatory, to operate in single-story plants, which

consume large amounts of land. Although central cities have substantial amounts of vacant land, much of it is not available for

development or is available in parcels too small for modern

industrial plants. 8/ Developable land amounts to less than 10

percent of total land in one out of three cities with populations of

more than 100,000; if suitable for industry, it is typically three to

eight times more expensive than similar land in outlying suburbs. 9/

Cities in New England and the Mid-Atlantic States are particularly

short of suitable land for industry.

The cost and availability of land thus rank high among site

selection criteria in surveys of industry, often first: or second.

10/ Land seems to be important both as a push and a pull factor:

numerous surveys have shown that industrial establishments most

often move because of a lack of space to expand operations, and most

often seek sites with adequate space for future expansion. A survey

in San Francisco, for example, found that establishments moving from

that city to its suburbs, on average, doubled the floor area of their

buildings and quadrupled the size of their lots. 1_1/

27-861 O - 78 - 3
Federal Policy with Respect to Land

The federal government has subsidized the assembly and

clearance of central city land under its urban renewal program and,

to some extent, its economic development program. During the heyday

of urban renewal, thousands of acres were assembled, cleared, and

redeveloped for industrial or commercial use. Unfortunately, much

of that acreage was converted from residential use, and the program

came increasingly under fire for breaking up neighborhoods,

depleting the stock of low- and moderate-income housing, leaving

many blocks of vacant land and, by some accounts, inducing very

little economic development that would not have occurred anyway. 12/

As a result of these criticisms, federal efforts to revitalize cities

came to focus almost exclusively on housing improvements, particularly after urban renewal was subsumed under the Community

Development Block Grant program early in 1975.

This state of affairs is changing, however. The Economic

Development Administration (EDA) is spending more on industrial and

commercial parks in central cities each year, nearly seven times as

much in fiscal year 1977 as in fiscal year 1972. 13/ Recent

amendments to the Public Works and Economic Development Act have

increased the number of cities eligible for EDA assistance by a

factor of five, and have given cities priority equal to that of small

urban and rural areas in the competition for limited funds. More

important, the Department of Housing and Urban Development (HUD),

under 1977 amendments to the Housing and Community Development Act,

is about to underwrite industrial and commercial development

projects for the first time in years, under both its Community

Development Block Grant and Urban Development Action Grant programs.

It is possible that the mistakes of urban renewal can be avoided

through the exercise of administrative discretion on action grants

and through appropriate planning and procedural requirements on

regular block grants. In many cases, intensive land uses, such as

multistory development, industrial and commercial rehabilitation,

and marginal, site expansion for businesses needing additional space,

will have to substitute for land assembly, clearance, and redevelopment . 14/

Certain provisions of the federal income tax code have tended to

accentuate land-related barriers to central city industrial and

commercial development; foremost among them is the ability of

industrial and commercial establishments to calculate depreciation

on new buildings according to an accelerated schedule. While

applicable to new buildings everywhere, cities have clearly
benefited less from "accelerated depreciation" on buildings than

have suburbs, since they have less land available for new construction. Even so, because industrial and commercial buildings have long

useful lives (40 or more years) and are subject to a low rate of

accelerated depreciation (150 percent), the impact of this tax

provision on business location patterns has been slight. Businesses

can reduce their tax bill by no more than 0.6 percent of construction

cost in the first year of accelerated depreciation, and progressively less in subsequent years. Thus, the total subsidy to business

in fiscal year 1977 was less than $400 million, a negligible fraction

of total business expenditures. Of course, if accelerated depreciation is replaced by a more substantial investment tax credit on

industrial buildings, as proposed by the Administration, it will be

harder to dismiss the impact of the tax code on business location

patterns. 15/

LABOR AS A BARRIER TO URBAN ECONOMIC DEVELOPMENT

Availability and Quality of Labor

For every dollar of value added in the United States, 66 cents

is spent on labor. This is nearly four times the expenditure on

land, plant, and equipment combined. It is not surprising, then,

that the availability, cost, and quality of labor strongly influence

business location decisions.

Lack of skilled and professional labor is the most significant

labor-related barrier to central city industrial and commercial

development. Automation of production processes and the growing

importance of services in our economy have increased the demand for

skilled and professional labor relative to that for unskilled and

semiskilled labor. Suburbanization of the middle and upper classes

has made skilled and professional labor more readily available in

suburbs than in central cities. These circumstances have combined to

divert industry and commerce from cities to suburbs. A study in the

^Boston metropolitan area found that industrial establishments with

high wage rates (an indication of high skill levels) were four times

more likely to locate in the suburbs than were those with low wage

rates. Labor availability made the difference. 16/ A survey of

corporate headquarters leaving New York City found that Labor availability dominated all other reasons for moving. Moves were prompted

primarily by recruiting difficulties, lack of clerical staff, and

executive residence in suburbs. 17/
Even some low-skill industry has been attracted to suburbs by

labor considerations. Suburban labor is widely viewed as more

productive, dependable, arid trainable than central city labor. A

well-known article in the Harvard Business Review posited that a

manufacturing establishment using labor-intensive production methods

and drawing its labor force from a central city poverty area would

have a 7.5 percent lower productivity, a 50 percent higher turnover

rate, twice the hiring cost, and eight times the training cost of one

drawing its labor from the "conventional labor pool." 18/ These

figures, it should be noted, were largely without empirical foundation. Indeed, under the Department of Labor's Job Opportunities in

the Business Sector program, participating firms have found labor

from central city poverty areas virtually indistinguishable from

"conventional" labor. 197 Nonetheless, as long as central city

labor is viewed as inferior to suburban labor, central cities will be

at a disadvantage in the competition for industry and commerce.

In brief, lack of skilled and professional labor, and real or

imagined labor-quality problems, are substantial barriers to central

city economic development. Outside of a few metropolitan areas in

the Southwest and West, central city residents have markedly less

education than suburban residents, and hence fewer skills and, by

some accounts, lower productivity. Other labor-related barriers to

central city economic development pale next to those.

While wage rates in certain industries are slightly higher in

central cities than in suburbs, the reverse is more often the case,

and low-wage industries continue to cluster in central cities. 20/

Surveys have shown that wage rates for skilled labor are fairly

uniform within metropolitan areas, not only in highly unionized

industries subject to metropolitan-wide wage agreements, but also in

other industries tapping the same labor market. Wage rates for

unskilled labor do vary within metropolitan areas, unionization

being less prevalent among unskilled workers, but seldom by more than

10 percent and usually to the advantage of central cities. 21/

Of course, this does not rule out the possibility that

systematic regional wage differentials inhibit economic development

in the central cities of certain regions. Various studies suggest

that between 10 and 30 percent of U.S. manufacturing is labororiented, that is, attracted to low-wage areas. 22/ One early study

found that nearly one-third of the interstate shifts in manufacturing were attributable to the availability of low-wage, nonunionized labor in the South.
This is no longer the case, however. Two recent studies found

that industry, which had come principally from the Northeast, is no

longer attracted to the South solely or even largely because of low

wage rates. 23/ Interregional migration, it appears, has brought

wage rates in the two regions into rough equivalence. As of 1972,

the average hourly earnings for production workers were only 2

percent higher in the Northeast than the South, and they were

actually lower in Boston and New York, for example, than in Atlanta

and Houston.

Studies and surveys in the 1940s and 1950s found some industrial

firms moving south simply to avoid unionization. It was not so much

the low wage rates that motivated them as the absence of work rules,

work stoppages, and other correlates of unionization. The incentive

to move to the South has diminished, however, as patterns of unionization have become more uniform within the United States. Although

the Northeast and the Midwest still have a higher percentage of

unionized employees than the South, the gap has narrowed to the point

where the most recent econometric study, after controlling for wage

rates and other factors, found no significant relationship between

unionization and growth rates of manufacturing employment across

states. 24/ Unionization may still influence industrial location

through its effect on wage rates, but it apparently has little

independent effect now.

Federal Policy with Respect to Labor

Federal manpower programs of the 1960s focused on the principal

labor-related barrier to central city economic development—lack of

skilled labor. 25 / Manpower training under the Manpower Development

and Training Act (MDTA) of 1962 sought to give unemployed labor the

specialized skills demanded by the private sector. The impact of

that training on worker earnings has been hotly debated, but on one

point there is agreement: it provided skills of use to the private

sector, as evidenced by a high rate of job placement and retention.

Despite high unemployment in the early 1960s, 78 percent of those

trained with MDTA assistance were fully employed a year or more after

job training, 13 to 23 percent above comparable workers who were

untrained. 26/

Yet, as concern for minorities grew in the mid-1960s and as the

more employable of the unemployed found jobs in the expanding

economy, manpower policy came to emphasize, first, the provision of

basic skills for the hard-core unemployed and then, when jobs for
them did not materialize in the private sector, the creation of

public service jobs. Public employment has since become the dominant

element of manpower policy in this country. Only one-fifth of total

fiscal year 1976 expenditures under the Comprehensive Employment and

Training Act (CETA) were devoted to manpower training, and only onefifth of the manpower training funds went directly to industry.

Those trained under CETA were mostly young and poorly educated; hence

they were marginal candidates for highly skilled jobs. Those placed

in public service jobs, though older and better educated, were given

almost no training of use to the private sector, should they reenter

the labor market. 27/

Some critics believe that manpower programs would be more

effective if there were more involvement of the private sector in

manpower training and more emphasis on structural unemployment. By

themselves, those changes would not channel industry and commerce

into central cities. They might, however, if manpower training

efforts were more heavily targeted to central cities and were better

coordinated with federal job-creation efforts (infrastructure

development, business loans, tax credits, and the like). 28/

Federal labor laws have contributed to the equalization of wage

rates and unionization across regions, but less than they might have

because of pervasive noncompliance. Even in industries fully

covered by minimum wage standards, nearly as many workers are below

the minimum wage as are at: or just above it (within 25 cents of it);

and even with unfair labor practices prohibited by law, thousands of

employers each year interfere with union recruitment, discriminate

against union members, or refuse to bargain in good faith. 29/ This

will be the case as long as it costs employers less to violate labor

laws, given the modest penalties involved and the small chance they

will ever pay them, than to observe labor laws, given their inflationary impact on wages and fringe benefits. 30/

The investment tax credit on machinery and equipment provides a

substantial subsidy to business, some $10.6 billion in fiscal year

1977. This subsidy, reinforced by accelerated depreciation on

machinery and equipment, encourages industry to substitute capital

for labor. Central cities, with their abundant supplies of unskilled

labor, almost certainly lose some industry as a result. There is

reason to believe, however, that the impact of the investment tax

credit on central city economic development is slight. Labor demand

studies, though sometimes contradictory, indicate that capital and

labor are not perfect substitutes for each other, and that automation

does not systematically favor highly skilled labor. 31/ In

consequence, the investment tax credit has been estimated to deflate

10
blue-collar employment by a modest 1.1 percent, and, of course, only

part of this is at the expense of central cities. 32/

The tax code, moreover, contains two provisions that tend to

moderate the bias toward capital-intensive production methods. One

is double taxation of corporate income, first as business earnings

and then as stockholder dividends, while employee income is taxed

only once. The other provision is the employment tax credit

authorized by the Tax Reduction and Simplification Act of 1977. It

will provide an estimated $2.5 billion subsidy to business in fiscal

year 1978, partially offsetting the projected $11.9 billion

investment tax credit.

The main effect of the tax code is not, then, to encourage

industry to locate outside cities. It is rather to accelerate the

growth of industry locating outside cities for other reasons. Both

employment and investment tax credits reward businesses which expand

their operations; thus they are worth more to areas with growing than

declining economic bases. 33/ Cities obviously benefit less than

suburbs, and cities in the Northeast less than those elsewhere. In

1972, for example, New York City had 4.0 percent of the nation's

manufacturing employment, but only 1.7 percent of its new investment

in manufacturing. The tax subsidy to manufacturing in New York was

correspondingly lower than average. Central cities would gain a

clear tax advantage over suburbs only if tax credits or deductions

were targeted to depressed areas, as in Robert Kennedy's proposed

Urban Employment Opportunities Development Act of 1967.

FINANCE AND MANAGEMENT AS BARRIERS TO URBAN ECONOMIC DEVELOPMENT

Availability of Capital and Managerial Expertise

Lack of capital and managerial expertise rank high among

barriers to central city industrial and commercial development—not

inherently, but as a result of the particular mix of businesses

located in central cities.

When major U.S. corporations need outside financing (which is

the exception for them), they borrow from national money markets at

relatively low and uniform interest rates. Similarly, when they need

managerial expertise, they find it through nationwide talent

searches. Capital and managerial expertise are readily available to

them. 34/

11
They are not, however, readily available to the vast majority of

businesses in central cities. Approximately 75 percent of firms in

central cities have fewer than ten employees, and approximately 10

percent are owned by minorities. Those small and minority-owned

firms have great difficulty attracting capital and managerial

talent, and they have correspondingly high rates of business

failure. 35/

Many are undercapitalized to begin with and find lending

institutions, which can afford to be selective since government

regulation insulates them from competition for clients, unwilling to

take a chance on long-term profitability. 36/ Many have the added

liability of being managed by persons who lack basic business skills

or business experience in the same line.

Lack of managerial expertise can be just as damaging to

businesses as lack of capital. One study found that small businesses

whose owners had previous experience in the same line stood a 50

percent better chance of surviving the first two years of operation

than those whose owners lacked such experience. Another study found

that minority-owned businesses whose managers had previous

experience in the same line had significantly higher net earnings

during the first four years of operation than those whose managers

did not. 37/

The Federal Role in Finance and Management

The federal government makes capital available to businesses

primarily through loan guarantee programs, and managerial expertise

available primarily through short-term training and counseling programs. Unfortunately, those programs tend to miss the kinds of

businesses most in need of assistance from the federal government.

38/ Federal business assistance programs do not meet the needs of

many businesses in declining areas. By guaranteeing more loans than

it makes directly, the federal government is able to make its limited

business loan funds go a long way. It cannot guarantee, however,

that businesses in declining areas will be adequately financed

because private lending institutions are loathe to invest in such

areas, even with federal guarantees. The result is a heavy concentration of regular Small Business Administration (SBA) loans in

fast-growing cities and regions. 39/

Federal business assistance programs do not meet the needs of

many new businesses. On direct loans, SBA will defer payments for

as long as one year, will reamortize loans, and will provide supple12
mental loans during the first year of amortization if that will keep

new businesses from failing. On guaranteed loans, it will ask

private lending institutions to do the same. But, in all cases,

businesses are expected to begin repaying loans before they have

reached the financial break-even point, which is generally three to

six years after start-up. Businesses that cannot repay loans on

schedule do not qualify for SBA direct loans or loan guarantees, and

if they happen to secure them, they are likely to default. 40/

SBA has yet to grant moratoria on loan repayments to new

businesses, though empowered to do so on certain loans. Further, it

has yet to seriously encourage equity investments in new businesses,

though equity investments are preferable to loans because they

neither require steady repayment nor cut off other sources of

financing by raising debt/equity ratios. 41/ The federal government's only equity financing program—the Small Business Investment

Company (SBIC) program—is poorly funded and, in actuality, is

structured to encourage more debt than equity financing. In fiscal

year 1977, SBA budgeted twenty times as much for its loan programs as

its SBIC program, and the SBICs themselves provided five times as

much in straight debt as in straight equity financing. With no

strong federal program to encourage equity investments in small

businesses, and a tax structure which discourages them, venture

capital for small businesses has virtually dried up since 1969. 42/

Federal management assistance programs do not meet the needs of

many businesses with inexperienced management. 43/ A great majority

of SBA management counseling is done on an occasional basis by

volunteers and students of varying competence and commitment. SBA

management training reaches a small fraction of the business

community and consists, for the most part, of short orientation

courses and specialized workships and seminars. The EDA technical

assistance program is oriented more toward economic planning than

management assistance. Only the Office of Minority Business Enterprise, through its business development program, provides what might

be called intensive management assistance.

In fiscal year 1977, federal outlays for financial assistance

to small businesses exceeded outlays for managerial assistance by 65

to 1. In light of Dun & Bradstreet surveys indicating that poor

management is the root cause of most business failures, it would seem

that management assistance warrants more emphasis. 44/ The

challenge lies in structuring programs to increase participation by

businessmen, who do not always perceive the need for management

assistance when it exists.

13

27-861 O - 78 - 4
To summarize, businesses in declining areas—including central

cities—would benefit from more federal involvement as a loan maker,

or perhaps as a loan guarantor. New businesses would benefit from

debt-free financing, preferably through equity investments but,

short of that, through moratoria on loan repayments. Businesses with

inexperienced management would benefit from intensive management

training and counseling, perhaps in combination with financial

assistance so there is more incentive to participate.

MARKET POTENTIAL AS A BARRIER TO URBAN ECONOMIC DEVELOPMENT

Proximity of Markets

The nation's central cities have lost substantial population—

and relatively affluent population at that—to their suburbs,

exurbs, and other areas. Indeed, some cities in the Midwest have

lost population at rates, of over 3 percent per year. This loss of

population cost cities nearly $30 billion in purchasing power

between 1970 and 1974, much of it at the expense of central city

commerce. 45/ With shopping trips averaging under 5 miles in 1970

(less than trips for any other purpose), commercial establishments

cannot afford to locate too far from markets; hence they have

followed population out of the central cities and into outlying

areas. In fact, proximity to markets is so vital to commercial

establishments that intraraetropolitan commercial location patterns

can be mathematically modeled solely in terms of market potential.

46/

Interregional migration from north to south and east to west has

reduced the market for goods produced in the Northeast and Midwest,

much of it at the expense of central city industry in those regions.

Numerous surveys and studies indicate that roughly half of all

industrial firms are market-oriented, and that at least 15 percent

serve local markets. 47/ One study found that counties doubling

their population over a ten-year period end up with nearly three

times the industrial employment they would have with no population

growth. 48/ One reason is increased market potential.

The Federal Role With Respect to Markets

Federal policies have not been the dominant force behind interregional migration and resulting market shifts. The literature on

interregional migration clearly indicates that factors beyond

14
federal control—such as climate, age of residents, contacts in

other areas, and previous migration experience—have as much impact

on migration patterns as do unemployment rates, income levels, and

educational attainment, which are themselves less a function of

federal policies than of private decisions. 49/

Nevertheless, federal policies have facilitated and reinforced

prevailing patterns of regional migration. Migration to the West and

Southwest would have occurred without the interstate highway and

land reclamation programs, but at a slower pace. Civilian population

would have moved to the South and West, but federal defense installations and defense contracts brought military population as well. 50/

Nor have federal policies been the dominant force behind

suburbanization of population. Suburbanization has occurred because

suburbs have less expensive land than cities, lower tax rates than

cities, better schools than cities, and a host of other advantages

for the auto-owning public.

Nevertheless, federal policies have facilitated and reinforced

prevailing patterns of suburbanization. An EDA-sponsored study

judged the following federal programs to have a "heavy" impact on

suburbanization: highway and rapid transit programs, water and

sewer construction programs, and mortgage insurance programs. 51/

Highway and rapid transit improvements have enabled persons who work

in cities to live at ever-greater distances from cities. In

Minneapolis-St. Paul, for example, highway improvements enabled auto

users in 1970 to travel 2.2 miles farther on a half-hour commute than

they had twelve years before. Commuters have taken advantage of this

by moving farther from the city. 52/

Federal grants for water and sewer collector systems have

facilitated residential development in outlying areas by reducing

development costs and providing a substantial margin of excess

capacity for future development. 53/ They have particularly facilitated development in areas where low soil permeability, high

bedrock, unusually high or low water table, or small lot size make

septic tanks and wells impractical. Although HUD has spent less on

sewers since its Water and Sewer Grants program was incorporated into

the Community Development Block grant program in 1975, the Environmental Protection Agency (EPA) has more than made up the difference

under its Wastewater Construction Grants program.

15
Federal mortgage credit and insurance programs have made

financing available on millions of single-family homes, a great

majority in the suburbs. In 1964, 74 percent of new and 54 percent

of existing homes insured by FHA were outside cities. Subsequent

programmatic changes designed to promote homeownership among low-and

moderate-income urban families have moderated this suburban bias.

Yet, as of 1976, three-fifths of the new homes and two-fifths of the

existing homes insured by FHA were still outside cities. As long as

FHA-mortgage insurance is available to any suburban family that can

service a mortgage properly, a high percentage of homes with

federally insured mortgages will be outside cities simply because

most moderately priced vacant land is outside cities. 54/

The federal income tax code, by permitting deductions of home

mortgage interest payments and property taxes, and deferral of

capital gains taxes on home sales, will provide an estimated subsidy

to homeowners of $11.1 billion in fiscal year 1978; over 80 percent

of that subsidy will go to taxpayers with incomes of $20,000 a year

or more. Because opportunities for homeownership tend to be greater

outside of central cities, the tax subsidy for homeownership has

reinforced, if not prompted, suburbanization of the more affluent.

To be sure, some federal programs have made central city

residence marginally more attractive to the affluent. Urban

renewal, for example, increased the stock of high-rent housing in

central cities. To do so, however, it razed many times more low-rent

housing units than it replaced, and it could not have significantly

altered residential patterns of the affluent as only 100,000 middleand upper-income units were constructed between 1950 and 1971 — a

trickle by the standards of the private housing market. 56/

Other federal programs have presumably made cities more attractive to the affluent by improving their public services, public

facilities, and their cultural and recreational opportunities, but

those programs have not offset some very tangible detractions of

central city residence, among them high taxes, high crime rates, and

poor schools. Thus, while there is some evidence of a back-to-thecity movement by the middle class, it has remained insignificant on a

national scale. 57/

In order to expand central city markets, financial incentives

might be used to attract significant numbers of the affluent to

central cities. The federal housing "programs" with the largest

number of affluent beneficiaries are tax subsidies and mortgage

insurance for homeowners. According to one expert, the two together

16
accounted for nearly the entire percentage increase in homeownership

between 1940 and 1960, with tax subsidies dominating at higher income

levels and mortgage insurance at lower income levels. _58/ If the two

were somehow targeted to central cities, they would no doubt induce

some middle and upper class resettlement of cities, thereby

expanding the market for central city goods and services.

Similarly, if federal procurement expenditures were targeted to

central cities, they would expand the market for central city

industrial products. One billion dollars in federal procurement

expenditures have been estimated to create between 60,000 and

100,000 man-years of work—more than that created by an equivalent

tax cut, and as much as that created by an equivalent public works

expenditure. 59/ Although targeting of federal procurement

expenditures may be economically inefficient, it has one obvious

advantage over resettlement of cities by the affluent—it would

minimize displacement of the urban poor, the major drawback of urban

renewal. 60/

TRANSPORTATION AS A BARRIER TO URBAN ECONOMIC DEVELOPMENT

Quality and Cost of Transportation

Major cities, particularly those in the Northeast, once offered

industry and commerce the best in transportation. Most developed

around seaports or on inland waterways, which were ideal locations

for the transport of bulk commodities. Most were focal points on the

nation's rail network, with downtown freight yards and spurs

handling all manner of goods. Most had dense streetcar and bus

lines, which transported customers and employees to downtown

businesses.

While major cities still offer good water, rail, and transit

access, they have lost much of their competitive edge. The

increasing importance of light industry in our economy and the

growing orientation toward local markets have made access to water

and rail transport, which have their greatest cost advantage on long

hauls of bulk commodities, less advantageous than it once was.

Trucking has become the dominant mode of freight transport, both in

its own right and as a mover of containerized goods. In addition,

rising income and changing land-use patterns have increased auto

ownership, and that, in turn, has diminished business dependence on

transit service. The automobile has become the dominant mode of

passenger transport, for both employees and customers of business

establishments.

17
Older cities, constrained by historical development patterns,

have had great difficulty in making the transition to the truck and

auto age. Most have congested roads, inadequate truck terminals, and

inadequate parking facilities, which place them at a tremendous

disadvantage in the competition for industry and commerce.

The points made above are best illustrated with summary

statistics. 61/ Between 1950 and 1975, rail's share of intercity

freight traffic declined from 47 to 30 percent of total tonnage

carried. Only containerized (mainly trailer-on-flatcar) shipments

registered any increase, rising from virtually nothing to 5 percent

of revenue carloadings. National waterways as a group maintained

their market share over this period, but the Great Lakes, the most

urbanized portion of the national waterways, suffered a sharp

decline. Here again, containerized (including roll on/roll off)

shipments outpaced all others.

The decline of rail and water transport and the growth of

containeration translated into gains for the trucking industry.

Between 1950 and 1975, that industry's share of intercity freight

traffic rose from 26 to 36 percent of tonnage carried, more than any

other mode. Although more expensive than rail or water transport on

long hauls of bulk commodities, trucks are cost-competitive on hauls

of less than about 200 miles, and on even longer hauls, when loads

are light or when they are moved by independent or private carriers.

More important, trucks are faster, more reliable, and less subject to

loss and damage than their main competitor, railroads. Industries

with higher valued products are willing to pay more for this kind of

service. In three nationwide surveys of industry, access to highways

and contract trucking ranked first or second among site selection

factors. By contrast, access to rail facilities was about halfway

down all three lists and access to waterways was at the very bottom

of the two lists that included it. 62/

Transit ridership in the United States fell from 17 billion

passengers in 1950 to 7 billion in 1975. By 1970, transit accounted

for only 11 percent of all work trips in metropolitan areas, and a

mere 4 percent of all trips nationwide, with the automobile carrying

the vast majority of the remainder. Although more expensive than

transit on many trips, the automobile has a cost advantage on trips

of less than two or three miles and on longer trips with multiple

occupants. More important, the automobile is faster, more

convenient, and more reliable than its main competitor, transit.

Households in all but the lowest income classes are willing and able

to pay more for this kind of service. One result is that the

nation's oldest cities have been the nation's biggest losers of

industry and commerce, despite their superior transit systems.

18
Developers of industrial parks, office complexes, and shopping

centers have come to demand sites close to highways, whether served

by transit or not. 63/

Like highway transportation, the rise of air transportation has

contributed to central city economic decline. Between 1950 and 1975,

air carriers' share of the intercity travel market increased from 14

to 78 percent of passenger-miles by public carrier. This increase

was accompanied by industrial and commercial development around

outlying airports—development that might otherwise have occurred in

central cities. Still, the impact of airports on business location

patterns is in no way comparable to that of highways. Proximity to

airports ranks well down the list of site selection criteria for

corporate offices, and is even lower for manufacturing

establishments, whose goods are shipped almost exclusively by land

or water.

The Federal Role in Transportation

The federal-aid highway program has contributed to changes in

passenger and freight movement detrimental to central cities.

Between 1945 and 1975, route mileage on high-performance federal-aid

highways nearly doubled while intercity waterway mileage in the

continental United States remained virtually constant and intercity

rail mileage declined slightly. A corresponding increase of 40

percent in average truck speed nationwide greatly improved the

competitive position of trucking and enabled industrial firms

serving regional and even national markets to move away from central

city rail spurs. Auto accessibility within metropolitan areas also

improved tremendously, allowing commercial firms to move away from

central locations while continuing to compete for metropolitan

markets.

Many of these firms were attracted to circumferential highways

constructed around central cities under the federal-aid highway

program. A survey of industrial establishments along the Capital

Beltway in Northern Virginia found that nearly all had located there

for reasons of accessibility, and that most had moved there from

inlying sites in Washington, Alexandria, or Arlington. 64/ A study of

retailing in 14 metropolitan areas, half with beltways and half

without, found that employment growth was much more heavily concentrated outside central cities with beltways than outside those

without. 65/ A survey of industrial and commercial establishments

along a beltway in the Boston metropolitan area indicated that nearly

all of them were attracted from the central city rather than other

metropolitan or nonmetropolitan areas. 66/

19
As billions of dollars were being spent on circumferential

highways, many central city arterial roads were allowed to

deteriorate and many proposed radial highways (freeways going out

from cities) were scrapped altogether. Between 1970 and 1975, urban

arterial route mileage with "good" pavement declined by 10 percent,

and mileage with "free flowing" peak-hour traffic declined by 5

percent. 67/ Arterials were not adequately maintained, let alone

upgraded, because of lack of funds. As late as fiscal year 1974,

higher levels of government were channeling one-third fewer dollars

into central cities than into their metropolitan "fringes."

Of course, as authorizations for urban system highways have

grown, more federal-aid highway funds have become available to

central cities. Yet many central cities may still be inadequately

funded: they may have arterial and other major roads excluded from

the federal-aid urban system; they may not receive a specific

allocation of urban system funds from their respective states or

metropolitan planning organizations; or they may lack sufficient

matching money to utilize their full allocation of urban system

funds. 68/

Withdrawal of proposed radial highways from the interstate

system saved neighborhoods along the right-of-way and avoided some

environmental degradation, but it did so at the expense of central

city industrial and commercial development. The vast weight of

evidence indicates that radial highways bring business into central

cities. 69/ For example, a survey of manufacturing firms along

radial highways in eight cities found that while 49 percent had

located there before highway construction and 29 percent had moved

there from elsewhere within those cities, 22 percent were newly

attracted to them, many specifically because of the highways. 70/

To compete effectively for industry and commerce, central

cities need to upgrade and maintain their arterial roads and, where

the integrity of neighborhoods can be preserved, complete their

radial highways. At present, the interstate system contains roughly

equal mileage in radial and circumferential gaps; if past performance is any indication, more progress will be made on the

circumferential gaps unless programmatic changes are made. 71/

Radial gaps could, for example, be given higher priority in funding

than the many circumferential gaps designated of local significance

only, or the latter could be removed from the interstate system

entirely.

20
The federal rail, waterway, and transit programs have only

slightly offset the adverse impact of federal-aid highways on older

cities. Subsidies for railroads carrying freight grew from

virtually nothing in the early 1970s to 3 percent of expenditures by

users in fiscal year 1975, three times the figure for trucking. The

Regional Rail Reorganization (3R) Act of 1973 provided subsidies for

operation of bankrupt railroads in the Northeast, pending rail

reorganization, loans for rehabilitation and modernization of their

physical plants, and matching funds for continuation of service on

unremunerative rail lines in that region. The Railroad Revitalization and Regulatory Reform (4R) Act of 1976 extended financing for

rehabilitation of physical plants and matching funds for continuation of unremunerative rail service to marginal railroads nationwide, most of which are in the Midwest.

While the wholesale rail abandonment that might have occurred

without federal assistance would have been devastating to industry

in the Northeast, and older rail-oriented cities would have been

hardest hit, the federal rail assistance program has not provided

those cities with a decisive advantage in the competition for

industry and commerce. Subsidies for unremunerative rail lines go

almost exclusively to rural and small urban areas, and even there may

have minimal impact on industrial development. Past rail abandonments have shown that trucks can substitute for railroads to a great

extent. 72/ This is the case because railroads' major function is to

transport inputs to production, and the cost of transporting those

inputs is a dominant location factor for only 8 percent of all

manufacturing. 73/

Federally financed rail rehabilitation and modernization

upgrade service to all points on a rail line, not just those to in

cities. This is true of track improvements, the major component of

current rehabilitation efforts, and it is also true of freight yard

consolidation, the one measure directly affecting cities. If

consolidated freight yards are located in central cities, all

industry on local spurs, both central city and suburban, will benefit

to about the same extent. If consolidated freight yards are located

outside central cities, however, some central city industry could be

effectively bypassed. 74/

It has been asserted that if entirely deregulated, railroads

would lower rates on intercity traffic to compete more effectively

with trucks, would raise rates on branch lines to reflect the full

cost of service to rural and small urban areas, and would raise rates

on containerized shipments to reflect the value of their contents.

Each of these actions would give industry more incentive to locate on

21
central city rail spurs. In fact, however, railroads already have

considerable latitude in lowering rates or raising them in cases

where effective competition exists. Early returns from the 4R Act,

which grants railroads greater flexibility in rate making, suggest

that deregulation would primarily enable railroads to raise rates in

cases where effective competition does not exist, rather than

compete more effectively in cases where it does. 75/

Water transportation is by far the most heavily subsidized mode

of intercity freight transport: the federal government pays the full

cost of construction, operation, and maintenance of national waterways. As of fiscal year 1975, federal waterway subsidies amounted to

42 percent of barge revenues nationwide, 14 times the figure for

railroads. Since the nation's largest cities are located on waterways, many of their businesses benefit from artificially low transportation costs as a result of those subsidies. Even so, these

cities do not have a great advantage in the competition for industry

and commerce.

Like railroads, waterways primarily carry inputs to production,

and consequently have lost much of their drawing power as industry

has become less sensitive to the costs of transporting inputs. A

survey of manufacturing establishments locating or expanding in

counties contiguous to one inland waterway showed that transportation costs were a minor consideration for most of them, as compared

with the availability and cost of labor, market accessibility, and

land costs. 76/

Moreover, federally funded waterway improvements do not, in

general, favor central cities over other points on waterways. .The

newest addition to the inland waterway system, the McClellan-Kerr

Multiple Purpose Arkansas River System, attracted some $3 billion in

new industrial investment between 1968 and 1974, but much of that was

outside cities, as many privately owned ports sprang up along the

waterway. A mere 1 percent of that $3 billion was around Tulsa's

port, despite large public expenditures on port facilities. 77/

The only federally funded waterway projects clearly favoring

central cities over other locations are harbor and related channel

improvements, and they are neither heavily funded nor directed

toward older port-oriented cities. Waterway construction projects

completed by the Army Corps of Engineers between 1970 and 1977 cost

the federal government more than $4.5 billion, but only 7 percent of

that was spent on harbors and channels nationwide, and only 2 percent

on harbors and channels in the Northeast and the Midwest. 78/ A

handful of cities have clearly attracted new industry and commerce as

22
a result of those projects, but all are "new" cities blessed with

other economic advantages. To cite an extreme example, the upgrading

of Houston's ship channel has made Houston the nation's third largest

port in tonnage handled, creating an estimated 27,000 permanent

jobs, 79/ Thanks in part to harbor and channel improvements, the

Gulf Coast now has more large ports (handling over 20 million tons

per year) than the East Coast.

Like harbor improvements, port improvements have been funded on

a relatively small scale, and mostly in the South and the West.

Between 1966 and 1977, only $125 million, or 4 percent of EDA's

public works budget, was spent on port-related improvements, and

less than $10 million of that was spent on ports in the Northeast and

the Midwest. 80/ Ironically, even cities upgrading their ports with

federal assistance have not necessarily attracted new industry, as

many invested in facilities for containerized cargo unlikely, to

originate nearby. 81/

The previous Secretary of Transportation stated that federal

"port activities" have had "little or no apparent effect on the

competitive relationship among...ports." This may be true if the

Secretary was referring solely to federally funded port improvements. It probably is not true, however, if the full range of portrelated activities, from federal harbor and channel improvements to

foreign trade agreements, are taken into account. 82/ And it is even

less likely to be true in the future, as foreign waterborne commerce

assumes ever-greater importance in our economy and as federal portrelated expenditures correspondingly increase.

Federal obligations for mass transportation have increased

twentyfold over the past decade, to the point where transit now

receives almost half of all federal funds for surface transportation

in urbanized areas—a remarkable figure in light of transit's small

share of the market. 83/ Much of that funding goes into older

transit-oriented cities, which could not maintain such extensive

transit service without it. But again, this does not give these

cities a tremendous advantage in the competition for industry and

commerce, for at least three reasons.

First, transit assistance is not doled out solely or even

largely on the basis of need (that is, transit ridership or ridership

potential). Under the existing apportionment formula, such highwayoriented cities as Los Angeles, Houston, and Denver receive more than

twice as much operating assistance per transit passenger as do

Chicago, Philadelphia, and Boston, and a number of highway-oriented

cities have been awarded capital grants for expensive new rapid

transit or peoplemover systems. 84/

23
Second, as with rail assistance, transit assistance benefits

suburban as well as central city industry and commerce. The main

thrust of transit development in the United States has been toward

regional transit systems which, while improving accessibility to

central cities, have done the same for suburbs. Thus, while regional

bus systems have facilitated the commuting of suburban residents

into central cities, 1970 census "journey to work" statistics

indicate that they have also facilitated the commuting of city

residents to suburban centers. And while rapid transit lines have

spurred store and office development in the central business

district of one metropolitan area (San Francisco), they have done the

same in suburbs of others (Philadelphia and Boston). 85/

Third, transit service is of minor concern to business

nowadays. The only transit improvements that attract business are

heavy rail improvements. JJ6/ The only business they attract is

retail trade and some services. 87/ And the only time they attract

them is when land is easily assembled, the demand and capital for new

development exist, and local land-use policies favor development.

88/ Unfortunately, those complementary factors are not often

present in U.S. cities.

To summarize, federal rail, water, and transit programs have

only slightly offset the adverse impact of federal-aid highways on

older cities due to the limited drawing power of these modes of

transportation, the regional rather than local nature of transportation improvements, the wide dispersal of federal funds, and the

absence of "complementary factors" facilitating commercial and

industrial development in central cities. All but the first of those

could be moderated through federal policy changes.

The federal government has not significantly contributed to

decentralization of industry and commerce through its airport

development program. 89/ Until passage of the Airport and Airways

Development Act of 1970, federal funding for airport development was

well under $100 million per year. Funding has increased manifold

since then, but it has been largely reserved for existing air carrier

airports and new general aviation facilities. This will continue to

be the case as long as discretionary funding for airport development

remains limited and environmental opposition to large-scale projects

remains intense. In fact, by underwriting the construction to

transit links from cities to outlying airports, the federal government may, on balance, make a positive contribution to central city

industrial and commercial development. 90/

24
CHAPTER III. SECONDARY BARRIERS TO URBAN ECONOMIC DEVELOPMENT

Businesses collectively consider dozens of factors in site

selection. 91/ The previous chapters reviewed the most critical

ones. This chapter looks at the "tie-breakers," that is, the factors

which typically become critical only when sites are comparable in

other respects. These factors may nonetheless act as barriers to

urban economic development.

Taxes

As discussed previously, federal tax policies may indirectly

affect business location patterns, acting through other location

factors to reinforce trends detrimental to central cities. Since tax

policies are the same everywhere, however, they have no direct impact

on business location patterns and they probably have less overall

impact than certain location-specific federal programs. This will

be the case as long as federal tax policies do not explicitly favor

certain areas over others.

Although none have been enacted, bills that would give special

tax benefits to businesses in depressed areas have occasionally been

submitted to the Congress. Most tax experts agree that such benefits

would not reach all businesses which need federal assistance because

about one out of two businesses do not have any tax liability, and,

moreover, such benefits would be wasted on many businesses which do

not need federal assistance. For these reasons, they favor direct

assistance to business.

State and local tax policies are, of course., an entirely

different matter. New York, the state with the highest business

taxes, has a corporate income tax two and one-half times that of

Alabama; its local taxes on commercial property are an average of

three and one-half times those of Alabama. 92/ Even within the same

metropolitan area, it is not uncommon for cities to have property tax

rates 50 percent higher than their suburbs. 93/

Despite those sometimes substantial differences among state

and local business taxes, the weight of evidence indicates that state

and local taxes become a determining factor only when sites are

comparable with respect to primary location factors. At least six

empirical studies and three literature surveys have found state and

25
local tax rates to have little effect on business location patterns.

94/ The fact is that state and local taxes together constitute less

than 2 percent of the value of shipments for almost all industries in

almost all states, and they do not vary enough to change the

competitive position of most industries in most states. 95/ Moreover, state and local taxes are partially recovered in the form of

public services to business and deductions from federal income tax

liability.

Urban Environmental Problems

As described above, urban "environmental" problems have

contributed to suburbanization of population, and that, in turn, has

contributed to suburbanization of industry and commerce through its

effect on markets and labor availability. In addition, urban

environmental problems have had some direct impact on business

location patterns. Theft, fraud, and vandalism have unquestionably

put some establishments in central cities out of business and have

prompted others to move to the suburbs. Likewise, air quality

controls have unquestionably caused some new industrial

establishments to locate in nonurbanized areas.

Nonetheless, the direct impact of urban environmental problems

on business location patterns has apparently been slight. Crime

rates are surprisingly similar from city to city and city to suburb.

96/ Small Business Administration surveys show that the incidence

of shoplifting is actually lower for businesses in central cities

than for those in suburbs, and that the incidence of other crimes is

only marginally higher. Surveys by the Law Enforcement Assistance

Administration show no systematic regional variation in commercial

victimization rates among major cities. Atlanta, Denver, Dallas,

and Portland, for example, all have higher burglary rates than New

York City. Inasmuch as crime rates are fairly uniform, and crime,

though costly in absolute terms, still amounts to less than 1 percent

of business receipts nationwide, the economic cost of crime does not

represent a significant barrier to industrial and commercial

development in central cities. Of course, the psychological cost of

crime could be significant even though the economic cost is not.

Anecdotal evidence suggest that it is in certain cases.

Since 1971, the federal government has provided "affordable"

crime insurance to businesses in states that do not have it. The

small number of commercial policyholders (13,000 currently) reflects

certain programmatic shortcomings, among them fairly high premiums,

particularly in high crime areas; inadequate promotion of the

26
program; exclusion of certain types of crime; and the ineligibility

of cities in low-crime states. But it also reflects limited need.

The impact of commercial victimization is more psychological than

economic, and federal crime insurance can neither compensate

businessmen for their anxiety nor induce them to locate in cities

with high crime rates.

Strictly interpreted, the Clean Air Act Amendments of 1970

would have prohibited new industrial development in areas failing to

meet federal ambient air quality standards. 97/ When opponents

alleged that this would curtail all industrial development in the

nation's most populated areas, the Environmental Protection Agency

(EPA) responded with an emissions offset policy that allows industry

to locate in "non-attainment" areas (areas that do not meet federal

air quality standards) if its emissions are controlled to the

greatest degree possible and, more significantly, if more than

offsetting emission reductions are obtained from existing sources of

pollution.

As far as can be determined from EPA and industry representatives, with the offset policy in effect, air quality controls have

not significantly deterred industry from locating in central cities.

By one conservative estimate, 96 percent of new industrial sources

have been exempt from the offset requirement because, they produce

less than 100 tons of pollutant annually. The rest have either

secured "built in" offsets by replacing old plants with new, less

polluting ones; have been given offsets by states or localities as an

inducement to locate within their boundaries; or have been willing to

pay for offsets because sites had compensating advantages.

Generally speaking, establishments have had no incentive to locate

in suburbs rather than cities because non-attainment areas have

encompassed entire metropolitan areas.

All of this is changing, however. Non-attainment areas for

sulfur dioxide and particulates are being redesignated, in some

cases, to exclude suburbs but to include parts of cities. The offset

requirement is being extended to establishments with potential as

well as actual emissions of more than 100 tons of pollutant annually,

an extension that will quadruple the number of establishments so

covered. Finally, low-cost offsets are "drying up" as states

incorporate them into their implementation plans. To be sure, the

natural turnover of central city industry will continue to provide

offsets for new establishments, and the increasingly strict

constraints on new source emissions in attainment areas will tend to

minimize the advantage of suburbs and exurbs over cities. Even so,

air quality controls could emerge as a significant barrier to

expansion of central city industry.

27
Business Climate

A favorable "business climate" ranks fairly high among site

selection factors in surveys of industry. Yet there is no evidence

that elements of a favorable business climate, such as industrial

bond financing, tax holidays, and liberal industrial zoning, are

prerequisites of industrial development. The only nationwide survey

of industry to consider such factors found that a mere 3 to 8 percent

of establishments viewed industrial bonds, tax incentives, and

lenient industrial zoning as critical location factors; 16 location

factors had higher rankings. 98/ Other surveys have found that

relatively few businesses ask for or receive financial incentives

from state or local governments, and that most doing so would locate

in the same place and would invest to the same extent without any

incentives. _99/

Industrial bond financing dominates all other financial

incentives in terms of potential savings to industry, and is utilized

most heavily by states in the South. 10Q/ Largely on the basis of

these two facts, some observers have assigned industrial bond

financing a major role in the movement of industry to Southern

states. A more plausible position is that industry moved South

primarily because of labor costs, climate, and markets, and

considered industrial bond financing only in choosing among otherwise comparable locations. Even in the mid-1960s, peak years for

industrial bond financing, bond issues amounted to only 1.4 percent

of all expenditures on new plant and equipment by industry nationwide, and that figure has fallen sharply since the Revenue Act of

1968 placed restrictions on the value of tax-exempt bonds. Further,

with one or more levels of government authorized to issue industrial

bonds in all but two states, no region has a corner on the industrial

bond market anymore. 101/

Water and Waste Treatment

Major water-consuming industries might be expected to avoid

areas of periodic water shortage, notably the West and Southwest.

This is not the case. Nearly all industries, even those producing

primary metals, have leeway in substituting water-extensive for

water-intensive production methods, and therefore seldom reject

regions solely or even largely because of limited water supplies.

102/ Massive federal water projects in the Southwest and West have

tended to neutralize what little advantage other regions once had in

the competition for industry.

28
The cost of water and waste treatment varies within metropolitan areas, but less than some other costs, and it thus ranks low

among site selection factors in surveys of industry. The availability of water and waste treatment, on the other hand, ranks

moderately high in a number of surveys. 103/

Large establishments engaged in such activities as petroleum

refining and petrochemical manufacturing consume so much water and

generate so much waste that it pays them to draw their water from

surface courses, treat it themselves, and return it directly to those

courses. 104/ Small establishments engaged in commerce and certain

industrial activities require so little water and generate so little

waste, all of it "domestic" in nature, that they can rely entirely on

wells and septic tanks or cesspools, if they must. But about one out

of four industrial establishments falls between the two extremes,

producing effluent incompatible with septic tanks and cesspools, but

in insufficient quantity to justify a separate treatment facility.

The availability of water and waste treatment is a key site selection

factor for those establishments. It is also a key factor for all

establishments in areas where land is very expensive, soil is

impermeable, or the water table is unusually low or high, making

septic tanks, cesspools, or wells impractical.

Cities, having extensive, high capacity water and sewer systems

in place, once had a clear advantage over other jurisdictions in the

competition for industry and commerce. This advantage would have

been accentuated by federal water pollution control laws but for the

federal waste treatment grants which accompanied them. Between 1956

and 1973, 14,200 waste treatment facilities were constructed with

federal assistance, nine out of ten in municipalities with populations of less than 50,000. Though only half of all expenditures were

in those smaller municipalities, central cities lost their nearexclusive claim to high-capacity waste treatment facilities. In the

mid-1960s, the federal government also began funding the construction of water purification plants and water and sewer collector

systems, again largely outside central cities. These facilities

unquestionably expedited the exodus of industry and commerce from

central cities, though to a lesser extent than population movements.

105/

The Water Pollution Control Act of 1972 requires that the

federal share of construction costs for wastewater treatment facilities and infrastructure be recovered from industrial users. This

attempt to discourage decentralization of industry has been only

marginally effective because of exemptions and liberal terms on cost

29
recovery. Amendments to the Act also require that industrial users

of municipal wastewater systems pre-treat their discharges. This

attempt to equalize the financial burden of waste treatment for all

establishments in the same industry could cost cities some marginal

industry. 106/

Energy

The availability and cost of energy do not significantly affect

the location of industry or commerce at the subregional level.

Prices of electricity, natural gas, and other fuels are essentially

constant within metropolitan areas, and gas and electric lines are

extended at little or no cost to large industrial and commercial

users. 107/ The latter neutralizes the slight advantage that central

cities, with their ubiquitous gas and electric lines, would otherwise have in the competition for industry and commerce. It would

take strong "cost of service" rate requirements, stronger than those

in the National Energy Act, to end this popular practice.

The availability and cost of energy do have some effect on

locational patterns at the regional level. Residual fuel oil,

electricity, and natural gas are currently priced 30, 50, and 100

percent higher in New England than the Southwest, and natural gas, in

particular, has not been readily available to new commercial and

industrial customers outside the Southwest for a number of years.

Nonetheless, because energy generally represents less than 1

percent of production costs, and because fuels are generally interchangeable, most industries do not weigh energy cost or availability

heavily in locational decisions. One study concluded that of 370

sectors in the: United States economy, only 24 spend more than 2 cents

on energy per dollar of output and are also sufficiently independent

of markets and material inputs to follow energy supplies. 108/ It

further concluded that only a few of the 24 sectors, albeit some

important ones such as industrial chemicals and primary aluminum,

were actually concentrated in states with abundant energy supplies.

As long as energy supplies were relatively abundant, federal

energy policies had little effect on energy cost and availability

across regions. Natural gas shipped interstate, though subject to

federal price regulation, was virtually the same price as natural gas

sold intrastate (adjusting for transmission costs). Foreign and

domestic oil were also comparably priced and so were largely

unaffected by federal price equalization. Offshore sites were

leased for oil and gas exploration and western lands for coal

exploration, but the demand for these fuels did not justify extensive

development.

30
Energy shortages of the early 1970s changed all of this.

Dwindling production of natural gas caused the price of unregulated

gas sold intrastate to soar relative to regulated gas sold

interstate, prompting gas producers to reserve much of their newly

discovered supplies for intrastate markets of the Southwest. The oil

embargo and subsequent oil price increases made foreign oil much more

expensive than domestic oil and would have grossly inflated the price

of fuel oil in nonproducing states, had it not been for the preexisting price equalization policy. Although much less significant,

the higher price of oil, gas, and coal accelerated exploration and

development of federal offshore oil and gas reserves and western coal

reserves.

The current push to increase domestic energy production and

decrease domestic consumption could have significant regional

impacts. The major energy-producing states of the Southwest would

lose some of their attraction to industry if oil and gas reserves off

the East Coast and coal and shale oil reserves in the West were

developed; if liquified natural gas and Canadian/Mexican natural gas

were imported in large quantities; or if natural gas were subject to

taxes and end-use controls or price deregulation.

Raw Materials

Proximity to raw materials, once a major industrial location

factor, has declined in importance over time. 109/ Today's complex

products require so much processing that location near a source of

raw materials no longer affords a decisive advantage in all but a few

industries. Changing technology has facilitated development of

resources in areas where it was once uneconomical. The federal

government has made raw materials available from foreign suppliers

by gradually easing trade restrictions. U.S. Steel, was able, for

example, to locate its Fairless Works on the Delaware River near

Trenton, New Jersey, because it had access to foreign iron ore.

These changing circumstances have lessened the need to be near raw

materials to the point where only 1 to 8 percent of the variation in

industrial employment growth among states can be explained by the

availability of raw materials. IIP/

jPersonal Factors

There is no doubt that purely personal factors enter into some

industrial and commercial location decisions, a classic example

being the businessman who sets up shop near his favorite golf course.

Ill/ Yet personal factors are clearly secondary to economic factors,

31
particularly for large firms. When a firm's location is inconsistent

with the calculus of economic advantage, its very existence will be

threatened by more favorably located competitors. That fact tends to

keep personal factors in check. 112/

32
CHAPTER IV. CONCLUSIONS

Although cities in the United States differ widely in their

economic, demographic, and political character, irost find their

ability to attract industry and commerce limited by the same factors,

principally the high cost and limited availability of land, lack of

skilled labor, inadequate capital and managerial expertise,

declining market potential, and inferior highway access. Other

factors limit the ability of certain cities to attract certain types

of industry and commerce, but they are less pervasive and decisive

than the factors mentioned above. The first conclusion of this paper

is, therefore, that while central cities need some leeway to adjust

for local conditions, federal efforts on their behalf can focus on a

small number of barriers to central city economic development.

The federal government has underwritten assembly and clearance

of central city land under urban renewal and economic development

programs; skill training for central city workers under manpower

programs; loans and management assistance for central city

businesses under various business assistance programs; improvements

in central city housing and public services to encourage resettlement of cities under a battery of urban-oriented programs; and

central city highway construction under the federal-aid highway

program. Yet none of those programs have been outstandingly

successful in eliminating the primary barriers to central city

industrial and commercial development and some have had unfortunate

social consequences. The second conclusion of this paper is,

therefore, that while the primary barriers to central city

industrial and commercial development are susceptible to federal

influence, the economic and social cost of eliminating them is likely

to be high.

The federal government already has policies and programs

capable of mitigating almost all barriers to central city industrial

and commercial development, even the lesser ones such as high

property taxes and high commercial victimization rates. Those

policies and programs have not always done so, however, because of

programmatic flaws and countervailing policies. In particular,

federal policies and programs have tended to favor new development

over conservation and rehabilitation; to reinforce rather than

redirect market forces; and to disperse rather than target benefits.

33
Examples can be found throughout this paper. The third conclusion of

this paper is, therefore, that while new initiatives on behalf of

central cities may be beneficial, there is ample opportunity to

encourage central city industrial and commercial development through

reorientation of existing policies and restructuring of existing

programs.

34
FOOTNOTES

35

\J Different perspectives on the causes of central city decline

and related remedies are reviewed by Peter Greenston and Carl

Snead, A Selected Review of Urban Economic Development, Report

prepared by the Urban Institute for the Economic Development

Administration (May 1976), pp. 81-114; and Bennett Harrison,

"Ghetto Economic Development: A Survey," Journal of Economic

Literature, (March 1974), pp. 1-37,,

2/ The role of industry as a leader in decentralization has been

hotly debated in recent years, but the vast weight of evidence

indicates that decentralization of industry and population are,

at the very least, mutually reinforcing, and that both

contribute to decentralization of commerce. A review of the

more recent empirical evidence is provided by Bennett Harrison,

Urban Economic Development-Suburbanization, Minority

Opportunity, and the Condition of the Central City (Washington,

D.C.: The Urban Institute, 1974), pp. 7-26.

_3/ Relevant theory is reviewed and tested by Michael Goldberg,

Intrametropolitan Industrial Location: Plant Size and the

Theory of Production (Center For Real Estate and Urban

Economics, University of California, 1969), pp. 92-98 and 188-

200.

4_/ While businesses in some central cities have higher failure

rates, higher moving rates, and lower growth rates than

businesses elsewhere, businesses in other central cities do

not. Only business starts are consistently underrepresented in

central cities. See, Roger Schemenner, The Manufacturing

Location Decision, Report prepared for the Economic Development

Administration (forthcoming), Chapter 4; Raymond Struyk and

Franklin James, Intrametropolitan Industrial Location: The

Pattern and Process of Change in Four Metropolitan Areas

(Lexington Books, 1975), pp. 96-100; Franklin James and James

Hughes, "The Process of Employment Location Change: An

Empirical Analysis," Land Economics, (November, 1975), pp. 404-

413; Robert Leone, "Location of Manufacturing Activity in the

New York Metropolitan Area" (National Bureau of Economic

Research, unpublished manuscript); Kenneth McClennan and Paul

Seidenstat, New Businesses and Urban Employment Opportunities

(Lexington Books, 1972), pp. 41-60; David Creamer,

Manufacturing Employment by Type of Location-An Examination of

Recent Trends (The Conference Board, 1969), pp. 79-93; George

Bleile and Leon Moses, "Transportation and the Spatial

Distribution of Economic Activity," Highway Research Board

Bulletin 311 (1962), pp. 27-30; and William Kinnard and Zenon

Malinowski, The Turnover and Mortality of Manufacturing Firms

in The Hartford Connecticut Economic Area, Report prepared for

the Small Business Administration (January 1960), p. 36 and 46.

37
5/ Between 1969 and 1972, core counties in seven of nine census

divisions lost more jobs through intra- than through

interregional shifts in manufacturing, and all nine lost more

jobs through intraregional shifts than through national

declines in their principal industries. Kathryn Nelson and

Clifford Patrick, Decentralization of Employment During the

1969-1972 Business Cycle: The National and Regional Record

(Oak Ridge National Laboratories", 1975), p"] 10. Likewise,

central cities in 11 of 12 representative metropolitan areas

lost more jobs between 1953 and 1965 through suburbanization of

industry and commerce than through the other components of

change. Wilfred Lewis, Urban Growth and Suburbanization of_

Employment: Some New Data (The Brookings Institution,

unpublished manuscript, 1969), p. 12.

6/ Gerald Manners, "The Office in Metropolis: An Opportunity for

Shaping Metropolitan America," Economic Geography (April 1974),

pp. 93-110.

Tj Wolfgang Quante, The Exodus of Corporate Headquarters from New

York City (Praeger, 1976), p. 90.

_8/ Andrew Hamer, Industrial Exodus from the Central City

(Lexington Books, 1973), pp. 35-45.

9/ The percentage of buildable vacant land in cities with

populations of more than 100,000 was calculated from Table IV of

Ray Norton, "Vacant Urban Land in the American City," Land

Economics (November 1971), pp. 345-355; price ranges for prime

industrial land in eleven metropolitan areas were obtained from

regional offices of the Army Corps of Engineers:

SMSA Central City Outlying Suburbs

(in thousands of dollars per acre)

Atlanta $120-260 $15-45

Baltimore 75-150 40

Dallas 80-160 5- 20

Los Angeles 175- 15-200

New York 100-200 50- 80

Norfolk 25- 50 12

Philadelphia 100-200 30- 35

Phoenix 120-130 15-100

Portland 65- 70 25- 50

Sacramento 65- 85 25-100

San Francisco 220 30-125

38
10/ See, for example, Charles Stonier, ed., Industrial Location

Principles and Their Role in Site Selection on Long Island

(Hofstra University, 1964), p. 273.

ll/ Leland Smith, "Inner City Industrial Districts,," Urban Land

(May 1971), pp. 3-8.

12/ An exhaustive critique of urban renewal is provided by

John Weicher, "Urban Renewal—National Program for Local

Problems," in Perspectives on Housing and Urban Renewal

(Praeger, 1974), pp. 181-278.

13/ The source of this statistic is a computer run done for CBO by

the Economic Development Administration.

147 At least in certain cases, multistory plants in central cities

could be cost-competitive with single-story plants in suburbs,

and marginal site expansion could satisfy the needs of

expanding businesses. See Hamer, Industrial Exodus, pp. 63-80;

and Schmenner, The Manufacturing Location Decision, Chapter 5.

15/ A forthcoming CBO report estimates that extension of the

investment tax credit to buildings will provide a subsidy to

industry of $1.8 billion in 1979, perhaps 90 percent of which

will be for new construction. This is several times the tax

subsidy currently provided by accelerated depreciation on

building^. Congressional Budget Office, "The Impact on Cities

of Proposed Changes in the Investment Tax Credit," Report

prepared for the Task Force on State and Local Government of

the House Committee on the Budget (forthcoming).

16/ Donald Stone, Industrial Location in Metropolitan Areas

(Praeger, 1974), pp. 56-59.

17/ Quante, The Exodus of Corporate Headquarters, pp. 90-106.

18/ John Garrity, "Red Ink for Ghetto Industries?", Harvard

Business Review (May-June 1968), pp. 4-16.

19/ Various surveys and studies drawing this conclusion are cited

by Harrison, "Ghetto Economic Development," p. 16.

20/ Struyk and James, Intrametropolitan Industrial Location, pp.

115-122.

39
21/ The most: recent studies of intrametropolitan wage differentials

are those of Hamer, Industrial Exodus, pp. 48-51; Manners, "The

Office in Metropolis," pp. 98-99; McClennan and Seidenstat, New

Businesses and Urban Employment Opportunities, p. 68; and

Albert Rees and George Shultz, Workers and Wages in an Urban

Labor Market (University of Chicago Press, 1970), pp. 176-184.

22/ A number of these studies are reviewed by Leonard Wheat,

Regional Growth and Industrial Location (Lexington Books,

1973), pp. 6-20.

23/ Wheat, Regional Growth, pp. 183-197; and Curtis Harris and

Frank Hopkins, Locational Analysis (Lexington Books, 1972), p.

88.

24/ Wheat, Regional Growth, pp. 194-195.

25/ This brief history of manpower policy in the U.S. is based on

three evaluative studies: Charles Perry and others, The Impact

of Government Manpower Programs (Wharton School, University of

Pennsylvania, 1976); Advisory Commission on Intergovernmental

Relations, The Comprehensive Employment Training Act: Early

Readings from a Hybrid Block Grant (1977); and David O'Neill,

The Federal Government and Manpower (Washington, B.C.: American

Enterprise Institute, 1973).

26/ Earl Main, "A Nationwide Evaluation of M.D.T.A. Institutional

Job Training," Journal of Human Resources (Spring 1968), pp.

159-170.

27/ Congressional Budget Office, Public Employment and Training

Assistance: Alternative Federal Approaches (February 1977).

See, in particular, Tables 3 and 5.

28/ Manpower training is neither effectively targeted to cities nor

linked to job-creation activities. According to some critics,

the legislative objectives of manpower training would be better

served if they were. U.S. Advisory Commission on

Intergovernmental Relations, The Comprehensive Employment

Training Act, pp. 67-68; and Stanley Friedlander, Regional

Economic Development and Federal Legislation, Report prepared

for the Economic Development Administration (March 1976), pp.

7-16.

40
29/ Edward Gramlich, "The Impact of Minimum Wages on Other Wages,

Employment, and Family Income," Brookings Papers On Economic

Activity (1976), pp. 409-451; Committee on Education and Labor,

The Labor Reform Act of 1977 (September 1977), pp. 8-28.

30/ Orley Ashenfelter and Robert Smith, "Compliance With The

Minimum Wage Law," Paper prepared for the Department of Labor

(April 1974); and B. Skelton, "The Economics of Unfair Labor

Practices by Employers," Testimony before the Subcommittee on

Labor-Management Relations of the House Committee on Education

and Labor (August 9, 1977).

31 / Most time-series studies show that even in the long run, the

demand for labor with respect to the price of capital is quite

inelastic, and by inference, opportunities to substitute

capital for labor are limited. Some cross-sectional studies

are in agreement, others find capital and labor perfect

substitutes for one another. See reviews by Daniel Hamermesh,

"Econometric Studies of Labor Demand and Their Application to

Policy Analysis," Journal of Human Resources (Fall 1976), pp.

507-527; and Marc Nerlove, "Recent Empirical Studies of the CES

and Related Production Functions," in The Theory and Empirical

Analysis of Production (National Bureau of Economic Research,

1967), pp. 55-121. A number of studies showing that automation

does not always eliminate low-skill jobs are reviewed by Morris

Horowitz and Irwin Herrnstadt, "Changes in the Skill

Requirements of Occupations in Selected Industries," in

Technology and the American Economy-Appendix to Volume II

(National Commission on Technology, Automation, and Economic

Progress, 1966), pp. 227-287.

32/ Jonathan Kesselman and others, "Tax Credits for Employment

Rather Than Investment," American Economic Review (June 1977),

pp. 339-349.

33/ Orley Ashenfelter, "Evaluating the Effects of the Employment

Tax Credit," Paper prepared for the Conference on Evaluation of

the Economic Stimulus Package at the Brookings Institution

(November 1977); and Roger Vaughan, The Urban Impacts of

Federal Policies: Vol. 2, Economic Development (The Rand

Corporation, 1977), pp. 93-94.

34/ Mahlon Straszheim, An Introduction and Overview of Regional

Money Capital Markets, Report prepared for the Economic

Development Administration (July 1969), pp. 15-19; and Ruth

Shaeffer, Staffing Systems: Managerial and Professional Jobs

(New York: The Conference Board, 1972), pp. 14-40 and 48-55.

41
35/ That small and minority-owned businesses have difficulty

attracting capital and managerial expertise, and have

correspondingly high failure rates, is widely acknowledged.

See, for example, William Strang, "Minority Economic

Development: The Problem of Business Failures," Law and

Contemporary Problems (Winter 1971), pp. 119-136; and Edward

Hollander and others, The Future of Small Business (Praeger,

1967), pp. 91-106 and 126-135.

36/ Cyrus Gardner, Banking Regulation and Urban Growth (The Rand

Corporation, 1973), pp. 6-18.

37/ Kurt Mayer and Sidney Goldstein, The First Two Years: Problems

Of Small Firm Growth and Survival, Report prepared for the Small

Business Administration (February 1961), pp. 104-106; and Jerry

Cromwell and Peter Merrill, "Minority Business Performance and

the Community Development Corporation," The Review of Black

Political Economy (Spring 1973), pp. 65-81.

38 / This section evaluates business-assistance programs from the

standpoint of business needs. For an evaluation from the

standpoint of cost control, see the U.S. General Accounting

Office, The Small Business Administration Needs to Improve Its

7(a) Loan Program (February 1976).

39/ See the appendix on the 7(a) Loan Program in Donald Kummerfeld

and others, Federal Activities Affecting the Location of

Economic Activity, Volume II, Report prepared for the Economic

Development Administration (November 1970); and Georges Vernez

and others, Federal Activities in Urban Economic Development,

Volume II: Technical Appendices, Report prepared for the

Economic Development Administration (January 1978), Tables C.7

and C.8.

40/ At one time, the Small Business Administration did not even make

loans to new businesses for fear of default, and currently makes

fewer than one out of three loans to new businesses, most in

relatively small amounts.

41/ For a discussion of the problems facing new businesses,

including their shortage of equity, see Small Business

Administration, Report of the SBA Task Force on Venture and

Equity Capital for Small Business (January 1977), pp.4^8.

42/ Ibid., pp. 8-13.

42
43/ This discussion of federal management-assistance is based

primarily on interviews with SBA personnel and the statistics

they provided. A brief description of management-assistance

programs and their clientele is provided by the Small Business

Administration, Management Assistance, Paper prepared for

Congressional briefing (July 1977). A brief evaluation of

management assistance for SBA loan recipients is provided by

the U.S. General Accounting Office, The Small Business

Administration, pp. 57-68.

44/ Dun and Bradstreet, The Business Failure Record 1975 (1976), p.

12.

45/ Vincent Barabba, "The National Setting: Regional Shifts,

Metropolitan Decline, and Urban Decay," in Post-Industrial

America: Metropolitan and Interregional Job Shifts (Center for

Urban Policy Research, Rutgers University, 1975), pp. 39-76.

46/ Models typically distribute retail and service employment

within metropolitan areas on the basis of population

distribution, employment distribution, and occasionally income,

all determinants of market potential. H. James Brown and

others, Empirical Models of Urban Land Use: Suggestions on

Research Objectives and Organization(National Bureau of

Economic Research, 1972), pp. 19-29.

47/ Vaughan, The Urban Impacts of Federal Policies, p. 51;

Benjamin Chinitz and Raymond Vernon, "Changing Forces in

Industrial Location, Harvard Business Review (January-February,

1960), pp. 126-136. Studies in several large cities have found

25 to 30 percent of industry to be oriented toward local

markets.

48/ James Burrows and others, Industrial Location in the United

States (Lexington Books, 1971), p. 76.

49/ See, for example, Bernard Bass and Ralph Alexander, "Climate,

Economy, and Differential Migration of White and Nonwhite

Workers," Journal of Applied Psychology (December 1972), pp.

508-521; Michael Greenwood, "An Analysis of the Determinants of

Geographic Labor Mobility in the United States," Review of

Economics and Statistics (May 1969), pp. 189-194; and James

Tarver and William Gurley, "The Relationship of Selected

Variables with County Net Migration Rates in the United States,

1950-1960," Rural Sociology (March 1965), pp. 3-22.

43
50/ Ira Lowry, Migration and Metropolitan Growth: Two Analytical

Models (Chandler, 1966), pp. 7-33; James Tarver and R. Douglas

McLeod, "Trends in Distances Moved by Interstate Migrants,"

Rural Sociology (December 1970), pp. 523-533.

51/ Kummerfeld, Federal Activities Affecting Location, Exhibit B.

52/ A recent study has shown that average daily travel time is

relatively constant from place to place and year to year,

regardless of transportation and land-use variations. Highway

improvements simply allow people to travel farther or more

often in the same time period. Yacov Zahavi, Travel Over Time,

Report prepared for the Federal Highway Administration (January

1978).

53/ The tendency of water and sewer facilities to promote urban

sprawl is discussed in qualitative terms, with reference to

relevant literature, by the Environmental Impact Center,

Secondary Impacts of Transportation and Wastewater Investments:

Review and Bibliography, Report prepared for the Environmental

ProtectionAgency^January 1975), pp. 17-23. The same

conclusions are reached quantitatively by Clark Binkley and

others, Interceptor Sewers and Urban Sprawl (Lexington Books,

1975), pp. 82-90; and the Environmental Impact Center,

Secondary Impacts of Transportation and Wastewater Investments:

Research Results, Report prepared for the Environmental

Protection Agency (July 1975), pp. 50-57.

54/ After assessing changes in FHA mortgage insurance programs

during the 1960s, one study stated that "...to conclude that FHA

shifted its emphasis from the suburbs to the central city would

seem to imply erroneously that FHA withdrew some of its mortgage

insurance benefits from the suburbs and gave them to the central

city. As mortgage insurance is voluntary with the user and in

recent years has been authorized to all intents and purposes in

unlimited amounts, an increased volume of FHA operations in the

central city did not in itself imply or bring about any

reduction of mortgage insurance in the suburbs, nor was it even

contemplated." Semer & Zimmerman, FHA Mortgage Insurance

Programs During the 1960's, Report prepared for the Department

of Housing and Urban Development (October 1974), p. 39.

55/ Subcommittee on the City, Federal Tax Policy and Urban

Development (September 1977), pp. 2-5.

44
5£/ Weicher, "Urban Renewal," p. 190-191.

57/ Franklin James, "Private Reinvestment in Older Housing and

Older Neighborhoods: Recent Trends and Market Forces,"

Statement before the Committee on Banking, Housing, and Urban

Affairs of the United States Senate (July 10, 1977), pp. 29-30.

58 / George Peterson, "Federal Tax Policy and Urban Development,"

Statement before the Subcommittee on the City of the House

Banking, Finance, and Urban Affairs Committee (June 16, 1977),

p. 23.

59/ These figures refer to jobs created in the second year of a

program. Congressional Budget Office, Temporary Measures to

Stimulate Employment (September 1975), p. 69; also see George

Johnson and James Tamola, The Efficacy of Public Service

Employment Programs, Report prepared for the U.S. Department of

Labor (June 1975), p. 21.

60/ The inefficiency of procurement preference schemes is discussed

by James Sundquist, Dispersing Population: What America Can

Learn from Europe (The Brookings Institution, 1975), pp. 269-

270.

61/ These statistics are taken from the Transportation Association

of America, Transportation—Facts and Trends (July 1976);

Federal Highway Administration, Nationwide Personal

Transportation Study-Report Nos. 8 and 9 (1973); American

Public Transit Association, Transit Fact Book (June 1977); and

Association of American Railroads, Yearbook of Railroad Facts

(1977).

62/ Economic Development Administration, Survey of Industrial

Location Determinants (1971); McGraw-Hill, Plant Site Survey—A

Study Among Business Week Subscribers (1964); and Edward Kiley,

Highways as a Factor in Industrial Location," Highway Research

Record 75 (1965), pp. 48-52.

63/ See, for example, J. Ross McKeever, Business Parks-Office

Parks, Plazas, and Centers (Urban Land Institute, 1970), pp.

13-14.

64/ Bureau of Population and Economic Research, The Socio-Economic

Impact of The Capital Beltway on Northern Virginia (University

of Virginia, 1968), pp. 64-68.

45
65/ See the section on "Retail Trade" in Economic and Demographic

Forecasting Team, "Suburbanization and Beltways" (Federal

Highway Administration, unpublished manuscript, May 1972).

66/ Of 96 establishments on Route 128 around Boston, 62 relocated

there from sites in Boston and another 14 from sites in

Cambridge. As only one out of four of those establishments even

considered locating outside the Boston metropolitan area, Route

128 was clearly attracting more industry and commerce from

Boston and Cambridge than from other metropolitan and

nonmetropolitan areas. Transportation Engineering Division of

MIT, Economic Impact Study of Massachusetts Route 128, Report

prepared for the U.S. Bureau of Public Roads, Department of

Transportation (December 1958), pp. 18-21 and 37-38.

67/ Secretary of Transportation, The Status of The Nation's

Highways: Conditions and Performance, Report to the U.S.

Congress (September 1977), pp. 80-93.

68/ Secretary of Transportation, Urban System Study, Report to the

U.S. Congress (January 1977), pp. 61-65 and 70-73.

69/ Studies of the impact of radial and other highways on economic

development, land use, and land value were most recently

summarized by the Federal Highway Administration, Social and

Economic Effects of Highways (1976), pp. 75-92; and the

Environmental Impact Center, Secondary Impacts of

Transportation and Wasterwater Investments, pp. 41-122.

70/ Hammer, Siler, George Associates, The Influence of Central City

Radial Freeways on Manufacturing Location Decisions, Report

prepared for the Federal Highway Administration (October 1973),

pp. v-xi.

71/ At CBO's request, the Federal Highway Administration produced

the following estimates of interstate highway mileage:

Radial Circumferential

Complete 1,699 2,758

Incomplete 417 518

72/ James Sloss and others, Analysis and Evaluation of Past

Experience in Rationalizing Railroad Networks, Report prepared

for the U.S. Department of Transportation (October 1974), pp.

73-99. Also see Public Interest Economics Center, The Impacts

on Communities of Abandonment of Railroad Service, Report

prepared for the U.S. Railway Association (June 1975), pp. 6-

21.

46
73/ Robert Lichtenberg, One-Tenth of a Nation (Harvard University

Press, I960), pp. 43-44.

74/ The Penn Central, in particular, had an abiding interest in

closing its New York City freight yards and so encouraged

industrial firms on central city rail spurs to move to sites

near its suburban freight yards.

75 / For roughly half of all rail freight movements, railroads have

complete freedom in rate making as long as rates are

compensatory. For the other half, railroads are without

effective competition and would have an incentive to raise

rates if deregulated. Since the 4R provisions went into effect,

several rate increases have been suspended by the ICC because

effective competition did not exist. Interstate Commerce

Commission, The Impact of the 4R Act Railroad Ratemaking

Provisions, Report to the U.S. Congress (October 1977), pp. 22-

52.

76/ Institute for Water Resources, Recent Developments in the

McClellan-Kerr Arkansas River Navigation System Area (U.S. Army

Corps of Engineers, April 1977), pp. 63-74.

111 See sections on "Economic Development" and "Port Development"

in George Antel, "Impact Study of the McClellan-Kerr Arkansas

River Navigation System, The First Four Year—1971 through

1974" (Institute for Water Resources, U.S. Army Corps of

Engineers, unpublished manuscript, 1975).

78/ These percentages were derived from project expenditure data

provided by the Army Corps of Engineers.

79/ Warren Rose, "Catalyst of an Economy: The Houston Ship

Channel," Land Economics (August 1967), pp. 32-43.

80/ These percentages were derived from project expenditure data

provided by the Economic Development Administration.

81/ This has been cited as one example of counterproductive federal

expenditures in central cities. William Alonso, "Problems,

Purposes, and Implicit Policies for a National Strategy of

Urbanization," in Population, Distribution, and Policy (U.S.

Commission on Population Growth and the American Future, 1972),

pp. 644.

47
82/ The adverse impact of international trade on New York City's

economy is discussed by Vernez and others, Federal Activities

in Urban Economic Development, p. III-5.

83/ Federal obligations for highway projects in urbanized areas

totaled $2.7 billion in fiscal year 1977. Federal obligations

for transit projects, almost all of which were in urbanized

areas, totaled $2.5 billion.

84/ Studies noting a divergence of need and federal assistance

include the Urban Mass Transportation Administration, Transit

Operating Performance and the Impact of the Section 5 Program

(November 1976), pp. 6-11 and 33-35; and George Hilton, Federal

Transit Subsidies-The Urban Mass Transportation Assistance

Program (Washington, D.C. : American Enterprise Institute,

1973), pp. 73-83.

85/ The impact of transit improvements on business location

patterns is reviewed by Robert Knight and Lisa Trygg, Land Use

Impacts of Rapid Transit: Implications of Recent Experience,

Report prepared for the U.S. Department of Transportation

(August 1977), pp. 194-198; Environmental Impact Center,

Secondary Impacts of Transportation and Wastewatrer

Investments: Review and Bibliography, pp. 13-14 and 124-131;

and Nancy Sheldon and Robert Brandwein, The Economic and Social

Impact of Investments in Public Transit(Lexington Books,

1973), pp. 41-47.

86_/ Knight and Trygg, Land Use Impacts, pp. 202-203.

87/ Environmental Impact Center, Secondary Impacts, p"p. 13-14.

88/ Knight and Trygg, Land. Use Impacts, pp. 196-200.

89/ A history and evaluation of the federal airport development

program is provided by Ross Eckert, Airports and Congestion

(Washington, D.C.: American Enterprise Institute, 1972).

90/ The nation's first rapid transit extension to an airport, in

Cleveland, has been criticized for its high cost and limited

patronage. Nonetheless, surveys indicate that 15 percent of

all air passengers use the system, and 25 percent are traveling

to and from the central business district. Hilton, Federal

Transit Subsidies, pp. 61-66.

91/ For an exhaustive listing, see "Checklist of Site Selection

Factors," Site Selection Handbook (February 1978), p. 57.

48
92/ U.S. Advisory Commission on Intergovernmental Relations,

Significant Features of Fiscal Federalism: 1976-1977 Edition

(March 1977), Tables 86 and 113.

93/ Dick Netzer, Economics of the Property Tax (The Brookings

Institution, 1966), Table 5-7.

94/ The six studies are cited by Vernez and others, Federal

Activities in Urban Economic Development, p. II-8. The three

literature surveys are by Vaughan, The Urban Impacts of Federal

Policies, pp. 72-73; Advisory Commission on Intergovernmental

Relations, State-Local Taxation and Industrial Location (April

1967), pp. 59-63; and John Due, "Studies of State-Local Tax

Influences on Location of Industry," National Tax Journal (June

1961), pp. 163-173. The few studies which have found some

relationship between tax rates and business location patterns

indicate that tax rates must be unusually high before they begin

to inhibit economic development.

95/ William Williams, "A Measure of the Impact of State and Local

Taxes on Industrial Location," Journal of Regional Science

(Summer, 1967), pp. Other studies showing that state and local

taxes represent a small fraction of value added or sales are

reviewed by Bennett Harrison and Sandra Kanter, "The Great

State Robbery," in Conference on Alternative State and Local

Public Policies (1977), pp. 57-66."

96/ This discussion of commercial victimization is based on

interviews with Housing and Urban Development and the

Department of Commerce personnel familiar with the federal

crime insurance program, and on the published report:

Department of Commerce, Cost of Crimes Against Business

(January 1976). A forthcoming update of that report provides

more recent commercial victimization figures.

97/ The Environmental Protection Agency has contracted for studies

to assess the impact of air quality controls on industrial

location, but the results are not in yet. This discussion is

therefore based entirely upon interviews with EPA personnel in

several regional offices and with representatives of the

National Association of Manufacturers and the U.S. Chamber of

Commerce.

98/ Economic Development Administration, Survey of Industrial

Location Determinants.

49
99/ These surveys are summarized by Schmenner, The Industrial

Location Decision, Chapter 4; Daryl Hellman and Gregory

Wassail, "State Financial Incentives to Industry: Do They

Work? Are They Desirable?" Paper presented at the Annual

Conference of the National Tax Association (November 1977), pp.

4-6; and Harrison and Ranter, "The Great State Robbery," p. 61.

100 Daryl Hellman, Gregory Wassail, Laurance Falk, State Financial

Incentives to Industry (Lexington Books, 1976), 6-7 and 21-43.

101/ "The Fifty Legislative Climates," Industrial Development

(January-February 1978), p. 3.

102/ Gilbert White, "Industrial Water Use: A Review," Geographical

Review (July 1960), pp. 412-430.

103/ See, for example, Bureau of Business Research and Service, Site

Selection Factor Studies, Fresno, California, 1968-1969 (Fresno

State College, November 1971), pp. 50-66.

104/ This discussion is based largely upon interviews with EPA

staff.

105/ Environmental Impact Center, Secondary Impact of

Transportations and Wastewater Investments: Review and

Bibliography, pp. 15-23.

106/ Between 1971 and 1974, water and air pollution controls were

responsible for an estimated 68 plant closings, a high

percentage of which were in the New York region. It is likely

that many more plants will be forced to close when the new water

and air pollution control requirements go into effect, and that

a disproportionate number of them will be in older industrial

cities.

107/ Gas companies in many metropolitan areas no longer accept new

industrial or commercial customers, whether they require line

extensions or not. But before gas shortages became commonplace

(and even now in areas of abundant supplies), most gas companies

installed a length of line at no cost to a customer up to a

percentage of the customer's estimated first year bill. Most

electric power companies do the same.

108/ William Miernyk, "Rising Energy Prices and Regional Economic

Development," Growth and Change (July 1977), pp. 2-7.

50
109/ Reasons for the decline are best summarized by Management and

Economics Research Inc., Industrial Location is a Factor in

Regional Economic Development, Report prepared for the Economic

Development Administration (November 1967), p. 19.

HO/ Wheat, Regional Growth and Industrial Location, pp. 203-204.

Ill/ A number of studies showing that personal factors influence

location decisions are summarized by M. Logan, "Locational

Behavior of Manufacturing Firms in Urban Areas", Annals of the

Association of American Geographers (September 1966), pp. 451-

466.

112/ Martin Segal, Wages in the Metropolis (Harvard University

Press, 1960), pp. 5-6.

o

51