The Technological Reshaping of

Metropolitan America

September 1995

OTA-ETI-643

GPO stock #052-003-01448-3
Recommended Citation: U.S. Congress, Office of Technology Assessment, The

Technological Reshaping of Metropolitan America, OTA-ETI-643 (Washington, DC:

U.S. Government Printing Office, September 1995).
iii

oreword

dvanced industrial economies are in the midst of a technological revolution, driven in large part by rapid advances in microelectronics

technologies. These digital electronic technologies permit information in a myriad of forms to be generated, routed, and transmitted

cheaply, instantaneously, and at high volumes virtually anywhere. There has

been much speculation about the impacts of the “information superhighway,”

“digital society,” and emerging “cyberspace” on society in general, but surprisingly little is known about the potential effects of this technology revolution on industrial and residential location patterns broadly, or on urban conditions in the United States specifically. In fact, these technologies underpin the

transformation of metropolitan areas.

These technologies are facilitating an ever more spatially dispersed economy, which in turn is causing metropolitan areas to become larger, more dispersed, and less densely populated. Moreover, though some places benefit

from these changes, the economies of many older, higher cost metropolitan

areas and many central cities and older inner suburbs are likely to face further

job loss and disinvestment, leading to underutilization of the built environment, potentially reduced central city benefits for industry, increased poverty

and ghettoization, and fiscal problems for local governments.

The OTA Report examines new policy approaches that would focus on development of innovative strategies for economic revitalization of urban core

areas (including central cities and inner suburbs); creation of partnerships between urban cores and industry, state governments, and suburban jurisdictions;

and movement toward full pricing of development and infrastructure to reduce

or eliminate price subsidies now encouraging dispersed development.

This Report was prepared in response to requests from the Senate Committee on Banking, Housing and Urban Affairs; the House Committee on Banking, Finance, and Urban Affairs and its Subcommittee on Economic Growth

and Credit Formation; and the House Committee on Public Works and Transportation and its Subcommittee on Investigations and Oversight.

In the course of this study, OTA drew on the experience of many organizations and individuals. In particular, we appreciate the invaluable assistance of

the advisory panel, as well as the efforts of the project’s contractors. We would

also like to acknowledge the help of the many reviewers who gave their time to

ensure the accuracy of this study. To all of them goes the gratitude of OTA and

the personal thanks of the staff.

ROGER C. HERDMAN

Director
iv

dvisory Panel

Marie Howland, Chairperson

Director, Department of Urban

Planning

University of Maryland

Marc Bendick

Principal

Bendick and Egan Economic

Consultants, Inc.

Scott Bernstein

President

Center for Neighborhood

Technology

John A. Butler

Vice President

National Urban League

John Claypool

Executive Director

Greater Philadelphia First

Robert Embry

President

Abell Foundation

Pete C. Garcia

President & CEO

Chicanos por la Causa, Inc.

Peter R. Gilezan1

Environmental Consultant

PR Gilezan Co.

Franklin James

Professor of Public Policy

University of Colorado

Mark Kaufman

Senior Vice President

Director of Corporate

Development

Chase Manhattan Bank, N.A.

Thomas Larson

Transportation Consultant

Tom Moody2

Former Mayor of Columbus, Ohio

Mitchell L. Moss

Director, Urban Research Center

New York University

Robert Paaswell

Director, University

Transportation Research

Center City College, New York

Sergio Rodriguez

Deputy City Manager

City of Miami Beach

Charles Royer

Former Mayor of Seattle

Senior Lecturer, Dept. of Public

Health and Community

Medicine

University of Washington

Paul L. Silverman

Vice President

Geltmore, Inc.

Carl Swearingen

President, BellSouth Georgia

BellSouth Telecommunications,

Inc.

Joel Tarr

Professor of History

Carnegie Mellon University

Mary Margaret Whipple

Chairman

Arlington County Board, Virginia

Regina Williams

City Manager

City of San Jose, California

Robert D. Yaro

Executive Director

Regional Plan Association

________________

1Retired Director of Environmental and Energy Affairs, Chrysler Corporation

2Retired

Note: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the advisory panel. The

panelists do not, however, necessarily approve, disapprove, or endorse this report. OTA assumes full responsibility for the report

and the accuracy of its contents.
v

roject Staff

Peter D. Blair

Assistant Director

Industry, Commerce, and

International Security Division

Emilia L. Govan

Program Director

Energy, Transportation, and

Infrastructure Program

ADMINISTRATIVE STAFF

Marsha Fenn

Office Administrator

Tina Aikens

Administrative Secretary

Gay Jackson

PC Specialist

Lillian Chapman

Division Administrator

PRINCIPAL STAFF

Robert D. Atkinson

Project Director

Tom Hausken

Analyst

Jan Linsenmeyer

Analyst

William Mallett

Analyst

Richard Thornett

Research Assistant

CONTRIBUTORS

Audrey Buyrn

Senior Associate

Kevin Dopart

Senior Analyst

Eric Gille

Research Assistant

CONTRACTORS

Brian Berry

University of Texas at Dallas

Larry Bourne

University of Toronto

Robert J. Gibbons

Amy Glasmeier

Pennsylvania State University

Madeline N. Gross

David Hodge and Richard Morrill

University of Washington

Wallace Katz

Hugh O’Neill

Appleseed

Joan Sherry

Editor

Sammis B. White

University of Wisconsin at

Milwaukee
vi

eviewers

Robert J. Aiken

Department of Energy

Philip L. Bereano

University of Washington

Brian Berry

University of Texas at Dallas

William Beyers

University of Washington

Tom Black

Urban Land Institute

Andrew Blau

Benton Foundation

James Cohen

University of Maryland

John A. Copeland

Georgia Center for Advanced

Telecommunications

Technology

James Cornford

University of Newcastle upon

Tyne

Jack Dean

Regional Plan Association

Anthony Downs

Brookings Institution

Kenneth R. Dunmore

Ameritech

Jeff Finkle

Council for Urban Economic

Development

Phyllis A. Furdell

National League of Cities

Robert Gibbons

Consultant

Robert Giloth

Annie Casey Foundation

Amy Glasmeier

Pennsylvania State University

Gil Gordon

Gil Gordon Associates

Stephen Graham

University of Newcastle upon

Tyne

Charles Grantham

Institute for the Study of

Distributed Work

Rosalind Greenstein

Lincoln Institute of Land Policy

Richard Hanley

New York City Technical College

Steve Herzenberg

Office of Technology Assessment

Edward Hill

Cleveland State University

Harry Holzer

Michigan State University

Patrick Hunt

Communication Workers of

America

Mark Jamison

Sprint

Wendell Joice

Office of Personnel Management

John D. Kasarda

University of North Carolina

Sue Koch

Consultant

Alfred Lee

National Telecommunications and

Information Administration

Warren Master

General Services Administration

Richard Mattoon

Federal Reserve Bank of Chicago
vii

Tony Mocenigo

International Trade

Administration

Patricia L. Mokhtarian

University of California at Davis

Richard Morrill

University of Washington

Arthur C. Nelson

Georgia Institute of Technology

John S. Niles

Global Telematics

Jack M. Nilles

JALA International, Inc.

Thierry Noyelle

Consultant

Hugh O’Neill

Appleseed

Barry Orton

University of Wisconsin at

Madison

Joseph Persky

University of Illinois at Chicago

Michael Rich

Emory University

Brandon Roberts

Consultant

John Ross

Department of Housing and Urban

Development

Herbert Rubin

University of Northern Illinois

Jorge Reina Schement

Rutgers University

Thomas Stanback

Columbia University

Anita Summers

University of Pennslvania

Woody Talcove

International City/County

Management Association

Roberta Tasley

New York Law School

Stephen Tom

Washington International Teleport

Barney Warf

Florida State University

Edward Weiner

Department of Transportation

Marc Weiss

Department of Housing and Urban

Development

Sammis White

University of Milwukee

Ted Wysocki

Chicago Association of

Neighborhood Development

Organizations

Note:OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the reviewers. The reviewers do not, however, necessarily approve, disapprove, or endorse this report. OTA assumes full responsibility for the report and the

accuracy of its contents.
contents

1 Summary 1

Evolution and Current Conditions of the U.S.

Metropolitan System 3

Impacts of New Technology on Rural, Urban, and

Suburban Economies 5

Uneven Development: Outer Suburbs and Exurbs 11

Uneven Development: New Challenges for the Urban Core 11

Policy Options 12

2 Issues and Policy Options 23

The Basis of Concern with Uneven Development 27

Urban Policy Approaches 29

Improving Economic and Community Development Efforts 38

Developing Partnerships and Metropolitan Linkages 56

Reducing Subsidies to Peripheral Development 60

3 Evolution and Current Conditions of the

US. Metropolitan System 67

Technology and Stages of American Urban Growth 67

Describing the Post-Industrial Metropolis 71

Conclusion 98

4 Technological Change and Employment

Location 101

Technological Underpinnings of the New Period of

Metropolitan Growth 102

Information Technology and Spatial Patterns 106

Impacts of New Technology on Rural, Urban, and

Suburban Economies 112

5 Technological Change and the Location of

Information-Based Service

Industries 127

Financial Services 127

Insurance 133

Securities Trading and Investing 136

Telecommunications 138

Professional Services 141

Data Entry and Processing 144 ix
6 Technology and Location of Freight

Transportation, Distribution, and

Manufacturing Jobs 145

Freight Transportation 146

WholesaleTrade and Distribution 154

Manufacturing 159

7 Telework, Intelligent Transportation Systems,

and Telecommunications infrastructure 165

Telework and its Effect on Metropolitan Areas 165

Metropolitan Implications of Intelligent Transportation Systems 177

Telecommunications Infrastructure and Economic Development 181

8 Uneven Development: Outer Suburbs and

Exurbs 193

What is Urban Sprawl? 194

Causes of Sprawl 195

Benefits of Urban Sprawl 196

Costs of Sprawl: Is it Subsidized? 198

Costs of Industrial Development 210

Automobile Subsidies 212

Subsidies to the Central City 214

Externalities Associated with Sprawl Development 215

Summary 218

9 Uneven Development: New Challenges for

the Urban Core 219

Technological Change and Urban Adaptation 219

Job Opportunities for Urban Core Residents 221

Improving Opportunities for Urban Core Residents 223

Factors Facilitating Reurbanization 224

Factors Inhibiting Reurbanization 226

Underutilization of Urban Core Infrastructure: The Problem of

Brownfields 227

x
Summary

he United States is in the midst of a technological revolution, driven in large part by rapid advances in microelectronics. Digital electronic technologies permit information

in a myriad of forms to be generated, routed, and transmitted cheaply, nearly instantaneously, and at high volumes

virtually anywhere. There has been much speculation about the

impacts of the “information superhighway,” “digital society,” and

emerging “cyberspace” on society as a whole, but surprisingly

little is known about the potential effects of this technology revolution on the spatial distribution of jobs and people broadly, or on

urban conditions in the United States specifically. Today, urban

life is increasingly shaped through the continuous and real-time

interactions facilitated by information technologies (computing

and telecommunications technology). Because these interactions

differ so markedly from past interactions that were more burdened by space and time constraints, they have, through their impact on industries and jobs, the potential to significantly reshape

America’s metropolitan areas, leading to growth for some places

and decline for others. These technologies will form the basis of

a new technology system that is giving shape to the next wave

in urbanization, one OTA calls the post-industrial metropolis.

The new technology system is creating an ever more spatially

dispersed and footloose economy, which in turn is causing metropolitan areas to be larger, more dispersed and less densely populated. There are a number of important benefits from such

development patterns. Some metropolitan areas will grow, as will

many outer suburbs. Businesses and people will be freer to

choose where they will locate, and many will choose to locate in

lower-cost, higher-amenity areas. And as technology facilitates | 1
2 | The Technological Reshaping of Metropolitan America

the dispersion of businesses to the outer suburbs,

workers can live closer to their jobs.

However, the changes will also create problems

because of inadequate transportation, added infrastructure costs, and negative environmental consequences. Moreover, some places will have

trouble adapting, and will face disinvestment, job

loss, and fiscal difficulties. The economies of

many older, higher-cost metropolitan areas, as

well as central cities and older inner suburbs of

many metros, are likely to face increasing job loss

and disinvestment, leading to underutilization of

the built environment, potentially reduced central

city agglomeration benefits for industry, increased poverty and ghettoization for residents,

particularly minorities, and fiscal problems for local governments. Moreover, the mismatch between the location of the new economy (in the

suburbs and in post-industrial metros) and the

skills it demands, and the large and rapidly growing population of lower-skilled and often minority

residents in urban cores is likely to exacerbate current economic and social problems in the urban

core.

The new development patterns pose a number

of challenges that have important public policy

implications. OTA concludes that a new and reinvented federal urban economic development

policy is needed to respond to the fundamental

changes that America’s metropolitan areas are

undergoing. The new policy would work to build

up the productive capacity of distressed places, in

partnership with state and local governments and

the private sector. It embraces three kinds of policies: first, economic development policies that focus on economic revitalization of urban core areas

(including central cities and inner suburbs); second, policies to create partnerships between urban

cores and industry, state governments, and suburban jurisdictions, including facilitating the mobility of urban core workers into suburban labor

markets; and third, policies to move toward full

pricing of development and infrastructure, to reduce or eliminate price subsidies now encouraging sprawl development.

In May 1994, three congressional committees

asked OTA to undertake a study on how new

technologies are reshaping America’s metropolitan areas: The Senate Committee on Banking,

Housing, and Urban Affairs; the House Committee on Banking, Finance and Urban Affairs and its

Subcommittee on Economic Growth and Credit

Formation; and the House Committee on Public

Works and Transportation and its Subcommittee

on Investigations and Oversight. Because the

form of cities and metropolitan areas is largely

shaped by patterns of commerce and industry, this

report examines the likely impact of the information technology revolution on industry and commerce in America’s metropolitan areas, including

cities and suburbs. This chapter summarizes the

findings of the report.

Chapter 2 analyzes policy options Congress

could consider in addressing the problems and opportunities stemming from the technologically

driven economic reshaping of metropolitan areas.

Chapter 3 first presents an overview of how technological change has affected the historical development of U.S. metropolitan areas. It then

examines the trends over the last 15 years in regional and urban economies and describes the nature of the post-industrial metropolis. The next

four chapters focus on how technology is affecting

and is likely to affect the spatial location and character of industry and residences. Chapter 4 provides an overview of the major technologies,

discusses how they affect metros and cities, and

presents a summary of the likely impacts. Chapters 5 and 6 focus on how technology is reshaping

the locational patterns in two specific sets of industries: 1) information-based service industries

(e.g., banking, insurance, securities trading, telecommunications, and professional services); and

2) goods-related industries (freight transportation, wholesale trade, and manufacturing). Chapter 7 examines three important crosscutting

technology applications that could change the nature of human and economic settlement patterns:

1) telecommuting; 2) Intelligent Transportation

Systems, and 3) advanced telecommunications

infrastructure. Finally, chapters 8 and 9 concentrate on the impacts of these changes and discuss

strategies for addressing the problems they are

likely to cause. Chapter 8 analyzes impacts on the
Chapter 1 Summary | 3

outer suburbs and the exurbs, particularly the impact of urban sprawl, and documents how dispersed development appears to be subsidized.

Chapter 9 considers the prospects of the core (central cities and inner suburbs), and examines a

number of approaches for increasing development

and economic activity in the core, including addressing the impact of the spatial mismatch between the location of jobs and urban residents, and

the reuse of urban brownfields (contaminated

lands).

EVOLUTION AND CURRENT CONDITIONS

OF THE U.S. METROPOLITAN SYSTEM

Because technological change in the United States

has not been continuous, but rather has occurred

in waves, with clusters of technological innovations emerging in relatively short periods of time,

many believe that the development of cities and

metros of the United States has not been a smooth

evolution to the conditions of the present, but has

been marked by major transformations from one

kind of city to another.1 Technology transitions

have driven urbanization, redefining urban hierarchies and bringing new types of specialization to

the urban economic base.

The current and emerging phase of urban development, beginning in the 1970s, is best understood as post-industrial metropolitan development,

where business spreads throughout the metropolis; residential growth spreads to the outer suburbs

and to exurban areas; some parts of some central

cities, especially central business districts (CBDs)

revive (at least in the 1980s); and many parts of

older central cities and inner suburbs, particularly

those formerly dependent on mass production

manufacturing, stagnate or decline (see chapter 3).

Goods-related employment declines as a share of

metro jobs, and services, particularly information-based services (e.g., banking, insurance), increase.

During the 1970s, after decades of relative decline, population and employment rose faster in

rural areas than in metropolitan. Moreover, in the

1980s, both the population and civilian workforce

of large metros (over 1 million population) grew

slightly faster than that of smaller metros. However, all that workforce growth was in fringe, as

opposed to core, counties of metro areas.

Not all metropolitan areas grew, however.

About half of the largest 25 metros suffered decline or little to no growth between 1970 and

1990, while the other half grew vigorously. Five

(13 percent) of the largest 40 metropolitan areas

lost population between 1980 and 1990 (Detroit,

Pittsburgh, Cleveland, Buffalo, and New Orleans), and 49 (22 percent) of the 228 next largest

metros also shrank. For example, the city of Pittsburgh’s population declined by 30 percent between 1970 and 1990, while the metropolitan

population fell by 4 percent. Most declining metros depended on older industries that lost many

jobs in the last 15 years, including tires, automobiles, and steel, or were centers for the excavation

and refining of copper, coal, aluminum, and oil. In

short, the fortunes of metropolitan areas have diverged sharply; some have grown as they increased linkages to global markets and/or

assumed new roles and functions; others have

stagnated or declined.

The 1980s growth of large metropolitan areas is

not synonymous with, but is related to, the fate of

historic core cities. Whereas most of the 40 largest

metropolitan areas grew (on average 1.9 percent),

half of the central cities continued to decline in

population. Central cities that grew in the 1980s

tended to be those that had managed a successful

transition from an older industrial economy to an

advanced service economy via specialization as

locations for corporate headquarters; finance,

banking, insurance, commercial real estate

(FIRE); and related producer services (e.g., law,

advertising, tourism and hotels). This was especially the case for so-called global cities (New

York, Los Angeles, San Francisco, Chicago) that

served as command and control centers for global

1 John Borchert, “American Metropolitan Evolution,” Geographical Review, vol. 57, 1967, pp. 301-32.
4 | The Technological Reshaping of Metropolitan America

corporations and for operations of global financial

institutions and related businesses, but also cities

such as Boston, Dallas, Minneapolis, Seattle, and

San Jose, whose regions specialized in high-tech

manufacturing.

While not all central city economies lost population and jobs, virtually all are losing blue collar

jobs and becoming more specialized in services,

particularly advanced services. Manufacturing

used to be, but is no longer, identified with the

central city. Decline of manufacturing employment in high-cost urban areas, particularly in the

Midwest and Northeast, is not new. However, its

severity and speed is new. In the 1980s, the 28

largest central counties of the Northeast and Midwest regions lost a total of nearly 1 million

manufacturing jobs.2 A large share of manufacturing is now located in the outer suburbs and exurbs

of major metropolitan areas.

Wholesaling, retailing, construction, and consumer services also were once predominantly urban, but now are primarily suburban. In part,

retailing and consumer services followed the market—when people moved to the suburbs, so did

they, although it was probably not until the 1980s

that some large department stores, for example,

closed their city flagship stores. Most of the

growth in warehousing and distribution has occurred on the periphery of America’s metropolitan

areas, rather than in the urban core, in part to be

near beltways and interstate highways and to gain

access to larger parcels of low-cost land.

As center cities lost industries like manufacturing, retail, wholesale, construction, and consumer

services, producer services (e.g., financial services, advertising, accounting, law) in many

places filled the gap. Many of these industries rely

upon face-to-face contact and need to be near each

other and other industries. A major reason for the

growth of central county economies since the

1970s is that they already had specialized in industries, particularly financial services and business services, that grew faster than the national

economy. In addition to producer services, three

other major industries help support many central

city economies: 1) cultural and educational institutions, including museums, zoos, universities,

teaching hospitals, and medical centers; 2) industries that reflect the role of the central city as a center of tourism and conventions, i.e., hotels and

airports; 3) government services, for state capitals

or cities with federal or state installations or

courts.

Even as central city economies have lost blue

collar jobs and gained producer services jobs,

which employ a higher percentage of college-educated workers, their populations have become

poorer and disproportionately minority. Of the 40

largest cities, 29 had poverty rates in 1990 above

the national average and 11 of the 29 have rates 1.5

times greater. The poverty rate in the largest 71 cities increased from 16.1 percent to 18.2 percent

between 1980 and 1990.3 Moreover, the poor are

(not surprisingly) more concentrated in central cities than in suburbs. In 1990, the central city poverty rate (18 percent) was approximately 10

percentage points higher than that in the suburbs.

In addition, the number of poverty census tracts in

America’s largest 100 cities increased 63 percent

between 1970 and 1990, while the number of extreme poverty tracts increased 160 percent.4 Thus,

by 1990, two in five urban tracts had at least 20

percent of their population in poverty, and one in

seven had at least 40 percent in poverty.

While many central cities and inner suburban

economies have been struggling and losing population, both population and jobs in most outer suburban and exurban locations have increased. The

spatial form of U.S. metropolitan areas has

evolved significantly in the last 20 years. The ac2 John D. Kasarda, “Industrial Restructuring and the Changing Location of Jobs,” in Reynolds Farley (ed.), State of the Union (New York:

Russell Sage Foundation, 1995).

3 Sue G. Neal and Harold L. Bunce, “Socioeconomic Change in Distressed Cities During the 1980s,” Cityscape, vol. 1, No. 1, August 1994.

4 Ibid.
Chapter 1 Summary | 5

cepted picture of the metropolitan area as a place

with one economy, located in downtown skyscrapers and inner ring factories, is no longer valid. Now, 57 percent of office stock is in the

suburbs, up from 25 percent in 1970 (see also figure 3-8 in chapter 3).5 Today the bedroom suburb,

little more than a home to workers commuting to

the central city, is rare.

Bedroom suburbs have been replaced by an increasingly urbanized metropolitan area outside

the central city, which, like the core, is a place not

only for houses but for businesses and jobs. Many

people both live and work in the suburbs and rarely visit the central city; others still commute to the

core for work, but patronize the retail, personal,

business, consumer, and social services in the suburbs. Suburban job growth has led some to argue

that “downtown,” by which they mean a diversified center of economic activity that includes offices and retail, has relocated to the suburbs or,

specifically, to business and commercial centers

in the suburbs known as “edge cities,” which in

some cases are larger than the central business district.6

Today, approximately 55 percent of Americans

live in the suburbs. In the largest 25 metros, 75

percent of the population live in the suburbs.

Moreover, exurbs and satellite cities are growing,

as low-density development spreads beyond the

outer suburbs. The fastest-growing sections of

many metropolises are now furthest from the central city, in low-density exurban areas.

IMPACTS OF NEW TECHNOLOGY ON

RURAL, URBAN, AND SUBURBAN

ECONOMIES

Predicting the future is difficult. New and powerful information and telecommunications technologies continue to be developed and their impacts

on industrial and residential location are still

evolving. However, based on the analysis of individual industries (chapters 5 and 6), telecommuting and technology-based infrastructure (telecommunications infrastructure and Intelligent

Transportation Systems—chapter 7), it is possible

to see how advanced technologies are changing

the locational patterns of individuals and industries and, on the basis of this, to predict how these

changes are likely to affect metropolitan economies in the United States over the next 10 to 20

years.

Historically, cities have arisen and grown as

centers of transactions and commerce, largely because of the need for physical proximity among

firms, suppliers, and customers. Agglomerations

of people, infrastructure, and industry allowed efficient production, transport, and distribution of

goods and services. By letting activity be physically farther apart, yet functionally still as close,

technology, particularly new transportation

modes (e.g., trains, electric trolleys, cars and

trucks), helped shape the first industrial city

(1870-1920) and the mass production metropolis

(1920-1970).

Today, new technologies, particularly information technologies, are playing a similar

role. To better understand how the next wave of

technologies is likely to recast industrial and residential locational patterns, it is important to understand the key technologies being adopted by

industry. Many of the early applications of information technology improved internal operations (e.g., mainframe and desk top computing)

and often created “islands of automation” with

little interconnection between components. It is

only recently that technologies that facilitate

real-time and widespread linkages and communication among operations have begun to be

widely adopted. These technologies are getting

cheaper and more powerful, and will become

pervasive. This report puts these technologies

into three groups: 1) technologies to transform

information into electronic form (e.g., fax, video

5 Gary Pivo, “The Net of Mixed Beads,” also, Neil Pierce, Citistates: How Urban America Can Prosper in a Competitive World (Washington, DC: Seven Locks Press, 1993).

6 Joel Garreau, Edge City: Life on the New Frontier (New York, NY: Doubleday, 1991).
6 | The Technological Reshaping of Metropolitan America

phones, computers, optical scanners, and bar

code readers); 2) switching and routing technologies (Internet communications and e-mail, call

forwarding systems, local and wide area networks, and wireless communications and computing); and 3) transmission (e.g., fiberoptics,

digital switching systems, and satellites).

Digitized and electronic processes have the potential to replace many paper transactions, some

face-to-face functions, and some physical transport of goods. Because a rapidly growing share of

the economy consists of information transactions—be they stock trades, insurance forms, or

point-of-sale data—the potential of information

technologies to shape spatial patterns of employment is greater than ever before (see chapters 4, 5,

and 6). For example, industries that in the past had

to be close to customers and other firms because

they constantly transmitted information are now

more free of the need for proximity because of

electronic digital transactions. Within goods industries, information technology is transforming

the logistics chain, making it possible for goods

distribution and transportation to consolidate operations and locate farther from the customer.

Similarly, industries requiring frequent face-toface contact (for example, architects in design

teams) will be able to adequately meet many communication needs electronically through e-mail,

video telephones, and easy-to-use data transfer

protocols. In sum, technology is connecting economic activities, enabling them to be physically

farther apart, reducing the competitive advantage of high-cost, congested urban locations,

and allowing people and businesses more (but

not total) freedom to choose where they will live

and work.

❚ Urban/Rural Growth

Because information technology is making an increasing share of the economy less dependent

upon face-to-face contact and close proximity

with customers, suppliers, and competitors, many

speculate that it will lead to a radical deconcentration of economic activity and population to lowercost rural areas and to developing nations. A

number of noteworthy examples fuel such speculation: New York Life’s life insurance processing

operations in Ireland; Citibank’s back office credit

card operations in Sioux Falls, South Dakota; telecommuters living in Telluride, Colorado. Visions

of life spent conducting business through the Internet, hooked up by video phone, and receiving

and sending faxes, all the while living in bucolic

and isolated bliss, are likely to be a dream that

only a few can fulfill. OTA concludes that the

new wave of information technologies will not

prove to be the salvation of a rural U.S. economy that has undergone decades of population

and job loss as its natural resource-based economy has shrunk.7 At least in the foreseeable

future, most of the economy will be locating

in metropolitan areas, perhaps not the largest,

highest-cost metros, but the next tier of mid-sized

metros.

There are several reasons for this. First, much

of the work that goes overseas and to rural areas

(e.g., data entry and processing) is routine and

low-skilled and is most amenable to elimination

by automation.8 Second, although technology enables an increased share of work to be done anywhere, large and medium-sized metros continue

to provide advantages for industry (see below).

One important advantage is that metropolitan

7 However, a limited number of high-amenity rural areas and rural areas at the periphery of metropolitan areas may experience significant

growth. To the extent that information technologies enable growth in some rural areas, it is likely to be in those areas that are already doing well.

8 Some work, such as computer programming, that is higher skilled and amenable to being done at distance, is being done overseas, but it is

not clear that other higher skilled work can be performed in such remote locations.
Chapter 1 Summary | 7

areas offer an environment conducive to innovation and learning, which, as technology increases

the importance of continual product and service

development, is an advantage to many more firms.

Finally, the information technology (IT) revolution allows many service functions to gain economies of scale through consolidation. This is true

in part because sectors such as freight transportation and wholesale trade are buying ever larger

and more complex equipment, and also because

information technology lets businesses serve

more places and customers from a single location.

In the past, many service companies had branch

facilitates distributed throughout the country,

many in smaller towns. Now more and more firms

are using IT to consolidate operations, closing

smaller offices in smaller cities and towns, and

building up larger offices in metropolitan areas.

❚ Inter-Metropolitan Differences

Consistent with historical patterns, new information technologies are making it easier for business

to locate many operations in any region of the

country. These technological changes are likely to

lead to increasing factor price equalization among

regions. Historically, some regions, such as the

Northeast, had historic advantages stemming

from agglomeration economies, location near

large markets, transportation, and more recently,

an advanced telecommunications infrastructure.

However, as information technology allows more

functions to be performed at a distance or to be

consolidated, and as advanced telecommunications infrastructure diffuses down the urban hierarchy, these competitive advantages are likely to

lessen. Lower-cost regions, providing they have

sufficient external economies (e.g., air travel,

transportation, labor force, quality of life, and

telecom infrastructure) are likely to grow.

With technology enabling more locational freedom, the search by firms for lower-cost locations

is likely to continue to reshape regional employment patterns, leading to higher rates of growth

for many smaller and mid-size metros, many of

them in the middle of the country. Geographic

centrality aids operations, by reducing average air

travel distance, and because of central time zones.

Geographic wage and other cost differentials will

encourage relocations to low-cost regions until an

equilibrium is established or approached.

Finally, as the need for proximity is weakened

by information technologies, urbanization economies and diseconomies may become more important. Metropolitan areas continue to provide

important advantages for industry, including a

large and diverse labor supply, large and more

prosperous consumer markets, frequent and cheap

air transportation, prompt regular mail service,

and availability of repair and technical services.

Advantages for people include high-quality medical care, cultural and educational institutions, and

a large and diverse labor market.9 At the same

time, diseconomies of urbanization, including

high costs of living and doing business, crime,

pollution, traffic congestion and lack of access to

open spaces, are high in many metros, particularly

larger ones. The interplay between economies and

diseconomies of large metros will play an important role in shaping the future of metropolitan

areas.

As, or perhaps because, technologies allow

more locational freedom, development may be becoming more uneven, with places that made the

transition to the post-industrial metropolis (see

chapter 3) doing well, while places that have not,

continuing to decline. Places with the advantages

described above, including a skilled, moderately

priced labor force; low diseconomies (e.g., crime,

congestion, and environmental pollution); an industrial base of advanced innovative companies,

and high quality of life, will continue to do well. In

contrast, places without these advantages are like9 However, it is important to note that information technology and telecommunications have the potential to allow some formerly urban

advantages to be accessible to rural households. These include, for example, access through the Internet to top-quality libraries and other information, distance learning, telemedicine, and satellite television receivers.
8 | The Technological Reshaping of Metropolitan America

ly to continue to lose out, and risk a continuing

cycle of decline as reduced advantages (both public and private) lead to reduced economic growth,

which in turn reduces advantages even more.

❚ Intra-Metropolitan Differences: Central

City Prospects

As discussed in chapter 3, much of the revival of

central cities in the 1980s was because of dramatic

growth in producer services on the one hand, and

increased foreign immigration on the other. In addition, some central cities have remained viable

by successfully integrating themselves into the

metropolitan-wide economy.10 Yet, the perception has grown that American cities, particularly

the urban cores of many large metropolitan regions, are in trouble, and may not be sustainable

over the long term, caught in a downward spiral of

joblessness and business failure, revenue shortfalls and declining services, crime, racial strife,

and ungovernability, with middle-income families leaving while the wealthy wall themselves off

in protected enclaves.

Technological change is likely to continue to

impact urban cores by letting more of the economy be operated at a distance; it threatens the

economic well being of many central and inner

cities, and older suburbs of metropolitan areas.

Many of these places may have trouble adapting,

and will face disinvestment, job loss, and fiscal

crisis. A number of important changes facilitated

by technology are discussed below.

The New Metropolitan-Wide Economy

First, it is clear from urban settlement patterns in

the late 20th century that reference to cities is

anachronistic, a holdover from a period when the

core city was home to most of the productive capacity in the metropolitan area. Today, as industry spreads throughout the metro region, it is

the metropolitan areas as a whole, not just the

core, that is the functioning economic unit.

Technology, by enhancing the locational freedom of firms within metropolitan areas, is causing

the rise of metropolitan-wide economies. At one

time, core cities had advantages of agglomeration

and proximity that outweighed their high costs.

However, now the core is in some sense just one of

several “edge cities” within the metropolis. By

making firms more footloose, technology lets

jobs follow people. Quality of life for people and

cost for business become more important. Thus,

central cities will increasingly have to compete on

cost, niche markets (such as tourism), and amenities.

Weakened Central City and Inner-Suburb

Economies

There are a number of technological factors that

put the economies of central cities (particularly

outside the central business district) and inner

suburbs at risk. First, technology is reducing the

importance of distance for many functions, particularly more routine functions, giving businesses

more freedom to locate in places with cheaper

land, buildings, and labor. These places are often

in the outer suburbs or the exurbs, or in mid- and

smaller-size metros. Moreover, these places typically have less crime, traffic congestion, and air

pollution than most urban cores.

Second, in some sectors, information technology and other advanced technologies are reshaping

physical infrastructure needs, and in a number of

industries this has led to (in some cases required)

new, larger, and differently designed facilities.

This is particularly true in goods production and

handling. For example, in wholesale trade, the

move to flow-through practices like cross-docking requires buildings configured quite differently

from older urban warehouses. In shipping, access

to intermodal facilities with good road access is

increasingly important. In some service sectors,

buildings with large floor plates that can easily be

reconfigured, especially for fiberoptics and other

wiring, is increasingly important. These factors

10 For example, Indianapolis is both politically and economically tightly integrated with its surrounding suburbs.
Chapter 1 Summary | 9

lead many routine goods and services industries to

locate at the edge of metros where larger and

cheaper parcels of land on which to build are available.

Overall, the technological and economic

trends suggest that the non-central business

district portions of many central cities and

their inner suburbs will continue to be the

weakest part of metropolitan economies for at

least the next two decades, and that without

economic development policies they will find it

harder to compete.

Specialization of Core Economies

Technological change is also contributing to a restructuring of urban core economies, particularly

the central business district, which is becoming a

place requiring more highly skilled and educated

people. As technology enables lower skill routinized work to be moved out of high-cost central cities, the economic base of the central business

district is increasingly shaped by complex, higher-end office work, including managerial and professional functions. There are several reasons for

this. Though technology allows work to be routinized, and hence moved, it also supports, especially

in the services, the continuous creation of new

products, a process which tends to be located in

urban areas. The rise of globalization means that

a larger share of the U.S. economy is devoted to

command and control functions, which are naturally attracted to a small number of global cities,

including New York, San Francisco, and Los

Angles. Finally, much managerial and professional office work needs face-to-face communication,

and so remains in central cities.

Yet, as discussed above, new technologies can

reduce the importance of spatial proximity in

communication. For example, portable computing and phones, e-mail and Internet connections,

fax, and easy-to-use data transfer protocols all

make communication over distance easier. Coming technologies such as ubiquitous computing,

high-definition displays, video phones, and highspeed and high-capacity communications will accelerate this trend. However, there are at least two

reasons why technology will not substitute for all

face-to-face needs. First, it is not clear how well

technology can substitute for face-to-face communication. The latter has not only richness and

contextual advantages, but also includes informal,

“water cooler” conversations and meetings out of

the office over lunch. Second, some industries and

functions may be more willing to use these systems and decentralize than others, depending

upon the extent, nature, and importance of face-toface communications and the extent of cost competition in the industry.

Similarly, while the predominant effect of technological change is toward dispersion of activities, particularly the more routinized ones,

technologies may create specialized niche functions, which, if they do not give urban core areas

an edge, at least may help compensate for their

disadvantages of cost, congestion, etc. Many of

these niche functions are related to innovation,

flexibility, speed of delivery and response, and

other factors, and are often described as flexible

specialization. These include opportunities in

smaller-scale flexible manufacturing, just-in-time

goods distribution activities, and some intermodal freight transportation activities (see chapter 6).

However, notwithstanding some niche functions, technology will likely continue to decentralize routine work and goods-related work,

while at the same time leading to core economies

becoming more highly skilled, with many professional and managerial jobs. In addition, technology is requiring higher skills for many more jobs,

regardless of location. As a result, there is likely to

be a growing mismatch between the location of

the new economy and the skills it demands, and

the large and rapidly growing population of lowerskilled and often minority residents in urban

cores. The mismatch contributes to unemployment and underemployment in the urban core. Cities face a challenge in how to bridge what

appears to be a growing gap between the skills

required for employment in advanced services

concentrated in urban cores, and the limited
10 | The Technological Reshaping of Metropolitan America

skills that many young big-city residents bring

to the job market.

Finally, in an era of rapid technological

change, cities (and metropolitan areas) that

succeed—grow in population, jobs and incomes—will be places that have successfully managed to adapt to the new technology system. In

contrast, metros, cities, or parts of cities that

will not or cannot adapt run the risk of being

left behind to face stagnation or decline. Adaptation of people, institutions, and the built environment will be important to urban core

survival (see chapter 9).

❚ Intra-Metropolitan Differences: Outer

Suburban and Exurban Prospects

Over the next two decades, many outer suburbs of

metropolitan areas will be the healthiest part of the

metropolitan economy and the strongest parts of

the national economy. Job growth is likely to continue, in part driven by relocations out of the central city and inner suburbs, but also because of

faster rates of expansion. Suburban jurisdictions

housing growth will by and large enjoy fiscal

health, although they may be hard pressed to pay

for the expansion if they do not require new development to pay the total public costs of new development (e.g., roads, schools) (see chapter 8).

These places will need little or no assistance from

state or federal governments to promote development. Residential development is likely to continue to expand at the peripheries of most

metropolitan areas, leading to increased urban

sprawl and lower population densities. These

trends in business and residential location are likely to exacerbate a number of problems, including

outer suburban traffic congestion, consumption of

open space, and increased gasoline consumption.

Business Suburbanization

The locational freedom gained by advances in intrafirm communications will likely cause continued dispersal of firm activities, with an increasing

share of routine, and even non-routine back office

work moving to the suburbs. Industry will move

in part to save on rent and taxes, which are usually

lower in the suburbs, and to be closer to a higherquality workforce.

Residential Dispersion

Residential dispersion to the outer suburbs and exurban areas is also likely to continue, if not accelerate. The driving forces include lower-cost land,

which means more affordable and larger houses

and the desire of many Americans for space. Technological change is facilitating this.

Because technology is enabling increased business suburbanization, greater numbers of workers

can live even further out in exurban locations and

still commute to jobs at the edge of metropolitan

areas. Moreover, as the number of workers telecommuting increases, residential dispersion is

likely to increase even more (see chapter 7). Because most of these will be telecommuting perhaps two to three days a week from home, or from

telecommuting centers at the edge of metropolitan

areas, they will still have to live near metropolitan

areas. Thus, while reduced work time in central

offices is not likely to lead to significant deconcentration of population to rural areas far from

metropolitan areas, it does allow workers to live

farther from urban cores.

Finally, intelligent transportation systems

(ITS, the application of information technology to

the surface transportation system) should reduce

congestion and commuting times, allowing even

more residential mobility (see chapter 7). ITS will

have marginal, though possibly critical, impact on

land use by increasing the average, and in some

cases the maximum, vehicle throughput capacity

at some bottlenecks and routes through speededup toll collection, optimized flow through and

across signalized routes, and quick detection and

resolution by road officials of accident-causing

delays. These technologies are likely to encourage

urban dispersion. Almost all theoretical formulations of the impact of transportation investment

assert that better transportation will attract people

and business, and spread them out over a wider

area, because commuters and others can travel a

greater distance in the same amount of time.
Chapter 1 Summary | 11

UNEVEN DEVELOPMENT: OUTER

SUBURBS AND EXURBS

The characteristic pattern of American metropolitan development toward the end of the millennium

is one of a vast, low-density, and fragmented urban region with sprawling, isolated suburbs surrounding an older, often decaying inner core. For

example, while the Chicago metropolitan population has grown hardly at all over the last decade,

the urbanized area has increased by over 20 percent as population has declined in the core and

grown on the fringe. OTA concludes that the technological revolution in computer technologies,

telecommunications, and industrial organization

will exacerbate industrial and residential dispersion within metropolitan areas.

Sprawling growth on the fringe, however, is not

just an outcome of unimpeded market forces, implementation of technological advances, and social factors (e.g., crime and racial segregation),

but is also influenced by public policy forces (see

chapter 8). Though there is no definitive analysis

on the effect of government policies on the spatial

form of metropolitan areas, there is evidence that

public policies at many levels encourage sprawl

and thus, indirectly, abandonment of the central

city and inner suburbs. Unfortunately, there have

been few careful studies of the marginal costs of

infrastructure and services in metropolitan areas.

But the evidence suggests that fringe suburban

and exurban development does not pay the marginal costs of its development, and that the costs

are sometimes borne by the central cities and inner

suburbs.

For example, the federal mortgage interest tax

deduction disproportionately benefits the wellhoused (a greater share of whom are in the suburbs) and appears to encourage large building lots,

leading to residential dispersion. State governments subsidize suburban sprawl largely through

road building on the fringe, a cost not fully borne

by users. Indeed, automobile users, especially

heavy users in the automobile-dependent suburbs,

exurbs, and rural areas, are heavily subsidized.

Local government, too, distorts development by

subsidizing residential infrastructural investment

on the fringe. Moreover, both state governments

and suburban jurisdictions provide large financial

incentives for industry to locate in outer suburban

and exurban locations, often to firms relocating

from urban core areas. The pricing of public and

private utilities also understates the costs of providing services to suburban and exurban residents. There are good reasons for providing such

things as telephones, mail, electricity, and gas at

an average cost throughout a metropolitan region

(for health and safety and the prevention of social

and economic isolation); however, these pricing

policies appear to subsidize suburban and exurban

development.

Moreover, in addition to direct subsidies, there

may be a number of indirect costs (externalities)

borne by others because of dispersed development. These include environmental quality, traffic

congestion, and access to open space. These direct

and indirect subsidies appear to raise the cost of

development in the core (central cities and inner

suburbs), while making development on the edge

cheaper. However, it should be noted that the extent of such subsidies and their impact on development patterns is largely unknown.

UNEVEN DEVELOPMENT: NEW

CHALLENGES FOR THE URBAN CORE

In some respects, the technological revolution reshaping many economic sectors has produced

mixed results for America’s cities, but there are

two areas in which its effects have been clearer: it

has reduced the ability of urban core residents,

particularly lower-skilled minorities, to gain good

jobs; and it has led to the increasing abandonment

and underutilization of urban land, buildings, and

infrastructure (see chapter 9).

Technological change and industrial restructuring has steadily ratcheted upward the skill levels

required for employment, while at the same time

spatially separating routine jobs (many of which

have moved to the fringe) from complex jobs

(many of which are concentrated in the core). Jobs

for people with high-school-level skills are fewer

in number, and in many cases they no longer offer

a route to better jobs. Jobs for people without even
12 | The Technological Reshaping of Metropolitan America

high-school-level skills are even fewer. One major

problem for many urban core residents is a skills

mismatch between their skills and the skills demanded by the new economy. Moreover, jobs that

do exist for high school graduates are increasingly

in the suburbs and hard for central city residents to

get to, or even find. Economic and spatial change

and skills and spatial mismatch have contributed

to more and longer unemployment among central

city residents and increased poverty in many

neighborhoods outside of the central business district

Moreover, changes in technology, business organization, and residential patterns are causing increasingly uneven development, including greater

misuse and under-use of urban land, buildings,

and infrastructure in central cities and older suburbs. Where industry has closed or moved, land

and buildings are left behind, idled, or underutilized, jobs vanish, and local tax revenues drop. In

spite of the absence of hard evidence, there is general agreement that the underutilization of land

and buildings in cities is growing. The most visible evidence is the vacant land and the derelict

and abandoned buildings in the inner cities, much

of it referred to as brownfields, contaminated with

chemical wastes. In addition, there is a growing

number of poor and very poor neighborhoods

which are becoming more sparsely populated.

Recently, a great deal of attention has focused

on brownfields and their cleanup and reuse.

Cleanup difficulties, particularly uncertainties related to federal and state environmental regulations, present a barrier to reuse of these sites and

associated job creation. Barriers to brownfield reuse include: technical remediation issues; liability

concerns associated with contamination; the cost

of cleanup and reuse; community concerns; and

prospects for redevelopment. Developers and

business will be wary of brownfield sites until

there is progress on these issues.

POLICY OPTIONS

OTA concludes that, given the technological and

economic trends toward decentralization, America’s central and inner cities are unlikely to regain

their earlier dominance. However, renewal and

development does appear possible, particularly if

new and effective federal, state, and local public

policy approaches are instituted.

There are at least three reasons why policy

makers at the national level should care about metropolitan development patterns. First, uneven development reduces the efficiency of the national

economy and imposes costs on non-urban core

residents, taxpayers, and consumers. The premature writedown or less than full use of public and

private resources in distressed or declining areas

imposes costs and reduces the efficiency not only

of the declining area, but also of the U.S. economy

as a whole. In addition, uneven urban development imposes economic and social hardships on

some people in some urban economies. Finally,

the nature of the federalist system means that

some states and cities will not adequately address

urban decline, especially poverty. In many cases

city or state governments would like to do more to

help distressed local economies or parts of economies but can’t justify these actions politically.

Federal urban policy has built on a number of

assumptions since World War II, including a

strong federal role, the idea of a mass production

metropolis with most employment concentrated

in the core, a focus on remedying market

imperfections through direct government action,

and an emphasis on housing, social services, and

physical redevelopment. These assumptions are

no longer as valid, and therefore there is a need to

reevaluate policy in light of changing conditions.

This report discusses the federal role in addressing the problems of the post-industrial metropolis. In the era of the post-industrial metropolis,

federal urban policy needs to become smarter

and more strategic, focusing on shaping the

institutional, regulatory, and fiscal environment influencing uneven growth patterns. Especially in an era of reduced federal resources,

increased capacities at the state, local, and private

(non-profit and profit) levels, and increased variation and diversity between places, federal policy

needs to focus less on simply providing funding to

a large number of places through grant and other
Chapter 1 Summary | 13

programs, and more on intervening strategically

in the metropolitan development system. Federal

funding is still needed, in part because it can provide important levers to shape the behavior of other institutions. The federal role, however, needs to

encompass several critical functions not now being performed: 1) providing incentives for other

players (e.g., states, suburban governments, core

city governments, non-profits, and business) to

strategically devote their own resources to solving

problems of uneven development between and

within metropolitan areas; 2) assessing how other

non-urban federal policies (e.g., environmental

regulation, tax policies, telecommunications policies) contribute to uneven development and, if

feasible, working to minimize their negative impacts; 3) assessing how non-urban federal programs (e.g., manufacturing modernization

programs, business finance programs) could be

better targeted to support more even development;

and 4) supporting new innovative institutions, including in the private sector, that promote urban

economic development, and 5) increasing efforts

devoted to evaluation, demonstration, and technical assistance so that state-of-the art federal, state,

and local urban economic and community development efforts are continually advanced.

Chapter 2 discusses three new approaches to

federal urban policy: 1) improving the effectiveness of urban and community economic development efforts; 2) developing partnerships and

metropolitan linkages; and 3) reducing subsidies

to peripheral development (see table 1-1).

❚ Federal Economic and Community

Development Policies

There is a common perception that since the 1960s

federal urban policies have concentrated on economic development, particularly of distressed

communities within cities, and that the policies

have failed.11 Yet, few if any urban development

programs since the 1960s have targeted economic

development, and overall, policy has made only

limited efforts to implement economic development in the urban core. If this current wave of technological change were leading to increased

centralization of economic activities, there would

be little need to try to stimulate economic growth

in these areas. However, because technology is

leading in the opposite direction, it may be an appropriate federal role to assist affected cities and

suburban communities to give them time to adjust

to these changes and reduce the transition costs

(for people, industries and governments) of moving from the old industrial metropolis to the postindustrial metropolis (see chapter 3). One

important avenue toward this goal is to ensure that

a broad range of federal economic development

policies focus on these areas. Moreover, it will be

important that federal policies recognize the latest

and most innovative economic development approaches and not only encourage communities to

adopt these, but also modify their rules and regulations to allow communities to do so.

Today, four departments or agencies provide

assistance for urban economic development: the

Department of Housing and Urban Development,

the Economic Development Administration

(EDA) in the Department of Commerce, the Small

Business Administration, and the Treasury Department.

HUD operates two major programs for urban

economic and community development, the

Community Development Block Grant program

(CDBG), and the Empowerment Zone and Enterprise Communities Program. In addition, it operates several smaller programs. The CDBG

program is the major federal community development program. It allocates grants on a formula basis to entitlement communities (cities with more

than 50,000 population and selected urban counties) and to states for distribution to non-entitlement communities on a discretionary basis. Funds

can be used for a variety of purposes including

11 Nicholas Lemann, “The Myth of Community Development,” New York Times Magazine, Jan. 9, 1994: 26-31; 50; 54; 60.
Change in

federal

role

N

M

M

Change in

state/local

role

N

N

M

Impact on

federal $

IMPROVING ECONOMIC AND COMMUNITY DEVELOPMENT EFFORTS

Increase funding for economic and community development

Target more funds to distressed cities and suburbs.

■ require that EDA spend more of its funds in urban areas

● tighten CDBG funding formulas

1 M-L

N

N

2

3 Increase targeting of SBA loan programs to minority-owned businesses and businesses in distressed urban core areas. N s

s

s

s

4 Require cities to spend an increased share of federal funds in distressed neighborhoods N M

5 Provide incentives for cities and states to focus programs on distressed places and disadvantaged persons. N M

6 Base state and local funding on performance

■ allocate a share of block grant funds based on selected performance measures of the grantee N

N

M

L

M

L

L

s

s

M

■ create a competitive, challenge-grant program combining all federal economic and community development funds. M

Encourage EDA or HUD to do more to support innovative efforts, perhaps funding an office of strategic economic s

M

M

M

M

7 s

N

N

N

N

development

Consolidate existing urban economic and community development programs into one program into one agency or

institution.

8

= move more toward consolidated block grants.

● create a competitive, challenge-grant program combining all federal economic and community development funds.

9 Target a greater share of federal funding to more comprehensive, innovative economic development organizations.

● encourage HUD to fund more innovative economic development institutions, perhaps through funds distributed on a

performance basis.

■ broaden the applicability of activities under Title 1 in EDA to allow funding for innovative economic development

programs or activities.

10

11

Increase support for Community Development Corporations (CDCs) and other similar comprehensive, locally-based

development organizations.

■ increase funding for HUD’s National Community Development Initiative

■ establish a quasi-public corporation to fund community-based development organizations.

s

L

M

M

M

M

Target a greater share of NIST’s manufacturing outreach efforts urban areas N M s

DEVELOPING PARTNERSHIPS AND METROPOLITAN LINKAGES

12 M

s

M

s

N

N

Encourage federal policymakers to work with trade associations, large corporations, and other business organizations to M

M

L

catalyze efforts to revitalize distressed urban economies

Provide incentives for local governments in a metropolitan area to cooperate.

■ encourage the Administration to review existing federal programs as to the extent to which they hinder or encourage

regional cooperation at the metropolitan level.

■ require that states and cities receiving federal funds in areas such as transportation, economic development, and

13

housing establish metropolitan-wide development councils that work to minimize uneven development

(continued)

II
14

15

16

17

18

Impact on

federal $

Encourage the formation of metropolitan-wide organizations to manage federally-funded efforts. N

Increase support for mobility to work programs.

■ fund the “Bridges to Work” program, and based on its findings, expand the program to more cities and more M

participants.

■ provide tax incentives to suburban employers who provide van pools or other transportation for disadvantaged urban M

core residents.

REDUCING SUBSIDIES TO PERIPHERAL DEVELOPMENT

Require that HUD assess the extent to which public policies subsidize suburban and exurban development, particularly L

at low densities.

Develop policies to reduce state and local industrial incentive bidding wars.

■ prohibit executive branch agencies from entering incentive bidding contests for the attraction of federal facilities. s

● apply anti-pirating provisions to all federal economic development programs. N

■ encourage the Secretary of Commerce to convene a meeting of state economic development directors to try to reach N

an agreement to stop, or at least significantly curb the practice.

● require city and state recipients of federal economic and community development funds to report all subsidies given to N

relocating firms

● reduce federal funds to states and communities for economic development in proportion to recruitment incentives N

offered

■ subject state and local incentives to federal taxation. +

Foster cleanup and redevelopment of urban brownfields:

● establish programs to fund brownfield assessment and cleanup. M

● establish a “Brownfield IRA” that would allow small and medium-sized companies to put aside tax free money that M

must be spent for cleanup

1= none; S= small; M= moderate; L= large; + = increased revenue flow.

Change in

federal

role

M

s

s

N

s

s

s

M

M

s

M

s

Change

state/lo

role

L

M

s

N

N

M

M

L

L

M
16 | The Technological Reshaping of Metropolitan America

housing rehabilitation, energy conservation, public services and facilities, infrastructure, business

financing, and commercial revitalization. In

1995, funding was approximately $4.6 billion.

In addition, Congress established the Empowerment Zone/Enterprise Communities program in

1993, targeted to pervasive poverty, unemployment, and general distress. Six cities (Atlanta,

Baltimore, Chicago, Detroit, New York, Philadelphia/Camden) were designated as EZs (with Los

Angeles and Cleveland being designated as supplemental EZs), and 60 urban ECs were selected.

Each urban EZ is slated to receive $100 million,

and each EC is to receive $2.95 million through

the Social Services Block Grants administered by

the Department of Health and Human Services.

These grants can be used to fund a variety of economic, social, and community development activities as determined by community residents. In

addition, the Treasury Department will administer

$2.5 billion in tax credits to EZs.

The Economic Development Administration

(EDA) in the Department of Commerce principally funds local public works construction projects

(e.g., industrial parks, access roads, sewer lines),

in large part to enable communities to attract new

industry. EDA also provides grants to communities facing sudden economic distress, increasingly

to respond to military base closures, and funds

technical assistance and economic research. Current grant funding of $379 million is down from

$900 million (1995 dollars) in 1980.

The Small Business Administration (SBA)

provides financing and technical assistance to

small businesses, some of them minority-owned,

and some located in urban core areas. The

agency’s primary financing program, the 7(a) loan

guarantee program, guaranteed more than 36,000

loans in FY 1994 for a total of more than $8.1 billion. SBA’s 504 program is a fixed asset financing

program for existing businesses. In FY 1995, it

will have made approximately 4,000 loans, for

$1.5 billion.

Administered by the Treasury Department, the

Community Development Finance Initiative

(CDFI) was established in 1994 to provide capital

to either existing financial institutions that specialize in community development lending, or to

seed new organizations proposing to do this type

of work. The program plans to announce its first

round of funding availability ($50 million) in

mid-October, 1995.

❚ Improving Economic and Community

Development

Federal support for economic and community development helps local communities design and

carry out strategies to address poverty, abandonment, and economic distress. However, there are

several limitations to current federally supported

economic and community development initiatives. First, while the number of distressed places

has increased in the last 15 years, federal funding

has decreased. Second, the reduced funds could be

better targeted to distressed areas. A not insignificant share of CDBG and other economic development funds are spent on places with relatively low

levels of distress and need (such as well-off suburbs) and projects that have a low level of benefit

for low- and moderate-income people. For example, between 1975 and 1989 the share of CDBG

funds going to the most distressed cities declined

from about 50 percent to about 36 percent, while

the share going to cities that were best off doubled

(to about 11 percent).12

Third, funding formulas for many programs

provide few incentives for improving local grantee performance. Many federal urban programs

(including job training, housing, and economic

development) provide formula-based block

grants to city or state governments, regardless of

the performance of the grantee. In most cases, performance varies significantly between cities or

states, with some cities using federal funds to craft

and implement effective, strategic, and efficient

12 Michael J. Rich, “Targeting Federal Grants: The Community Development Experience” in Community and Economic Development:

Rethinking the Federal Role, Congressional Research Service, May 6, 1992.
Chapter 1 Summary | 17

actions, and others failing to plan, or operating

mediocre programs. Yet, for both the best performers and the worst, block grants provide the

same amount of money.

Fourth, although there is considerable agreement that comprehensive and strategic approaches to community development are more

effective than piecemeal ones, current efforts are

piecemeal and uncoordinated, with federal urban

policy being the province of a number of different

agencies and within each, a large number of individual programs. According to the General Accounting Office the federal government assists

distressed urban communities and their residents

through at least 12 federal departments and agencies.13 This proliferation of programs causes a

number of problems. Because these agencies rarely work together, their programs cannot reinforce

one another. Also, organizations at the local level

must deal with a plethora of programs and agencies, making it difficult for localities to obtain assistance. This also makes the crafting of strategic,

comprehensive, and integrated solutions at the local level difficult, as each federally funded program has its own rules, eligibility requirements,

and boundaries.

Fifth, new institutions and approaches are

needed at the local level. Efforts to improve the

economic prospects of distressed urban areas and

the lives of disadvantaged people in cities are an

amalgam of separate subsystems, usually with

very little overlap, cooperation, or coordination.

Moreover, many economic and community development programs do not work closely with industry and, as a result, have limited effectiveness.

Moreover, business development programs are

often bureaucratic, content with supplying general information rather than real services (e.g., training, access to technology, management

assistance), passive in orientation, and uncertain

how to develop working relationships with firms.

The best programs are customer-oriented, focused

on ongoing interaction with the business client,

provide customized services and are flexible.

Non-governmental (private or quasi-public) organizations often do this best.

Sixth, most EDA and HUD economic and community development funds are either for physical

revitalization projects (e.g., housing and infrastructure) or for loans and other financial assistance to individual firms. In part because of the

potential of new information technologies to

weaken and restructure the economy of the urban

core, a new kind of urban policy effort may be

needed, one that is focused sharply on economic

development in general, and on business development in particular. As a result, a major thrust of the

new urban economic development should be

building up the capacity and competitiveness of

business in the central city and inner suburbs.

Moreover, urban economic development should

rely less on tax incentives, low interest loans, and

provision of buildings and infrastructure, and

more on helping small- and medium-sized business owners and managers improve their management and financial skills, access to technology,

and workforce training levels. There are a number

of urban economic development initiatives that

will be important, including promoting urban

manufacturing, developing minority entrepreneurship, and using technology proactively.

Though the particular limitations of federally

supported economic and community development efforts can be addressed individually (e.g.,

institute new procedures for targeting, develop

performance standards as part of block grants),

Congress could undertake a major overhaul of

these efforts and create a new approach that addresses all the limitations simultaneously. One

option would be to create a consolidated urban development initiative (see box 2-1 in chapter 2).

This could be in one department, such as HUD or

Commerce. Or, to give the initiative more flexibility and a fresh new start, it could be housed in a

13 The General Accounting Office, “Community Development: Comprehensive Approaches Address Multiple Needs but Are Challenging to

Implement,” GAO/RCED/HEHS-95-69 (Gaithersburg, MD: February 1995).
18 | The Technological Reshaping of Metropolitan America

newly created, quasi-public National Urban Economic Development Corporation. Either entity

would operate as a comprehensive, performancebased, flexible urban development program and

would house all current federal urban economic

and community development programs, including EDA and CDBG. The organization’s main

role would be to make competitive challenge

grants to states and cities, perhaps with a share of

the funds going to states and a share directly to cities. In addition, it could play a catalytic role to

stimulate the development of other urban initiatives, particularly in partnership with foundations

and the private sector, and to help develop partnerships between states, suburban jurisdictions and

cities.

States and cities would compete for grants for a

multi-year period, with funding being renewed

each year based on performance. Initial funding

could be based in part on need and level of distress, and in part on the degree to which proposals

were strategic as opposed to ad hoc; comprehensive instead of piece-meal; regional in nature rather than local; and based on partnerships rather than

going it alone. Funding could be for a wide array

of projects, activities, or organizations. Moreover,

a portion of the city funds could be allocated on a

metropolitan basis in order to promote regional

cooperation and develop regional solutions. By

basing allocations in part on performance, the federal government could provide flexibility at the

state and local level, yet use market forces to drive

performance improvement among grantees, and

also create incentives for state and local grantees

to meet federal objectives. Because more disadvantaged communities may not have the resources

to design as effective programs or craft as effective

proposals, such a system could have provisions

built into it that reward performance in part on the

level of improvement shown by a jurisdiction.

❚ Developing Partnerships and

Metropolitan Linkages

In an era of reduced federal resources; increased

capacities at the state, local, and private (non-profit and profit) levels; and greater variation and diversity between places, federal policy needs to

focus less on simply providing funding to a large

number of places through grant and other programs, and more on intervening strategically in

the metropolitan development system. As a result,

it will be important to encourage state governments and industry to proactively be a part of the

solution to urban problems. Moreover, though

economic development will be important in urban

cores, both to provide breathing room during this

transition and to capitalize on the opportunities

provided by technological change, relying on economic revitalization of the core alone is unlikely

to be successful. Stronger linkages between all

parts of the metropolitan economy are needed now

that one of the defining features of the post-industrial metropolis is that it is not a collection of

small, nearly self-sufficient economies, but is a

truly metropolitan-wide economy (see chapter 3).

As a result, federal policy should encourage efforts that use region-wide resources and efforts to

solve urban core problems.

One important role for the federal government

is to catalyze partnership efforts between the private sector and firms and communities in distressed parts of metropolitan areas, partly by

documenting what is going on and then publicizing what can be learned from them.14 Even with

adequate federal funds, urban policy efforts would

be less than fully successful if they did not tap into

the expertise and creativity of the private sector.

Federal policymakers need to consider working

with trade associations, large corporations, and

other business organizations to explore the extent

14 Michael E. Porter, “The Competitive Advantage of the Inner City,” Harvard Business Review, May-June 1995, pp. 55-71.
Chapter 1 Summary | 19

to which efforts that firms find profitable also help

revitalize urban economies, and to help catalyze

such efforts.

In addition, the design of federal policies has

not adequately recognized that the defining feature of the post-industrial metropolis is that it is a

metropolitan-wide economy. It is important that

federal policy promotes efforts that link the opportunities in the growing outer suburbs with the

needs of the urban core, especially jobs. There are

several ways to do this.

First, the federal government can provide incentives for municipalities in metro areas to work

together to promote growth in core areas. The Intermodal Surface Transportation Efficiency Act

(ISTEA) and the Clean Air Act Amendments,

which require regional solutions to metropolitan

problems, are precedents for this approach. Effective regional planning will also help to overcome

the fragmentation of land use planning in American metropolitan areas. As a result, Congress may

want to encourage the Administration to review,

perhaps through the National Economic Council,

the extent to which existing federal programs hinder or encourage regional cooperation at the metropolitan level. In addition, it could require that

states and cities receiving federal funds for activities such as transportation, economic development, and housing establish metropolitan-wide

development councils to work to minimize uneven development.

Second, many federal and state-funded programs are operated by separate organizations in

suburban and central city areas. For example, the

Job Training Partnership Act (JTPA), the major

source of federal training funds, is usually organized into multiple Service Delivery Areas

(SDAs) with the central city SDA separate from

suburban ones. The lack of a regional structure

makes it difficult to craft metropolitan-wide training, placement, and transportation solutions for

employment. Instead of providing services

through federally funded organizations now set up

at the county or city level, Congress could encourage the formation of metropolitan-wide organizations to manage, or at least coordinate efforts. For

example, Congress could provide incentives under the JTPA program for Service Delivery Areas

(SDAs) to cooperate across SDA boundaries.

More proactively, Congress could consider requiring that Service Delivery Areas be consolidated to the metropolitan level.

Finally, even though economic development in

the core appears able to provide some jobs in the

core, dispersion of jobs will nonetheless continue

because of the technological changes described in

this report. As a result, urban core residents need

access to jobs throughout the metropolitan economy. This was not a problem when the poor and unemployed lived near large concentrations of jobs,

either in the downtown or in core city industrial

areas, and the metropolitan labor market was by

and large synonymous with the central city. However, as jobs decentralize, particularly jobs that

provide opportunity for people with less education, policies that recognize the metropolitan nature of the economy are needed. Thus, one

strategy for economic development is to overcome isolation by developing and maintaining

connections to growing suburban labor markets.

There are three main components of a metropolitan-wide employment accessibility policy. First,

people in central city areas may need job training

to prepare them for suburban jobs in back office

operations, light manufacturing, or retail. Second,

effective job information systems are needed to

match city workers with job openings in the suburbs. Finally, central city workers need transportation to suburban jobs and they are often dependent

upon car pooling or public transportation.

HUD has begun a pilot program, “Bridges to

Work,” to link unemployed and under employed

in central cities to jobs in the suburbs. Six cities

have been chosen for a four-year demonstration

project to begin at the end of 1995. Total funding

will be $25 million over four years. To further

these efforts, Congress could fund the “Bridges to

Work” program, and based on its findings, expand

the program to more cities and more participants.

In addition, it could provide tax incentives to suburban employers who provide van pools or other

transportation for disadvantaged urban core resi-
20 | The Technological Reshaping of Metropolitan America

dents. Possible forms of incentives could include

tax credits for van service to existing transit or bus

lines, and accelerated depreciation of the vehicles.

❚ Reducing Subsidies to Peripheral

Development

Even though urban economic development policies can be improved, their full effect will be hindered because outlying and core jurisdictions

often do not compete for investments on equal

terms. In a number of respects, including infrastructure and transportation, new development in

places with lower densities is often more expensive, yet pricing policies often do not reflect these

differences. Federal tax policy also appears to favor suburban as opposed to core areas. In many

ways, the actions of the public sector, including

the federal government, distort the locational decisions of the market. The failure of market prices

to reflect full costs, including externalities, means

that price signals are being given that further stimulate urban sprawl and dispersed development.

Dispersed development is cheaper than it would

be if it paid its full costs, and core development is

more expensive. Moreover, such development

patterns appear to systematically weaken the development prospects of the urban core.

Though only preliminary empirical research

has been done, it does appear that development on

the edge of metropolitan areas, particularly sprawl

development, does not pay for itself, and is instead

subsidized by others (e.g., local taxpayers in the

core, consumers in a region, and state and federal

governments). Several important subsidies include the provision of incentives by local and state

governments to businesses locating in prosperous

suburbs, the costs imposed on urban core brownfield redevelopment, and the underpricing of

physical development (e.g., roads, sewers, etc.) in

low-density, peripheral development. Moving to

reduce or eliminate these subsidies and instituting

full-cost pricing policies for peripheral development appears to be a step in the right direction, although the magnitude of these subsidies or the

impact of their elimination on metropolitan

growth patterns is not known.

Although dispersed development weakens the

economic prospects of the core, unduly restricting

development in the outer suburbs or exurban locations through such mechanisms as growth controls may be economically inefficient. However,

an array of mechanisms, including marginal cost

pricing, development levies, and full-cost recovery regulations, use the market’s own signal

mechanism—price—to encourage a more cost-effective urban development pattern. However,

these mechanisms are in themselves incomplete

because they address only localized and direct

costs, not the region-wide social, economic, and

environmental costs of excessive suburbanization

and inner city decline. For that to occur, mechanisms that internalize external costs onto development are also needed.

A number of policies could move in this direction. First, options to encourage pricing of services to reflect marginal differences in the cost of

providing services (such as telecommunications,

cable TV, electric power) depending upon location, could increase costs in outer locations and reduce costs in the central city. Second, policies to

internalize externalities could help reduce the unfair cost advantage outer suburb and exurban sites

currently enjoy. For example, enforcing the Clean

Air Act provisions regarding trip reduction in

nonattainment metropolitan areas is likely to

benefit urban core locations because transit access

is greater there. Similarly, congestion pricing for

driving would require automobile drivers to pay

for the costs of increased traffic congestion that

they impose on other drivers. Third, reforming tax

treatment of home ownership could be beneficial

to core areas. The homeowner mortgage interest

tax deduction currently favors the well-housed

and encourages large building lots, both of which

favor outer suburbs where home ownership rates

are higher and lots are larger.

However, without further and more definitive

information, it is not clear how important subsidies are to encouraging peripheral development.

Therefore, one option would be to task HUD to

undertake a major study to assess the nature and

extent to which public policies at all levels of gov-
Chapter 1 Summary | 21

ernment inadvertently subsidize suburban and exurban development, particularly at low densities,

and what policy steps could be taken to reduce or

eliminate these subsidies.

Second, curbing industrial recruitment incentives, particularly by fast-growing and prosperous

areas, is an important urban policy. It is one thing

for companies to leave the center city to move to

the outer suburbs because land costs or rents are

cheaper. Market forces are operating well here.

However, it is quite another thing when financially well-off suburban jurisdictions provide financial incentives (free land, reduced taxes) to induce

companies to move out of the city; financially

strapped urban core jurisdictions cannot afford to

counter such incentives. Though most federal economic development programs contain prohibitions against funding firms to move from another

community, the CDBG program does not. As a result, one option would be to apply anti-pirating

provisions to all federal economic development

programs. More fundamentally, Congress could

link federal funding for economic and community

development inversely to the amount of incentives jurisdictions offer. States and cities (particularly growing ones) that spend money on

incentives for relocating firms might have the

amount of federal economic development funding

reduced by some proportion, depending on the degree to which they provide more incentives than

other states.

Finally, more so than outer suburbs, inner suburbs and central cities (or new firms locating

there) are burdened with the costs of cleaning up

contaminated lands because, in many cases, those

responsible for the contamination cannot pay.

Brownfields pose a number of problems, including cost, liability, delays, and uncertainty, all of

which discourage their development. While removal of these impediments would not solve all

redevelopment problems for these sites, it would

help. There are a number of federal policies that

could improve the prospects for brownfield redevelopment, including modification or clarification of liability issues, and EPA delegation of

authority to states.15 In addition, the federal government could provide funds to communities for

assessment and cleanup of sites with strong prospects for development.

15 U.S. Congress, Office of Technology Assessment, The State of the State of Brownfields (Washington, DC: OTA, June 1995).
Issues

and

Policy

Options

he United States is in the midst of a technological revolution that is leading to an ever more spatially dispersed and

locationally footloose economy and, as a consequence, is

reshaping America’s metropolitan areas (see chapters 4

through 8). Under these conditions, many older, higher-cost metropolitan areas, central cities and inner suburbs are experiencing

job loss and disinvestment. Moreover, the existing skills mix of

urban, suburban and rural economies is changing. Goods production, transportation and distribution jobs, and routinized service

jobs are decentralizing to metropolitan peripheries and to middlesize and smaller metros. In contrast, higher-skill professional and

managerial jobs are more likely to remain in urban cores and suburbs of larger metropolitan areas.

These changes create benefits and opportunities, including

greater efficiency (as industry locates in the lowest-cost locations), increased opportunities for people to live in the suburbs,

and potentially decreased commuting times.1 However, the new

development patterns pose challenges that have important public

policy implications. First, the changes are likely to bring about

ever-larger, more sprawling, and less densely populated metropolitan areas, creating problems of inadequate transportation,

added infrastructure costs, and poor environmental quality. Second, some places will not successfully adapt, and will continue to

suffer disinvestment and job loss leading to underutilization of

the built environment, reduced central city agglomeration benefits for industry, and increased poverty, ghettoization, and fiscal

1 Moreover, this wave of information technologies has the potential to lead to significant improvements in productivity, particularly in the services sector.

| 23
24 | The Technological Reshaping of Metropolitan America

problems for local governments. Moreover, the

combination of the higher skills needed in the new

economy in the suburbs, and the large, growing

population of lower-skilled and often minority

residents in urban cores is likely to exacerbate

economic and social problems. Overall, rapid

technological change reinforces uneven development patterns, both between and within metropolitan areas.

Federal urban policy has been built on a number of assumptions since World War II, including a

strong federal role, the idea of a mass-production

metropolis with most employment concentrated

in the core, a focus on remedying market

imperfections through direct government action,

and an emphasis on housing, social services, and

physical redevelopment. Based on these assumptions, the federal role in addressing the problems

of the industrial metropolis has largely been devoted to operating programs to provide funds.

In the era of the post-industrial metropolis, federal urban policy needs to become smarter and

more strategic, focusing on shaping the institutional, regulatory, and fiscal environment influencing uneven growth patterns. Especially in

an era of reduced federal resources, increased capacities at the state, local, and private (non-profit

and profit) levels, and increased variation and diversity between places, federal policy needs to focus less on simply providing funding to a large

number of places through grant and other programs, and more on intervening strategically in

the metropolitan development system. Federal

funding is still needed, in part because it can provide important levers to shape the behavior of other institutions. The federal role, however, needs to

encompass several critical functions not now being performed:

 providing incentives for other players (e.g.,

states, suburban governments, core city governments, non-profits, and business) to strategically devote their own resources to solving

problems of uneven development between and

within metropolitan areas;

 assessing how other non-urban federal policies

(e.g., environmental regulation, tax policies,

telecommunications policies) contribute to uneven development and, if feasible, working to

minimize their negative impacts;

 assessing how non-urban federal programs

(e.g., manufacturing modernization programs,

business finance programs) could be better targeted to support more even development;

 supporting new innovative institutions, including in the private sector, that promote urban

economic development; and

 increasing efforts devoted to evaluation, demonstration, and technical assistance so that the

state-of-the art of federal, state, and local urban

economic and community development efforts

is continually advanced.

The chapter discusses three new approaches to

federal urban policy (see table 2-1). The first emphasizes new approaches to economic development in urban core areas (including central cities

and inner suburbs). As discussed below, past federal policy has not emphasized job creation and

enterprise development in urban areas as a solution to disinvestment, poverty, and the fiscal problems of urban governments. If this current wave of

technological change were leading to increased

centralization of economic activities, there would

be little need to try to stimulate economic growth

in these areas. However, because technology is

leading in the opposite direction, it may be an appropriate federal role to assist affected cities and

suburban communities, in large part to give them

the time to adjust to these changes and reduce the

transition costs (for people, industries and governments) of moving from the old mass production

metropolis to the post-industrial metropolis (see

chapter 3). One important avenue toward this is to

ensure that a broad range of federal economic development policies focus on these areas. Moreover, it will be important that federal policies

recognize the latest and most innovative economic development approaches and not only encourage communities to adopt these, but also modify

their rules and regulations to allow communities

to do so.

Second, while economic development will be

important in urban cores, both to provide breath-
Change Change

Impact in in state/

on federal local

federal $ role role

IMPROVING ECONOMIC AND COMMUNITY DEVELOPMENT EFFORTS

1 Increase funding for economic and community development M-L N N

2 Target more funds to distressed cities and suburbs.

■ require that EDA spend more of its funds in urban areas N M N

■ tighten CDBG funding formulas N M M

3 Increase targeting of SBA loan programs to minority-owned businesses and businesses in distressed urban core N s s

areas.

4 Require cities to spend an increased share of federal funds in distressed neighborhoods N s M

5 Provide incentives for cities and states to focus programs on distressed places and disadvantaged persons. N s M

6 Base state and local funding on performance:

■ allocate a share of block grant funds based on selected performance measures of the grantee N M M

 ■ create a competitive, challenge-grant program combining all federal economic and community development funds. N L M

7 Encourage EDA or HUD to do more to support innovative efforts, perhaps funding an office of strategic economic de- S M s

velopment

8 Consolidate existing urban economic and community development programs into one program into one agency or

institution.

■ move more toward consolidated block grants. N L M

■ create a competitive, challenge-grant program combining all federal economic and community development funds. N L M

9 Target a greater share of federal funding to more comprehensive, innovative economic development organizations.

■ encourage HUD to fund more innovative economic development institutions, perhaps through funds distributed on a N s M

performance basis.

■ broaden the applicability of activities under Title 1 in EDA to allow funding for innovative economic development N s M

programs or activities.

10 Increase support for Community Development Corporations (CDCs) and other similar comprehensive, locally-based

 development organizations.

■ Increase funding for HUD’s National Community Development Initiative M s M

 ■ establish a quasi-public corporation to fund community-based development Organizations. M L M

11 Target a greater share of NIST’s manufacturing outreach efforts urban areas. N M s

(continued)
Change Change

Impact in in state/

federal local

federal $ role role

DEVELOPING PARTNERSHIPS AND METROPOLITAN LINKAGES

12 Encourage federal policymakers to work with trade associations, large corporations, and other business organizations s M M

to catalyze efforts to revitalize distressed urban economies

13 Provide incentives for local governments in a metropolitan area to cooperate.

■ encourage the Administration to review existing federal programs as to the extent to which they hinder or encourage N s M

regional cooperation at the metropolitan level.

■ require that states and cities receiving federal funds in areas such as transportation, economic development, and N M L

housing establish metropolitan-wide development councils that work to minimize uneven development .

14 Encourage the formation of metropolitan-wide organizations to manage federally-funded efforts. N M L

15 Increase support for mobility to work programs.

■ fund the “Bridges to Work” program, and based on its findings, expand the program to more cities and more partici- M s M

pants.

● provide tax incentives to suburban employers who provide van pools or other transportation for disadvantaged M s s

urban core residents.

REDUCING SUBSIDIES TO PERIPHERAL DEVELOPMENT

16 Require that HUD assess the extent to which public policies subsidize suburban and exurban development, particular- L N N

Iy at low densities.

17 Develop policies to reduce state and local industrial incentive bidding wars.

■ prohibit executive branch agencies from entering incentive bidding contests for the attraction of federal facilities. S s N

■ apply anti-pirating provisions to all federal economic development programs. N

 ■ encourage the Secretary of Commerce to convene a meeting of state economic development directors to try to N

s M

s M

reach an agreement to stop, or at least significantly curb the practice.

■ require city and state recipients of federal economic and community development funds to report all subsidies given N M L

to relocating firms

■ reduce federal funds to states and communities for economic development in proportion to recruitment incentives N M L

offered

■ subject state and local incentives to federal taxation. + s M

18 Foster cleanup and redevelopment of urban brown fields:

■ establish programs to fund brownfield assessment and cleanup. M M s

● establish a “Brown field IRA” that would allow small and medium-sized companies to put aside tax free money that M s s

must be spent for cleanup

N= none; S= small; M= moderate; L= large; + = increased revenue flow
Chapter 2 Issues and Policy Options | 27

ing room during this transition and to capitalize on

the opportunities provided by technological

change, relying only on economic revitalization

of the core is unlikely to be successful. In most

places the strongest parts of the post-industrial

metropolis are selected outer suburbs, and even

exurban areas. Linking these growing and buoyant economies with urban core economies will be

particularly important. One avenue involves increasing regional planning, cooperation, and linkages in metropolitan areas. One critical strategy

will be to increase the ability of urban core residents, particularly disadvantaged residents, to get

jobs in the growing suburbs.

Finally, while the first two policy approaches

work to provide additional assistance to places

where market forces may not be producing socially desirable outcomes, it is important that market

prices themselves give the right signals for development, so that they do not lead to a bias against

development in more dense inner suburbs and

central cities. Though only preliminary empirical

research has been done, it does appear that development on the edge of metropolitan areas, particularly sprawl development, does not fully pay for

itself, and is instead subsidized by others (e.g., local taxpayers in cores of large, sprawling cities;

consumers in the region; and state and federal

governments). Several important subsidies include the provision of incentives by local and state

governments to businesses locating in prosperous

suburbs, the cleanup costs borne by developers of

contaminated lands in urban cores (brownfields),

and the underpricing of physical development

(e.g., roads, sewers, etc.) in low-density, peripheral development. Although the magnitude of these

subsidies or the impact of their elimination on

metropolitan growth patterns is not known, moving to reduce or eliminate these subsidies and

institute full-cost pricing policies for peripheral

development appears to be a step in the right direction.

This chapter first discusses the rationale for

why federal policymakers should be concerned

with metropolitan areas, and in particular, uneven

development patterns within and between them. It

then discusses a range of broad guiding principles

or approaches that could guide federal urban

policy. Next, it examines urban economic development policies and offers a number of options for

improvement, including increased targeting,

greater incentives for better performance, more effective coordination at both the federal and local

level, and increased efforts at business development. Policies to link urban core economics with

growing suburbs are then discussed. Finally, the

last section examines policies to reduce or eliminate subsidies to suburban and exurban growth,

particularly low-density growth.

THE BASIS OF CONCERN WITH UNEVEN

DEVELOPMENT

Before examining policy options for metropolitan

areas, we ask why policymakers at the national

level should care about metropolitan development

patterns. There are at least three reasons for concern: 1) the efficiency of the national economy; 2)

the economic and social hardships experienced by

some people in some urban economies; and 3) the

nature of the federalist system, which results in

some cities and states not adequately addressing

urban decline, especially poverty.

Uneven development at the regional level

means some metropolitan areas (metros) grow

very fast while others stagnate or lose jobs and

population. Uneven development at the metropolitan level means growth, prosperity, and congestion in some parts of the metropolitan area, and

decline, poverty, and underutilization in other

parts. For many metropolitan economies, particularly those that have not successfully made the

transformation to the dispersed city, their growth

is characterized by uneven development. Technological change is likely to further exacerbate uneven development patterns.

Uneven development can reduce the efficiency

of the national economy because some places are

declining and have excess capacity, while others

are growing and spending to add new capacity.

When some metropolitan areas or parts of a metropolitan area suffer dislocation and decline, some

factors of production are moved and can be used

elsewhere. Some firms may relocate, either to oth-
28 | The Technological Reshaping of Metropolitan America

er metros, or to other parts of the metropolitan

area, taking their capital, expertise, and even their

machinery with them. Some workers may do the

same. However, firms cannot move their buildings, nor can workers move their homes. Public

and quasi-public infrastructure, such as hospitals,

utility networks, schools, roads, sewers, and

bridges, is likewise immobile. As a result, when

all or part of a metropolitan area undergoes economic dislocation leading to out-migration, many

houses, factories, and offices and land remain vacant or underused, and public infrastructure is underused. This premature writedown or less than

full use of public and private resources imposes

costs and reduces the efficiency not only of the declining area, but also of the U.S. economy as a

whole. No one argues that all inefficiencies can be

squeezed out of a dynamic economy. However,

some inefficiencies are self-correcting, or easily

corrected, and others are not. Metropolitan economic decline may lead to inefficiencies of the latter kind, even at the national level.

With urban decline, local spending on social

services usually increases and, because of a smaller tax base, tax rates often increase, leading to fiscal difficulties that are today evident in many

central city and inner suburban governments. A

reduced tax base in the medium term means that

less is spent on city services, including infrastructure, transportation, police protection, and education. This can in turn lead to increases in

congestion, crime, and other negative externalities, while reducing educational levels and some

of the benefits to firms of agglomeration economies. As a result, further rounds of outmigration

occur, threatening to create a downward cycle, one

Myrdal has characterized as cumulative causation.2

If the departing industries or workers move to

areas that are growing—either outer suburbs or

other metropolitan areas—the growing community either has to incur costs to pay for new infrastructure (e.g., bigger hospitals, widened roads),

or put further strains on already overextended resources, thereby causing increased transportation

congestion and delays, overcrowded schools, and

other inadequacies in public services. Private resources are strained as well, increasing the price of

land, housing, labor, and offices.3 Businesses

competing in international markets bear some of

these increased costs. Moreover, uneven utilization of resources limits the ability of the Federal

Reserve Board to lower interest rates and otherwise stimulate the economy as much as it might,

because growing places threaten to overheat the

economy. The less uneven development, the faster

the U.S. economy as a whole can grow.

Urban economic decline imposes social, psychological, and physical distress as well as economic costs. Such stress can weaken the

community fabric so that redevelopment becomes

more difficult. Moreover, urban decline has led in

many places to expanded ghettoes and increased

poverty, making advancement even harder for

those living in these areas4 (see chapter 3). The

health of the residents can suffer, and crime and

other social disorders can increase. Moreover, increased costs (e.g., health insurance, prisons) can

be borne by all consumers and taxpayers.

Finally, assuming that public policy action to

respond to urban economic distress is desirable,

the question remains as to whether this is necessarily a federal responsibility rather than solely a

state or local one. One byproduct of the federalist

system in the United States is that states and cities

2 The theory of cumulative causation, first proposed by Gunnar Myrdal, suggests that economic decline is not always self-correcting. Rich

Lands and Poor (New York, NY: Harper and Row, 1957).

3 One study of 103 Massachusetts communities found that local per-capita expenditures were highest in both rapidly declining cities and

rapidly growing cities. One reason local public expenditures increase with growth is that the cost of providing services for new households is

often higher than the revenues they provide. Helen Ladd, “Municipal Expenditures and the Rate of Population Change,” in R. Burchell and D.

Listokin, (eds.), Cities Under Stress (Rutgers, NJ: Center for Urban Policy Research, 1981) pp. 351-68.

4 William J. Wilson, The Truly Disadvantaged (Chicago, IL: University of Chicago Press, 1987).
Chapter 2 Issues and Policy Options | 29

compete for jobs and residents, and so must keep

taxes low, especially when revenues are targeted

for redistribution to distressed cities or parts of cities. As a result, many states are reluctant to spend

much money to address urban problems, because

doing so runs the risk of raising taxes. Cities and

suburban communities that want to address problems of uneven development within their borders

may not have the revenue to do so, since increasing taxes for this purpose runs the risk of exacerbating business and middle-class flight. Even

states and cities that have the fiscal capacity to

help rebuild urban economies may not have the

political will to do so. In many state legislatures,

the power of urban constituencies is weak, making

it difficult for states to help cities.5 In addition,

Governors often respond to more influential suburban or rural constituencies. Similarly, many

mayors and local elected officials emphasize services and economic development assistance for

prospering areas of the city, particularly the downtown, in part because the political costs of not

helping distressed areas are low, and in part because they perceive this as the most effective strategy for improving the tax base.6

A federal role appears to be appropriate on two

grounds. First, there is inter-state and inter-city

competition to keep expenditures low. Second, in

many cases city or state governments would like

to do more to help distressed local economies or

parts of economies but cannot justify these actions

politically. Being able to point to the federal government as requiring these actions or providing

matching funds for them can establish needed, and

sometimes welcome, political cover. An appropriate federal urban policy provides incentives and

motivation for states and localities to address

these issues and provide a framework for viable

partnerships, not only between all levels of government, but most importantly involving the private sector, non-profit organizations, and citizens.

URBAN POLICY APPROACHES

❚ People or Places

There is an historical debate about whether urban

and regional policy should target people directly

or instead target distressed places.7 People policies focus on helping people regardless of where

they live, and include, for example, welfare reform, helping people move to get jobs, and portable housing vouchers. In contrast, place policies

focus on helping people in particular places, and

include, for example, enterprise zones, health

clinics in poor areas, and publicly assisted housing. The people vs. place choice has, unfortunately, usually been stated in stark terms, with

policymakers expected to choose one or the other.

A more effective approach appears to be to combine the best elements of place- and people-oriented policies into a coherent approach to address

the problems of distressed urban places and their

residents.

There are at least three broadly defined ways to

address the problem of economically disadvantaged places and persons in urban areas, with the

first focusing on people, the second on both, and

the last on place: 1) assist people in moving out of

depressed local urban economies; 2) help local

residents gain access to jobs in suburbs; and 3) revitalize depressed local urban economies. All

three approaches are premised on the notion that

geography matters in terms of economic opportunity.

Clearly some people move from declining metros to growing ones, and from declining neighborhoods to more prosperous ones, and early

evidence suggests that these strategies can in5 For example, in the small-city Community Development Block Grant (CDBG) program administered by states, there was significant variation among states in terms of degree of targeting on the most distressed places, and a majority of states did less well at targeting CDBG funds

than did the federal government. Michael Rich, Federal Policymaking and the Poor (Princeton, NJ: Princeton University Press, 1993).

6 Phyllis A. Furdell, “Poverty and Economic Development: Views from City Hall” (Washington, DC: National League of Cities, July 1994).

7 Robert Wood, “People Versus Places: The Dream Will Never Die,” Economic Development Quarterly, vol 5, No. 2, May 1991, pp. 99-103.
30 | The Technological Reshaping of Metropolitan America

crease the economic and social well-being of the

movers.8 However, not all people can or will avail

themselves of this option. The poor may not be

able to afford housing in the suburbs and they face

other barriers. Even for people who can afford to

move, many long-time residents are committed to

their neighborhoods and communities and do not

want to move.

The second approach focuses on helping

people in distressed areas get jobs in the growing

suburbs. Usually, mobility-for-work programs

train residents of disadvantaged areas for jobs in

the suburbs, help them become aware of job openings, and facilitate transportation to the jobs. The

major advantage of this approach is that it focuses

on where most of the new jobs are. (They are usually growing fastest in the suburbs.) A limitation

is that it is not clear that urban residents will be

able to get enough of these jobs. Moreover, commuting long distances to the suburbs can be costly

and time consuming.

The third approach is place-based and focuses

on revitalizing depressed local urban core economies through, for example, empowerment zones,

business development programs, and provision of

infrastructure to urban core areas. The pros and

cons of this approach form the subject of the first

half of this chapter.

Any discussion of revitalizing urban core economies must acknowledge there are many factors

that contribute to the problems of the urban poor,

including a lack of good jobs, discrimination, a

culture of poverty, drug abuse, crime, and low

education levels and poor schools. As technology

restructures urban core economies to become

more service oriented and more highly skilled, increasing the skills and education levels of urban

residents will be increasingly important. To compete and continue to provide jobs for residents, cities will have to do a better job of preparing their

young people for employment. Thus, one important public policy for central city areas is improving central city public schools.

Although these social factors are important elements of the economic and social decline in some

of these places, there is widespread agreement that

factors related to economic decline and restructuring also play a significant role.9 Since this report

concentrates on how technologies are reshaping

the geography of metropolitan economies, the

emphasis is on place-based economic development policies.

Moreover, any attempt to formulate urban

policy options must recognize that it is not reasonable to expect any one option to be the complete

solution. In many cases, advocates tout their own

particular policy solution (e.g., moving to opportunity, enterprise zones) as the solution to the

problem and criticize all other options. A more

realistic view is that no one policy option will provide the answer. Rather, a wide range of policy options and approaches, each contributing

something to making cities better and their residents better off, has a better chance of success.

This does not mean that some approaches don’t

work better than others, but rather that the solution

to a multifaceted problem must itself be multifaceted.

❚ Major Approaches to Urban Policy

Place-specific policies offer Congress a number of

overlapping choices on how to address uneven development between and within metropolitan

areas.

Reduce Funding and Ensure That Accurate

Price Signals Are Sent

Congress could significantly reduce funding of

current programs and hope that existing market

8 For example, the Gautreaux project in Chicago, where a random sample of public housing residents was relocated to suburban locations, is

cited as having led to economic and social advancement for the participants. Mary Lou Gallagher, “HUD’s Geography of Opportunity,” Planning, July 1994, p. 12.

9 Wilson, op. cit., footnote 4.
Chapter 2 Issues and Policy Options | 31

forces will send the right price signals at the right

strength. Such a course has several advantages.

First, it minimizes federal expenditures. Second,

it is consistent with market forces that may by

themselves yield solutions. As urban areas decline

and suburban and exurban growth increase, cost

differentials between the core and the edge will

decline. Land costs will decline in the core and increase on the edge. Commuting will become more

difficult on the edge and easier in the core. Densities will decline in the core, perhaps with some

abandoned areas of cities devoted to open space,

while densities on the edge will increase.

However, for three reasons, market adjustments alone are not likely to produce economic recovery in all metros or parts of metros in the near

future. First, it can take a long time for prices to

fall far enough to put adjustment into motion.

Moreover, unlike consumers who may readily

shift to lower-priced items, most firms will not

necessarily move to declining areas to take advantage of lower costs, not only because the costs of

relocating are substantial, but because other noneconomic factors (e.g., crime, blighted environment) reduce the attractiveness of the area. In

addition, workers have non-economic ties to

neighborhoods and localities that make it hard for

them to move when local economies decline. Other factors may make it difficult for urban residents,

particularly minorities, to move to suburban locations.

Second, economic decline may never be selfcorrecting. When it is sustained and significant it

can create a vicious circle that makes a city progressively less competitive. As financial, human,

and civic resources shrink, investment in public

and private infrastructure falls. Reduced spending

on education and training, transportation, and other public infrastructure makes the city less attractive to new investment, in turn causing further

economic decline. Caught in a downward spiral, it

may be impossible for a community ever to regain

its former level of prosperity and quality of life unless it gets help.

Third, there are many tax, regulatory, and

policy factors that hinder accurate price signals

from being sent. These distortions appear to systematically tilt development toward suburban and

rural areas (see chapter 8). Part of the problem

arises from the conventional practices of subsidizing (directly and indirectly) new development in

lower-density outer suburban and exurban areas.

For example, the cost of providing phone service

to fringe, low-density suburban development is

higher than providing phone service to the central

business district, yet monthly rates are set the

same by regulation. In addition, part of the problem is that there is no effective system for allocating the external costs to the people and businesses

that generate them. These externalities, including

increased expenditures on infrastructure, increased traffic congestion, pollution, reduced

open space, and abandonment of property in central cities and older suburbs, are not usually borne

by those who choose dispersed development.

Policies that reduce subsidies (e.g., changes in

telecommunications pricing policies) or internalize externalities (e.g., Clean Air Act Trip Reduction Programs) to greenfield development might

be profitably employed. Prices would rise if lowdensity areas were forced to pay the real marginal

costs of these services.10 Similarly, limiting the

ability of suburban and state governments to provide subsidies to attract industry from urban core

areas would not only help retain industry in cities,

it would save cities money. These policies have

the advantage of not costing the federal government much.

Economic Incentives

Congress could rely on economic incentives to encourage residents and businesses to locate in

weaker inner suburbs and central cities. For exam10 United States Congress, Office of Technology Assessment, Technology and the American Economic Transition: Choices for the Future

(Washington, DC: U.S. Government Printing Office, 1988).
32 | The Technological Reshaping of Metropolitan America

ple, some have proposed significantly reducing

federal income taxes on residents of central cities.

Similarly, empowerment zone and enterprise

community programs rely in part on tax exemptions and credits to make distressed parts of cities

more attractive. Such mechanisms have several

advantages. First, they can pump significant resources into older central cities and inner suburbs;

moreover, as residents or industries prosper, they

will spend more, multiplying the jobs and investment in the city. Second, these mechanisms let individuals and businesses make decisions on how,

where, and when they will relocate.

However, these approaches suffer from three

principal drawbacks. First, they can be expensive

and difficult to target. For example, reducing federal income taxes on the residents of central cities

by 10 percent would cost the Treasury tens of billions of dollars. Likewise, the empowerment zone

program has made $2.5 billion in tax incentives

available to firms locating in the six zones. Moreover, in many central cities, particularly more

prosperous ones and ones that have grown significantly through annexation (many Sunbelt cities,

and some northern cities such as Indianapolis and

Columbus), the portion of the city or its residents

who are distressed can be quite small, leading to a

diffusion of benefits to areas or people that do not

need it. Moreover, the benefits go not only to residents or industries that move to the area because of

the incentives, but also to those already there or

who would have moved there without the benefits.

Second, in many places incentives may not be

enough to overcome problems in the business and

residential environment, including crime, inadequate infrastructure, poor education, minimal urban services, and regulatory barriers (including

Superfund regulations regarding reuse of contaminated land; see chapter 9). It is likely that firms or

individuals will locate in distressed places with a

large enough incentive, but that amount may be

very high in some places. In fact, the amount may

be larger than the firm’s or resident’s entire tax

bill, so that forgiving all the taxes may not be sufficient to induce location in the targeted places.

Third, even if incentives attract residents and

industry, it does not necessarily follow that disadvantaged people will be helped. For example,

though empowerment zone job creation tax credits are tied to zone residents, disadvantaged residents of the zone may not be hired in them,

especially if they lack skills or other qualifications.

Continue the Status Quo

Congress could continue current programs, either

at current or reduced levels. However, many of

these programs were built up and designed to respond to problems of the mass production metropolis, when most of the jobs in the metro were in the

core. Technology is transforming this pattern, and

as a result, new policies should reflect this new

reality. Moreover, urban policy has focused on

providing adequate housing, social services, and

in some cases community infrastructure. However, if information technology is weakening core

economies, responding to the needs of people in

these places will require either widespread outmigration to more economically healthy places, or

increased economic development. Moreover,

while current programs do help cities and their

residents, the problems of poor housing, poor

neighborhoods, and poor urban services stem in

part from the low incomes of disadvantaged urban

residents.

Sharpen the Focus on Economic and

Community Development

Congress could sharpen the focus on community

and economic development as a way to revitalize

lagging metros and parts of metropolitan areas

and provide jobs for low- and moderate-income

residents. Urban economic development refers to

the attraction, creation, or expansion of businesses

within metropolitan areas. As discussed in chapter

4, technological change is reducing some of the

competitive advantage central cities once held. In

addition, it appears to be moving blue collar jobs

away from urban cores and contributing to the increase in skills required by many urban jobs. Reduced economic activity is leading to under-
Chapter 2 Issues and Policy Options | 33

utilization of the built environment in many cities

and to increased local government fiscal stress.

Moreover, many low- and moderate-income residents without the education needed for many urban jobs are finding it difficult to advance

economically.

Economic development in urban core areas

could lead to several benefits. First, as more industry is attracted, created, or expanded in core

areas, land and building use will rise. Second, increased industry and commerce will help urban

residents advance economically. Finally, economic development can improve the tax base and fiscal health of urban governments, which in turn

could improve services, including schools, public

safety, and public housing.

The place-oriented, economic development

policy approach has been criticized on a number

of grounds. The first criticism is that as jobs are

decentralizing to the suburbs, a policy of job creation in urban core areas swims against an inexorable tide. Similarly, people are moving out to the

suburbs in search of opportunity. Expanding urban policy to include access by central city residents to suburban jobs is an important component

of any effective policy effort. (However, not all

residents or businesses can leave core areas, nor

do they want to.) But many core areas are losing

jobs, particularly lower skilled jobs, and this is

often occurring for reasons that are amenable to

public policy, such as labor force skills, tax rates,

regulatory structure, and land availability. Moreover, as the current of decentralization of people

and jobs flows on, there are hundreds of efforts to

foster economic development in America’s cities

that are based on a strategic look at the new environment and the strengths and weaknesses of the

community to determine the best role it can play in

the new metropolitan economy.

Second, many believe the federal government

has tried to promote urban economic development

in the past and has failed, and therefore current efforts are doomed to fail. However, historically, the

dominant focus of U.S. urban policy has been on

redistributive measures to provide economically

disadvantaged urban residents with services (e.g.,

income support, social services) or to provide

housing and build infrastructure. Much less was

spent on economic development. Moreover, that

spending has declined over the last 15 years.

Third, much criticism is based on the view that

government does not create jobs or know how to

promote economic development effectively. In

fact, it does appear that many efforts at economic

development have been poorly conceived or targeted. However, the field of economic development has evolved significantly in the last decade,

largely through innovative efforts at the local and

state level. These efforts have developed and

tested a wide range of new approaches on a limited

basis, but they are not yet widely deployed.11

Many of the approaches rely on private organizations and industry to carry out economic development, with the public sector playing a catalytic

and supportive role.

Fourth, some argue that helping distressed core

economies is a zero sum game that does little to

help the overall economy, because jobs are simply

shifted from one area to another. For example,

many criticize empowerment zones for generating

jobs at the expense of other areas. This criticism is

valid when economically strong communities (either growing metropolitan areas or healthy suburbs) use inducements to recruit industry,

particularly from distressed areas. In these cases

not only are no new jobs created, but congested

places get more congested and costs go up, and

distressed places suffer even more. In contrast, as

Bartik has shown, when distressed places attract

industry, it helps the U.S. economy by evening out

differences in regional economic capacities and

allowing the national economy to grow at a faster

rate with less fear of inflation.12 The national un11 Robert D. Atkinson, “The Next Wave in Economic Development,” Economic Development Commentary, Spring 1993.

12 Tim Bartik, Who Benefits From State and Local Economic Development Policies (Kalamazoo, MI: Upjohn Institute for Employment

Research, 1993).
34 | The Technological Reshaping of Metropolitan America

employment rate of 5.5 percent (March 1995)

masks significant regional differences with rates

of 2.7 percent in Raleigh-Durham, and 8.5 percent

in New York City.13 Such differences in regional

capacity utilization mean that national economic

policymakers are constrained in boosting U.S.

growth for fear of inflation in places with low unemployment. Moreover, creation of jobs in depressed areas generates increased demand for

goods and services produced outside the areas,

creating new jobs throughout the economy.

❚ Federal Economic and Community

Development Initiatives

There is a common perception that, since the

1960s, federal urban development policies have

focused largely on economic development, particularly of distressed communities within cities,

and that these efforts have failed.14 Yet, few if any

urban development programs since the 1960s

have explicitly targeted economic development,

and overall, policy has made only limited efforts

to implement economic development in the inner

city.15 Yet, urban core areas of many metropolitan

areas are increasingly at risk of economic decline

as information technologies allow an increasing

share of the economy to operate at distance and become more footloose. As a result, urban policy

may need to take economic factors more into consideration and build up the productive component

of the inner city. A key to this strategy would be to

focus on developing the locational advantages of

the inner city for businesses and enable the private

sector to play a more active role.

Historically, the nature, perception, and response to urban problems has differed. From 1948

to the early 1960s, the federal response to urban

problems was primarily to provide housing and to

clear and assemble land through the Urban Renewal Program. In the late 1960s to early 1970s,

HUD’s Model Cities program focused on distressed places within metropolitan areas. But

funding was limited (in 1972 it was equivalent to

approximately $1.5 billion in 1995 dollars), widely dispersed (to 150 cities) and mostly spent on

education, housing, health, social services, and infrastructure in poverty neighborhoods, with only a

small share going for economic development.16 In

1974, the Community Development Block Grant

program (CDBG) was created to consolidate a

number of housing and community development

grant programs. Today, it is the major federal community development program. Outlays peaked in

1981 at $4.042 billion and in 1994 were $3.651

billion.

The Urban Development Action Grant program was established in 1977 to make direct

grants to cities, in part because of the difficulty in

using CDBG funds for economic development,

particularly large-scale physical development

projects. During its 12 years of operation

(1978-1989) it awarded $4.6 billion to assist about

3,000 economic development projects in more

than 1,200 cities.17 UDAG mostly provided financial incentives (usually loans) for larger-scale

projects, usually involving development or redevelopment of offices or retail stores; most communities did not (or could not) fund such projects

with CDBG funds, which were used more for

neighborhood renewal. Funding peaked at $675

million in FY 1981. Over 90 percent of UDAG

funds went to central cities (with half of that going

13 Unemployment rates are even higher in some small metropolitan areas such as Fresno, CA (15.4 percent) and McAllen, Texas (17.1

percent). U.S. Department of Labor, Bureau of Labor Statistics, Employment and Earnings, vol. 42, No. 5, May 1995.

14 Nicholas Lemann, “The Myth of Community Development,” New York Times Magazine, Jan. 9, 1994, pp. 26-31; 50; 54; 60.

15 Michael Porter, “The Competitive Advantage of the Inner City,” Harvard Business Review, May/June 1995, pp. 55-71.

16 Morton Schussheim, The Modest Commitment to Cities (Lexington, MA: Lexington Books, 1974).

17 Michael J. Rich, “UDAG, Economic Development and the Death and Life of American Cities,” Economic Development Quarterly, vol. 6,

No. 2, May 1992, pp. 150-172.
Chapter 2 Issues and Policy Options | 35

to downtown projects), and most went to places

with high levels of economic distress.18 UDAG

was praised for its ability to target money to distressed places, to strengthen public-private partnerships, and for contributing to a large number of

development projects. Critics of UDAG believed

that the program subsidized large developers and

firms, such as large hotel chains, who did not need

the subsidy. In addition, some criticized the program for building large-scale real estate development projects, often in the central business

district. These projects provided economic activity, but they may not have directly addressed the

economic needs of urban core residents.19

Today, four departments or agencies provide

assistance for urban economic development:

HUD, the Economic Development Administration (EDA) in the Department of Commerce, the

Small Business Administration, and the Treasury

Department.

HUD

HUD operates two major programs for urban economic and community development, the Community Development Block Grant program (CDBG),

and the Empowerment Zone and Enterprise Communities Program. In addition, they operate several smaller programs.20

 The CDBG program allocates grants on a formula basis to entitlement communities (cities

with more than 50,000 population and selected

urban counties) and to states for distribution to

non-entitlement communities on a discretionary basis. Funds can be used for a variety of purposes, including housing rehabilitation, energy

conservation, public services and facilities, infrastructure, business financing, and commercial revitalization. In 1995, funding was

approximately $4.6 billion.

CDBG has long been criticized by local and

state government officials for being difficult to

use for economic development because of overly restrictive rules and regulations governing

use of funds. CDBG rules have recently been

relaxed, making it somewhat easier to use for

economic development.21 However, funding is

still tied to job creation and retention, which

can make it hard to fund activities such as industrial service organizations, because establishing a direct link to job creation is difficult.

Moreover, according to some city officials, the

new rules have not gone nearly far enough in removing the impediments to putting in place

flexible and innovative economic development

efforts.

In 1994, HUD established its Economic Development Initiative (EDI) to encourage

CDBG recipient cities to undertake more economic development activities. The program

provides grants that can be used as a match for

the Section 108 Loan Guarantee program. Under Section 108, communities can obtain loan

guarantees from HUD to finance economic development and large-scale physical development projects that create jobs for low- and

moderate-income people. Communities can

18 Ibid.

19 Bernard Friedan, “Who Gets the Jobs in the New Downtown,” The Future of National Urban Policy, Marshall Kaplan and Franklin James

(eds). (Durham, NC: Duke University Press, 1990).

20 Two smaller HUD programs also target community development. In 1994, HUD committed $20 million to the National Community

Development Initiative to leverage $120 million from a consortium of foundations and a private insurance company, with the funds going to

community-based nonprofit groups working to revitalize distressed communities, largely through provision of housing. The John Heinz Neighborhood Development Program provides grants to community organizations to create jobs; develop, rehabilitate or manage housing; and deliver services. In 1994, HUD awarded $4.8 million to 75 organizations, an average of $64, 000 per organization.

21 On January 5, 1995, HUD published new rules in the Federal Register detailing these changes. For example, a worker a company hires is

now presumed to qualify as having a low or moderate income if he or she lived in a census tract in which at least 70 percent of the residents have

low or moderate incomes. Moreover, upon development of a neighborhood revitalization strategy through the consolidated Plan, communities

gain further flexibility in use of CDBG funds for economic development.
36 | The Technological Reshaping of Metropolitan America

borrow up to five times their annual CDBG allocation. However, because many communities are hesitant to pledge CDBG funds as

collateral, partly because of the risk involved,

but also because of the regulatory difficulties in

using CDBG for economic development, HUD

created EDI. Under the EDI program the Department awards grants to communities to use

as collateral for loans. In FY94, HUD awarded

70 grants for just under $50 million dollars (an

average of $714,000 per grant), and in conjunction with these grants HUD will provide these

communities with nearly $413 million in loan

guarantees. In FY1995, approximately $300

million was allocated, with most of it going to

the supplemental empowerment zones (Los

Angeles—$125 million; Cleveland—$87 million). So far, there have been no defaults to

banks through use of the 108 program, largely

because the communities’ CDBG funds are

used as collateral. However, HUD does not

know the rate of project default. To date, funds

are used largely for capitalizing revolving loan

funds or for financing commercial and industrial rehabilitation projects. HUD also recently

proposed a “Leveraging Investments for Tomorrow” (LIFT) program, which would have

been targeted as project gap financing for community-based economic development real estate projects. However, the program was not

funded.

 Empowerment zones, borrowed from an earlier

British initiative and similar state government

programs, assist local governments in attracting new business and investment to inner cities

by providing tax incentives to firms locating in

a designated zone and by providing funds for

employment and other social programs within

the zone.22

The Omnibus Budget Reconciliation Act of

1993 (Title XIII, Chapter 1) established the

Empowerment Zone/Enterprise Communities

program. The zone area or combination of areas

meeting certain population, size, and poverty

criteria required joint nomination by the local

government and state(s) in which it is located.

These areas can be characterized as having pervasive poverty, unemployment, and general

distress. The legislation allowed the Administration to designate six urban and three rural

communities as empowerment zones (EZs),

and up to 100 as smaller enterprise communities (ECs). From over 500 rural and urban applications, the Administration selected 105

awardees in 1994. Six cities (Atlanta, Baltimore, Chicago, Detroit, New York, Philadelphia/Camden) were designated as EZs (with

Los Angeles and Cleveland being designated

as supplemental EZs) and 60 urban ECs were

selected. Each urban EZ is slated to receive

$100 million, and each EC is to receive $2.95

million through the Social Services Block

Grants administered by the Department of

Health and Human Services. These grants can

be used to fund a variety of economic, social,

and community development activities as determined by community residents. In addition,

the Treasury Department will administer $2.5

billion in tax credits to EZs. Businesses that

qualify and operate in EZs will be eligible for

employer wage credits of up to 20 percent on

the first $15,000 of wages paid to certain zone

employees, increased deductions for plant and

equipment (section 179), and new tax-exempt

bond financing.23 Businesses that qualify and

operate in ECs will be eligible only for the taxexempt bond financing incentive. Because programs have only recently been established, it is

22 Barry M. Rubin and Craig M. Richards, “A Transatlantic Comparison of Enterprise Zone Impacts: The British and American Experience,” Economic Development Quarterly, vol. 6, No. 4, November 1992, pp. 431-443. See also Stuart Butler, Enterprise Zones: Greenlining the

Inner Cities (New York: Universe Books, 1981).

23 Bruce K. Mulock, “Empowerment Zone/Enterprise Communities Program: Background and Analysis of Economic Issues,” Congressional Research Service, Apr. 12, 1995.
Chapter 2 Issues and Policy Options | 37

too early to evaluate results. However, many of

the principles underlying the EZ/EC program,

including thinking strategically, developing integrated solutions across programs, crafting regional partnerships, and connecting planning

with implementation, are consistent with what

many experts believe are the foundations of

solid urban economic development efforts.

Economic Development Administration

The Economic Development Administration

(EDA) in the Department of Commerce was established in 1965 to aid economically distressed

regions, and soon became the flagship federal

agency for regional economic development. EDA

principally funds local public works construction

projects (e.g., industrial parks, access roads, sewer lines), in large part to enable communities to attract new industry. EDA also provides grants to

communities facing sudden economic distress, increasingly to respond to military base closures,

and funds technical assistance and economic research. Current grant funding of $379 million is

down from $900 million (1995 dollars) in 1980.24

Historically, about 70 percent of EDA funds have

been spent in rural areas and small cities, while 30

percent has been spent in larger metropolitan

areas; even less has been spent in distressed central cities or inner suburbs. In 1994 EDA did propose, but did not implement, a Competitive

Communities program to support high-growth industries in distressed urban communities.

The Small Business Administration

SBA provides financing and technical assistance

to small businesses, some of them minorityowned, and some located in urban core areas. The

agency’s primary financing program, the 7(a) loan

guarantee program, guaranteed more than 36,000

loans in FY94 for a total of more than $8.1 billion.

However, the program is generally targeted neither to urban areas nor to minority businesses in

distressed areas.25 Moreover, SBA programs have

focused on small-scale “mom and pop” retail and

personal service industries, which do little to revitalize urban economies as a whole or to create

significant numbers of jobs.26

SBA’s 504 program is a fixed-asset financing

program for existing businesses, providing longterm, fixed, below-market rates. SBA will fund up

to 40 percent of a loan, with a bank or other financial institution providing 50 percent, and the borrower 10 percent. SBA requires that one job be

created or retained for every $35,000 of SBA

funds. The loans are packaged and administered

by approximately 280 SBA-certified Certified

Development Companies around the country. In

FY95, approximately 4,000 loans, for a total of

$1.5 billion, will have been made.

The Community Development Finance

Initiative

Administered by the Treasury Department, CDFI

was established by Congress in September 1994

to provide capital to either existing financial institutions that specialize in community development

lending, or to seed new organizations that are proposing to do this type of work. In contrast to traditional lenders, the express purpose of

community-oriented financial institutions is to

make loans and other investments to individuals

and businesses located in economically distressed

places, usually, but not exclusively, in cities.

CDFI was modeled in part on the successful experience of the South Shore Bank in Chicago, a community development bank and development

organization that has worked for over 20 years to

help revitalize the South Side of Chicago. While

South Shore was seen as a successful model, it has

not been widely duplicated across the country, in

24 Fiscal Year 1995 funds include $194 million for public works, $37 million for planning and technical assistance, and $105 million for

defense conversion activities.

25 Daniel Immergluck, “Moving to Economic Development: A New Goal for SBA Loan Programs” (Chicago: Woodstock Institute, 1995).

26 Porter, op. cit., footnote 15.
38 | The Technological Reshaping of Metropolitan America

part because though it does not lose money, its rate

of return is not high enough to attract money from

traditional equity capital markets. Yet, because the

activities involved (community development in

distressed places) provide benefits beyond those

accruing to the borrower or bank alone, there may

be some economic justification for government

support of these activities. As a result, CDFI was

created to help stimulate more community development lending organizations.

In addition to South Shore, there are a number

of other models of community-oriented lending.

For example, the Community Capital Bank in

New York City is an insured bank that is oriented

to making loans in low-income communities in

New York. Community Development Credit

Unions, of which there are several hundred, serve

low-income neighborhoods. In addition, there are

also community development loan funds focused

on business development, micro-enterprise loan

funds, and community development venture capital funds. Finally, for-profit and not-for-profit

multi-bank CDCs are usually formed and invested

in by a number of conventional banks as part of

their Community Reinvestment Act (CRA) obligations.27

CDFI is a competitive program authorized to

provide a variety of assistance, including grants,

equity investments, loans, deposits (to insured

institutions), and technical assistance to community-oriented financial institutions. Though the

program received funding in FY 1995 of $125

million, $75 million was rescinded. The program

plans to announce its first round of funding availability in mid-October 1995. Of the $50 million,

two-thirds will go to CDFI. Recognizing that all

communities have different needs, the program

will fund a variety of different types of institutions. However, given the proclivity of community development finance institutions, including

South Shore, to focus largely on housing and personal finance, it is not clear that these organizations will focus extensively on business

development financing.

The other one-third of the funds will go to the

Bank Enterprise Award program that provides incentives to traditional banks and lenders to invest

in community development finance activities.

Banks propose a set of activities during an assessment period, and if this exceeds their similar lending during a prior baseline period, they may be

eligible for grants. One advantage of this program

is that it may get banks more oriented and used to

community development lending, encouraging

this practice after the grant period is over. However, the program also runs the risk of providing

subsidies for activities the banks would have done

through their Community Reinvestment Act

(CRA) obligations. Moreover, because the grants

are likely to be small, they may simply reinforce

what banks were already doing, as opposed to encouraging them to engage in new types of activities.

IMPROVING ECONOMIC AND

COMMUNITY DEVELOPMENT EFFORTS

Federal support for economic and community development appears to play an important role in

helping urban communities design and carry out

strategies to address poverty, abandonment, and

economic distress. However, there is considerable

room for improvement. There are several problems with current federally supported economic

and community development initiatives:

 Though the number of distressed places has increased in the last 15 years, federal funding has

decreased.

 Reduced funds could be better targeted to distressed areas.

 Funding formulas for many programs provide

few incentives for improving local grantee performance.

 Efforts are piecemeal and uncoordinated.

27 John Sower and Beverly L. Milkman, “The Bank Community Development Corporation: An Economic Development Tool for the Nineties,” Economic Development Quarterly, vol. 5, No. 1, February 1991, pp. 3-8.
Chapter 2 Issues and Policy Options 139

■ Most economic and community development

funds are either for physical revitalization projects (e.g., housing and infrastructure), or for financial assistance to individual firms. There is

no strategy to build up private and non-profit

institutions to promote economic and community development in distressed inner suburbs

and central cities.

● Even when business and managerial assistance

is provided to firms, many organizations are

not well suited to operate programs that provide services to industry.

To address these shortcomings, a number of

policy options are listed in the following sections

of this chapter.

■ Federal Funding Levels for Economic

and Community Development

Federal funds for economic development have declined in real dollars over the last 15 years. For example, HUD outlays for community development

(including Urban Development Action Grants)

fell from $4.13 billion in 1980 to $3.68 billion in

1994, a decline of over 45 percent in inflation-adjusted dollars.28 At the same time, the needs of cities and inner suburban communities grew. For

example, between 1969 and 1989, the poverty rate

of CDBG grantees in a sample that accounted for

80 percent of funds allocated in 1989, increased

from 14.1 to 17.8 percent.29 Moreover, the current

wave of technological change is likely to further

reduce the competitive advantage of many of

these places over the next 20 years.

Congress could increase funding for

economic and community development targeted to

distressed urban places.

■ Targeting Federal Economic

Development Funds

Given the reduced federal resources for economic

and community development, it becomes even

more important that the remaining resources be

targeted to areas that are actually distressed.

Though increased targeting to a fewer number of

more distressed places risks losing widespread

political support for programs, shotgun approaches to federal economic and community development not only diffuse the resources too

broadly, but also risk subsidizing development in

prosperous places at the expense of distressed

places.

Targeting to the Most Distressed Places

A not insignificant share of CDBG and other economic development funds is spent on places with

relatively low levels of distress and need (such as

relatively well-off suburbs) and projects that have

few benefits for low- and moderate-income

people. For example, between 1975 and 1989 the

share of CDBG funds going to the most distressed

cities declined from about 50 percent to about 36

percent, while the share going to cities that were

best off doubled (to about 11 percent) .30

Similarly, SBA programs appear to be poorly

targeted to firms in distressed places or to minority-owned firms. For example, the SBA 504 program provides some extra benefits to firms in

distressed areas. Firms located in labor surplus

areas (as defined by the Department of Labor), redevelopment areas (usually rural or small metropolitan areas defined by the Economic

Development Administration), or state or federal

enterprise/empowerment zones must create one

job for every $43,000 (instead of $35,000) of SBA

28 Budget of the United States Government: Fiscal Year 1996 (Washington, DC: U.S. Government Printing Office, 1995), table 12.3.

29The Urban Institute, “Federal Funds, Local choices: An Evaluation of The Community Development Block Grant program’” (Washington, DC: HUD Office of Policy Development and Research, 1995).

30 Michael J. Rich, “Targeting Federal Grants: The Community Development Experience” in Community and Economic Development:

Rethinking the Federal Role, Congressional Research Service, May 6, 1992.
40 | The Technological Reshaping of Metropolitan America

funds, and the SBA loan limit of $750,000 can be

increased by 25 percent. Yet, these bonuses appear

to do little to actually target funds to firms located

in more distressed areas.

The SBA 7(a) program appears to be even less

targeted. For example, a recent study of the program conducted in San Antonio, Texas, found that

lending was generally neither targeted to minorities businesses or to businesses located in distressed areas.31 According to the study,

non-manufacturing firms in lower-income zip

code areas received 43 percent of the 7(a) funds,

despite these zip codes having 54 percent of the

metro area sales and receipts. Moreover, according to the study, after the recent introduction of the

SBA Low Documentation program (LowDoc)

that allowed an increased number of loans to be

made for under $100,000, lending patterns favored firms in well-off areas even more. For example, while lending to firms in lower income

areas increased 44 percent after the introduction of

the LowDoc program, it increased by 110 percent

in upper income areas.32

It is difficult to justify the public purpose of

SBA loans that are not targeted sectorally, spatially, or demographically. SBA and other publicly

assisted business finance programs are often justified for their job creation benefit. However, it is

not clear that providing funds to any and all business serves that goal. For example, providing

funds to a local serving business (e.g., restaurant,

retail store) located in an economically growing

community may result in the firm creating jobs,

but the net job creation in the community and the

nation is likely to be zero, as the expansion will

simply take business away from firms that would

have expanded after receiving private financing at

less favorable rates. Moreover, with an unemployment rate of below 6 percent in 1995, and Federal

Reserve Bank policies that appear to resist letting

this rate decline any further, such job creation policies appear to be a poor use of public funds. A

more effective use would be to target these funds

for explicit public purposes. Though there appear

to be several possible public purposes for SBA

loans, including boosting productivity, increasing

international competitiveness of firms, and assisting disadvantaged individuals or distressed

places, the current system of simply providing

loans to any and all firms that apply (provided

they create jobs and are financially viable), diffuses the effectiveness of the program.

Targeting Distressed Neighborhoods and

Disadvantaged Persons

Targeting needy communities is important to

make federal economic and community development expenditures more effective, but results will

be diminished if the money is not spent on the

poor areas of the community and the poor residents. Some cities have been able to target their efforts at relatively distressed neighborhoods and

disadvantaged areas. However, many city governments appear to spread federal funding, including

CDBG funds, out to a wider range of neighborhoods, including those with low levels of distress.

Moreover, cities are pressured to spend federal

grants on regular functions of local government,

including those in higher-income areas.33 For example, Michael Rich, in a study of Chicago, documented that when restrictions on neighborhood

targeting of CDBG funds were relaxed in the early

1980s, most of the increased CDBG funds went to

middle and high income neighborhoods.34 In contrast, targeting to the most distressed areas did increase significantly when Harold Washington

31 Daniel Immergluck, op. cit., footnote 25.

32 Because this study focused on just one metropolitan area, further research is needed to analyze lending patterns in other areas.

33 Peggy L. Cuciti, “A Nonurban Policy: Recent Public Policy Shifts Affecting Cities,” The Future of National Urban Policy, Marshall Kaplan and Franklin James, (eds.) (Durham, NC: Duke University Press, 1990).

34 Rich, op. cit., footnote 5.
Chapter 2 Issues and Policy Options | 41

became mayor, suggesting that local politics can

affect significantly the degree of targeting.35

Community development officials from several

large cities that OTA visited discussed the political pressures that led them to disperse funds

throughout the city instead of spending them on

the most distressed areas. In addition, even when

cities spend federal money in distressed areas,

they often reduce general fund expenditures there;

thus federal funds substitute for local funds rather

than augment them.

Currently 50 percent of the beneficiaries of

each CDBG project must be low- and moderateincome persons (defined as households with incomes less than 120 percent of median income in

the region). Moreover, 70 percent of projects must

meet this criterion. If a project benefits a majority

of low- and moderate-income residents, then all of

that money is counted as benefiting low- and moderate-income people, even though higher-income

people also benefit. This all or nothing method of

accounting for benefits leads to an overestimation

of targeting to needy people. Theoretically, as

high as 65 percent ((100 percent minus (50 percent

times 70 percent)) of the beneficiaries of a community’s CDBG allocation could be higher-income people. Moreover, many communities,

particularly suburban, spend HUD funds on what

HUD calls special populations, particularly the elderly and the handicapped, to qualify. One argument against targeting to the neediest persons is

that cities want to attract the middle class back

into cities, and overly strict targeting provisions

would hinder their efforts.

Encouraging Cities to Target Their Own

Funds

Some cities with strong economies have been able

to focus economic development policies on enhancing opportunity. For example, the city of

Charlotte, North Carolina, focuses its economic

development programs on alleviating poverty.

However, most cities’ economic development

programs do not strongly target distressed areas.36

For example, even though half the elected officials in one survey reported that poverty is a serious problem in their city, most reported that

economic development activities are not directed

specifically toward reducing poverty.37 For example, the economic development programs in one

large, fast-growing southwestern city are directed

almost entirely toward recruiting new industry to

the region, and the lion’s share of these jobs went

to outlying areas far from the large disadvantaged,

mostly Hispanic, community. In another big

northeastern city, economic development programs are crafted largely to boost economic

growth in the region, with little or no thought given to how the benefits of that growth could be used

to enhance economic opportunity for disadvantaged residents.

Many cities do not target their economic development programs on needy places or people, in

part because the most vocal and organized constituency for economic development is the segment

of the local business community that benefits

most directly from growth—the businesses that

strongly depend on sales within the metropolitan

area (e.g., local media, retail stores, utilities, and

local banks). For example, a survey of elected officials of 188 large cities by the National League

of Cities found that 48 percent of officials thought

that promoting economic development was more

important to their chances of getting reelected

than reducing poverty, while 2.9 percent felt the

opposite, and 49 percent viewed them as equal.38

When areas are already growing, promoting economic development, especially by attracting

35 Ibid.

36 Furdell, op. cit., footnote 6.

37 In two surveys of local officials on local economic development goals, addressing issues of poverty ranked lowest. Ibid, and Ann Bowman, “The Visible Hand: Major Issues in City Economic Policy,” (Washington, DC: National League of Cities, 1987).

38 Furdell, op. cit., footnote 36.
42 I The Technological Reshaping of Metropolitan America

firms from other areas, is inefficient from the national perspective and can increase congestion,

raise housing and land costs, and increase costs to

businesses, especially to those exporting products

outside the region.39 Appropriate development

policies depend on strong involvement by local

residents and businesses negatively affected by

growth, but political factors often limit such involvement.

As a result, the degree of targeting that is appropriate depends on the condition of the local and

regional economy. In cities that are losing jobs, increasing employment benefits all groups, including low- and moderate-income residents, even if

the jobs are not specifically targeted to them. In

contrast, in cities that are growing, there is less rationale for not targeting jobs specifically to lowand moderate-income persons and distressed

neighborhoods.

There are several measures Congress could

take if it wanted to increase targeting.

Change funding formulas so that a

greater share of funds go to distressed cities and suburbs. Congress could:

Require that EDA spend more of its funds in urban areas. Currently approximately 80 percent

go to rural areas and small cities. However, as

discussed in chapters 4-7, technological change

is not likely to lead to significant enhancement

of rural economic prospects, so diverting economic development funds from rural areas may

not be appropriate.

Tighten the formula for allocation of CDBG

funds so that fewer funds go to well-off and

growing jurisdictions.

Increase the targeting of SBA loan programs (both 7(a) and 504), so that a greater percentage

of loans serve minority-owned businesses (see below)

and businesses in distressed urban core areas. Congress could:

Require SBA to develop better definitions of

distressed places used in the 504 program,

since the use of unemployment rates in counties does not adequately provide incentives for

targeting problems of uneven development

within metropolitan areas. One way to improve

this would be for poverty census tracts to be

used as one indicator of location in distressed

area. Firms located in such areas would be given greater priority for SBA funding, provided

that they meet normal SBA financial standards.

Encourage SBA to make greater efforts to target funds to distressed areas or minority-owned

businesses. Funding or guarantees for banks,

Certified Development Corporations, and other institutions relying on SBA funds could be

based in part on how well they target funds.

SBA regional offices that approve loans could

be required to establish targets for funding minority-owned firms and firms in distressed

places.

Tighten criteria so that cities receiving

federal aid spend more of it on distressed neighborhoods and disadvantaged persons. Congress could:

■ Change the CDBG criteria to focus more on

low- and moderate-income people, perhaps

lowering the definition of low- and moderateincome persons to households below 100 percent of median income and/or requiring that 80

percent of projects have over 60 percent of

benefits going to low- and moderate-income

persons. If Congress does not want to apply

these stricter standards to all places, it could

vary the percentage targets depending on the

unemployment rate in the metropolitan area—

the healthier the economy, the higher the percentages could be.

39 Tim Bartik, Does Local Economic Development Work (Kalamazoo, MI: Upjohn Institute, 1993).
Chapter 2 Issues and Policy Options 143

Federal funding could be used as incentives for cities and states to focus their economic

development programs on distressed p/aces and disadvantaged persons. Congress could:

■

■

Encourage HUD to develop performance indicators on which to allocate additional block

grant funds. One indicator could be the degree

to which cities and states demonstrate a commitment to target their own programs.

Performance-Based Funding

Many federal urban programs (including job

training, housing, and economic development)

provide formula-based block grants to city or state

governments, regardless of the performance of the

grantee. Inmost cases, performance varies significantly between cities or states, with some cities

using federal funds to craft and implement strategic and efficient actions, and others failing to plan

or target, and then operating mediocre programs.

Yet, for both the best performers and the worst,

block grants provide the same amount of money.

Without some kind of market-based competition,

there is less incentive for poor performers to improve.

Currently, some federal programs are based on

competition, including the Empowerment Zone

and Enterprise Community programs and EDA

funding. However, EZ/EC funding is based on the

quality of the grantee’s initial application, and further funding is not based on performance. Political and institutional obstacles in some cities may

result in less than fully effective efforts. Anecdotal

evidence from several cities receiving EZ designation suggests that local performance may vary

significantly, with at least some programs getting

bogged down in politics and bureaucracy. Moreover, in some instances, federal agency delay and

unresponsiveness have not helped matters. The

legislation to establish the program did create an

Enterprise Zone Board headed by the Vice President to coordinate efforts within the federal government and to act as a means by which

communities could seek help in resolving differences with federal agencies.

HUD has taken some steps in the direction of

building performance incentives into CDBG. As

part of Secretary Cisneros’ HUD reinvention plan,

“From Blueprint to Action,” HUD has proposed

consolidating 60 major programs into three flexible, performance-based funds: a Community Opportunity Fund (COF); an Affordable Housing

Fund; and a Housing Certificate Fund. HUD also

proposed that a percentage of program funds be retained for later distribution to reward those jurisdictions deemed good performers. The funds

would be targeted for job creation and brownfield

cleanup (see chapter 9).

However, HUD has made little effort to define

meaningful performance-based standards. For example, some have suggested that one performance

standard be whether communities have spent all

of their CDBG allocation. However, this criteria

would simply reward communities that spend

money, even if the money is spent unwisely. Developing meaningful performance standards can

be quite difficult. Standards must be able to control for the influence of factors, such as regional

recessions, beyond the control of local officials.

Moreover, while standards must be related to outcomes, they must not penalize communities with

fewer resources and expertise, or lead to creaming

by organizations receiving funds. For example,

one complaint leveled against many job training

programs is that they tend to enroll people who are

relatively easy to employ, in order to pump up

their placement rates.40 Similarly, many locally

operated public business finance programs fund

relatively safe deals for fear of having too high a

default rate, although strict federal oversight also

makes cities hesitant to fund more risky deals.

This criticism has also been leveled at SBA financing programs. Such creaming increases the

40 United States Congress, Office of Technology Assessment, After the Cold War: Living With Lower Defense Spending, OTA-ITE-524

(Washington, DC: U.S. Government printing Office, 1992).
44 | The Technological Reshaping of Metropolitan America

risk that public resources are simply substituting

for private.

One reason why performance standards are difficult to develop is because there has been so little

evaluation of local efforts .4] Careful and rigorous

evaluations of urban development efforts are

needed, in particular, evaluation of different strategies (e.g., loan funds, infrastructure, technical

assistance) and approaches (e.g., government run

programs, vouchers, networks). Better evaluation

would lead to a more sophisticated set of indicators, which could help judge performance and

make funding decisions.

Finally, an additional weakness of the current

funding system is that though federal agencies

concentrate on closely monitoring the grantees to

ensure they do not violate procedures or accounting rules, much less is done to help communities

identify and implement the most effective economic and community development strategies. In

short, federal economic and community development programs try to ensure funds are spent efficiently, but not necessarily that they are spent

effective y.

There are several drawbacks to this skewed

priority. First, local grantee flexibility is often severely restricted as the grantees try to comply with

a myriad of federal regulations. Because they are

often second guessed by federal oversight officials, communities often choose safe projects that

may not yield the most economic benefits, but are

assured of getting approved. Moreover, the paperwork faced by local governments in managing

these grants diverts resources from the real work.

For example, there is a risk that the Empowerment

Zone program, while initially designed as a flexible program, could become more rule bound, limiting local flexibility and initiative. Second,

relying on rules enforced from Washington to secure objectives in distant communities is difficult.

Communities can find a myriad of ways to bend

the rules to allow them to do what they want.

In spite of the difficulties in developing

effective performance indicators, there are several

steps Congress could take. Congress could:

■

■

Modify existing block grant programs so that

communities would receive a minimum

amount based on need (perhaps 50 to 75 percent of current levels). The remainder of the

money would be allocated across all the communities and states based on performance measures (e.g., quality of strategies, percent of

funds meeting national objectives, degree of

matching funds, degree of comprehensiveness,

and measurements of outcomes). Outcome indicators could include such things as reduction

in percentage in poverty (relative to the metro

area), increases in employment, and increases

in first-time housing purchases.

Create a competitive, challenge-grant program

combining all federal economic and community development funds (see box 2-l). Such

grants would be based in part on need and in

part on performance. One advantage of this

would be that it would maximize federal ability

to promote national objectives. However, a

drawback, especially if the grants are based on

responding to grant proposals, is that the more

disadvantaged communities may not have the

resources to design as effective programs or

craft as effective proposals. As a result, such a

system could have built into it provisions that

reward performance in part on the level of improvement shown by a jurisdiction.

Finally Congress might want to ensure

that federal economic development and community

development agencies, in particular HUD and EDA,

place greater emphasis on technical assistance and

evaluation. Congress might:

■ Encourage EDA or HUD to do more to support

innovative efforts, perhaps by providing funding (or reallocating funding) for an office of

41 Bartik, op. cit., footnote 39

.
Chapter 2 Issues and Policy Options 45

Although the particular limitations of federally-supported economic and community development efforts can be addressed individually (e.g., institute new procedures for targeting, develop performance

standards as part of block grants), one option for Congress would be to create a new approach that

addresses all the limitations simultaneously. Such an approach would have several characteristics, it

would:

■ provide increased funding targeted to distressed urban core areas;

■ be comprehensive and avoid piecemeal approaches;

■ be flexible enough for localities to easily and imaginatively use the funds in ways they see as important,

yet would ensure that valid federal objectives would be met;

■ provide incentives for states and communities to change their behavior to better meet incentive requirements.

To do this, Congress could create a consolidated urban development initiative. This could be in one

department, such as HUD or the Economic Development Administration. Or, to give the initiative more

flexibility and a fresh new start, it could be housed in a newly created quasi-public National Urban Economic Development Corporation. This corporation could have a board of directors appointed by the

President and Congress, representing industry, academia, CDCs, community-oriented banks; and,

most importantly, state and local government.

Either entity would operate comprehensive, performance-based, flexible urban development programs Either would house all current federal urban economic and community development programs,

Including EDA and CDBG. Other programs that it might include are the Minority Business Development

Agency and some SBA programs such as the 504 loan program.

The organization’s main role would be to make competitive challenge grants to states and cities

(perhaps with a share of the funds going to states and a share directly to cities). States and cities would

compete for grants for a multi-year period, with funding being renewed each year based on performance. Funding could be for a wide array of projects, activities, or organizations. Moreover, a portion of

the city funds could be allocated on a metropolitan basis in order to promote regional cooperation and

develop regional solutions. Some of the allocation could be based on need, while the rest could be

based on performance. By basing funding on performance, the federal government could not only use

market forces to drive performance improvement among grantees, but could also create incentives for

Inducing state and local grantees to meet federal objectives.

Performance standards could include: 1) demonstrated commitment by the states and cities not

only to leverage their own funds, but also to target the funds to distressed places and disadvantaged

people; 2) efforts of states and cities to promote regional cooperation and initiatives to solve urban core

problems; 3) extent to which states and cities refrain from recruiting firms from outside through financial

incentives, particularly to prosperous, growing areas; 4) degree to which funds are focused on innovative activities, especially non-financial business assistance; 5) degree to which grantees provide services in a comprehensive, as opposed to piecemeal, manner.

In particular, such an organization might make competitive grants supporting locally based, fully integrated, one-stop service centers. These quasi-public centers would provide a wide array of services

(e.g., training, technology, export assistance and management assistance) to help firms in central cities

and inner suburbs expand and compete.

(continued)
46 The Technological Reshaping of Metropolitan America

In order to ensure that grantees are meeting the performance standards and yet avoid onerous rules

and regulations, awarding and management of grants could be based on negotiated agreements between the organization and the states and localities. For example, the organization could assign one

person to serve as a program officer for a small number of states (5 to 10) and metros (10 to 25, depending on the size) to work cooperatively with the cities and states, in part to help develop ongoing

strategic economic development plans These officers would be able to focus on assuring that funding

is spent to solve local problems effectively, not just on complying with rules, In part, DOD’s Office of

Economic Adjustment plays a similar role in helping regions deal with the economic impacts from defense cuts

The organization would also provide technical assistance and evaluate what works, It could employ

a small cadre of the leading economic and community development experts to study best practices in

economic development, to support demonstration and rigorous evaluation, to examine trends and

changes in economic conditions that affect regional and local development, and finally, to effectively

disseminate this knowledge to states and localities, Moreover, this group could help lagging performers

improve their performance so as to qualify for increased funding,

Finally, the organization would play a catalytic role to stimulate the development of other urban initiatives, particularly in partnership with foundations and the private sector.

strategic economic development, whose job

would be to learn from best-practice economic

development efforts around the country and to

diffuse that knowledge to economic development organizations throughout the nation.

❚ Coordination of Federal Economic

Development

There is considerable agreement that comprehensive approaches to community development are

more effective than piecemeal ones.42 Yet, historically, federal economic and community development policy has been the province of a number of

different agencies and within each, a large number

of individual programs. According to GAO, the

federal government assists distressed urban communities and their residents through at least 12

federal departments and agencies.43 The Departments of Labor and Health and Human Services

help people enter the labor market by providing

training and human services. The Small Business

Administration (SBA) and the Minority Business

Development Agency in the Department of Commerce both try to promote minority business.

Twenty-four programs provide technical assistance to business. 44 At least six Departments provide economic development assistance.

This proliferation of programs causes a number

of problems. First, because these agencies rarely

work together, their programs cannot reinforce

one another. Second, organizations at the local

level must deal with a plethora of programs and

agencies, making it difficult for localities to obtain assistance. Third, the crafting of comprehensive, integrated solutions at the local level is

difficult, because each federally funded program

42 U.S. Congress, General Accounting Office, Community Development: Comprehensive Approaches Address Multiple Needs but Are

Challenging tO Implement, GAO/RCED/HEHS-95-69 (Gaithersburg: MD: U.S. General Accounting Office, February 1995).

43 Ibid.

44 U.S. Congress, General Accounting Office, U.S. Government Aid to Business, GAO/GGD-95-3FS, (Gaithersburg: MD: U.S. General

Accounting Office, October 1994).
Chapter 2 Issues and Policy Options | 47

has its own rules, eligibility requirements, and

boundaries. Moreover, the overlap, specialization, and duplication at the federal level fosters

similar conditions in most metropolitan areas.

As a result, efforts to improve the economic

prospects of distressed urban areas and the lives of

disadvantaged people in cities are an amalgam of

separate subsystems, usually with very little overlap, cooperation, or coordination.45 These subsystems include:

 Economic development. These efforts are

usually run by city governments or private sector coalitions and are typically focused on specific enterprises, and in some cities are directed

at the revitalizing the CBD. Their major goal is

usually economic growth of the region, even if

the region is growing rapidly, as opposed to

overcoming uneven development within the region.

 Community development. These efforts,

often run by housing activists and community

development corporations, and supported by

banks and foundations, usually focus on housing, some small-scale retail development, and

community services. Often these efforts revolve around CDBG funds.

 Job training. The mission of these programs is

to train and place disadvantaged residents;

funding is by the Department of Labor.

 Transportation. The efforts to use transportation to promote economic development (e.g.,

by such means as providing transit services to

assist disadvantaged inner city residents to

commute to suburban jobs) are often run by regional or local transportation officials and supported by Department of Transportation Funds.

 Health and social services. These programs,

often supported with HHS funds, provide direct services to people who are in poverty.

 City services. Cities provide basic services, including police, fire, water, and garbage, as well

as investments in infrastructure.

Unfortunately, each of the subsystems is driven

by different funding sources, different definitions

of the customer, and different organizational and

political imperatives. Because of this, in most cities, these parties usually work in isolation from

one another, each addressing a part of the problem,

but seldom in a synergistic manner.46 Public programs rarely operate as full-service, one-stop

shops. This smorgasbord makes it difficult to craft

comprehensive strategies with mutually reinforcing components. As a result, an important function for federal urban policy in the post-industrial

metropolis will be to enable and encourage local

delivery organizations to craft integrated and strategic economic development solutions that link

business development, job training, community

development, transportation, and human services

into a holistic framework.47

HUD has taken some steps to coordinate and

consolidate its efforts, and has increased funding

for comprehensive community-based organizations. It has proposed that its current community

development programs be merged into a Community Opportunity Performance (COP) Funds program. COP funds would provide localities and

states with flexible, formula-based funding for

economic revitalization (including housing) and

renewal of distressed communities. In addition,

its Consolidated Plan allows communities to produce just one plan and one application for HUD’s

45 William Schweke and Carol Conway, Proceedings of the Macarthur Roundtable: Reinventing Urban Development Delivery (Washington, DC: Corporation for Enterprise Development, Sept. 26, 1994).

46 Corporation for Enterprise Development, 1995 Entrepreneurial Economy Review: The Path Toward Urban Revival, (Washington, DC:

CfED, 1995).

47 Marc Bendick and Mary Lou Egan, “Linking Business Development and Community Development in Inner Cities,” Journal of Planning

Literature, vol. 8, August 1993, pp. 3-19.
48 I The Technological Reshaping of Metropolitan America

major formula community development programs, including CDBG and several housing programs. One goal of the Consolidated Plan is to

encourage local departments and agencies to become more strategic and to communicate and

cooperate. However, it is not clear how successful

the Plan will be in this respect, as some cities may

view the plan as a pro forma exercise required before obtaining federal funds.

EZ and EC winners also had to demonstrate

how they would coordinate efforts among various

organizations in the cities. The creation of local

empowerment zone boards to oversee efforts is

one attempt to bring some coordination to the

process. However, there is a risk that such boards

may become too top heavy and actually impede

effective action. For example, Detroit has proposed that its Empowerment Zone Development

Corporation board be made up of 50 members.

Consolidate existing urban economic

and community development programs into one program into one agency or institution. Congress could:

Move more toward consolidated block grants.

Existing fragmented block grant and categorical grant programs could be consolidated and

provided to states and cities. For example,

instead of the current project-specific funding

in EDA, Congress could put EDA funds into

two block grant programs-one for states and

the other for cities. The advantage of this approach is that it provides maximum flexibility

to state and local governments. However, it

provides few incentives for state and local government to improve performance or meet national objectives.

Consolidation of programs into an urban development block grant program administered by

the states could be a transitory measure to an

operating regime where states assume full responsibility, including funding responsibility,

for what are now federally-operated urban programs. Such a system would provide maximum

flexibility to the states and could lead them to

spend more to address uneven development.

However, it is not clear, given the added fiscal

responsibilities they are likely to face, that

states would place significant priority on these

problems.

Create a competitive, challenge-grant program

combining all federal economic and community development funds. This could be in one department, such as HUD or the Economic

Development Administration. Or, to give the

initiative more flexibility and a whole new

start, it could be housed in a newly created quasi-public National Urban Economic Development Corporation (see box 2-1 ). One drawback

of such an approach is that it may divert attention and energies from other important issues

such as targeting, fostering local flexibility, and

promotion of more innovative approaches.

New Institutions for Economic and

Community Development

At the local level, one institutional solution to

piecemeal, uncoordinated efforts is to increase

support going to organizations that provide more

comprehensive approaches to community and

economic development.

In the area of community development, one

method to boost coordination is to increase funding of Community and Local Development Corporations (CDCS).48 These locally based, private

non-profit organizations, governed by a board

consisting primarily of neighborhood residents

and business leaders, generally focus on revitalizing distressed areas. They are usually engaged in

one or more types of community development, including affordable housing, commercial and industrial development, and small-scale business

development. In addition to project specific work,

many CDCs often conduct other activities to

48 Corporation for Economic Development, Rebuilding Inner-City Communities: A New Approach to the Nation’s Urban Crisis (Washington, DC: CED, 1995).
Chapter 2 Issues and Policy Options | 49

benefit local areas, including providing social services.

Initially begun in the late 1960s, in part as an

alternative to the federal Community Action Program, these programs focused less on advocacy

and community action, and more on community

and physical development.49 The number of

CDCs has grown significantly, to approximately

2,000, although not all of these serve urban areas,

and many are not very large. According to one survey of over 1,100 CDCs, 88 percent create affordable housing.50 In contrast, only about 25 percent

are involved in economic development, and they

are often engaged in commercial and industrial

real estate activities. Some also operate revolving

loan funds for business development, although

usually on the micro-enterprise scale, since almost 75 percent of loans are under $25,000. Many

CDCs, particularly the larger ones, also provide

other services, such as job training and placement,

child care, health care, youth programs, and anticrime activities.

Funding comes in part from federal (largely

through CDBG), state, and local governments.

However, private foundations, as well as intermediary organizations, such as the Local Initiatives

Support Corporation (initiated by the Ford

Foundation) and the Enterprise Foundation (initiated by James Rouse), provide significant financing. In addition, some banks (in part through

financing that allows them to fulfill CRA requirements) and other private companies invest in

CDCs, particularly in housing projects.

CDCs, particularly the better and more established ones, offer several advantages.51 First, because many are neighborhood based, they are able

to craft more comprehensive solutions that try to

solve an array of problems.52 Second, in the midst

of poverty and despair, many CDCs represent a

hope and enthusiasm that is all too often missing

in distressed urban areas. Because they do more

than just provide housing or jobs in isolation, and

instead also build “social capital,” these organizations can help strengthen the community fabric,

thereby facilitating development.53 In many of

these communities, it is not simply traditional

business location factors (e.g., cost of land, availability of skilled labor) that hinder development, it

is the lack of local leadership and institutions to

create a coherent community that can support and

foster development by the private sector.54 In this

respect, the maturation and expansion of CDCs in

the 1980s has been an important institutional development that can serve as a foundation for the

next steps in urban policy.55

Notwithstanding these strengths, the current

organization of CDCs suffers from several weaknesses. First, in the face of large problems, their

efforts remain small. In many places, CDCs have

only marginal impact. For example, in the late

1980s, the average CDC created approximately 15

units of housing per year.56 However, some of the

49 Mitchell Svirdoff, “The Seeds of Urban Revival,” The Public Interest, Winter, 1994.

50 National Congress for Community Economic Development, Changing the Odds: The Achievements of Community-Based Development

Corporations (Washington, DC: NCCED, 1991).

51 See Avis Vidal, Rebuilding Communities: A National Study of Urban Community Development Corporations (New York: New School

for Social Research, 1992).

52 Bennett Harrison, Marcus Weiss, and John Gant, Building Bridges: CDC’s and the World of Employment Training (New York: Ford

Foundation, 1995).

53 Mitchell Svirdoff, op. cit., footnote 49, pp. 82-103.

54 For a discussion of this as it relates to rural communities hard hit by plant closings, see Michael Hibbard “When the Going Gets Tough:

Economic Reality and the Cultural Myth of Small Town America,” Journal of the American Planning Association, vol. 52, No. 4, 1986.

55 Corporation for Economic Development, op. cit., footnote 48.

56 National Congress for Community Economic Development, op. cit., footnote 50.
50 | The Technological Reshaping of Metropolitan America

more successful CDCs are much larger, and with

more resources, CDCs could certainly do more.

Second, in contrast to much of the rhetoric of the

community development movement, much of

their work has been focused on housing revitalization and construction, and much less on economic

development.57 In part, this has been because

funding by government (through the Federal Low

Income Housing Tax Credit and HUD) and

foundations has been predominately for housing.

However, economic development by CDCs is

growing, although largely oriented to commercial

and retail revitalization. As more and more jobs

move to the suburbs, and unemployment and underemployment rises in distressed areas in core cities, everyone agrees that job creation is

important. Foundations are increasingly supporting economic development, especially commercial revitalization.

While CDCs can play an important role in community development, they appear to be less well

suited for economic development, especially

business development beyond local commercial

revitalization. Yet, other economic development

organizations are also sometimes poorly suited.

Urban economic development programs are often

run by organizations, including city governments,

that are not familiar with industry. As a result,

business development programs are often too bureaucratic, too focused on general information

rather than on real services (e.g., training, access

to technology, management assistance), generally

passive in orientation, and do not develop working relationships with firms.58 Most public agencies have little contact with or knowledge of

business needs. The best programs are customer

oriented, focused on ongoing interaction with the

business client, provide customized services, and

are flexible. Non-governmental (private or quasipublic) organizations often do this best.

These problems are exacerbated by the fact that

economic development programs take a “shotgun” approach to economic development, serving

a wide variety of firms. The lack of sectoral specialization severely hinders service providers

from developing in-depth, comprehensive knowledge about particular industries.59 In many cases,

providers are expected to give assistance to all industries while knowing little beyond the most

general information about market structure,

technology needs, and worker skill requirements.

The generalist approach may serve novice entrepreneurs attempting to open up retail stores, but it

falls far short when it comes to working with firms

operating in intensively competitive and complex

markets. To be competitive, firms need services

that help them address pressing problems. General business development programs are not likely

to provide this type and level of service.

As a result, federal policies could increasingly

support organizations that have closer ties with industry and can provide real services to them. Such

institutions can help small and medium-sized

manufacturing and producer service firms improve quality, product design, productivity, and

market savvy, and thus help them be more competitive. These organizations can also play a role

in bringing key players together and marshaling

the resources of the private sector. This kind of social and economic organization cannot be legislated or mandated: these efforts must emerge from

particular places and particular actors, including

residents, business leaders, universities, federal

laboratories, and local government. However, the

federal government can provide matching funds,

can publicize success stories and other models,

and can provide technical assistance.

Interest in these approaches in part reflects

learning from sub-national European experiences.

57 Robert O. Zdenek, “Investing in Distressed Communities,” Economic Development Commentary, Winter 1993, pp. 17-24.

58 Office of Technology Assessment, op. cit., footnote 40.

59 Mt. Auburn Associates, Jobs and the Poor: Defining and Assessing Sector Economic Development Efforts by the Public Sector, prepared

for the Ford Foundation and Mott Foundation, forthcoming , 1995.
Chapter 2 Issues and Policy Options | 51

For example, in the United Kingdom the central

government has played a direct facilitating role,

not just financially for enterprise zones, but by

providing managerial expertise and creating new

organizational structures, in part by establishing

and funding locally independent urban development corporations.

In Copenhagen, the Technology Institute (one

of 31 technology services centers in Denmark)

was established to help small and medium-sized

industrial firms use advanced technologies. The

Institute not only conducts applications-oriented

R&D, but also provides a wide range of services to

its clients. These include market research, assessment and consultancy on technical and management problems, demonstration of new technologies, financial consulting and referral. Over

two-thirds of the Institute’s budget comes from

the firms it serves.60

Similarly, in Bologna, the Centro Ceramico, a

research/industrial services center funded by the

500 ceramics firms in the Bologna area, works

one-on-one with member firms to solve technical

problems, including reducing environmental

emissions, developing new materials and products, and putting in place more efficient production processes.61

There are similar programs in the United

States. Although most are not targeted to distressed urban areas, the model holds significant

promise for such areas. Oregon’s Wood Products

Competitiveness Corporation provides a wide

range of services to Oregon secondary wood products producers, including marketing, training of

workers and managers, manufacturing modernization, research and development, financing

and promotion of cooperative industrial networks. In Pennsylvania, seven Industrial Resource Centers provide an array of services to

small and medium-sized manufacturers. Originally established in 1988 as a manufacturing extension program, this effort has evolved and now

offers a wider range of services. In New York City,

the Garment Industry Development Corporation,

funded in part by city government, unions, and industry, helps garment firms both to become more

competitive and to hire low- and moderate-income New York residents.

Though a number of states and cities have tried

to apply the new models of economic development,62 few have focused on revitalizing distressed urban core economies. There are a number

of reasons for this, but most of them come down to

not knowing how to apply the new models to the

particular case of distressed areas. Moreover, little

or no technical assistance is available for this application. Finally, and perhaps most importantly,

it is difficult to fund such efforts through some

Federal programs. For example, the CDBG program focuses on projects with specific outputs

(e.g., rehabilitating a building, giving a business a

loan), rather than on creating and sustaining organizations that can foster business development.

Moreover, historically HUD area and regional office interpretations of rules and documentation

and other administrative requirements have been

so time consuming and difficult to manage, that

for many communities, housing rehabilitation and

infrastructure was the path of least resistance and

least likely to raise HUD office concerns. The

structure and culture of EDA also constrains it

from funding these types of economic develop60 Office of Technology Assessment, op. cit., footnote 40.

61 U.S. Congress, Office of Technology Assessment, Industry, Technology and the Environment: Competitive Threats and Business Opportunities, OTA-ITE-586 (Washington, DC: U.S. Government Printing Office, 1994).

62 R. Scott Fosler, “State Economic Policy: The Emerging Paradigm,” Economic Development Quarterly, vol. 6, no. 1, February 1992, pp.

3-13.
52 I The Technological Reshaping of Metropolitan America

ment organizations. Moreover, because much of

EDA’s funds are in Title 1, which principally

funds infrastructure, it is difficult for EDA to fund

non-infrastructure efforts.

Target a greater share of federal funding

to more comprehensive, innovative economic development organizations. Congress might:

Encourage HUD to fund more innovative economic development institutions, perhaps through

funds distributed on a performance basis.

Broaden the applicability of activities under

Title 1 in EDA to allow funding for economic

development programs or activities. Another

option would be to reduce or eliminate Title 1

funding, and allocate the funds to the more

flexible Title IX. Congress might then broaden

the definition of economic adjustment in Title

IX to allow funding for long-term distressed

areas, not just for areas suffering sudden and severe economic distress. If Title 1 were eliminated, appropriate infrastructure projects could

be funded under Title IX. In addition, require

EDA to open up its funding process to support

the most effective organizations.

Increase support for Community Development Corporations (CDCs) and other similar comprehensive, locally based development organizations.

Congress could:

Increase funding for HUD’s $20 million National Community Development Initiative,

which, in conjunction with foundations, funds

community-based non-profit groups.

Establish a separate quasi-public corporation to

make grants for economic and community development to community-based organizations. 63

■ Focus Efforts on Business

Development

In part because of the potential of new information

technologies to weaken and restructure the economies of the urban core, a new kind of urban policy

effort may be needed, one focused explicitly on

economic development, and specifically on business development. For example, Michael Porter

argues that the cornerstone of a new model of urban economic development should be to identify

the potential competitive advantage of inner citybased companies and thus understand the basis for

sustainable market positions.64 The major thrust

of the new urban economic development should

be to build up the capacity and competitiveness of

business in the central city and inner suburbs, relying less on tax incentives, low interest loans, and

provision of buildings and infrastructure and more

on improving the management and financial skills

of small- and medium-sized business owners and

managers.

Yet, historically, urban community development efforts have been organized around programs to supply housing, infrastructure, and

social services. When economic development has

been the focus, federal funds have often been used

to provide subsidies (e.g., low-interest loans, free

land, developed infrastructure) to corporations to

induce them to locate or build a facility in the city.

For example, two-thirds of CDBG economic development funds are for assistance to individual

firms, and 78 percent of these funds provide lowinterest loans to help business develop and expand. 65 Similarly, tax incentives are a major

component of the empowerment zone program.

In a study of CDBG economic development

funds, only 4 percent of assisted businesses re63 In 1991, Congress proposed the National Community Economic Partnership Act, which would have provided $250 million over three

years in a competitive process for CDCS to do community economic development projects. As originally proposed, the funds would be administered by a quasi-public corporation. However, in the final legislation it was housed within the Office of Community Services at HHS. The program was included in the urban aid bill vetoed by President Bush and included, but not appropriated, in the Crime Bill.

64 Porter, op. cit., footnote 15

65 The Urban Institute, op. cit., footnote 29.
Chapter 2 Issues and Policy Options 153

ported receiving technical assistance, while 98

percent received either grants or loans.66Providing direct loans in a retail manner to industry may

not make much sense.67 First, it is not clear that

capital is the major need of many of these firms.In

many cases, firms need managerial or technical

assistance to prepare business plans, keep their

books properly, and develop marketing strategies.

After these are in place, finding private financing

becomes much easier. Second, a dedicated direct

loan program is a costly way to provide capital to

industry. An alternative method would be to have

banks make the loans, but provide a processing fee

to help cover the costs of processing small-scale

loans, or provide a loan loss reserve pool to encourage banks to make more risky loans. Finally,

by making direct loans or grants, many of these

programs can help only a few firms a year.

While incentives and business financing can

play a role, urban economic development should

do much more than recruit industry from outside

through large one-time incentives. Building partnerships with industry, community organizations

and others is probably more important. Moreover,

the nonprofit sectors in these areas need to be

stronger and better linked to industry. The following factors will be important for an urban economic development initiative.

Urban Blue Collar Industry Initiative

Low- and moderate-income urban residents are

experiencing increased economic difficulty partly

because of the movement of blue collar jobs out of

urban cores. While it is not realistic to expect to

replace all the jobs that have been lost, employment in these sectors might be stabilized or increased slightly. Industries such as

manufacturing, freight, distribution, and recycling can thrive in urban cores, particularly if they

adopt flexible technologies and seek market

niches (see chapter 6). Therefore, federal assistance might help firms in these industries become

more competitive, particularly through application of advanced technology. Currently, some, but

not all of the 44 Manufacturing Outreach Centers

supported by DOC’s National Institute of Standards and Technology’s Manufacturing Extension

Partnership target manufacturing firms in central

cities and inner suburbs. For example, the Chicago Manufacturing Center has focused a share of its

efforts on helping the city’s manufacturers, many

located in distressed areas, become more competitive (see box 2-2). And the Center itself is located

in the Empowerment Zone.

Target a greater share of federal assistance to modernize manufacturing to manufacturers

in urban areas. Congress could:

■ Encourage NIST to provide guidance to NIST’s

Manufacturing Outreach Centers (MOCs) to

establish urban manufacturing initiatives.

■ Provide increased funds for MOCs ($73 million in FY 1995) and require that some of the

money be spent to create centers that focus at

least in significant part on serving manufacturers in distressed urban areas. Centers need not

necessarily be located in these places, but

would have to serve firms located there. Section 103 of S17, The New Urban Agenda Act,

introduced in 1995 by Senators Arlen Specter

and Carol Moseley-Braun, requires the Secretary of Commerce to give preference for awarding funds to manufacturing centers located in

empowerment zones and other distressed areas.

In addition, Congress could broaden the range

of industries able to be served to include other

blue collar industries, including wholesaling

and freight transportation.

Minority Entrepreneurship

Evidence suggests that minority-owned firms are

more likely to hire minorities, even if they are not

66 Ibid, p. 3-30.

67 Doug Ross and Robert Friedman, “The Emerging Third Wave: New Economic Development Strategies of the ‘90s,’” The Entrepreneur/al

Economy Review, vol. 9, No. 1, Autumn 1990.
54 | The Technological Reshaping of Metropolitan America

located in places with high levels of minority residents.68 Bates found that most white-owned small

businesses in non-minority neighborhoods

employ no minority workers and that roughly onethird of these businesses in minority areas employ

no minorities. In contrast, 97 percent of black employers in minority areas hired minority workers,

(in most cases minorities made up over 75 percent

of their workforce) and black-owned firms outside

minority neighborhoods employ a large proportion of minorities.69 Therefore, policies to encourage minority entrepreneurship are one way to

create jobs for minority urban residents. As discussed above, targeting a greater share of SBA

loan funds to minorities is one way to do this.

Bates also documents that black-owned firms

in urban minority areas had lower levels of capitalization, were smaller, had owners with less

education, and had higher chances of failure.70

Many of these firms were small local-serving

businesses (e.g., retail, personal services,

construction) and had little prospects for expansion, in part because they depend on the low

spending power of the local areas. In contrast,

stronger black-owned firms tended not to be located in urban minority areas, and were in industries (e.g., manufacturing, producer services) that

generated income from wider markets. This suggests that policies that target minority business focus more (but not exclusively) on businesses that

exhibit growth potential and sound business fundamentals, and less on local-serving businesses

with little potential to expand.71 As noted below,

many minority-owned firms are in suburban locations, but they are still likely to hire minority

workers. Thus, they can provide employment opportunities for central cities minorities. And if

these firms employ central city residents, their

employees will also support central city localserving businesses.

Urban Neighborhood Networks

Many successful immigrant areas within formerly

declining or stagnant parts of U.S. cities have vibrant cooperative business networks. For example, in Los Angeles, the Chinese community relies

heavily on networked relations, both formal and

informal, to boost economic activity. They have

formed banks, accounting firms, and other business service companies. These ethnic firms have

extremely high levels of intra-community purchasing, outsourcing and hiring. As a result,

money is recycled within the community many

times before it leaves, creating more jobs and

wealth.72 One approach would be to fund programs that help local organizations to identify and

promote local, import-substituting market niches,

and foster ethnic and area commercial networks.

Urban Technology Initiative

There are a number of technological innovations

and applications, which, if diffused to urban settings, could improve economic prospects. For example, Argonne National Laboratories outside of

Chicago is working with several CDCs, in areas

such as energy-efficient housing rehabs, setting

up recycling facilities, developing small-scale and

inexpensive remediation and assessment technologies for small brownfield sites, and writing software to map urban land use (see box 2-2).

In addition, a number of communities, including Los Angeles and Durham, North Carolina, are

exploring how access to the Internet and other information and communication technologies can

help create jobs in inner city neighborhoods. For

example, in Los Angeles, black residents from the

68 Timothy Bates, Banking on Black Business (Washington, DC: Joint Center for Political and Economic Studies, 1993).

69 Ibid.

70 Timothy Bates, “Small Business Viability in the Urban Ghetto,” Journal of Regional Science, vol. 29, No. 4, 1989, pp. 625-643.

71 Bendick and Egan, op. cit., footnote 47.

72 Ibid.
Chapter 2 Issues and Policy Options 55

Argonne National Laboratory (ANL), located outside of Chicago, and Bethel New Life, Inc. (BNL), a

community development corporation (CDC) in West Garfield Park (on the near west site of Chicago)

have formed a “Towards a Healthy, Sustainable Community” project, a community economic development initiative focused on recycling, environment and energy. The two-year-old partnership brings together Argonne’s technologies and Bethel’s expertise in community economic development to create

new liveable wage jobs in new industry as the foundation for a healthy, sustainable community.

Staff at Argonne and Bethel have identified five main areas of endeavor that make use of Argonne’s

expertise in energy and the environment, as well as Bethel’s track record in community economic development.

Industrial Site Reclamation and Retention

More than 40 vacant or abandoned industrial buildings are clustered in the vicinity of the Bethel

headquarters alone, and many more are scattered throughout the area. The ANL-BNL partnership is

developing a process for analyzing abandoned buildings and land formerly used for industrial purposes buildings, with the aim of:

● Developing cost-effective methods of assessing and cleaning-up contaminated sites in order to use

this process in the area and offer it to other community development groups throughout the nation.

■ Bringing industrial properties located in the community to a condition in which prospective new owners and tenants will be assured of compliance with pertinent environmental regulations.

In its first project, completed in late 1994, Argonne served as the site characterization technical advisor to a small minority-owned, female-headed business specializing in environmental services The

two completed Phase 1 assessment of a six-acre site, which Bethel is now in the process of selling to a

company that makes fiberboard from waste wood.

Promoting Manufacturing Jobs Through Partnerships

West Garfield Park is home to approximately 40 small- to medium-size manufacturers. Bethel has

formed a partnership with Argonne and the Chicago Manufacturing Center (CMC) (a Manufacturing

Outreach Center supported in part by the National Institute of Standards and Technology) to help firms

modernize, become more competitive, and retain or create jobs. For example, BNL developed onsite

training programs for employees who want to upgrade their skills. The CMC augments Bethel’s program

by offering a variety of services to improve firm performance. “Benchmarking,” for example, enables a

company to compare its performance with that of similar companies.

Recycling Spin-offs

Bethel has also focused on environmentally based community economic development. In 1992,

Bethel opened a $1 4-million Material Recovery Facility (MRF) providing employment for community

residents while handling 45 tons of recyclable daily. Bethel realized that for the project to achieve its

full potential, they need to encourage scrap-based manufacturers to use the end products of the MRF.

Argonne has been conducting research and development, in collaboration with industry, to make recycling of a wide variety of waste streams technically feasible and economically attractive.

Affordable, Energy-Efficient Housing Rehabilitation

Another Bethel-Argonne project involves the development of a collaborative team which will incorporate energy conservation measures in a large set of multi-family dwellings in the community. In addition

to Bethel and Argonne, the project will bring together the resources of local utilities, Chicago Department of Housing, and the Illinois Department of Energy and Natural Resources. The team is

(continued)
56 The Technological Reshaping of Metropolitan America

investigating cost effective opportunities to include energy conservation measures in moderate rehabs.

In addition, they hope to help others use the process to include energy efficiency in large scale residential rehabilitation projects such as those being proposed under the Empowerment Zone initiative

Education and Training

Education and training are key components of the Argonne-Bethel partnership. All of the earlier projects require a trained work force and engineers who can be a part of developing and refining the

technology for problem solving and appropriate industrial applications. The partnership is also developing three specific projects

■ Short-term certification training for environmental technician and hazardous waste handler, with pathways for further training in specific waste materials, assessment technology, and self-employment.

■ A training program for residents on how to catalog solid waste streams at Argonne. This training wiII

be useful to the residents as they return to West Garfield Park with the experience to assist the community in establishing additional recycling activities.

● The Urban Engineering Program is being developed to help prepare academically and economically

disadvantaged children (grades 4-1 2) for careers in science and engineering.

Watts area telecommute to downtown and suburban jobs from local satellite offices of Business

Services Etc., Inc. The company employs graduates of the Urban League job training program to

provide remote computer and word processing

services to business clients.

In other places, organizations are helping urban

residents become better prepared to cope with a

technologically advanced work place. For example, in Detroit, Focus Hope, a non-profit community development organization, trains

disadvantaged residents to use advanced technologies related to the automobile industry. Their

Center for Advanced Technology trains community residents in advanced automobile engineering methods. In addition, predominately minority

two-year colleges can play important roles in

training minorities for technology-based jobs,

particularly in manufacturing.

73 Urban policy efforts might profitably focus on helping local organizations apply advanced technology solutions to

urban problems and helping urban residents, particularly minorities prepare for these jobs.

DEVELOPING PARTNERSHIPS AND

METROPOLITAN LINKAGES

In an era of reduced federal resources, increased

capacities at the state, local, and private (non-profit and profit) levels, and increased variation and

diversity between places, federal policy needs to

focus less on simply providing funding to a large

number of places through grant and other programs, and more on intervening strategically in

the metropolitan development system. As a result,

it will be important to encourage state governments and industry to be proactively a part of the

solution to urban problems. A second component

will be to establish linkages between all parts of

the metropolitan economy. This is even more important, now that one of the defining features of

the post-industrial metropolis is that it is not a

collection of small, nearly self-sufficient economies, but is a truly metropolitan-wide economy

(see chapter 3). As a result, federal policy should

encourage efforts to link opportunities and policies in the growing outer suburbs to the needs and

efforts in the urban core.

73 Stuart Rosenfeld and Marcia E. Kingslow, Advanced Opportunity for Manu facturing: The Potential of Predominantly Minority Two-year

Colleges, (Chapel Hill, NC: Regional Technology Strategies, Inc., 1995).
Chapter 2 Issues and Policy Options 157

■ Tapping Into Industry’s Role

In addition to providing greater support to more

innovative efforts, federal agencies and programs

could do more to develop new partnerships between industry, government and communities.

Urban policy has often meant creation of specific

programs or mandates for action that have failed

to adequately involve the private sector. In addition, even with adequate federal funds, these efforts would be less than fully successful unless

they tapped into the expertise and creativity of the

private sector.

There are a number of partnerships that suggest

productive avenues. For example, the city of Birmingham, Alabama, in an effort to award more

contracts to black-owned building and contracting firms without using set-asides, established a

mentoring program in which successful contractors provide technical and business assistance to

struggling minority contractors. In Chicago, the

Sears Merchandise Group recently announced a

$250,000 grant to help establish a training center

for minority entrepreneurs. In Boston, the Harvard Business School, under the direction of Michael Porter, is sending its MBA students to

inner-city businesses to provide technical assistance and management training. Other business

schools, including Columbia and MIT, are doing

the same. The Initiative for A Competitive Inner

City was formed in Brooklyn, New York, to help

graduates and alumni of business schools provide

management assistance to inner city firms.

Similarly, a national program by the Food Marketing Institute is working with its members, large

grocery store chains, to promote expansion into

under-served inner city areas. On a similar program, the Local Initiatives Support Corporation, a

non-profit corporation created by the Ford

Foundation that funds CDCs and other urban development efforts, has organized a consortium of

10 large financial institutions, who have put up

$24 million to be invested in inner-city supermarkets and shopping centers.74 Increasing the number and quality of retail and service stores in

underserved inner-city areas would increase employment in these areas by keeping more of the local dollars circulating in the community.

In addition, there is potential to connect innercity businesses with markets and strengths in the

greater region. A number of places, including Baltimore and Columbus, included such options in

their applications for Empowerment Zone designation. In some cases this might mean fostering

mentoring programs, while in others it could

mean the development of cooperative industrial

networks where urban and suburban firms cooperate to address common concerns (e.g., purchasing,

marketing, training) .75

One important role for the federal government is to catalyze these partnership efforts, partly

by documenting what is going on and then publicizing

what can be learned from them. Congress could:

w

I

Encourage federal policymakers to consider

working with trade associations, large corporations, and other business organizations to explore the extent to which efforts that firms find

profitable also help revitalize urban economies,

and to help catalyze such efforts.

Metropolitan Cooperation

First, the federal government can provide incentives for municipalities in a metropolitan area to

work together. The Intermodal Surface Transportation Efficiency Act (ISTEA) and the Clean

Air Act Amendments are precedents for this approach. However, it is not clear how effective ISTEA has been to date in bringing about regional

cooperation. Effective regional planning will also

74 Neil R. pierce, “A New Way to Bring Home the Bacon, “ National Journal, Oct. 8, 1994, p. 2359.

75 Gregg A. Lichtenstein, A Catalogue of U.S. Manufacturing Networks (Gaithersburg, MD: National Institute of Standards and Technology, State Technology Extension Program, 1992); also Brian Bosworth and Stuart Rosenfeld, Significant Others: Exploring the Potential of

Manufacturing Networks (Chapel Hill, NC: Regional Technology Strategies, Inc., 1992).
58 I The Technological Reshaping of Metropolitan America

help to overcome the fragmentation of land use

planning in American metropolitan areas.

Federal policies and programs can

provide incentives for local governments in a metropolitan area to cooperate. Congress could:

■

■

■

Encourage the Administration to review, perhaps through the National Economic Council,

existing federal programs as to the extent to

which they hinder or encourage regional cooperation at the metropolitan level.

Require that states and cities receiving federal

funds for applications such as transportation,

economic development, and housing, establish

metropolitan-wide development councils to

work to minimize uneven development.

Establish Metropolitan-Wide

Organizations -

Many federal and state-funded programs are operated by separate organizations in suburban and

central city areas. For example, the Job Training

Partnership Act (JTPA), the major source of federal training funds, is usually organized into multiple Service Delivery Areas (SDAs) with the

central city SDA being separate from suburban

ones. 

76 For example, in the Chicago metropolitan

region there are five SDAs that receive funds from

the Department of Labor. Some suburban county

and central county SDAs work cooperatively together, at least informally. But most do not. As a

result, in many metropolitan areas, suburban

SDAs do not market job openings to urban residents, even though most new jobs are in the suburbs. Likewise, many central city SDAs do not

fund organizations to place people in suburban

jobs. The lack of a regional structure makes it difficult to craft metropolitan-wide training, placement, and transportation solutions for

employment. Even in places where there is interest in consolidating the numerous SDAs into a

metropolitan-wide entity, local political factors

can hinder it. In at least one case, a large city mayor successfully opposed such a move because he

felt the city would not get adequate funding under

such an arrangement. The result, however, was

that urban residents who needed the jobs were effectively separated from where the jobs were located and growing.

In addition, instead of providing services through federally funded organizations now set

up at the county or city level, Congress could:

Encourage the formation of metropolitan-wide

organizations to manage or at least coordinate

efforts. Specifically, Congress could provide

incentives under the JTPA program for Service

Delivery Areas (SDAs) to cooperate across

SDA boundaries. More proactively, Congress

could consider requiring that SDAS be consolidated to the metropolitan level. Congress, however, would need to be careful to avoid

arrangements that may allow outer suburban

jurisdictions to unfairly capture a larger share

of resources than prior arrangements.

Linking Urban Residents with Suburban

Jobs -

While economic development in the core appears

to be able to provide some jobs in the core, dispersion of jobs will nonetheless continue because of

the technological changes described in this report.

As a result, urban core residents need access to

jobs throughout the metropolitan economy. This

was not a problem when the poor and unemployed

lived near large concentrations of jobs, either in

the downtown or in core city industrial areas, and

the metropolitan labor market was by and large

synonymous with the central city. However, as

jobs decentralize, particularly jobs that provide

opportunity for people with less education, policies that recognize the metropolitan nature of the

economy are needed. Anecdotal evidence suggests that many urban residents do not even consider suburban job openings, particularly those in

the outer suburbs, in part because they never

76 Gary Orfield and Carole Ashkinaze, The Closing Door (Chicago, IL: University of Chicago Press, 1991).
Chapter 2 Issues and Policy Options 59

become aware of them. Thus, one strategy for economic development is to overcome isolation by

developing and maintaining connections to growing suburban labor markets (see box 2-3).

There are three main components of metropolitan-wide employment accessibility policy.77

First, people in central city areas may need job

training to prepare them for suburban jobs in back

office operations, light manufacturing, or retail.

The gap between present skills and needed skills

can be enormous for the higher-end service jobs

concentrated in many CBDs. The gap is much

smaller for blue collar and back office employment, which has decentralized to the suburban periphery. As a result, central city training systems

need to train for jobs regardless of where the jobs

are within the metropolitan area. Moreover, the

largest training needs seem to be in basic areas,

such as reading skills, positive work habits, and

problem solving.

Second, effective job information systems are

needed to match city workers with job openings in

the suburbs. Regional job information programs,

including those operated by employment services

During the past three years, local officials in Columbus, Ohio, estimate that air cargo and related

distribution operations at Rickenbacker International Airport and the adjacent industrial park have generated about 5,000 new jobs. And they expect transportation and distribution employment in the area to

grow by an additional 25,000 jobs by the year 2010.

Rickenbacker is located at the edge of the greater Columbus area, about 15 miles from downtown.

Businesses on and around the airport draw most of their employees from the city and three adjoining

counties. Jobs in the Rickenbacker area are generally accessible only by auto; there is currently no

public transportation to the airport or the industrial park. Says William Honey of the Greater Columbus

Chamber of Commerce:

“This is a real concern for us. Columbus has a low unemployment rate--in fact, we’re at virtually full

employment. We already have companies telling us that they can’t find workers. But we also have a

high poverty rate; in fact, Columbus has more people living below the poverty level than a number of

larger cities--Philadelphia, for example. Entry-level jobs in transportation and distribution typically pay

about $7.00 an hour in this area, which ought to provide an attractive alternative to public assistance.

But the low-income population is concentrated in the center of the city, and most of the growth is on the

periphery.”

Local officials and the business community have proposed to address this spatial mismatch by extending public transit from the city to outlying areas. The proposed new services would be part of a

package of metropolitan transportation improvements that would be financed in part by a new half-cent

sales tax surcharge, which will be submitted for voter approval in November 1995.

The city and the Chamber of Commerce are also exploring ways to encourage some growing distribution businesses to locate in older industrial areas, closer to the inner city, rather than in outlying

areas. Strategies they are considering include tax incentives, encouraging re-use of abandoned land

under the state’s new voluntary-clean-up law, and assistance in the development of day care services

for local residents.

77 Mark Alan Hughes, “Employment Decentralization and Accessibility: A Strategy for Stimulating Regional Mobility,’’ APA Journal, vol.

57, No. 3, Summer 1991, pp. 288-298.
60 I The Technological Reshaping of Metropolitan America

and the Job Training Partnership Act Private Industry Councils (PICs) can help make these linkages. In addition, less formal systems, based on

building networks between suburban employers

and city residents can help.

Finally, central city workers need transportation to suburban jobs (see chapter 9), and they are

often dependent upon car pooling or public transportation. In some cases, transit routes can be

more effectively organized to facilitate reverse

commuting. For example, SEPTA, the transit authority in the Philadelphia region, has successfully implemented some reverse transit routes.

Similarly, the Milwaukee transit authority, partly

at the urging of the local PIC and suburban employers, has established new routes to help urban

workers commute to the suburbs. In other cases,

specially organized van pools or buses can be set

up. In Chicago, for example, Suburban Job Link

operates buses every day to transport largely minority residents of Chicago’s near west side to

suburban jobs.

There have been limited federal efforts in this

area. The JOBLINKS Employment Transportation Initiative, created by the Federal Transit Administration, is a demonstration project on how

transportation may improve employment outcomes of participants in the Department of Health

and Human Services Job Opportunities and Basic

Skills (JOBS) program. However, it is of short

duration (one year), limited funding ($83,000 for

each of 12 sites) and is largely rural.78

HUD’s “Bridges to Work” program is an antipoverty strategy to link unemployed and underemployed in central cities to jobs in the suburbs.

The program was initially funded mostly by five

private foundations that put up $1.2 million. HUD

and DOT contributed an additional $250,000 between them. The first phase of the project involved planning in nine communities. As a result,

six cities, Baltimore, Chicago, Denver, Milwaukee, Philadelphia, and St. Louis, were chosen for a

four-year demonstration project to begin at the

end of 1995. The cities were selected in part because they developed a plan and collaborative

relationships among job providers, job training

organizations, transit providers, and social services organizations. The four-year demonstration

project will include a control group and an experimental group in four of the cities to rigorously

test its effectiveness. Total funding will be $25

million over the four years. Currently, HUD is

working with HHS, DOL, and DOT to negotiate

funding shares. Funding is coming from internal

department funds. Congress has not explicitly appropriated money for this purpose.

Increase support for mobility to work

programs. Congress could:

m

m

Fund the “Bridges to Work” program and,

based on its findings, expand the program to

more cities and more participants. Senator Bill

Bradley recently introduced Mobility for Work

Legislation that would provide federal funds

for a similar program.

Provide tax incentives to suburban employers

who provide van pools or other transportation

for disadvantaged urban core residents. Possible incentives could include tax credits for

van service to and from existing transit or bus

lines, and accelerated depreciation of the vehicles.

REDUCING SUBSIDIES TO PERIPHERAL

DEVELOPMENT

Since the earliest years of the Republic, localities

and regions have competed with each other to attract investment, and to some extent to attract certain types of residents. However, in the last 20

years, competition for industry and people has intensified significantly, resulting in widespread industrial recruiting and increased efforts at

exclusionary zoning to restrict the entry of low-income residents. Cities compete with each other to

attract industries that provide jobs, and high-in78 Mark Alan Hughes, “Changing the Geography of Work,” a report to the Ford Foundation, March 1994.
Chapter 2 Issues and Policy Options | 61

come residents, who pay more in taxes than they

consume in services.79 There are several reasons

why these practices have increased. First, before

the 1970s, when the economy was growing rapidly and regional dislocations were minimal, jurisdictions had less need to compete for a share of the

economic pie because the pie was growing. Second, the decline in federal support to cities over

the last two decades has made them much more

dependent upon the health of their local economies and the prosperity of their residents for revenues. As a result, they are more active in trying to

get a favorable mix of industry and residents.

Third, the rise of metropolitan-wide economies,

in part facilitated by technological change, means

that business has more locational freedom and that

jurisdictions are competing more fiercely to attract and retain industry.

The system of 50 states and thousands of local

governments has a number of advantages. The

system widens jurisdictional choices for industry

and individuals. Moreover, private enterprise and

state and local governments must compete to attract people and industry, and this competition exerts pressure on them to keep taxes low and to

operate efficient government services. States and

cities cannot become complacent about the quality or cost of the services they offer.

Despite these advantages, aspects of this jurisdictional fragmentation weaken the competitive

position of urban core jurisdictions. Outlying and

often more fiscally healthy jurisdictions offer incentives to attract industry, often at the expense of

core jurisdictions (see chapter 8). Competition

among local governments exacerbates the fragmentation of land use planning, which in the era of

the post-industrial metropolis often has deleterious results.80 Finally, there is some evidence to

suggest that greenfield development in outer suburbs and exurban areas does not pay its own way.

For a number of areas, including infrastructure

and transportation, places with lower densities of

development often cost more to serve, yet pricing

policies often do not reflect these differences. Federal tax policy also appears to favor suburban as

opposed to core areas. In sum, the actions of the

public sector, including the federal government,

distort the locational decisions of the market.

In this case, the failure of market prices to reflect full costs, including externalities, means that

price signals are being given that further stimulate

urban sprawl and dispersed development. Dispersed development is cheaper than it would be if

it paid its full costs, and core development is more

expensive. Moreover, such development patterns

appear to systematically weaken the development

prospects of the urban core.

Dispersed development weakens the economic

prospects of the core and possibly creates inefficiencies at the metropolitan level. Yet, unduly restricting development in the outer suburbs or

exurban locations through such mechanisms as

growth controls may also be economically inefficient. However, an array of mechanisms, including marginal cost pricing, development levies,

and full-cost recovery regulations, have the advantage of using the market’s own signal mechanism—price—to adjust land uses and to

encourage a more cost-effective pattern of urban

development. But these are in themselves incomplete because they address only localized and direct costs, not the region-wide social, economic,

and environmental costs of excessive suburbanization and inner city decline. For that to occur,

mechanisms that internalize the external costs of

development are also needed.

The private sector and the market may ultimately address part of this imbalance if the rent

gap and cost differentials between city and suburban land development become smaller. But it is

the public sector’s role to review the nature of, and

biases inherent in, the tax and regulatory environments, and to address the social, economic and environmental consequences of uneven urban

79 Peter D. Salins, “Cities, Suburbs, and the Urban Crisis,” The Public Interest, No. 113, Fall 1993, pp. 91-104.

80 Anthony Downs, New Visions for Metropolitan America (Washington, DC: The Brookings Institution, 1994).
62 | The Technological Reshaping of Metropolitan America

growth and change. In some cases, government

policies (subsidies) or lack of policies (e.g., to

price negative externalities) appear to allow new

development, particularly low-density development on the periphery of metropolitan areas, to not

pay its own way. It is not clear how large these subsidies and externalities are, nor whether requiring

dispersed development to pay its full share would

significantly impact urban growth patterns. However, efforts in that direction have the potential to

not only increase economic efficiency, but also to

strengthen the development prospects of the core.

A number of policies could move in this direction.

❚ Marginal Cost Pricing of Urban Services

and Infrastructure

Pricing policies for most utilities (public and private, including telecommunications, power, cable

TV, postal service) do not generally reflect the differences in costs of serving areas that differ in density (see chapter 8). For example, the cost of

serving rural telephone users is generally most expensive (and is subsidized by non-rural users), followed by dispersed suburban users, with densely

populated (usually urban core areas) the cheapest

to serve. Yet, telephone regulation limits the extent to which telephone service providers can

charge prices that reflect the true cost of providing

services to business and residents in different density locations. Encouraging pricing of services to

reflect these differences at least in part could increase costs in outer and exurban locations and reduce costs in central city locations. Clearly, the

major motivations for any deregulation of utility,

telephone, and mail services will be for other reasons, including attempts to increase overall efficiency. In addition, average cost pricing does

promote the goal of universal service. However,

as discussed in chapter 8, moving to marginal cost

pricing in rural areas, at least, is estimated to have

only a minimal impact on phone penetration rates.

Overall, these changes could also have a beneficial effect on urban cores.

❚ Full Cost Pricing

Policies to internalize externalities could help reduce the cost advantage outer suburbs and exurban sites currently enjoy. For example, efforts to

enforce the Clean Air Act provisions on trip reduction in non-attainment metropolitan areas are

likely to benefit the urban core because transit access is greater there. Similarly, efforts to have

drivers pay the full cost of driving are likely to

benefit urban cores. Likewise, congestion pricing

for driving would require automobile drivers to

bear the costs they impose on other drivers in the

form of increased traffic congestion. To be most

efficient, the price charged a motorist for driving

should account for the costs imposed on all motorists as a result of the additional delay caused by

that motorist’s entry into the system. Various

forms of traditional toll barriers could partially do

this, but would not necessarily account for regional mileage traveled. More importantly, they would

impose high transaction costs (toll infrastructure,

labor, and delays imposed by the tolling process)

to accomplish the policy objective.

Some systems developed in the Intelligent

Transportation Systems program could enable

real-time congestion pricing to be implemented.

Congestion pricing uses tolls on highway use at

peak periods. Technological innovations now

make it possible to impose such tolls with low

transaction costs. To date, few places have experimented with congestion pricing despite widespread interest. The lack of experience with

congestion pricing hampers assessment of its impact on metropolitan form. Given the importance

of context, the handful of congestion pricing-like

schemes provides an uncertain base on which to

speculate about its impact on U.S. metropolitan

form.

Although the effect of congestion pricing on urban form is difficult to predict, it is possible that

congestion pricing can help major centers and the

CBD by providing greater access. On the other

hand, congestion pricing is also likely to lead to

increased pressures for development at the periph-
Chapter 2 Issues and Policy Options 163

cry, particularly among higher-income households who put a high value on their time. In

contrast, policies to make users pay the full cost of

using a particular road, through such mechanisms

as tolls, could have the effect of increasing the cost

of travel in more dispersed settings, leading to

more concentrated residential and commercial development pattems.81

Without further and more definitive information, it is not clear how important subsidies are to

encouraging peripheral development. Therefore, Congress could:

■

■

It

Require that HUD undertake a major study to

assess the nature and extent to which public policies at all levels of government inadvertently

subsidize suburban and exurban development,

particularly at low densities, and what policy

steps could be taken to reduce or eliminate

these subsidies.

Reining in Business Location

Incentives

is one thing for companies to leave the center

city to move to the outer suburbs because land

costs or rents are cheaper. Market forces are operating well here. However, it is quite another thing

when financially well-off suburban jurisdictions

provide financial incentives (e.g., free land, reduced taxes) to induce companies to move out of

the city. Clearly, there are many cases where companies would have moved even without incentives. Yet, there are others where the incentives tip

the balance. For example, Brooks Sausage, a minority-owned and largely minority-employee

firm, formerly located in the South Side of Chicago, was offered significant incentives to relocate

its facility to a smaller city in Wisconsin; it

moved, and laid off its Chicago workforce. Similarly, the Securities and Exchange Commission

located in Washington, D. C., has been offered

millions in incentives by Maryland and a suburban jurisdiction to move out of the District. Moreover, state incentive policies exacerbate this

pattern. Virtually no states use incentives to target

new investment to distressed areas, particularly in

cities. In contrast, usually states provide funds for

companies in suburban or smaller city locations,

in large part because they are responding to locational preferences by industry. Central cities and

inner suburbs are often at a disadvantage in attracting investments, and state incentive programs only exacerbate this. For example, the state

of Virginia and the city of Manassas are providing

close to $100 million to a joint venture by IBM

and Toshiba to establish a semiconductor fabrication plant in Mannassas, an outer suburb of Washington, D.C. In some cases, states even fund

companies that are moving out of the central city

to the outer suburbs. For example, the state of Illinois provided Sears with $110 million to move out

of the downtown, where a large share of its workforce were central city residents, to Hoffman Estates, a suburb 40 miles from the downtown, with

little public transportation access for potential

workers from the central city.82

Unfortunately, because of the weakened fiscal

conditions of most urban jurisdictions, they either

cannot match these incentives, or if they do, they

must reduce funding on other important urban services. Moreover, in some cases, cities use federal

funds, including CDBG funds, to lure firms to

their communities.

Finding policies to curb incentives is

difficult. However, because of the nature of competition

between states or between cities, only higher levels of

government can control such giveaways, in this case

81 Just as Intelligent Transportation Systems enable realtime congestion pricing systems to be implemented, in part 

ment systems, they could also enable greatly expanded use of toll systems.

82 Sears had threatened to relocate to North Carolina.
64 I The Technological Reshaping of Metropolitan America

the federal government. 83 To end or reduce bidding

wars, Congress could:

■

■

■

■

Prohibit executive branch agencies from entering incentive bidding contests for the attraction

of federal facilities. For example, a number of

states bid for the Superconducting Super Collider, and many bid for other federal facilities,

such as the Department of Defense accounting

centers. However, with reduced federal budgets, the monies for such incentives may be more

important to federal agencies than they were in

the past.

Ensure that federal programs and practices do

not further bidding wars. While most federal

economic development programs prohibit using the money to encourage firms to move, the

CDBG program does not. As a result, one option would be to apply such anti-pirating provisions to all federal economic development

programs. Recent legislation in the House (HR

463) and Senate (S192) would prohibit the use

of CDBG funds for this purpose. Because states

and cities are still likely to find ways to use federal funds to recruit industry or to substitute

their own funds in incentive deals, more fundamental measures to restrict incentives may be

needed.

Encourage the Secretary of Commerce to convene a meeting of state economic development

directors to try to reach an agreement to stop,

or at least significantly curb the practice. If an

initial agreement could be reached, it would be

in the interest of states to keep it, since all

would benefit.84

Require city and state recipients of federal economic and community development funds (including tax breaks and tax-free financing—

e.g., Industrial Development Bonds) to report

all subsidies given to relocating firms (over a

certain minimum amount, such as $1 million)

to HUD. This information could be reported

●

■

■

electronically and be accessible through the Internet to anyone in the nation. As a result,

watchdog efforts by other communities or

states could help ensure that communities and

states reported all the incentives they are providing.

Reduce federal funds for economic development in proportion to industrial recruitment incentives offered. Congress could encourage

compliance with an agreement to curb bidding

wars by directing the Administration to reduce

funds from those budget categories in proportion to the dollar value of incentives provided

by cities and states to attract new business.

States that spend money on incentives for relocating firms could have the amount of federal

economic development funding reduced by

some proportion, depending perhaps on the degree to which they provide more incentives

than other states.

Make state and local incentives subject to federal taxation. Congress could modify federal

tax law so that tax abatements provided by

states and localities to businesses would be

treated as part of corporate income for federal

tax purpose. In order to make the system manageable, Congress may want to set a minimum

amount of incentives above which businesses

must report (for example, $500,000 or $1 million). The IRS could also be required to report

this information to the designated federal

agency overseeing incentives.

Federal Telecommuting Programs

Although telecommuting may have environmental and transportation benefits, it also appears to

foster residential decentralization (see chapter 7).

Federal policy should realize this. For example,

the federal government, through the General Services Administration, pays for telecommuting

centers that exurban commuters travel to one to

83 Samuel Nunn, “Regulating Local Tax Abatement politics,” Policy Studies Journal, vol. 22, No. 4, 1994, pp. 574-588.

84 Collectively states would benefit from incentive curbs because the same level of development would occur in the United States without

the incentives, and states would have to pay much less to attain it.
Chapter 2 Issues and Policy Options | 65

three days a week. However, the large majority of

these federal commuters still have offices in the

core which the federal government must also pay

for, in addition to the cost of their telecommuting

office space. The rationale for such subsidies is

that the workers are not driving as much, thereby

reducing congestion and air pollution. However,

being able to telecommute a few days a week from

a center, and not paying any of the costs, makes it

easier for these workers to live in exurban locations. Workers living closer in receive no such

subsidy. Congress could consider requiring users

of telecommuting centers to pay at least part of the

net costs of supporting these centers.

❚ Brownfield Redevelopment

More so than outer suburbs, inner suburbs and

central cities (or new firms locating there) are burdened with cleanup costs on contaminated land

because in many cases, the industries responsible

for the contamination cannot or will not pay. A

number of problems attend the reuse of brownfields, including cost, liability concerns, and delays and uncertainty; all discourage development

of these sites. Though removal of these impediments would not solve all redevelopment problems at brownfield sites, it would improve their

development prospects. There are a number of

federal policies that could encourage reuse of

these sites, including modification or clarification

of liability issues, funding for cleanup, and EPA

delegation of authority to states.

Brownfields are currently receiving a lot of

attention from all levels of government in the

United States.85 In particular, state authorities and

organized stakeholder groups are promoting legislative and administrative changes in the way that

many of these properties are handled. During

1994-1995, nine states passed legislation creating

voluntary cleanup programs.86 Though many of

these changes are directed toward improving the

prospects for brownfield cleanup and redevelopment, some expand the scope beyond brownfields

to all hazardous waste sites including cleanups

pursued through enforcement driven programs,

such as state superfunds and property transfer

laws. Legislation designed to change state policy

on such factors as cleanup standards and liability

at a site will impact all hazardous waste cleanups

in a state. However, it is uncertain whether state

programs will be able to provide enforcement immunity to particular parties, since liability assurances are limited and extend protection only from

state enforcement actions, leaving liability under

federal law or third-party actions in place. As a result, state assurances may not go far enough for

some stakeholders to promote further brownfield

cleanups and redevelopment.

As states rethink their policies toward hazardous waste site cleanups, many are taking a more

comprehensive approach to the law, easing some

of the constraints considered barriers to brownfield activity. States are making an effort to clarify

cleanup standards and processes, clarify liability

at brownfield sites to include some level of government oversight without slowing the process

unnecessarily, and to offer financial incentives to

promote cleanups. However, considerable variation is still evident in some important elements.

In addition to brownfield activity at the state

level, EPA and Congress are addressing the problem at the federal level. EPA’s Brownfields Action

Agenda works to remove identified barriers to

cleanup and redevelopment. Congress is currently

addressing brownfield issues in Superfund reauthorization and in separate bills on lender and fiduciary liability for cleanups. Addressing the

issue of liability under federal law will be important to facilitate brownfield redevelopment.

A second important issue is who should pay for

cleanup and redevelopment, and if there is a federal role, what form should it take? Some have advo85 U.S. Congress, Office of Technology Assessment, The State of the State of Brownfields (Washington, DC: OTA, June 1995).

86 These states are Nebraska, Wisconsin, Colorado, Tennessee, Connecticut, Ohio, North Carolina, California, and Virginia. Stateside

Associates, personal communication, May 1995.
66 I The Technological Reshaping of Metropolitan America

cated large new programs to fund not only

brownfield cleanup but also redevelopment.

There are three potential drawbacks to such programs. First, it is not clear that market forces

would not adjust the price of privately owned sites

to reflect expected cleanup costs, especially if

there has been a site assessment. Second, under

the polluter pays principle, it is not clear that private companies responsible for the pollution at

sites they still own should receive cleanup subsidies. But providing assistance for orphan sites,

where there is no identifiable owner may make

sense. Third, while federal cleanup funds may be

needed, the rationale becomes weaker for government assistance for redevelopment. Many of these

sites have good redevelopment prospects that

should attract investors as long as environmental

uncertainties and problems do not overwhelm the

calculation.

In some places and at some sites,

federal financial assistance may be appropriate to help

stimulate brownfield development. As a result, Congress could:

■ Establish programs to fund brownfield assessment and cleanup. Several bills have been

introduced addressing financing of brownfield

HR2178, introduced in August 1995, would

provide federal assistance for brownfield

cleanup. Under the bill, the Environmental

Protection Agency would make grants to applicants to pay for site characterization and assessment. In addition, EPA would be authorized to

make loans for site cleanup. In making the

awards, one of the criteria for approval is the

extent to which the assessment or cleanup is

linked to redevelopment. Such provisions are

important, since there is a risk that a brownfield

finance program could result in sites with little

development potential being cleaned up.

■ Establish a “Brownfield IRA” that would allow

small and medium-sized companies to put

aside tax free a certain amount of money per

year up to some limit (perhaps $250,000) that

must be spent for cleanup or be subject to taxes

and penalty. The brownfield problem can be

particularly onerous for small and mediumsized firms faced with transferring ownership

of a site, and therefore fall under state property

transfer or brownfield laws. As a result, such a

mechanism might be particularly helpful to

firms where the owner is planning to sell and

knows ahead of time that cleanup will be an issue.

assessment and cleanup. For example,
Evolution and

Current Conditions

of the U.S.

Metropolitan

System

metropolitan region (metro) is a complex techno-politicosocio-economic system, with attributes that result from

ongoing decisions by individuals, governmental bodies,

and business firms. These decisions are shaped in no

small part by the technological possibilities of the time. Not only

does the shape of metros reflect changes in systems and organization of production, but the structure and function of metros themselves influence the performance of the economic system.

Today, advanced industrial economies are in the midst of a

technological revolution, driven by advances in microelectronics

technologies. It is not clear whether this is on the order of a shift

from an industrial to an information economy, as some speculate,

or a more modest, but still important shift from one technology

system to another. However, it does suggest that a new form of

metro is emerging, in ways with potentially profound benefits to

some places and costs to others.

In preparation for the discussion in chapters 4-7 on how this

latest wave of technological change is reshaping American metropolitan areas, this chapter provides background on historical

and current conditions in U.S. cities and metros. It first presents

an overview of how technological change has affected the historical development of U.S. metropolitan areas. It then discusses the

current spatial distribution of households and industry in the U.S.

TECHNOLOGY AND STAGES OF AMERICAN URBAN 

GROWTH

Because technological change in the United States has not been a

continuous process, but rather one in which clusters of technological innovations emerge in particular periods, many believe that

development of the cities and metros in the United States has pro- | 67
68 | The Technological Reshaping of Metropolitan America

ceeded in a discontinuous rather than linear fashion.1 Urbanization has been driven by technology

transitions that redefine urban hierarchies and

bring new types of specialization to the urban economic base. As a result, the pattern of urbanization has not been a smooth evolution to the

conditions of the present, but has been marked by

major transformations from one form of city to

another.

New technology changes the spatial distribution of industry and people in several ways. First,

the widespread distribution of new types of physical infrastructure make new locations accessible

and cheaper. For example, the building of the interstate highway system allowed manufacturers

traditionally dependent upon rail and ship to locate in other areas. Today, widely deployed advanced telecommunications infrastructure may

allow some information processing firms to locate

in more peripheral areas than they might otherwise (see chapter 7). 

Second, industries or demographic cohorts

with different locational patterns grow or decline

at different rates. For example, increases in agricultural productivity, largely a result of mechanization and application of biochemical processes,

resulted in declining farm employment, leading in

turn to the migration of 24 million persons from

rural areas to metropolitan areas between 1922

and 1954.2 More recently, the increase in central

city employment in the late 1970s and 1980s was

due in large part to the absolute and relative employment growth in sectors such as legal services,

banking, and other producer services.3 For example, the doubling of legal service jobs from 1977

to 1987, an industry heavily concentrated in large

urban area downtowns, contributed to the turnaround of the decline or stagnation of many central cities in the 1980s.4 These new legal jobs

required an estimated 120 million square feet of

new office space—the equivalent of three Chicago central business districts.

Third, as discussed in chapters 4-6, location of

jobs can also change as technology, product mix,

and industrial organization change. Technology

can be particularly important in this process, since

it can alter the nature and mix of inputs, including

type and quantity of labor, materials, energy, land,

and buildings needed. As these change, optimal

locations also change.

Finally, technologies can influence where

people live, in turn influencing where firms locate, particularly residentiary employment that

serves local markets (see chapter 7). For example,

the development of air conditioning made large

sections of the South and West attractive to millions more people. Medical technology advances

have enabled a larger share of the population to

live longer after retirement, allowing the retirement population of states like Florida, Texas,

California, and Arizona to expand significantly.

Social Security, and the ability to take it wherever

you go, was also a very significant factor in the expansion of these places. Today, many claim that

technologies to facilitate telecommuting from

home will further increase residential dispersion.

The importance of technological change is not

to suggest that other socioeconomic and public

policy factors have not also played, and will continue to play, important roles. Crime, single-parent families, teenage pregnancies, welfare

dependency, and drug availability all contribute to

urban problems and, by extension, economic and

residential spatial patterns. Likewise, public

policy interventions, such as the building of the

interstate highway system, use of investment tax

1 John Borchert, “American Metropolitan Evolution,” Geographical Review, vol. 57, 1967, pp. 301-32.

2 James Heilbrun, Urban Economics and Public Policy (New York, NY: St. Martin’s Press, 1987).

3 Thierry J. Noyelle and Thomas Stanback, Jr., The Economic Transformation of American Cities (New York, NY: Rowman and Allenheld,

1984); William Beyers, The Producer Services and Economic Development in the United States, Final Report to the U.S. Department of Commerce, Economic Development Administration, 1989.

4 Barney Warf and Chand Wije, “The Spatial Structure of Large U.S. Law Firms,” Growth and Change, vol. 22, No. 4, Fall 1991, pp. 157-74.
Chapter 3 Evolution and Current Conditions of the U.S. Metropolitan System | 69

credits for new facilities, the location of public

housing, and tax and other policies that create advantages for home ownership all have helped to

form the present patterns of urbanization (see

chapter 8). Nevertheless, technology plays an important enabling role in shaping metropolitan

areas.

All four kinds of technological change noted

above have had considerable impact on urban

form and life in the United States. In fact, as a result of these technology systems changes, some

urban scholars argue that there are distinct historical periods of urbanization.5 These can be classified as follows:

❚ Artisan and Craft City, 1820-1870

The period of the first industrial city in the United

States was from approximately 1820 to 1870. An

overwhelmingly rural society had only a few large

trading centers that were predominantly “walking

cities,” with little reason for space between work

and home, between social classes, or between

races. There was little functional separation of

land uses, production was not centralized, and

there was little social segregation. Early manufacturing was tied largely to craft or labor-intensive

primitive machines. Because surface transport

was primitive, the foci of activity were ports and

docks, and desirability of locations decreased

with increasing distance from the center, where

churches, public buildings, and the homes of the

most prominent citizens were clustered. Scattered

dam-site mill towns were built in the 1820s and

1830s as the domestic textile industry grew, bringing a different building pattern.

❚ Early Industrial City, 1870-1920

It was the growth of the manufacturing economy

from 1870 to 1920 that transformed urban structure. Manufacturing replaced cotton as the nation’s leading growth sector in the years between

1842 and 1859, and as the full U.S. industrial revolution unfolded, the national market was broadened by canals and railroads, factory organization

of production beyond the textile industry, and the

replacement of a self-sustaining rural economy by

commercialized agriculture.

The northeastern industrial belt lay at the heart

of a national rail network, with processing centers

at rail nodes. Accompanying urban impacts included concentration of production and circulation around central business districts, separation

and specialization of land uses, and the outward

thrust of residential areas of the high-status

groups, first to country estates and later to garden

suburbs, leaving behind the working classes in the

inner city. Technologies, including transportation

(railroads and steam-powered ocean vessels), new

materials (steel), new industrial processes (Taylorism), new energy sources (electricity), and new

communications technologies (telegraph and telephone), allowed urban centers to spread more

widely across the nation and permitted larger scale

industrialization. The densities of population and

activities in urban centers made investments in urban rail centers (long distance and commuter) financially viable. Coinciding with this came the

change from an urbanism made up of mill towns

and mercantile ports to one characterized by the

classic core-oriented industrial city.

During this period, the dominant flow of migrants was from rural to urban areas, as early stage

agricultural mechanization took hold and industrialization proceeded at a rapid pace. Initially this

flow, plus European immigration, produced a concentration (or absolute centralization) of population in the urbanized core of the young metropolis,

while population in the surrounding rural-urban

fringe (the ring) declined in many places. Within

cities, electric streetcars and train lines contributed to suburbanization of residences. Water and

sewer systems and advances in public health made

high urban densities safer. At the beginning of the

period, 1870, about one-fourth of all Americans

5 This section is based on a report prepared for the Office of Technology Assessment. Brian Berry, “Classification Systems for U.S. Cities,”

1995.
70 | The Technological Reshaping of Metropolitan America

lived in urban places—by the end, 1920, over half

were in cities.

❚ Mass-Production Metropolis, 1920-1970

The period 1920 to 1970 saw the emergence of a

new form of city—a third stage of industrialism

and urbanism. A wave of technologies—including the new transportation technologies of automobiles and airplanes; new infrastructure

technologies, including widespread diffusion of

electricity, highways, and water systems; mass

production manufacturing technologies; and importantly, agricultural mechanization—drove the

change. In addition, newly rationalized, vertically

integrated corporations with a national market

emerged.

Air travel, long-distance communications, and

truck transport began to recast regional relationships, allowing large-scale urban development to

spread farther south and west. Arterial highways,

then limited access parkways, then interstate

highways, tied metropolitan regions and finally

the entire nation together. Widespread electrification allowed industry much greater locational

freedom, stimulating much of southern and western industrialization. In addition, the development of air conditioning made living and working

in hot southern and western climes more tolerable.

Agricultural mechanization led to significant decreases in agricultural labor, with concomitant

migration from rural to urban areas.

During this period, growth continued to concentrate in metropolitan areas, while some growth

spilled over the existing urban boundary into the

rural fringe. This brought about widespread suburbanization and a relative decentralization of

population to the formerly rural fringe. Congestion and rising land values in the urbanized core,

the construction of a national highway system,

Veterans Administration and Federal Housing

Administration subsidies for single-family

homes, investment tax credits for new infrastructure, and a shortage of suitable development sites

encouraged firms and households to move outward. In the latter stage of this phase, as the outmigration of population from the core began to

exceed both in-migration from other regions and

natural increase, the population of many urban

cores began to decline (a situation of absolute decentralization), in some instances very rapidly.

Migration of blacks, displaced by agricultural

mechanization in the South, coupled with housing

segregation and the construction of concentrated

low-income housing, led to the creation of an increasing number of black ghettos, particularly in

northern-midwestern central cities.

Within metropolitan areas, cities were reshaped

by the automobile. Initially, streetcars created radial extensions from urban cores. Increasing automobile use caused residential locations to expand

significantly, leading to patterns of “bedroom suburbanization.” Residential suburbanization during this time meant the development of many

suburbs as basically bedroom communities largely dependent on the core city, although some local

service functions (e.g., retail, personal services)

grew in the suburbs. Steel girder buildings, electric elevators, and telephone communications facilitated intensified use in the central business

district through the construction of skyscraper office towers.

❚ Post-Industrial Metropolis,

1970-Present

The next phase of urban development, beginning

in approximately 1970, can be characterized as

post-industrial metropolitan development, where

business spreads throughout the metropolis; residential growth moves to the outer suburbs and exurban areas;6 some parts of some central cities,

especially central business districts (CBDs), revive while others decline; and many sections of

6 Exurban counties are defined as counties adjacent to metropolitan areas with significant commuting to the metro, but below the levels that

would make them officially part of the metropolitan area. Richard Morrill, “Population Redistribution within Metropolitan Regions in the

1980s: Core, Satellite and Exurban Growth,” Growth and Change, Summer 1992, pp. 277-302.
Chapter 3 Evolution and Current Conditions of the U.S. Metropolitan System | 71

older central cities and inner suburbs, particularly

those formerly dependent on mass production

manufacturing, stagnate or decline. In this period

of metropolitan growth, old dichotomies between

cities and suburbs have given way to a more spatially diversified and complex ordering of economic space. Core technologies underlying this

stage, as discussed in chapter 4, are information

and telecommunications technologies, particularly as applied to industry in both manufacturing

and services. New transportation technologies, including development of long-distance passenger

jets and completion of the interstate highway system are also important. The development and

widespread diffusion of these technologies are

contributing to a spatial restructuring of metropolitan economies. For example:

 Some metropolitan areas dependent upon older

technologies and industries, particularly lowtechnology manufacturing, stagnate and decline. Others successfully make the transition

to technologically based manufacturing or producer services industries and continue to grow.

 Many central cities experience slow growth or

decline in employment and population. Moreover, such decline now spreads to an increased

number of older, inner suburban areas.

 Most central city economies restructure, shifting from an economy based on goods production, distribution, and retail trade, to one based

on producer services, often employing a high

share of managerial and professional workers.

In addition, industries such as universities, hospitals, government, and tourism (e.g., hotels,

museums, airports), become more important to

core economies.

 In part due to the decline or stagnation of urban

core economies, coupled with an increased

shift to a white-collar occupational structure,

both poverty rates and ghettoization increase.

Moreover, minorities make up a large and

growing share of most central cities.

 A large share of outer suburbs and exurban

areas grow rapidly, both in terms of employment and population. Low-density residential

development spreads even farther outward,

leading to large, sprawling metropolitan areas.

 Metropolitan economies become “polycentric,” with concentrations of business activity

in many different parts of the area and the fastest growth taking place in suburban “edge cities.” However, in many places this growth is

relatively uneven, with some parts of the metro

growing and others stagnating.

DESCRIBING THE POST-INDUSTRIAL

METROPOLIS

This section describes metropolitan development

patterns in the United States over the last two decades. It examines the economic and demographic

changes from three aspects: interregional

changes, central cities and inner-suburbs, and outer suburban and exurban areas.

❚ Inter-Metropolitan and Inter-Regional

Economic Trends

Urban/Rural Growth

During the 1970s, after decades of relative decline, population and employment rose faster in

rural areas than in metropolitan.7 There are a number of reasons given for the growth in rural employment and population in the 1970s. These

include energy and minerals price increases (natural resource industries are more concentrated in

rural areas), the relative decline of urban manufacturing and growth in rural manufacturing, increased numbers of retirees living in rural areas

and the rise of amenities in smaller places that allowed rural preferences to be realized, and finally,

7 Metropolitan areas include Metropolitan Statistical Areas (MSA’s) and Primary MSA’s (PMSA’s). MSA’s include cities (defined as political units) and contiguous groups of cities with more 50,000 in population. PMSA’s are component metropolitan areas of larger Consolidated

MSA’s (CMSA’s). U.S. Census Bureau, Statistical Abstracts of the United States (Washington, DC: 1993), pp. 37-39.
72 The Technological Reshaping of Metropolitan America

Percentage change

Region and metropolitan categorya Population 1990 (millions) 1970-80 1980-90

North

Large 62.9 -0.9 2.8

Small and mid-size 25.6 5.2 3.3

Rural 22.6 8.0 0.1

South

Large 28.2 23.4 22.3

Small and mid-size 31.9 20.9 13.4

Rural 24.9 16,3 4.6

West

Large 33.8 20,0 24.2

Small and mid-size 10.8 32.2 22,8

Rural 8.1 30.6 14.1

U.S. totals

Large 124,8 8.1 12.1

Small and mid-size 67.9 15.5 10,8

Rural 56.0 14.3 3.9

Region totalsb

North 111.1 2.2 2,4

South 85.0 20.1 13,3

West 52.7 24,0 22.2

Total 248.7 11.4 9.8

a

Large metropolitan areas (MAs) include 39 CMSAs and MSAs with 1990 populations exceeding 1 million.

b

These regions are consistent with standard census definitions where the North region represents the combined Northeast

and Midwest census regions. When an individual MA overlaps regions, its statistics are assigned to the region where its principal central city IS located

SOURCE: Compiled by William Frey, “The New Urban Revival in the United States, ” Urban Studies, vol. 30, Nos. 4/5, 1993

improved transport (e.g., completion of the interstate highway system) and communications that

made many rural areas more accessible to industry.8

Many expected this trend to continue in the

1980s. In 1980, a Presidential Commission report

on urban issues9 reflected the widely held view of

the time that as new technologies and new modes

for distribution of consumer goods made heretofore exclusively urban amenities and jobs accessible to low-density rural and small city locations,

Americans, known to prefer these locations,

would choose them over congested larger metropolises. 10 Yet, this predicted movement of people

and jobs to smaller cities and rural areas did not

take place; indeed, the opposite occurred (see

table 3-1 ). Rather than continued reconcentration

of population away from large metropolitan areas

to smaller metropolises, and from both large and

small metropolises to non-metropolitan locations,

in the 1980s the largest metropolises gained population faster than smaller metropolises, and these

grew at a rate considerably slower than their rate

of growth in the 1970s. Non-metropolitan areas

8 William H. Frey, "The New Urban Revival in the United States,” Urban Studies, vol. 30, No. 4/5, 1993.

9 President's Comission on a National Agenda for the Eighties, Urban America in the Eighties: Perspectives and Prospects, Report on the

Panel on Policies and Prospects for Metropolitan and Nonmetropolitan America (Washington, DC: U.S. Government Printing Office, 1980.)

10J.M. Wardwell and D.L. Brown, “Population Redistribution in the United States During the 1970’s,” in D. L. Brown and J.M. Wardwell,

eds., New Directions in Urban-Rural Migration (New York, NY: Academic Press, 1980), pp. 1-35.
Chapter 3 Evolution and Current Conditions of the U.S. Metropolitan System | 73

had a rate of growth much below the level of the

1970s. Overall, the percent of the civilian labor

force living in metropolitan areas increased from

79.1 percent in 1976 to 81.1 percent in 1990.11

However, since 1990, there has been a small rebound in rural growth. Between 1990 and 1994,

population grew 0.9 percent per year, faster than in

the ’80s, but still less than the 1.1 percent in metro

areas.12 The share of the civilian labor force working in metropolitan areas declined slightly to 80.7

percent in 1994, while the share in rural areas increased slightly.

There are two important aspects to this rural

growth. First, over half (53 percent) of the labor

force growth in non-metropolitan areas occurred

in non-metropolitan areas adjacent to metropolitan areas.13 In part, as discussed in chapter 4, this

rural growth is stimulated by business suburbanization that allows workers to live in rural areas

and commute to metros for employment. Second,

much of the growth is fueled by the increasing

number of retirees. Between 1970 and 1989, the

population over age 65 grew 54 percent,

compared to an increase of 19 percent for the rest

of the population. Many of these retirees chose

locations in the South and the West in non-metro

areas with significant amenities. In fact, when

classified by type of county, counties classified as

retirement destinations grew faster (10.7 percent)

between 1990 and 1994 than any other county

type, and almost three times as fast as rural areas in

total (3.9 percent).14

Inter-Metropolitan Differences

America is neither predominantly an urban nor a

rural nation, but rather a metropolitan nation

where the majority of the population lives and

works in large urbanized areas that include both

historic central cities and inner and outer rings of

suburban development. A metropolitan area (metro) is defined by the U.S. Bureau of the Census as

“a large population nucleus, together with adjacent communities that have a high degree of economic and social integration with that nucleus.”15

In 1990, 75 percent or 193 million Americans

lived in either large or small metropolitan areas;

more than half the population, 126 million people,

lived in the 40 largest metropolitan areas (population of 1 million or above), and 43 percent lived in

the top 25 metros (population of 1.5 million or

above).16 While the central city population of the

largest 25 metros has changed very little since

1950, the suburban population has risen sharply

(see figure 3-1). In 1950, metropolitan population

was almost twice as great as central city population, meaning that urban and suburban populations were approximately equal. By 1990, the

metropolitan population had surged to nearly four

times central city population.

In the 1980s, both the population and civilian

workforce of large metros (over 1 million population) grew slightly faster than smaller metros,

consistent with the urbanization trends of the

1980s (see table 3-1). The share of the workforce

living in large metros increased slightly from 49.9

11 Economic Research Service, Department of Agriculture, based on data supplied by the Bureau of Labor Statistics, U.S. Department of

Labor, 1995.

12 Kenneth M. Johnson and Calvin L. Beale, “The Rural Rebound,” American Demographics, July 1995, pp. 46-55.

13 Economic Research Service, op. cit. footnote 11.

14 Ibid.

15 U.S. Bureau of the Census, Current Population and Housing Survey (Washington, DC: U.S. Government Printing Office, 1992).

16 Frey, op. cit., footnote 8.
74 The Technological Reshaping of Metropolitan America

45

40-

Metropolitan areas

35“

30-

25

20-

15-

Central cities

l o -

5

0 I I r

1950 1960 1970 1980 1990

SOURCE: U.S. Census Bureau, State and Metropolitan Area Data Book,

1991.

percent in 1976 to 50.5 percent in 1994; however,

all of that growth was a result of workforce growth

in fringe, as opposed to core, counties of metro

areas.

17 More recently, consistent with the technological trends discussed in chapters 4-7, growth

has been fastest in small and medium-sized metros, which gained 2.7 million workers between

1990 and 1994, compared to 1.4 million for large

metros.

Not all metropolitan areas grew, however.

About half of the largest 25 metros experienced

decline or little to no growth between 1970 and

1990, even as the other half incurred substantial

growth (table 3-2). In fact, five ( 13 percent) of the

largest 40 metropolitan areas lost population between 1980 and 1990 (Detroit, Pittsburgh, Cleveland, Buffalo, and New Orleans), and 49 (22

percent) of the 228 next largest metros also

shrank. For example, the city of Pittsburgh’s population declined by 30 percent between 1970 and

1990, while the metropolitan population fell by 4

percent.

With the exception of New Orleans, four of the

five declining large metros, and a large majority of

the declining smaller metros, have much in common. Many were based on older industries that experienced considerable employment loss in the

last 15 years, including tires, automobiles, and

steel, or were centers for the excavation and refining of copper, coal, aluminum, and oil. Moreover,

30 of the 54 declining small metros (55 percent)

are located in six states (Ohio, Pennsylvania,

Iowa, Michigan, New York, and West Virginia)

whose economies have been rooted in natural resources or manufacturing. Many of these declining, smaller metros are still dominated by their

historic, industrial-era cores, whereas many larger

metros, in spite of declining center cities, are

growing because people and jobs are locating in

the suburbs. In short, there appears to be increasing divergence in economic health between metropolitan areas: some areas have been able to grow

as they increased linkages to global markets and/

or assumed more specialized roles and functions;

other less fortunate areas have been less successful and have stagnated or declined.

Metropolitan areas, and in particular, larger

areas, grew in the 1980s for several reasons. First,

many of the industries concentrated in rural areas

grew slowly in the 1980s, meaning that national

growth tended to be concentrated in urban areas.

For example, employment in agriculture, mining,

and manufacturing all declined between 1977 and

1992. In contrast, as discussed below, employment in services, particularly producer services,

which have been concentrated in major metropolitan areas, grew significantly (see chapter 5).

Second, the growth of the minority population,

either through immigration or through natural increase (i.e., higher fertility rates), boosted growth

in many metropolitan areas, particularly the largest. Between 1980 and 1990 the minority population in the largest metropolitan areas (over 1

million) grew 37 percent, compared to 27 percent

in smaller metros. The white population is

growing faster in mid-size metropolitan areas (7.1

17 Economic Research Service, op. cit., footnote 11.
Chapter 3 Evolution and Current Conditions of the U.S. Metropolitan System 75
76 The Technological Reshaping of Metropolitan America

NORTHEAST AND MIDWEST

1950 1960 1970 1980 1990

SOUTH AND WEST

1950 1960 1970 1980 1990

NOTE: Population figures for the largest 13 metropolitan areas in the

Northeast and Midwest and the largest 12 in the South and West in

1990

SOURCE” U S Census Bureau, State and Metropolitan Area Data Book,

1991

percent) than in larger metros (3.8 percent), indicating that the nation’s large metros are becoming

more minority. 18

Inter-Regional Differences

In addition to differences in growth between different-sized metros, there have also been differences in growth between regions of the country.

The West and the South have been gaining population and employment faster than the East and the

Midwest for decades. Yet, there has been some

lessening of differences between northeastern and

midwestern metros and so-called Sunbelt metros

in the Southeast, Southwest, and West. Importantly, many large metros in the North and Midwest

reversed the decline in population of the 1970s in

the 1980s. Large metros in the South and West

continued, however, to grow faster than those in

the North (see figure 3-2). Still, employment

growth in the 1980s favored metropolitan areas of

the South and particularly the West, while employment growth in the Northeast and Midwest

was 94 and 93 percent, respectively, of the national average. 19

However, such simple North-South or coastheartland dichotomies appear to be becoming less

critical as some southern and coastal metropolitan

areas (e.g., Los Angeles, Houston, Boston) that

appeared to be immune to recession have undergone cyclical and structural difficulties in the last

decade, while some northern and interior cities remain healthy or have rebounded to some extent

(e.g., New York in the 1980s, Minneapolis, Columbus). Places that did well in the ‘80s, such as

California and Massachusetts, grew slower in the

‘90s, and some midwestern metros are growing

rapidly. Between 1990 and 1994, the Midwest reversed a decade of slow workforce growth, and

grew as fast as the nation as a whole (4 percent).

The Northeast, however, continued its pattern of

slower employment, actually losing 1.3 percent of

18 The Asian Population more than doubled from 3.5 to over 7 million. Hispanics grew by more than half—from 14.6 million to 22.3 million.

Blacks, numerically the largest minority, increased by 3.5 million over the 1980s, to almost 30 million people. Frey, op. cit., footnote 8.

19 Economic Research Service, op. cit., footnote 11.
Chapter 3 Evolution and Current Conditions of the U.S. Metropolitan System | 77

its employed workforce.20 These regional growth

patterns have varied for a number of reasons, including: changes in defense spending, which tended to be concentrated along the coasts;21 changes

in the value of the dollar which disproportionally

affects places dependent upon trade, such as the

industrial Midwest; and changes in energy and

natural resource prices, which affect many western and mountain areas.

One reason for the growth of population in

coastal locations in the 1980s is that many of the

large coastal metros—New York, Los Angeles,

San Francisco, Miami, and Houston—were ports

of entry for immigration from Asia, Africa, the

Caribbean, and Central and Latin America, accounting for 43 percent of national minority

growth. Twenty percent of the nation’s 1980s total

minority population growth—a 2.8-million increase—occurred in the Los Angeles metro, then

home to 12 percent of the nation’s total minority

population. New York’s minority population increased by 1.4 million.22

❚ Central City and Older, Inner Suburban

Economic Trends

The 1980s growth of large metropolitan areas is

not synonymous with, but is nonetheless related

to, the fate of historic core cities. Whereas most of

the 40 largest metropolitan areas grew (on average

1.9 percent), half of the central cities continued to

decline in population. However, of the 18 central

cities that lost population in the 1970s, four—

New York, Boston, San Francisco-Oakland, and

Seattle—grew in the 1980s, and all of the other 14

cities, except Denver, lost population at a slower

rate than in the earlier decade (see table 3-2).

Many other cities have lost population. Of the 196

cities in the United States with more than 100,000

residents in 1990, 65 lost population since 1970.

For example, since 1970, the population of Richmond, Virginia, declined from 250,000 to just

over 200,000, while the total population in the

metropolitan region increased from 676,000 to

866,000.23 Overall, population of the 25 largest

American cities in the 1980s grew annually by a

modest 0.5 percent, compared with a 5.3 percent

decline in the 1970s; and the top 40 cities grew 3.3

percent in the 1980s, compared with a 3.0 percent

decline in the 1970s. The share of U.S. population

living in the largest 25 central cities declined from

approximately 18 percent in 1950 to 13 percent in

1990.

Metros with minimal population growth generally had declining central city populations, while

the central city population of most growing metros held steady or grew as well.24 One study of the

60 largest metropolitan areas found that between

1970 and 1987, suburban population growth rates

were higher in metros with higher central city population growth, and central city populations grew

faster if suburban jurisdictions were also growing

faster.25

Total central city populations in the largest 13

Northeast and Midwest metros declined each decade from 1950 to 1990 (figure 3-2), and metropolitan population rose sharply during the 1960s and

then plateaued from 1970 to 1990. In contrast, the

central cities in the South and West have had slow

20 Ibid.

21 U.S. Congress, Office of Technology Assessment, After the Cold War: Living With Lower Defense Spending, OTA-ITE-524 (Washington,

DC: U.S. Government Printing Office, February 1992).

22 Frey, op. cit., footnote 8.

23 U.S. Census Bureau, op. cit., footnote 7.

24 Growth in these latter cities may be due in part to the fact that many of these cities are what David Rusk refers to as elastic cities that have

grown through annexation to incorporate new areas of development. David Rusk, Cities Without Suburbs (Baltimore: Johns Hopkins Press,

1994).

25 Peter D. Linneman and Anita A. Summers, “Patterns and Processes of Employment and Population Decentralization in the U.S.,

1970-1987,” Wharton Real Estate Center Working Paper #106, October 1991.
78 | The Technological Reshaping of Metropolitan America

population growth (figure 3-2). However, some of

these central cities of the South and West grew by

annexation, thus making it appear as if their central areas gained population, when in fact they

have not.26

A number of factors are involved in explaining

population loss in some cities, including: smaller

household size; increased commercial space in the

CBD that displaces population; and abandoned or

vacant land, for which precise data are often unavailable. Recent studies discuss the increasing

number of single persons, childless couples, or

single-parent households that now comprise the

populations of core cities.27 Household size in the

largest 40 metros decreased over the 20-year period by 16.5 percent, but housing units increased by

28 percent, indicating that fewer people occupied

more housing. Perhaps the most interesting aspect

of these data, however, is that core counties in the

Detroit, Cleveland, St. Louis, Baltimore, Pittsburgh, Buffalo, Hartford, and Rochester metros

lost population and housing units, indicating that

many housing units were not in use or were abandoned. For example, in Philadelphia, where population declined by 23 percent from 1950 to 1990,

there were 27,000 vacant residential structures

and 15,800 parcels of vacant land, most of which

were abandoned.28

The difference between central city and suburbs is not always stark. In fact, many older, inner

suburbs have also lost populations and jobs.

Moreover, some suburbs, particularly outer suburbs, have grown quickly in housing and employment, some of it in clusters of offices referred to as

edge cities, while others, particularly older, inner

suburbs, have not grown. Of 3,000 suburban jurisdictions in the largest 60 PMSAs, the range of differences between one suburban area and another

was extreme—e.g., employment growth rates between 1980 and 1986 as high as 106 percent and as

low as negative 47 percent, with 27 percent of suburban communities losing employment from

1980 to 1986.29 A 1987 HUD study indicates that

even in revived or prosperous metropolises like

Boston and Los Angeles there were many suburbs—perhaps 30 percent—in decline.30

There are generally two kinds of economically

troubled suburbs. First, many places defined as

suburbs are in fact older, somewhat smaller, industrial towns and cities now part of much larger

metropolitan areas: characteristically, they have a

high incidence of considerable poverty, unemployment, and abandoned and aging housing.

Many of these older suburban cities with declining manufacturing-based economies, such as

Camden and Patterson, New Jersey; East St.

Louis, Illinois; Gary, Indiana; and Hamtramack,

Michigan, are in as bad or even worse shape than

parts of the inner central city. Second, there are

also older inner suburbs to which, for a variety of

reasons, new industry has not moved and that have

attracted many low-income residents. Such suburbs are often places in which persons leaving

ghetto neighborhoods in the inner city “spill over”

into proximate suburban jurisdictions. In both

cases, these suburban jurisdictions often lack the

resources to adequately deal with the problems

facing them.31

26 Rusk, op. cit., footnote 24.

27 L.S. Bourne, “Close Together and Worlds Apart: An Analysis of Changes in the Ecology of Income in Canadian Cities,” Urban Studies,

vol. 30, No. 8 (1993), pp. 1293-1317. Bourne discusses the inner city as place with high concentration of elderly, young, and single-parent

households.

28 Philadelphia City Planning Commission, Vacant Land in Philadelphia, January 1995.

29 Linneman and Summers, op. cit., footnote 25.

30 Scott A. Bollens, “Municipal Decline and Inequality in American Suburban Rings, 1960-1980,” Regional Studies, vol. 22, 1988, pp.

277-285.

31 Ibid.
Chapter 3 Evolution and Current Conditions of the U.S. Metropolitan System | 79

Central City Economies

Central cities that increased in population in the

1980s tended to be those that had managed a successful transition from an older industrial economy to an advanced service economy via

specialization as locations for corporate headquarters; finance, insurance, and real estate

(FIRE); and related producer services (e.g., law,

advertising, and hotels). This was especially the

case for so-called global cities (e.g., New York,

Los Angeles, San Francisco, Chicago) that served

as command and control centers for global corporations and for operations of global financial institutions and related businesses,32 but also cities

such as Boston, Dallas, Minneapolis, Seattle, and

San Jose, whose regions specialized in high-tech

manufacturing. As discussed below and in chapter

9, the mismatch between the types of jobs in these

advanced service cities and the skills of the local

labor force, who are often not well suited to the

needs of this economy, has increased in many

places. Older cities in regions where transition to

these service and high-tech manufacturing sectors

did not advance, or was not sufficiently centralized, tended to continue declining.

Most central city economies can be divided

into two components, the Central Business District (CBD) and the rest of the central city (RCC).

The definition of the inner city is sometimes also

used to refer to areas with high minority and poverty concentrations in the central city. During the

1980s, employment in the CBD of most central cities grew slowly at about 1 percent annually,

compared to 3.4 percent for suburbs.33 While

manufacturing and retail employment declined in

the CBDs of the largest 60 metropolitan areas between 1976 and 1986, FIRE and business services

grew, and as a result, total employment grew.34

The RCC of many central cities grew faster in

employment than CBD employment between

1976 and 1986. However, cities where the opposite was true tended to be larger and older cities

(e.g., Chicago, Boston, Baltimore, Milwaukee,

Philadelphia, Pittsburgh, St. Louis) that had experienced overall difficulties, but some CBD revival.35 It does appear that the CBD and the RCC are

in competition for jobs—as gains in CBD growth

were correlated with losses in the RCC.36

For example, a study of employment in metropolitan Milwaukee supports the view that the inner city and not the entire central city is the area of

the metro which is most “at risk.” Manufacturing

is still important to the entire Milwaukee metro

(22.6 percent of jobs are in manufacturing) and especially to the inner city (31 percent of its employment base), but manufacturing jobs in the latter

declined, and the best manufacturing jobs that are

left are held by skilled employees, many of whom

are older. Otherwise, most industries (e.g., FIRE,

government) are underrepresented in the inner

city, allowing the conclusion that “the inner city is

not a very important source of metropolitan employment.”37

In part because of their high costs of doing business, central city economies appear to be heavily

dependent upon job creation through expansions

or new startups, as opposed to attraction of new industry. Historically, central city economies have

been sustained by their role as creators of new jobs

(either through expansion or new firm startup),

and when this function declines, the central city

32 See Mitchell Moss, “Telecommunications, World Cities, and Urban Policy,” Urban Studies, vol. 24, 1987, pp. 534-546.

33 Linneman and Summers, op. cit., footnote 25.

34 Given the difficulty in defining central city boundaries, developing data on employment change in CBDs is difficult. The Wharton data

are among the most recent.

35 Linneman and Summers, op. cit., footnote 25.

36 Ibid.

37 This section is based on a report prepared for the Office of Technology Assessment. Sammis White, Changing Spatial Patterns of Employment Location: Milwaukee, Wisconsin, 1979-1994, July 1995.
80I The Technological Reshaping of Metropolitan America

economy declines. For example, no new jobs were

created in the Milwaukee CBD from 1979 to 1994

due to large firms moving in (2,700 were lost due

to relocation outside the CBD), while the CBD

created 6,600 jobs due to expansions and 381 from 38 For all firms, the city lost new firm formation.

30,000 jobs through movement to the suburbs

alone, and gained approximately 11,500 from

firms moving into the city. Similarly, in New York

between 1976 and 1986, almost 160,000 jobs relocated out of Manhattan, while only 36,000

moved in, for a net loss of 120,000. For New York

City as a whole, 163,000 jobs moved out, and

37,000 jobs moved in, for a net loss of 126,000. In

contrast, over the same period Manhattan added

456,000 jobs from new startups and expansions, a

large share of these in business services and

FIRE. 39

Sectoral Change

Central-city economies are losing certain types of

employment faster than others, and in the process

are becoming more specialized in services in general, and advanced services in particular. They are

generally losing blue collar jobs, including

construction, particularly in the Northeast and

Midwest.

Manufacturing is no longer an economic activity identified with the central city. Decline of

manufacturing employment in high-cost urban

areas, particularly in the Midwest and Northeast,

is not new. However, its severity and speed is new.

Between 1979 and 1994, manufacturing employment declined by 47,000 in the Milwaukee central

city and inner-ring suburbs, but increased by

13,000 in outer-ring suburbs. In the 1980s, the 28

largest central counties of the Northeast and Midwest regions lost a total of nearly 1 million

manufacturing jobs (see table 3-3 and figure

3-3).40 A large share of manufacturing is now located in the outer suburbs and exurbs of major

metropolitan areas.

41 In the early 1960s such

plants were generally located in central cities and

inner suburbs, but as metro areas grew, manufacturing decentralized.

Wholesaling and retailing are two other major

industrial sectors that were once predominantly

urban, but now are primarily suburban. (see figures 3-4, 3-5, and table 3-4). In New York, for example, with retail-rich Manhattan at its core,

two-thirds of all retail is located in the suburbs. In

Milwaukee between 1979 and 1994, retailing and

wholesaling jobs declined by over 11,000 in the

central city, but increased by 28,000 in the subRegion Total Manufacturing Services

Northeast/Midwest 1,634,000 -971,000 2,605,000

(28 counties)

South/West 6,026,000 -17,000 6,043,000

(35 counties )

SOURCE: John D. Kasarda, “lndustrial Restructuring and the Changing Location of Jobs,” State of the Union: America in the

1990s, Volume 1: Economic Trends, Reynolds Farely (ed.) (New York, NY: Russell Sage Foundation, 1995)

38 One hundred and eighty-nine new jobs were created in the inner-city from industry attraction, while 1,225 were created from expansion

and 1,730 from new firm formation. (Ibid).

39 Stephen Leshinksi and Apryl Priestly, memorandum, “Regional Employment Relocations” October 12, 1990, Port Authority of New

York and New Jersey.

40 John D. Kasarda, “Industrial Restructuring and the Changing Location of Jobs,” in Reynolds Farley (ed.), State of the Union (New York,

NY: Russell Sage Foundation, 1995), pp. 23-26.

41 Arthur C. Nelson, William J. Drummond, and David S. Sawicki, “Exurban Industrialization: Implications for Economic Development

Policy,” Economic Development Quarterly, vol. 9, No. 2, May 1995.
Chapter 3 Evolution and Current Conditions of the U.S. Metropolitan System 81

New York

Chicago

Philadelphia

Detroit

Cleveland

Baltimore

Pittsburgh

Milwaukee

St. Louis

Boston

Seattle

Cincinnati

Minneapolis

Kansas City

Atlanta

Los Angeles

Dallas

Washington, DC

Denver

Miami

Tampa

Houston

San Fran. -Oak.-San Jose

Phoenix

San Diego

-459,200

-326,300

-168,000

-95,700

-56,300

-49,300

-37,100

-29,100

-20,100

-13,700

1,300

❚ 4,700

■ 14,900

■ 19,600

33,500

34,600

I 1 I ,

-600,000 -500,000 -400,000 -300,000 -200,000 -100,000 0 100,000 200,000

Difference

SOURCE: U.S. Bureau of the Census, City and County Data Book, 1974, 1994.

urbs, particularly the outer-ring suburbs .42 In part, Wholesaling also moved to the suburbs, as disretailing followed the market—when people cussed in chapter 5, in part to be near beltways and

moved to the suburbs, so did retailing. However, it interstate highways and to gain access to larger

was probably not until the 1980s that some large parcels of low cost land (see table 3-4). During the

department stores, for example, closed their city past two decades, most of the growth in warehousflagship stores. Likewise, as a greater share of the ing and distribution activity has occurred on the

population, generally consumers with higher in- periphery of America’s metropolitan areas, rather

comes, moved to the suburbs, many consumer ser- than in the urban core. For example, while overall

vices became predominately suburban industries. employment in Manhattan grew by 8 percent

42 White, op. cit., footnote 37.
82 The Technological Reshaping of Metropolitan America

Detroit

New York

Cleveland

Baltimore

St. Louis

Philadelphia

Minneapolis

Washington, DC

Pittsburgh

Boston

Atlanta

Milwaukee

Cincinnati

Miami

Seattle

Denver

Tampa

Dallas

San Fran.-Oak.-San Jose

San Diego

Phoenix

Los Angeles

Houston

-36,800

-4,667 ■

-4,193 ■

-3,375 ■

-1,304

-742

-491

729

48,391

50,983

51,549

70,033

-60,000 -30,000 0 30,000 60,000 90,000 120,000

Difference

SOURCE: U.S. Bureau of the Census, City and County Data Book, 1974, 1994. Data was unavailable for Chicago and Kansas City

between 1979 and 1989, employment in wholesaling declined by 14percent (see table 3-5). In the

26 counties surrounding the city, in contrast,

wholesaling employment grew by 31 percent—a

gain of more than 100,000 jobs.

As center cities lost industries like manufacturing, retail, wholesale, and consumer services, producer services in many places filled the gap (e.g.,

financial services, advertising, accounting,

law). 43 (See figure 3-6 and table 3-4.) Many of

these industries rely upon face-to-face contact and

the need to be near other industries or government

agencies (e.g., many parts of the legal industry locate downtown to be near courts and government

agencies that formulate and manage regulations).

A major reason for the growth in producer services in central counties since the 1970s is that

they were already specialized in industries, part43 Producer services is a generic industrial category that also includes business services. Legal and financial services are also producer services. Business services include accounting, marketing, advertising, public relations, etc.
Chapter 3 Evolution and Current Conditions of the U.S. Metropolitan System 83

New York

San Fran. -Oak.-San Jose

Detroit

Philadelphia

St. Louis

Cleveland

Atlanta

Washington, DC

Pittsburgh

Minneapolis

Baltimore

Milwaukee

Cincinnati

Seattle

Denver

Miami

Tampa

Dallas

Boston

San Diego

Phoenix

Los Angeles

Houston

-79,405

-11,785

-11,580

-6,852

-6,109

-1,979

■ 3,306

■ 4,930

-100,000 -80,000 -60,000 -40,000 -20,000 0 20,000 40,000 60,000

Difference

SOURCE: U.S. Bureau of the Census, City and County Data Book, 1974, 1994 Data was unavailable for Chicago and Kansas City

icularly financial services and business services,

that grew faster than the national economy.44

The importance of producer services to the current and future economic viability of the central

city cannot be underestimated. In 1984, the core

counties of the 24 largest metros housed 66 percent of law offices with more then 50 employees,

75 percent of investment and securities offices

with more than 50 employees, and 39 percent of

all jobs in information-intensive industries (see

figure 3-7). In nine major metros white-collar services constituted between 20-40 percent of central

city economies in 1970, but as much as 40-60 percent of the these same economies in 1990.45

44 For example, core counties of metropolitan areas over 1 million population gained 2.5 million jobs in producer services between 1974

and 1985, but 1.9 million of those jobs were due to the fact that these counties were already specialized in these fast-growing industries. See

Amy Glasmeier and Marie Howland, From Combines to Computers (Albany, NY: State University of New York, 1995).

45 Kasarda, op. cit., footnote 40. The metros include New York, Philadelphia, Boston, Baltimore, St. Louis, Atlanta, Dallas, Denver, and San

Francisco.
84 The Technological Reshaping of Metropolitan America

Change in Change in core

Percentage of employees percentage county

SIC in the metropolitan area share: employment

Industry CODE working in the core county 92-85 (thousands)

1974 1985 1992 1974-92 1985-92

Museums, Zoos and Botanical Gardens 84 87%

Security Brokers 62 91 85 

Air Transportation 45 87 75 78 3.1 82 58

, I ,

Advertising 731 86 78 72 -5.9 17 -11

Legal Services 81 69 68 67 -1,0 211 90

Water Transportation 44 72 66 65 -1.5 -23 -16.

Accounting 872 73 63 62 -0,9 106 51

Transportation Services 47 78 65 61 -3.9 45 13

Finance, Insurance, Real Estate-Administration 679 77 65 58 -7,7 -4 -31

,

Trans., Communication, Utilities-Administration 497 68 61 56 -5.0 -17 -42

Banking 60-61 67 64 56 -7,4 177 4

Real Estate 65 66 60 55 -5,1 52 -7

Educational Services 82 57 56 55 -1,1 213 68

Hotels 70 63 58 55 -3,7 76 10

Insurance Carriers 63 71 60 53 -6.9 -31 24 —

Communications 48 64 57 52 -4,7 -31 -29

Management and Public Relations 8740 63 53 50 -2,5 124 43

Membership Organizations 86 61 53 50 -2,8 122 66

Services Administration 899 76 53 49 -4,2 46 27

Total Administration 65 55 49 -5.4 -116 -212

Health Services 83 54 50 49 -1,0 983 567

Wholesale Trade 50 64 55 49 -5,4 78 -40

Social Services 83 59 51 48 -2.4 217 100

Electric, Gas and Sanitary Services 49 62 53 48 -5,5 2 -2

Trucking & Warehousing 42 61 49 46 -3,4 -26 12

I I I I I 1 I

Engineering & Architectural 871 58 49 43 -6.0 89 16

Manufacturing 20-39 54 47 43 -2.0 -1,550 -775

Construction 15-19 52 43 40 -2.8 -168 -122

Retail 53-59 51 44 41 -2.7 405 80

Computer & Data Processing 737 53 41 33 -7,8 113 29

NOTE Data are for 15 of the 25 largest metropolitan areas: Atlanta, Baltimore, Boston, Chicago, Cleveland, Dallas, Denver, Detroit, Houston, Los

Angeles, Minneapolis, New York, Pittsburgh, and San Francisco-Oakland-San Jose, Washington, DC.

SOURCE: U.S. Census Bureau, County Business Patterns 1974, 1985, 1992.
Chapter 3 Evolution and Current Conditions of the U.S. Metropolitan System 85

1979 1989 Percent

Manhattan 190,800 163,500 -14,3

Other boroughs 88,5000 90,000 1.7

Inner suburbs 161,700 190,300 17,7

Intermediate suburbs 118,100 169,700 43,7

Outer suburbs 69,100 97,200 40.7

SOURCE Data from U.S. Department of Commerce, Bureau of Economic Analysis.

Detroit

St. Louis

Cleveland

Milwaukee

Miami

Pittsburgh

Cincinnati

Baltimore

Kansas City

Minneapolis

Tampa

Seattle

Philadelphia

Denver

Atlanta

Boston

Washington, DC

Phoenix

San Diego

Chicago

Dallas

San Fran.-Oak.-San Jose

Houston

Los Angeles

New York

579

■ 14,350

■ 17,311

33,256

34,542

34,693

87,049

93,492

103,502

113,034

157,922

172,177

302,296

I I I

o 100,000 200,000 300,000 400,000

Difference

SOURCE U S Bureau of the Census, City and County Data Book, 1974, 1994.
86 The Technological Reshaping of Metropolitan America

100

39%

27%

420/o

66%

75%

Us. Central Information Law Securities

employment administrative intensive offices >50 offices >50

office employment employment employees employees

SOURCE: M.P. Drennan, “lnformation Intensive Industries in Metropolitan Areas of the United States of America, ” Environment

and Planning A, voI. 21, No. 12, 1989

However, particularly in core counties of larger

metros, the rate of growth is slower than in the

suburbs or mid-size metros even though employment in producer services has grown in central cities. Between 1974 and 1985, core counties of the

largest 40 metros gained 2.5 million producer services jobs, but they would have to gain an additional one million to keep pace with growth in the

rest of nation.46 In fact, the fastest growth in producer services has been in the suburbs, and often

in cities of 25,000 to 49,999 that are located within

metropolitan areas—i.e., in suburban cities that

are part of larger MSAS.

47

Some of this gain is due to relocations. For example, while central cities housed approximately

42 percent of corporate headquarters in 1984, by

the early 1990s this number had decreased to 29

percent, as many corporate headquarters relocated

to the suburbs or to smaller metros (see table

3-4.48 The most famous relocation is probably

that of Sears, which in the late 1960s built the

world’s tallest building as its central Chicago

headquarters, and then in the late 1980s moved its

Merchandise Group to Schaumburg, a northwestern Chicago suburb, leaving much of the Sears

Tower empty. Over one-quarter of new employment in the New Jersey suburbs of New York in

finance, insurance, and real estate between 1976

and 1986 was due to relocations out of Manhattan.49 In addition to the relocation of some more

complex functions outside the core, many routinized functions of producer service industries—so46 Glasmeier and Howland, op. cit., footnote 44.

47 Marie Howland, “Producer Services,” Economic Development Commentary, Fall 1991, p. 7..

48 Thomas Stanback, The New Suburbanization: Challenge to the Central City (Boulder, CO: Westview Press, 1991).

49 Memorandum, Stephen Leshinksi and Apryl Priestley, “Service Sector Study Update: Manhattan Job Generation, ” Port Authority of New

York and New Jersey, July 25, 1990.
Chapter 3 Evolution and Current Conditions of the U.S. Metropolitan System | 87

called “back-office” operations that do not require

the face-to-face contact provided by the core—are

often located in the suburbs to avoid the higher

transaction costs of the central city.

The loss of intrametropolitan share is a cause of

concern, particularly since the loss of manufacturing, wholesaling, and retailing has made producer

services the mainstay of the center city’s economy. This loss may mean that the central city is

slowly losing the very economic activities upon

which its economy has depended for the last

30years. If this is true, it would be a clear indicator

of core city decline. As discussed in chapters 4 and

5, the rise of information technologies (such as email, faxes, video-phones, and networking) is

likely to have a decentralizing effect on many producer service sectors, enabling many firms to

move out of high-cost, congested cores to the suburbs where they are closer to their workforce. It

may mean that the suburbs are growing much faster than central cities, and that economic functions

heretofore concentrated primarily in the central

city are now distributed throughout the metropolitan area.

But the decentralization of some kinds of producer services may not necessarily denote the economic autonomy of the suburb, nor its

independence from the central city for some kinds

of specialized business services. One study of corporate service linkages in New York, Los Angeles, and Chicago suggests that even where

central administrative or corporate headquarters

have relocated to the suburbs, they still rely on

world-class producer services located in large center cities.50 It is not clear whether this relationship

holds true for other large cities. Another study of

60 metro areas for two different periods (1976-80

and 1980-86) concluded that suburban employment growth translated into city employment

growth and continues to do so, “probably because

suburban employment utilizes the services of central city-based agents such as banks, lawyers, accountants, and consultants.”51 In contrast, the

study found that while central cities benefit from

employment expansion in the suburbs, suburbs

now benefit less from employment expansion in

the central city. This study’s conclusion and the

above discussion of corporate linkages in New

York, Chicago, and Los Angeles are only apparently contradictory, in that it is quite possible for

suburban employment to exceed that of the center

city in a variety of sectors, but still depend on the

center city for some kinds of specialized business

services. This, indeed, is what appears to be the

case, and it indicates the subtle and complex character of the present relation between cities and

suburbs.

In addition to producer services, three other industries help support many central city economies. First, cultural and educational institutions,

including museums, zoos, universities, teaching

hospitals, and medical centers, all have important

historical associations with the center city and

often find it difficult to move (though some cultural institutions are beginning to establish suburban

branches) (see table 3-4). Major university medical centers and hospitals located in central cities

further enhance the picture of the central city as a

place that specializes in the kind of information

and know-how essential in today’s economy; and

there are many attempts not only to stress the important medical and research capacities of university teaching hospitals, but also their potential

contribution to the economy in the form of commercially profitable ventures in bio-chemistry

and bio-medicine. For example, both Pittsburgh

and Baltimore have made much of their teaching

hospitals (University of Pittsburgh Medical Center; Baltimore’s Johns Hopkins and the Maryland

General hospital) in developing an economic development strategy for their respective cities. In

Milwaukee, one of the only sectors to add jobs

50 Alex Schwartz, “Corporate Service Linkages in Large Metropolitan Areas: A Study of New York, Los Angeles, and Chicago,” Urban

Affairs Quarterly, vol. 28, No. 2, 1992, pp. 276-296.

51 Linneman and Summers, op. cit., footnote 15, pp. 41-42.
88 The Technological Reshaping of Metropolitan America

faster in the central city than the suburbs was hospitals. 52

Second, industries that reflect the role of the

central city as a center of tourism and conventions

(i.e., hotels and airports) are still important.53

Tourism is a growing source of employment for

many central cities, particularly those endowed

with certain kinds of amenities, such as museums,

zoos, and historic sites, that allow the city to sell

itself as a place of amusement, pleasure, and recreation. During the 1970s and ‘80s, scores of central

cities developed downtown shopping malls and

new hotel complexes.54

Third, for certain cities that are state capitals,

have Federal or state installations or courts, or the

national capital, government services are also important because government tends to stay in historically established locations. For example, the

Milwaukee CBD, as well as the downtowns in the

six largest Ohio cities, specialize in government

(as well as education and medicine).55

Poverty and Race

At the same time that central city economies have

lost blue collar jobs and gained producer services

jobs employing a higher percentage of college

educated workers who commute in from the suburbs, their populations have become poorer and

increasingly minority (see table 3-6). As discussed in chapter 9, the economic decline of some

urban core economies accompanied by the increased specialization in information-based services in most has contributed to the economic

difficulties of the poor in central cities and inner

1960 1970 1980 1990

Population as percent of U.S. 26.1% 22.5% 20.9% 20.1%

Percent minority population 18.9 24.1 37.1 40.1

Unemployment rate 5.5 4.7 7.3 8.1

Percent employed in manufacturing 25.3 22.1 17.4 14.0

Median family income as percent of U.S. median family income 106.7 100,4 92.6 87.5

Family poverty rate 17.2 11.0 13.6 15.1

Percent population in census tracts with more than 40% poverty 8.0 5.1 8.1 10.8

Female headed families with own children as percent of all 7.9b 10.4 13.8 14.5

families

aBased on the 100 Largest MSA Central Cities in 1980 with the exception of Anchorage; Fort Lauderdale; Jackson, MS; Jersey City, Newark;

and Amarillo for which tract-level data was not available in 1960.

bEstimated.

SOURCE: U.S. Census data for 1960,1970,1980, and 1990, as compiled by John D. Kasarda, Urban Underclass Database Machine Readable Files,

Social Science Research Council, New York, 1992 and 1993 (except as noted). Calculations by U.S. Department of Housing and Urban Development

52The others were transportation services, security and commodity brokers, and legal services.

53 For a variety of interesting discussions concerning the center city “marketed” as a center of culture, tourism, entertainment, and education, see Gerry Kearns and Chris Philo, (eds.), Selling Places: The City as Cultural Capital, Past and Present (New York, NY: Pergamon Press,

1993).

54 Bernard J. Frieden, “The Downtown Job Puzzle,” The Public Interest, vo1. 97, Fall, 1989, pp. 71-86.

55 Richard D. Bingham and Deborah Kimble, “The Industrial Composition of Edge Cities and Downtowns: the New Urban Reality,” Unpublished Paper, Maxine Levin College of Urban Affairs, Cleveland State University, 1994; also White, op. cit., footnote 37.
Chapter 3 Evolution and Current Conditions of the U.S. Metropolitan System | 89

suburbs.56 Metropolitan and urban economic decline contributes to increased poverty and unemployment rates.57

Such sectoral changes are reflected in the transformation in educational levels of central city employees (regardless of place of residence). For

instance, in Baltimore the proportion of jobs held

by those without a high school diploma decreased

from 48 to 15 percent between 1970 and 1990.

The proportion held by high school graduates increased slightly from 29 to 32 percent. But both

those with some college and college degrees increased from 10 to 26 percent and from 12 to 27

percent, respectively.58 In a sample of 10 cities the

number of jobs held by people with less than a

high school diploma declined by 602,000 while

those jobs held by college graduates increased by

1,126,000.59 (See box 3-1.) These central city

jobs are increasingly filled by suburbanites where

educational attainment in higher. Stanback, looking at the four largest U.S. cities, found that educational attainment was somewhat lower than in the

suburbs in New York, Los Angeles, Chicago, and

Philadelphia, with about a 10 percent difference in

share of the population with more than two years

of college.60

These changes also appear to be related to increases in unemployment rates in central cities.

Unemployment among both white and black males without a high school degree increased in central cities between 1968 and 1992, but was most

pronounced for blacks. For example, for black

males aged 16 to 64 out of school, without a high

school degree, and living in the central cities of 22

of the largest metropolitan areas, depending on the

census region, unemployment increased from between 13 to 26 percent in 1968-70, to between 52

to 63 percent in 1990-92.61 For those with a high

school degree but no college, the rates increased

from between 11 and 13 percent in 1968-70 to 22

to 43 percent in 1990-92. In other words, in many

56 Timothy J. Bartik, Economic Development and Black Economic Success, Upjohn Institute Technical Report No. 93-001 (Kalamazoo,

MI: Upjohn Institute for Employment Research, January 1993), p. 6. Black concentration in slow-growing metros, Bartik argues, may help to

explain disparities in income and economic opportunity between blacks, other minorities, and whites.

57 “Poverty in Urban Neighborhoods,” in The Urban Institute Policy and Research Report (Fall 1993), pp. 11-13. Mark Alan Hughes makes

the similar argument that ghettoes are not rooted in racial or ethnic differences, but in structural conditions relating to metropolitan decentralization that impact certain inner-city neighborhoods in extreme ways, denuding them of economic and social vitality and creating an environment

of “isolated deprivation.” See Mark Alan Hughes, “Formation of the Impacted Ghetto: Evidence from Large Metropolitan Areas, 1970-1980,”

Urban Geography, vol. 11, No. 3, 1990, pp. 265-284. Hughes identifies white ghettoes in Cleveland’s inner city that suffer from the same deprivation and for the same reasons as black ghettoes.

58 By comparison, for the country as a whole: the proportion of jobs held by those without a high school diploma fell from 36.1 percent to

13.3 percent over the same period; those with a high school diploma increased slightly from 38.1 percent to 39.2 percent; those with some college increased from 11.8 to 20.8 percent; and those with a college degree increased from 14.1 percent to 26.5 percent. What this shows is that the

number of jobs for people without a high school diploma dropped much more precipitously and the number of jobs for those with some college

increased to a greater extent in Baltimore than in the U.S. as a whole.

59The 10 cities surveyed are Baltimore, Boston, Chicago, Cleveland, Detroit, Los Angeles, New York, Philadelphia, St. Louis, and Washington, DC. Kasarda, op. cit., footnote 40.

60 Stanback, op. cit., footnote 48.

61 If adjusted for periods of the business cycle, actual rates of increase in employment may be somewhat smaller given that 1990-92 was a

period of recession, and 1968-70 was a period of economic growth. John Kasarda, “Industrial Restructuring and Changing Job Locations,” draft

chapter, forthcoming in “Industrial Restructuring and the Changing Location of Jobs,” in Reynolds Farley (ed.), State of the Union (New York,

NY: Russell Sage Foundation, 1995), pp. 23-26.
90 The Technological Reshaping of Metropolitan America

There is growing concern among many federal policymakers about the fiscal crisis and weakened

economy of the District of Columbia. The evolution of the District’s economy is representative of the

changes that have occurred in many urban economies in the last decade. Two larger economic trends

have affected the health of many U.S. cities: the shift of economic opportunities from one region to

another, and the shift of people and jobs from central cities to outlying suburbs. It is the latter that has

played a role in the difficulties the District faces.

In fact, the region’s population grew 23 percent (815,000) between 1980 and 1991, ninth fastest of

the largest 20 metropolitan areas in the country. Region-wide employment grew 2.7 percent between

1989 and 1994, and in 1991 the region had the second lowest unemployment rate of these 20 metropolitan areas.

The second trend—the shift in jobs and populations outward from core cities to outlying suburban

Iocation—has affected virtually all metropolitan areas including Washington’s. Yet, unlike many central

cities of large metropolitan areas, the District gained jobs in the 1980s (10.8 percent increase). However, jobs in the suburbs increased by 51.5 percent, or approximately 775,000 jobs. As a result, the

District’s economy has become a smaller component of the region’s economy, with employment declining from 44 percent of the metropolitan economy in 1970 to 30 percent in 1988 to 28 percent in 1994

(see table A). Since 1989, however, the District has lost jobs. From 1989 to 1994, the District lost 27,000

jobs, while the region as a whole gained 61,000 jobs. Virtually all of the District’s job loss was in the

private sector, although this is likely to change as the federal government downsizes.

TABLE A: Employment Changes in the District and the Region

1989 1994 Growth rate, % Change in jobs

Total jobs—District 695,000 667,900 -

3

.

9 -27,000

Total jobs—region 2,281,000 2,343,000 2.7 61,700

Government jobs—District 276,500 275,000 - 0.5 -1,500

Government jobs—region 595,000 622,300 4.5 26,800

Private jobs—District 418,000 392,000 -6.1 -25,500

Private jobs—Region 1,610,000 1,720,000 2.1 34,900

SOURCE: Bureau of Labor Statistics, Employment and Earnings, 1990 and 1995.

Shifting Occupational Structure

Not only has the District lost jobs since the late-1980s, its employment structure has shifted significantly. From 1980 to 1990 jobs in the District held by high school dropouts declined by 25 percent while

those held by college graduates increased by 43 percent. The proportion of job holders in the District

without a high school degree declined from 23 percent in 1970 to 7 percent in 1990, while those with

college experience increased from 46 percent to 72 percent. ’ Jobs in the District increasingly require

higher levels of educational attainment.

While some of the improvement in educational levels of city job holders is due to increases in better

educated District residents, much of the increase in college jobs was absorbed by suburban commuters. As a result, less educated District residents, particularly minorities, fell farther behind. Among 10

large central cities, the District has the highest index of dissimilarity between the educational distribution of District jobs and the educational levels of District residents. While 72 percent of the District job

(continued)

1 John D. Kasarda, “lndustrial Restructuring and the Changing Location of Jobs, ” State Of the Union: America in the 1990s, Volume

1: Economic trends, Reynolds Farely (cd,) (New York, NY: Russell Sage Foundation, 1995).
Chapter 3 Evolution and Current Conditions of the U.S. Metropolitan System 91

TABLE B: Educational Requirements of District Jobs and Educational Attainment of

District Residents

Educational distribution (percent)

High school High school graduates Some college College graduates

Jobs 7 21 25 47

White residents 2 7 14 78

Black residents 26 40 20 14

Hispanic residents 50 21 10 19

SOURCE: John D. Kasarda, “lndustrial Restructuring and the Changing Location of Jobs, ” State of the Union: America in the 1990s,

Volume 1: Economic trends, Reynolds Farely (ed.) (New York, NY: Russell Sage Foundation, 1995)

holders have some college experience, only 34 percent of black District residents, who accounted for

65 percent of the population in 1990, have some college experience (see table B).

There are three reasons for the increasing education mismatch between minority District residents

and District jobs. First, improvements in education levels for District minorities have not kept pace with

education levels of whites. Second, jobs in the District as well as nationwide have required more education,

Third, relative to the rest of the region’s economy, the District has been gaining higher skilled jobs

and losing lower skilled jobs. For example, the sectors employing the most people in the District include

legal services, education, membership organizations, social services, and health services, which all

employ high levels of managers, professionals, technical, and sales staff. In fact, of the sectors in which

the District increased its share of region-wide employment from 1985 to 1992, legal services, educational services, and health services, only the latter employed a moderate share of lower-skilled workers

(table C).

In contrast, jobs that might employ lower skilled District residents at relatively good wages, such as

manufacturing, wholesale trade, and transportation and utilities, have been declining, in part because

the suburbs, and particularly the distant suburban counties such as Loudon, Prince William, and Frederick counties, are gaining jobs as these sectors spatially disperse.

Population Loss

The District has lost more than 53,000 residents between 1980 and 1992, a loss of over 8 percent. In

1960, the District’s population was 37 percent of the region’s population; in 1994 its percentage of the

region’s population was 15.5 percent.

The District’s population is not only declining, but has recently also been getting poorer. While the

percentage of the population classified as in poverty declined from 19.4 percent in 1985 to 16.5 percent in 1991, it increased to 18.5 percent in 1992. Middle-class people of all races and ages from 25

through 65 are leaving the city. Nearly 25 percent of the District’s households had incomes less than

$15,000 annually, and nearly 40 percent less than $25,000 annually, reflecting in part the large share of

female-headed single-parent households, elderly persons over 65, and single-person households in the

District. Fifty-three percent of the District’s children, even when not classified as below the poverty line,

live in poverty areas, and half of the persons (49,000) afflicted by poverty are in long-term poverty, i.e.,

they have been poor for eight or more years.

(continued)

2 Ibid.
92 The Technological Reshaping of Metropolitan America

TABLE C: Sectoral Composition of the District Economy

Percentage of jobs in the metropolitan

area located in the District

1974 1985 1992

% of region’s private sector jobs % % % Jobs

Total

Legal services

Educational services

Membership organizations

Hotels

Social services

Health services

Services to buildings

Management and public relations

Real estate

Communications

Banking

Retail

Manufacturing

Wholesale

Total private sector jobs

34%

68

73

73

56

61

18

53

40

46

38

35

24

24

31

309,000

26%

69

68

60

48

47

31

42

28

36

29

33

17

17

13

364,000

23%

72

69

53

44

41

37

31

26

24

21

19

14

10

10

29,600

37,900

41,100

14,500

17,800

61,700

10,300

13,200

11,200

10,100

9,700

49,200

13,800

7,800

407,000

SOURCE: U.S. Census Bureau, County Business Patterns, 1974, 1985, and 1992

The District also performs poorly on a wide range of socio-economic indicators. Of 31 central

cities studied in 1989, the District ranked 26 out of 31 with respect to infant mortality, 13 out of 31 in

regard to crime, 11 out of 31 in regard to per capita income, 20 out of 31 concerning per capita tax

revenues, and 26 out of 31 with respect to per capita expenditures.

large cities over 40 percent of black males with no ghettoes are growing in America and America’s

college education are unemployed. cities. The number of people in poverty increased

Though there are many difficulties in measur- from 29 million in 1980 to 39 million in 1993.63

ing poverty, 62 it is clear that both poverty and

62The principal difficulty is that most measurements of poverty rely on the national Consumer Price Index (CPI), which does not take into

account regional and local variations in standard of living. For example, people in New York City who make considerably more money than

people living in Atlanta may in fact be worse off because of the high cost of living in New York as opposed to Atlanta. The national CPI cannot

account for all these variations, so it may appear, for example, that there are fewer people in New York “below the poverty line,” whereas in fact,

because of the actual rather than statistical CPI, more people in New York are in poverty. Moreover, on occasion elements that makeup the

national CPI are understated or overstated. Between 1970 and 1980 the increase in the cost of home ownership and general price levels were

overstated (by about 6.5 percent), which caused the poverty rate to be overestimated by about 11 percent, or an additional 1.5 percent of the

population was determined to be below the poverty line. An additional problem is that comparing poverty data over time is complicated by

changes in the boundaries of census tracts and metropolitan areas. See John Weicher, “Measuring Poverty and Progress,” Cato Journal, vol. 7,

(Winter, 1987), pp. 715-730.

63 General Accounting Office “Community Development: Comprehensive Approaches Address Multiple Needs but Are Challenging to

Implement,” (Washington, DC: U.S. General Accounting Office, February 1995).
Chapter 3 Evolution and Current Conditions of the U.S. Metropolitan System 193

32%

43%

Non-Hispanic Blacks Hispanics Asians

Whites

SOURCE” William H. Frey, “Minority Suburbanization and Continued

‘White Flight’ in the U.S. Metropolitan areas Assessing Findings from

the 1990 Census, ” Research in Community Socioiogy, Vol. 4, 1994, pp

15-42

Of the 40 largest cities, 29 had poverty rates in

1990 above the national average and 11 of these

have rates 1.5 times greater. A slightly larger percentage of whites, blacks, Hispanics, and Asians

were poor in 1990 than in 1980, while the poverty

rate in the largest 71 cities increased from 16.1

percent to 18.2 percent over the period.64 Moreover, the poor are more concentrated in central cities than in suburbs. The central city poverty rate

(18 percent) was approximately 10 percentage

points higher than suburbs in 1990.

In addition to being concentrated in central cities, poverty is also concentrated within certain urban neighborhoods, variously described as

poverty areas, poverty neighborhoods, or ghettoes. 65 Not all those who are poor live in poverty

neighborhoods or ghettoes, and not all those who

live in such neighborhoods are poor. Similarly,

though poor blacks and/or poor Hispanics comprise the population most often residing in these

areas, not all ghettoes are minority ghettoes. 66

However, the share of the black poor in metro

areas who live in ghettos increased from 37.2 to

45.4 percent—indicating an increasing isolation

of the black poor from the black and white middle

class. 67

While minorities make up about one quarter of

the nation’s population, their share in central cities

is considerably higher. (see figure 3-8) Eleven of

the top 25 cities in the nation are “minority-majority” municipalities, and Dallas and St. Louis (49.6

percent and 49.9 percent minority population, respectively) are close to being minority-majority

cities. Moreover, 22 of the central cities of the

largest 25 metropolitan areas lost white population during the ‘80s.68 For example, Chicago’s

white population declined 18 percent, Miami’s 34

percent, and Detroit’s 40 percent.69

64 Sue G. Neal and Harold L. Bunce, “Socioeconomic Change in Distressed Cities During the 1980s,” Cityscape, Vol. 1, No. 1, August 1994.

65 The various descriptions sometimes also determine how an area with a high concentration of poverty is defined — e.g., Weicher defines

poverty neighborhoods as “contiguous census tracts, each having 20 percent of its population below the poverty line,” whereas Jargowsky

defines ghettoes as places whereat least 40 percent of the population is below the poverty line. See John C. Weicher, “How Poverty Neighborhoods are Changing, “ in Laurence E. Lyre, Jr. and Michael G.H. McGeary (eds.), Inner-City Poverry in the United States (Washington, D. C.:

National Academy Press, 1990); and Paul A. Jargowsky, “Ghetto Poverty among Blacks in the 1980s,” in Journal of Policy Analysis and Management, vol. 13, No. 2, 1994, pp. 288-310.

66 Indeed, during the 1980s the numver of neighborhoods with whites in the majority, and with poverty rates of at least 40 percent grew by

141 percent, whereas black poverty neighborhoods grew by only 49 percent. White ghettoes have a high rate of growth because they start from a

small base; of the 11 million persons who lived in urban ghettoes in the United States in 1990, seven out of eight were members of minority

groups, six million of these were blacks. Jargowsky, ibid.

67 Ibid.

68 Frey, op. cit., footnote 8, table 7.

69 Ibid.
94 | The Technological Reshaping of Metropolitan America

❚ Suburban and Exurban Economic

Trends

The spatial form of U.S. metropolitan areas has

evolved significantly in the last 20 years. The once

standard view of cities as consisting of a major

central business district, an inner ring of low-income residents, and an outer ring of more affluent

suburban residents, no longer adequately describes most U.S. metros. Today the suburb, so

defined, is rare. Residential development has extended even beyond the metropolitan periphery to

low-density “exurban” locations. What were once

bedroom suburbs have been replaced by a metropolitan area outside the central city that is increasingly urbanized, and, like the core, is a place not

only for residences but for businesses and employment. Many people both live and work in the

suburbs and rarely visit the central city; others still

commute to the core for work, but find that other

economic functions such as retail, personal, business, consumer, and social services are available

in the suburbs. This suburban job growth has led

some to argue that “downtown,” by which they

mean a diversified center of economic activity that

includes offices and retail, has relocated to the

suburbs70 or, specifically, to business and commercial centers in the suburbs known as “edge cities” that in some cases are larger than the central

business district.71

Yet this picture needs shading: suburbs are still

growing with respect to central cities, but at a

slower rate. Outer suburbs and exurbs adjacent to

and likely to become part of the metro area are

growing at the fastest rate, as might be expected

given their available vacant land. And some inner

suburbs are beginning to suffer from the same

problems and the population decline that has long

affected many central cities.72

Population Growth and Density

Since the 1970s the majority of Americans in metropolitan areas have lived in the suburbs.73 By

1993 the proportion of suburban to central city

residents for the entire nation reached 63 percent

to 37 percent,74 in the top 25 metros 75 percent of

the population resides in suburbs; and in the top

40 metros 71 percent is suburban.

In spite of growth, suburban population densities are still considerably below central city densities; however, over time, there appears to have

been a slight evening out. In 1980, for example,

the difference between central city densities and

metro area densities for the largest 40 metros was

approximately 10 to 1, whereas in 1990, with

more or less the same land area but a higher metro

population, the difference in density for the same

group of cities was about 9 to 1.75 This is due in

part to the fact that some central cities have been

losing population. For example, the population

density in the city of Chicago fell from 16,000 persons per square mile in 1950 to 12,000 in 1990.

But also densities in outer, established suburbs appear to be increasing as infill and multi-family

homes increase. For example, population density

tripled from 400 to 1,200 in Chicago suburbs from

1950 to 1990.76 Between 1980 and 1990, popula70 T.J. Baerwald, “The Emergence of a New Downtown,” Geographical Review, vol. 68, 1983, pp. 308-318.

71 Joel Garreau, Edge City: Life on the New Frontier (New York, NY: Doubleday, 1991).

72 Bollens, op. cit., footnote 30.

73 Suburban residents outnumbered central city residents by 53 percent to 47 percent by the early 1970s.

74 Frey, op. cit., footnote 8.

75 In the 1970s, many metropolitan areas expanded through the addition of adjacent, often rural counties to the definition of the MSA. As a

result, population densities decreased in the 1970s for many metros, as less dense areas were now included as part of the metropolitan area. Far

fewer counties were added in the 1980s.

76 Between 1980-1990, when population in the Chicago metro area grew by 1.6 percent, 90 units of local government in the city of Chicago

or its inner suburbs lost 700,000 population, whereas 165 units of local government, all in the suburban or metropolitan exurban areas of the

Chicago metropolis, gained one million residents (discussions with officials from the Northeastern Illinois Planning Commission, Chicago -

October 1994).
Chapter 3 Evolution and Current Conditions of the U.S. Metropolitan System | 95

tion density of the largest 40 metropolitan areas

increased 14 percent, from 456 persons per square

mile to 523.77

However, exurban and satellite city development is increasing, as low-density development

spreads outward from outer suburbs in metropolitan areas. The fastest growing sections of many

metropolises are now the low-density exurban

areas at furthest distance from the central city. A

recent study of seven major metropolitan areas,

Los Angeles, Boston, Minneapolis, Atlanta,

Phoenix, Detroit, and Houston, concluded that in

every case but one—Phoenix78—the exurban

areas of the metro grew much faster than either inner suburbs, outer suburbs, or the central city.79

Similarly, between 1980 and 1990, satellite metros (smaller metropolitan areas adjacent to larger

metros in consolidated metropolitan areas) grew

faster in population (17.2 percent) than suburbs

(13.8) or central counties of large metros (8.4).80

This decentralization of residencies results in

the physical size of metropolitan areas increasing,

and because new development is low density, it results in a reduction of overall metropolitan population density. Measuring changes in population

density is difficult, in large part because population and land area statistics are not collected for

the actual developed area of a metropolitan area,

but rather for a somewhat arbitrarily defined set of

counties intended to coincide with development

patterns. However, some metropolitan-specific

information does indicate the extent of population

dispersion. For example, the Philadelphia area,

with a population of 3.7 million that is only

100,000 larger than in 1960, is spread out over a

land area 32 percent larger than in 1960, representing the development of 125,000 acres of open

space. In Chicago, while the region’s population

grew only 4 percent, the residential land area expanded 50 percent.

Business Suburbanization

One reason for the exurban population increase is

the increasing rate of business suburbanization,

which lets workers live even farther out in cheaper

homes. In the last two decades, an increasing share

and variety of metropolitan employment has located in the suburbs (see table 3-4).81 The pattern

of suburban business location is diverse and complex and differs from metro to metro and within

metros. Businesses locate in metropolitan areas to

take advantage of the benefits metros offer,82 but

their precise location in the suburbs may result

from a number of causes, including factor cost differentials (price of land and rent, taxes, etc.), labor

supply, commuting patterns, the layout of roads

and highways, etc.83 High costs stemming from

congestion in the core as well as an increasing

ability offered by technology to gain from metropolitan-wide advantages (communications, labor

supply, etc.), have led suburban locations to be increasingly cost effective (see chapter 4). For example, between 1976 and 1986, 123,000 jobs

were relocated out of Manhattan, with about 55

77 These measures, however, hold counties constant between 1980 and 1990 and may not include the newly developed area at the edge of

the metros.

78Phoenix is one of those Sunbelt cities that still annexes its suburbs.

79 Alden Speare, Jr., Changes in Urban Growth Patterns, 1980-1990 (Cambridge, MA.: Lincoln Institute of Land Policy, 1993), pp. 15-16.

80 Morrill, op. cit., footnote 6.

81 Stanback, op. cit., footnote 48.

82 In other words, they want to be near the conveniences, amenities, institutions, opportunities for learning, and information and infrastructure that can be found in metro areas (metro-wide or urbanized agglomeration effects), or they seek specifically to be near other firms that make

or sell similar products and that are organized in industrial or business clusters. See Howland, op. cit., footnote 47; and Stanback, op. cit., footnote 48, esp. pp. 57-81.

83 Gary Pivo, “The Net of Mixed Beads: Suburban Office Development in Six Metropolitan Regions,” APA Journal, Autumn 1990, pp.

457-468.
96 I The Technological Reshaping of Metropolitan America

120

I I I

90

30

1960 1970 1980 1990

SOURCE: Gary PIvo, “The Next Mixed Beads, Suburban Office Development Regions, ” APA Journal, (Autumn, 1990), pp 457-468

percent going to the suburbs of New York and

New Jersey, and the rest moving outside the metro

area.

84 In Milwaukee, the central city lost 14,000

jobs between 1979 and 1994, inner-ring suburbs

gained 4,800, and outer-ring suburbs gained

82,000. 85 Between 1989 and 1993, albeit a recessionary period, downtowns in the six largest Ohio

cities lost an average of 7.17 percent of employment, while suburban business centers gained 2.1

percent, although even some older ones lost employment. 86

Though no metropolitan areas are the same, in

general the economies of metropolitan areas are

becoming less monocentric (most economic activity located in one place—the central business

district); and instead more polycentric, where economic activity is located in many centers throughout the metropolitan area. The common vision of

the metropolitan area as a place with one economy, located among downtown skyscrapers and inner-ring factories, no longer describes the

metropolis common to America at the end of the

20th century. For example, 57 percent of office

stock is located in the suburbs, up from 25 percent

in 1970 (see figures 3-9 and 3-10). 87

However, there are several patterns of office development. 88 On the one hand, there is the phenomenon of specialized economic activities

located in high concentrations in industrial and office parks and retail malls in a variety of so-called

“edge city” clusters. Garreau identifies 181 such

edge cities, located in 34 metropolitan areas

around the country.89 In six metropolitan areas,

Pivo found that the largest 10 percent of office

clusters in the suburbs (areas where two or more

offices are closer than one quarter mile) contain

over 40 percent of the office space, while the largest 25 percent contain over half.90 Thus, while

most office space is in larger clusters, some is in

much smaller clusters, sometimes of only two or

three office buildings with several hundred thousand square feet.91 One study of Dallas-Ft. Worth

found that while 60 percent of all jobs in the region

84 Leshinksi and Priestly, op. cit., footnote 39.

85 White, op. cit., footnote 37.

86 Richard D. Bingham and Deborah Kimble,’’The Industrial Composition of Edge Cities and Downtowns: the New Urban Reality,” Unpublished Paper, Maxine Levin College of Urban Affairs, Cleveland State University, 1994.

87 Pive, op. cit., footnote 83. Also, Neil Pierce, Citistates: How Urban America Can Prosper in a Competitive World, (Washington, D.C.:

Seven Locks Press, 1993).

88 See Robert Cervero America’s Suburban Centers: The Land Use-Transportation Link, (New York, NY: Unwin Hyman, Ltd., 1989).

89 See Garreau, op. cit., footnote 71. The term edge city was coined by Garreau, but the concept of concentrated perimeter development

belongs to many other analysts, including Cervero, Hartshom and Muller, Fishman, etc.

90 These areas were LOS Angeles, Houston, Seattle, Denver, Toronto and San Francisco.

91 Pivo, Op. cit., footnote 83.
Chapter 3 Evolution and Current Conditions of the U.S. Metropolitan System 197

Detroit

Dallas

Atlanta

Houston

Tampa

Denver

Kansas City

Miami

St. Louis I

Los Angeles

Baltimore

Minneapolis

Philadelphia

Boston

San Fran. -Oak.-San Jose

Seattle

Cincinnati

Cleveland

Chicago

Milwaukee

Phoenix

Pittsburgh

New York

o 2 0 40 60 80 100

Percentage of metropolitan commercial office space outside the CBD

SOURCE: U.S. Bureau of the Census, State and Metropolitan Area Data Book, 1991

are concentrated at 5 percent of the work sites, 40 of the central business district they are small. The

percent are concentrated in the remaining 95 per- largest of these clusters, at 3.5 to 6.5 million

cent of work sites. 92 Presumably, functions in square feet, are still one-fifth to one-tenth the size

these dispersed offices have less need of a high of the region’s central business districts, and the

level of face-to-face contacts enabled by location average square foot of office per acre in these clusin the central business district. Moreover, while ters was more than four times lower than the resome clusters may be large, compared to the size gion’s central business districts. 93

92 Brian Berry, Donald A.. Hicks, and Paul Waddell, State of the Region 1992, (Dallas, TX: Bruton Center for Development Studies, university of Texas at Dallas).

93 Pivo, op cit., footnote 83.
98 | The Technological Reshaping of Metropolitan America

Just as suburban economies are different from

central city, so suburban “edge cities” appear to be

different from each other. In Ohio, for example,

such edge cities contain employment in the aggregate that is more diverse than the employment in

the state’s major central cities (Dayton, Cincinnati, Cleveland), but each edge city is itself quite

specialized: 20 percent of the edge cities concentrate on manufacturing; wholesale and retail trade

is found in 22 percent of these perimeter centers of

economic activity; 27 percent specialize in personal and producer services; and some are centers

for hospitals, social and government services.94

In some metropolitan areas growth has been

relatively even, but in many metropolitan areas

growth is spatially uneven.95 Some suburbs are

growing rapidly at rates much higher than the central city and also much higher than their respective

metropolitan area generally, while some suburbs,

as discussed above, are losing jobs. In suburban

Chicago, for example, three densely developed

centers of suburban employment—O’Hare Airport, Schaumburg, and central Du Page county—

accounted for 27 percent of total net employment

growth in metropolitan Chicago in the 1980s.96

And though their employment density was much

lower than Chicago’s central business district (average employment density of 126,000 per square

mile), these three “edge cities” did reach densities

of about 30,000 workers per square mile.97 Moreover, the counties in which they were located experienced high employment growth in the

1980s—northwestern Cook county and Du Page

county accounted for 65 percent of the decade’s

metro employment growth of 394,000 jobs, or

roughly 257,000 jobs. If one adds to these figures

for suburban Chicago employment growth in the

1980s, the employment growth in the central business district—from 491,000 to 522,000 jobs, or an

increase of 31,000—and the fact that the city of

Chicago as a whole experienced a slight job loss

(20,000 jobs), the uneven aspect of suburban economic development becomes a bit clearer. The

suburbs are growing very fast and to a certain extent unevenly.

Similarly, northwest Atlanta employment

growth is densely concentrated in several perimeter activity centers.98 At the same time, the southern suburbs, which are predominately black, are

very sparsely developed or declining. The city of

Atlanta’s share of the metropolitan region’s jobs

declined from 40 percent in 1980 to 28 percent in

1990. However, the northern, predominately

white, suburbs gained all the share that the city

lost, exacerbating spatial mismatch for minorities

concentrated in the central city and southern part

of the city.

CONCLUSION

The spatial and economic structure of U.S. metropolitan areas has undergone considerable change

in the last 20 years. Growth is much more diffuse,

but also more uneven, at both the intra- and intermetropolitan levels. In other words, an increased

number of metros now vie for growth, and the

dominance of a few traditional large cities is giving way to what some term concentrated dispersal

to a larger number of metropolitan areas. Yet, this

decentralization is hightly selective and uneven,

and not all places will be able to succeed, particularly those that have not managed the transition to

the post-industrial metropolis.

94 Bingham and Kimble, op. cit., footnote 86.

95 Robin Bloch, “The Metropolis Inverted: the Rise and Shift to the Periphery and the Remaking of the Contemporary City,” Ph.D. dissertation, UCLA (1994).

96 John F. McDonald and Paul J. Prather, “Suburban Employment Centres: The Case of Chicago,” Urban Studies, vol. 31, No. 2 (1994),

201-218.

97 Ibid.

98 Keith Ihlandfeldt, “The Spatial Mismatch Between Jobs and Residential Locations Within Urban Areas,” Cityscape, vol. 1, No. 1, August

1994. Ihlandfeldt uses data from Atlanta that shows the growth of jobs in its northern suburbs, and the lack of jobs in its southern suburbs.
Chapter 3 Evolution and Current Conditions of the U.S. Metropolitan System | 99

Similar patterns are occuring within metropolitan areas. The historic dominance of the central

city is giving way to a much more dispersed pattern of growth as economic activity spreads unevenly throughout the metropolitan areas in other

nodes and centers (what some term edge cities).

Some sections of the metro, usually a select group

of outer suburbs and even exurban locations, are

growing quickly and becoming home to fastgrowing companies, while other sections, particularly many parts of the central city and inner

suburbs, are suffering job loss, disinvestment, and

poverty. As discussed in the next four chapters,

the technological revolution based on telecommunications and information technologies now underway is likely to exacerbate and accelerate these

trends, leading to both positive and negative outcomes.
Technological

 Change and

 Employment

Location

dvanced industrial economies are in the midst of a technological revolution, driven in large part by rapid advances

in microelectronics technologies. These digital electronic

technologies permit information in a myriad of forms to

be generated, routed, and transmitted cheaply, instantaneously,

and at high volumes virtually anywhere. There has been much

speculation about the impacts of the “information superhighway,” “digital society,” and emerging “cyberspace,” on society in

general, but surprisingly little is known about the potential effects

of this technology revolution on human settlement patterns

broadly, or on urban conditions in the United States specifically.99

Today, economic activities are increasingly shaped through

continuous and real-time interactions facilitated by information

technologies. Because these interactions differ so markedly from

past interactions that were more heavily burdened by space and

time constraints, they have, through their impact on industries

and jobs, the potential to significantly reshape American’s metropolitan areas, and to bring about significant growth for some

kinds of places and decline for others. In fact, some argue that

these technologies underpin the transformation of metropolitan

1 For a discussion of these trends in the OECD nations, see Organization for Economic

Cooperation and Development, Cities and New Technologies (Paris: OECD, 1992); also,

John Brotchie, Mike Batty, Ed Blakely, Peter Hall, and Peter Newton, Cities in Competition: Productive and Sustainable Cities for the 21st Century (Melbourne, Australia:

Longman, 1995). For a discussion of trends in Australia see Patrick Troy, ed., The Impact

of Technological Change on the City, unpublished manuscript, 1995. See also “City vs.

Country: Tom Peters and George Gilder Debate the Impact of Technology on Location,”

Forbes ASAP, January 1995.

| 101
102 | The Technological Reshaping of Metropolitan America

areas,100 and that the conceptual and policymaking frameworks built up since the beginning of the

20th century to deal with the physical, social, and

economic aspects of the industrial city are largely

outmoded.101 Clearly, technology is not the only

force working to reshape metropolitan economies; other factors such as changing industrial organization, demographics, and social conditions

(including crime in central cities), also play a role.

However, because of the magnitude of technological change, technology will play a central role.

Because the form of cities and metropolitan

areas is largely shaped by patterns of commerce

and industry, this chapter examines the likely impact of the information technology revolution on

the location of employment.102 It first discusses

the information technologies that facilitate electronic information generation and transfer. It then

presents an overview of how information technologies are affecting the spatial distribution of economic activities, and finally, it examines the likely

impact of these technologies on metropolitan

form.

The analysis in this chapter is based on a case

examination of the impact of technology on a

number of industries, including telecommunications, banking, insurance, securities trading, and

professional services (chapter 5); and freight

transport, wholesale trade, and manufacturing

(chapter 6). These industries were chosen because

much of their function involves “exporting” products or services to places other than the area where

they are located, and as such determine the economic growth of regions or metropolitan areas,

and to a lesser extent, parts of metro areas. In contrast, growth or decline in industries that serve local customers (e.g., barbers, repair shops, grocery

stores) is largely a response to economic growth

in other sectors that export their output outside the

region. For example, local insurance agents are a

residentiary function, since they are located near

their customers, but a nationwide insurance customer service center is an export function, since

the jobs are not dependent upon demand from the

local economy. Analysis in this chapter is also

based on the examination of three cross-cutting

technological issues in chapter 7, 1) telecommuting of individual workers, which has the potential

to affect where individual workers live and work;

2) the effect of Intelligent Transportation Systems

(ITS) on urban form; and 3) the spatial distribution of the telecommunications infrastructure,

which some argue limits where information-intensive industries can locate.

TECHNOLOGICAL UNDERPINNINGS OF

THE NEW PERIOD OF METROPOLITAN

GROWTH

To understand better how this next wave of

technologies is likely to recast industrial and residential locational patterns, it is important to understand first the key technologies being adopted

by industry. Many of the early applications of information technology (IT) were to improve internal operations (e.g., first mainframe computing

and then desk top computing) and often created

“islands of automation” with little interconnection between components. As a result, their impact on the location of activities was limited. It is

only recently that technologies facilitating linkages and communication between operations have

begun to be widely adopted. These technologies

are falling in price while increasing in performance, and as a result, will continue to be adopted

throughout the economy. For the purposes of this

report, these technologies can be grouped into

three categories: technologies to transfer informa2 Paul Knox, Urbanization: An Introduction to Urban Geography (Englewood Cliffs, NJ: Prentice-Hall, Inc., 1994).

3 Stephen Graham, (University of Newcastle upon Tyne) “Cities in the Real-Time Age,” paper presented at the Information and Telecom

Tectonics conference, Michigan State University, Mar. 21, 1995.

4 People may want to live in bucolic rural settings, and IT may enrich those settings, but as long as people depend on their livelihood through

work, they live near were work locates.
Chapter 4 Technological Change and Employment Location | 103

tion into electronic form, to distribute and route

information, and to transmit this information to

different locations. What makes these technologies revolutionary is their ability to capture, store,

and transmit information in digital form, which

makes electronic, and therefore instantaneous,

transmission possible. Rapid adoption of these

technologies is being driven by the significant increases in productivity they make possible.

❚ Transforming Information Into

Electronic Form

Generation and consumption technologies transfer information into electronic form or allow it to

be used (read, heard, etc.). For example, image

technology digitizes and stores images of physical

documents, such as checks, forms, and letters.

High-resolution monitors allow information to be

easily viewed. Other technologies include fax;

video conferencing and video phones; computers,

including portable and laptop computers; optical

scanning technology; bar code readers; graphics

software; knowledge-based software systems;

electronic storage technologies, including floppy

and hard disks and CD-ROMs; database software

systems; voice recognition; remote sensors; and

robotics and CAD/CAM.

Electronic Data Storage and Retrieval

Technologies

Electronic data storage capacity and access speed

have increased while costs have gone down.

Moreover, database software has become more

sophisticated. As a result, a large share of information is stored and accessed electronically. The development of laser-based CD-ROMs and CDs that

can both be read and written to make data storage

even cheaper and faster. These technologies allow

users to obtain information without having to handle paper records.

Scanning and Imaging Technology

Image technology, such as faxes, converts images

on paper to electronic form that can then be reproduced in original form. Optical character recognition (OCR) technology converts images of text

into digital code that can then be processed by

computers. For example, new check encoding machines recognize some check amounts and automatically magnetic encode them; for images that

are unrecognizable, the machine transfers the

image of the check to a terminal at which a person

manually encodes the amount.

The use of imaging and OCR technology was

initially limited by three factors—the relatively

high cost of digital transmission of complex

images, the cost of imaging equipment, and the

high error rates involved in imaging certain types

of documents. However, with the growth of fiberoptic networks and rapid progress in data compression technology, costs of transmission have

gone down. Also, equipment costs have fallen significantly, and error rates have declined.

Searchable Databases

Database software systems accessible through

PCs allow information to be obtained according to

selected search criteria. These systems facilitate

distributed work by allowing remote access to

data files. For example, work is underway to establish an information network for realtors that

would allow automated online title searches,

eliminating the need for title search firms to go to

courthouses for searches. Similarly, online legal

research has reduced the need to be near law libraries.

Electronic Files/Distributed Computing

Electronic folder management, an offshoot of

imaging and database applications, consists of

whole files of documents that are stored and retrieved electronically. Digital pictures of documents, rather than pieces of paper, are moved

through the system. Such file folder imaging allows all information about a client or project to be

collected and handled electronically. Combined

with distributed computing that links personal

computers together into a system, workers are

able to share access to the same information, including a wide variety of information from offsite

and distributed locations if desired. For example,

some insurance firms are using this technology to

store all information about clients and policies.
104 | The Technological Reshaping of Metropolitan America

Law firms are also increasingly using image

technology to enter legal documents into a computer format. Similarly, US West produces Yellow

Pages by using shared folders so that everyone, including sales reps, graphic artists, and the collections office, can access work electronically.

A similar version of this is groupware that enables distributed teams to work together. Groupware, such as Lotus Notes, is based on

client/server systems that allow users (or clients)

to communicate securely over a local area network or telecommunications link with a document residing on a shared computer (or server).

Video Transmission

In spite of being invented in the 1930s and being

touted at the 1964 New York World’s Fair as the

wave of the future, video telephony has been slow

to be adopted. In the 1980s, an increasing number

of companies purchased dedicated video conferencing equipment. Yet these systems were costly

and cumbersome to use.103 However, newer systems utilizing video modems are less expensive

and more portable, and thus much more useful.

Video modems translate and digitize data and

send it over high-capacity lines. In fact, some expect desktop video conferencing will become

commonplace for many users with access to advanced telecommunications. The cost is equivalent to two long-distance phone calls.

Personal Computers

Advances in speed, storage capacity, and ease of

use have increased the utility of personal computers. In addition, new graphical user interface software (e.g., “Windows”) makes computing easier

for non-technical personnel, allowing more functions to be put on computers. Portable computing

has become more powerful and cheaper in the last

five years, better enabling distributed work. For

example, the IRS is experimenting with the use of

laptops for its field agents, who can then access a

taxpayer’s records via modem. The IRS expects

agents will be able to do the job with only one field

visit and not have to go back for further information and followup.

Smart Cards

Financial institutions, telephone companies, software firms and other businesses in the U.S. are

getting ready to take another step in the continuing

convergence of information and finance—the expanded use of “smart cards” to perform a variety

of financial functions. Smart cards differ from

conventional credit or ATM cards in that they can

carry large amounts of information, using an embedded microchip.104 A smart card could be used,

for example, to download funds from the cardholder’s bank account directly onto the card itself.

Because this in effect makes the card a new form

of cash, authorization of individual point-of-sale

transactions would not be necessary. The same

card could also carry detailed information about

the holder’s health insurance coverage; for most

routine procedures, health care providers could be

paid directly from the card. The Smart Card Forum—a 115-member consortium of financial

institutions and others with an interest in applications of smart card technology—are now working

to develop common standards and protocols.

Smart cards have the potential to reduce the

need for branch banks to deliver services; they

also reinforce the importance of central processing facilities. Customers would be able to download “cash” at home via a screen phone or a PC.

The midnight trip to an ATM would no longer be

necessary. Pension payments, Social Security,

and unemployment and welfare benefits could

also be transmitted electronically onto smart

cards.

5 Companies could pay as much as $100,000 for dedicated systems, not counting the cost of office space for the rooms. There were other

disadvantages as well. Users had to schedule time in the rooms. In addition, cameras were not controlled by the viewers, which limited their

ability to participate.

6 “Smarter Yet and Smarter,” New Scientist, October 1994, pp. 41-43.
Chapter 4 Technological Change and Employment Location | 105

❚ Distributing Electronic Information

Distribution technologies allow electronic information to be switched and routed to particular

places or uses. For example, electronic data interchange protocols allow documents or other data to

be transmitted between users. Other technologies

include Internet communications and e-mail; modems, including high-capacity cable modems;

store and forward technologies, such as call forwarding systems; local and wide area networks;

data compression technologies; voice mail and

answering machines; pagers; wireless communications and computing; and automatic call routing systems.

Electronic Data Interchange

Broadly defined, electronic data interchange

(EDI) involves the transmission of data and information electronically from one computer to

another.105 This information can be in a variety of

forms, including data sets, forms and applications, funds, and letters. For example, in the insurance industry most transactions use standard

contracts with the unique policy information summarized on one page. Electronic exchange of this

information could streamline underwriting and issuing policies. In banking, electronic funds and

invoice transfers are increasing. For example, EDI

Banx is an electronic payment system developed

recently that allows companies to transfer payments and remittance data electronically to vendors and suppliers. Similarly, the need to read

utility meters may be eliminated with technology

that transmits meter information directly to computers, which in turn could debit customer bank

accounts.

Telephone Technologies

Development of new software and hardware applications in telecommunications have created a

number of new uses for telephones, enabling more

distributed work. For example, new digital call

distribution systems and distributed computing

make it possible to distribute phone service functions that previously had to be in more central

locations. Call routing technologies allow calls

from a wide geographic area to be routed to available offices, enabling companies to centralize service facilities and better manage the flow of calls.

Remotely accessed voice mail and call forwarding

better enables remote work. In recent years, innovations such as digital call distribution systems,

telephone keypads, and screen phones have enabled banks, brokerage firms, and mutual funds to

broaden the range of services that clients can access by phone. In addition, new number assignment technologies allow temporary assignments

of Internet and other addresses to people who are

on the road, making it easier to work off-site. Software-defined phone networks enable much wider

adoption of dedicated lines, enabling easier access

for interoffice calls.106 Finally, the rapid growth in

toll-free 800 service has meant that an increasing

number of companies can inexpensively serve

customers throughout the country or even the

world. In the late 1980s, AT&T included about

60,000 numbers in its nationwide 800 service

“public” listings directory.107 In 1995, so many

companies have 800 numbers there is a looming

shortage of available new numbers.

Internet and Online Applications

New systems that allow information to be easily

transmitted and obtained remotely by computer

7 U.S. Congress, Office of Technology Assessment, Electronic Enterprises: Looking to the Future (Washington, DC: U.S. Government

Printing Office, 1994).

8 Leland Johnson, “Advances in Telecommunications Technologies That May Affect the Location of Business Activities,” Rand Note

N-3350-SF, Rand Corporation, 1991.

9 Ibid.
106 | The Technological Reshaping of Metropolitan America

are growing. Electronic mail systems have grown

significantly, as has Internet use. Some companies

use these and other systems to maintain close linkages among personnel. In addition, recently a

number of firms have begun offering merchants

software that will allow customers to make online

credit-card purchases via the Internet.

❚ Transmitting Electronic Information

Transmission technologies facilitate transmission

of electronic information between two places. Atmospheric transmission includes: satellites, cellular systems, microwave relay systems, and radio

and TV transmission. Terrestrial systems include

cable, fiberoptics, and Integrated Services Digital

Network (ISDN).

Wireless Technologies

Radio-frequency-based wireless technologies, including phones, computing, faxes, and other electronic devices are becoming more widespread.108

Cellular telephones use switching and coded radio

broadcast to localized cells, offering mobility in

densely populated areas. The proposed low-earthorbit satellite systems now in development would

use switching and satellite broadcast, expanding

mobility to remote areas of the world.

Telecommunications

The U.S. telecommunications infrastructure is international in scope and is evolving as both the delivery system and applications advance. In the last

decade, there has been widespread deployment of

a nationwide and international system of highspeed, high-capacity fiberoptic cable. Moreover,

prices of telecommunications have fallen dramatically in inflation-adjusted dollars. For example,

from 1972 to 1986 ordinary telephone service

(MTS) rates fell between 44 and 36 percent when

adjusted for inflation.109 Similarly, revenues per

minute for international calls fell from $2.25 per

minute in 1975 to $1.18 in 1988 in real dollars.110

As a result of falling prices and increasing quality,

usage has increased significantly. For example,

between 1975 and 1988, international telephone

minutes from the United States increased by an

annual average of 23 percent.111

In addition, within most major metropolitan

areas, advanced telecommunications technologies, including fiberoptic lines, are available to

most large users (see chapter 7). Advanced packet

switching, ISDN, and other services allow transmission of digital signals. Broadband services to

the home will allow increased work to be done

from home, in part by enabling instant access to

remote computers.

INFORMATION TECHNOLOGY AND

SPATIAL PATTERNS

Historically, cities have arisen and grown as centers of transactions and commerce, largely because of the need for physical proximity among

firms, suppliers, and customers. Agglomerations

of people, infrastructure, and industry allowed for

efficient production, transport, and distribution of

goods and services. By allowing activity to be

physically farther apart, yet functionally still

close, advances in technology, particularly new

transportation modes (e.g., train, electric trolley,

cars and trucks), helped shape the first industrial

city and the mass production metropolis. Today,

new technologies, particularly information

technologies, are creating closer connections between economic activities, enabling them to be

physically farther apart. As a result, these technol10 U.S. Congress, Office of Technology Assessment, Wireless Technologies and the National Information Infrastructure, OTA-ITC-622

(Washington, DC: U.S. Government Printing Office, July 1995).

11 Johnson, op., cit., footnote 8.

12Ibid.

13 Ibid.
Chapter 4 Technological Change and Employment Location 1107

ogies are central to the reshaping of the post-industrial metropolis.

Three factors determine the extent to which

widespread diffusion of these advanced technologies will alter the location of industry and employment: 1) the degree to which functions can be

cost-effectively transformed into electronic flows

facilitated by telecommunications; 2) the degree

to which these new activities still require spatial

proximity to suppliers, customers, competitors,

and other units in the firm, and 3) the degree to

which other urban advantages remain important.

There are a number of factors that determine

the degree to which functions can be conducted

through telecommunications and information

technology (IT). Because many services involve

some transmission or manipulation of physical

things (machines—auto repair; food—restaurants; hair—barbers), their location continues to

be bound by the location of their customers. Some

functions may be automated, for example, by

technologies allowing self-service check-in and

check-out in hotels. In these cases, the services

would remain close to the customer, but employment would drop.

However, even for functions that involve production of goods or exchange of physical items

with the customer (e.g., wholesaling, check processing), the information share of these functions

is increasing, enabling many of these functions to

be enhanced or carried out by IT and telecommunications. For example, 30 years ago information

in most offices was on paper and transferred

physically, requiring filing clerks, messengers,

and even sometimes operators of pneumatic tubes

to shift paper around in large offices. Today, a

small but growing number of offices are moving

to computer-based systems for virtually all information. Electronic imaging allows data to be

transmitted electronically rather than by paper.

For example, by using PC-based databases, analysts at the Internal Revenue Service expect to be

able to respond more effectively to irregularities

in claims without searching out physical files and

seeking advice from managers. Similarly, in some

insurance companies, centralized customer information files containing the history of customer

interactions with the company allow one customer

service representative to see the customer’s entire

history with the company.

Developments in computing technologies, database access, and telecommunications have increased the share of services that can be conducted

without the direct involvement of customers, or at

least without requiring their physical presence.

For example, the rise in use of credit cards and 800

telephone service means that a growing number of

customer service functions are now conducted

over the phone from centralized customer service

centers. On the whole, information technology appears to be leading to a shift from transactions and

learning based on both face-to-face communication and goods shipment to one based on cheaper

electronic forms of communication (see table

4-1 .)

The effect of greater numbers of electronic

transactions appears to be a loosening of spatial

linkages between firms and their suppliers, customers, competitors, and other units within the

firm. Historically, because of the need to exchange

goods, information or people cheaply and easily,

many firms located in cities, creating what econoLinkage Means

Face-to face In-person meetings and interaction

Voice and video Video conferencing and video phones

Voice Telephone, voice mail

Electronic data E-mail, fax, electronic data interchange

Physical mail Postal service, overnight mail

Goods shipment Conventional freight movement

SOURCE: Office of Technology Assessment, 1995.
108 | The Technological Reshaping of Metropolitan America

mists term agglomeration economies.112 The cost

and difficulty of cooperation and communication

increased over distance. Now industries performing routine functions but located in urban areas because of the need to transport or display physical

goods (for example, back-office operations of

some wholesale banks) might, through application of IT, be freed of the need for proximity. Similarly, industries requiring frequent face-to-face

contact (for example, architects in design teams)

might now be able to communicate through electronic means such as e-mail and video telephones,

and be able to locate in suburban rather than central city locations. 

This new wave of technology also enables

greater economies of scale, particularly in the service sector, and these are reordering the spatial

distribution of activities This is true in part because of the adoption of ever larger and more complex equipment in sectors such as freight

transportation and wholesale trade. More importantly, information technology reduces the

constraints of distance on business operations, letting business serve a wider number of locations

and an increased number of customers from a

single location. By removing the production of the

service from a large number of local sites, each

with limited output, these applications offer many

companies increased economies of scale in production.113 As a result, the communities in which

these functions locate enjoy more employment,

often at the expense of other areas.

For example, in some financial services, such

as credit card payment processing and international money transfers, automation has created new

economies of scale, with dominant providers concentrating routine activities in a few very large

processing centers. American Express, for example, does all of its credit card processing in three

large facilities, and has announced plans to consolidate into just two. Similarly, in rail freight,

new information technologies allow rail control

operations to be centralized in one facility that

controls a company’s trains throughout the nation.

In wholesale trade, information technology and

new practices reduce order transmittal and processing time and provide a larger window for transportation time, allowing facilities to consolidate

and serve a larger area from one location.

Although these technologies are leading to

consolidation, they also allow many of these operations to act more like switching centers than

centralized production centers, and could permit

workers to do the work from a widely distributed

number of cites. In large part this is because, just

as information technology reduces the importance

of distance between the company and its customers and suppliers, it also reduces the importance of

distance in links between the workforce and the

company.

There are several examples of this. Computers

and telecommunications enable people to telecommute from home or at a telecommuting center, even though the company they work for is in

a centralized location. Similarly, new phone routing technologies allow phone operators and other

customer service representatives to work at home

and have calls automatically routed to their numbers. In Phoenix, Arizona, customer calls for transit route information go to a central number and

are routed to workers at their homes, who access

transit schedules from home terminals. In another

example, in the last decade a major midwestern

bank centralized all customer service calls to individual branches to its facility in the downtown of

a large city. By using sophisticated call distribu14 Agglomeration economies refer to the advantages gained by firms from spatial concentration in places with other firms and workers. Two

types of agglomeration economies are noted: 1) localization economies, which refers to advantages to a particular industry through locating

near other similar industries (e.g., auto makers in Detroit); and 2) urbanization economies, which refers to advantages across a number of industries due to spatial proximity (e.g., access to larger labor pools).

15 Between 1977 and 1991, the average firm size in the service sector increased 19 percent, while average firm size in the goods sector

declined 20 percent (U.S. Department of Labor, Bureau of Labor Statistics, unpublished data, 1994). Some individual service sectors increased

even mor—efor example, financial services, 34 percent; airlines, 38 percent; and legal services, 49 percent.
Chapter 4 Technological Change and Employment Location | 109

tion technologies, even though the calls still come

to one central number, they are now routed to the

first available representative, and all the representatives are back in branches. The wholesale trade

and distribution industry is evolving from a stock

system where warehouses hold large amounts of

goods, to a flow system, epitomized by crossdocking, where distribution centers hold goods

only for minutes or hours before sorting them and

reshipping them to new destinations. Broadly defined, these systems are consistent with distributed work, where work is not necessarily

performed at one location.

Finally, where localization economies are

weakened by advanced information technologies

and telecommunications operations are, at least in

theory, free to locate virtually anywhere, including in rural locations. Regional economic theory

suggests that as the localization type of agglomeration economy becomes less important, firms

will move to areas where land and labor are cheaper. These models, according to most scholarly

work on technological change and location, have

been largely applied to the manufacturing sector.

Yet, there is reason to expect that they should also

apply to services. Because IT enables them to

maintain closer contact with others (e.g., suppliers, customers) over a greater distance, we would

expect to find that many service activities disperse

from centralized, high-cost locations.

However, many operations may still locate in

high-cost metropolitan areas. Large metros continue to provide advantages for industry, including large and varied labor markets, frequent and

cheap air transportation, large consumer markets,

and availability of repair and technical services—

what economists call urbanization economies.

For example, metros like Phoenix, Atlanta, and

Kansas City are home to a large number of backoffice operations of banks and insurance companies that formerly were located in places such as

New York and Los Angeles. And though the variation in telecommunications infrastructure is rapidly diminishing between metropolitan areas as

mid- and small-size metros get widespread fiberoptics and other advanced telecommunications

services, these services are not likely to be widely

available in rural areas in the next 10 years.

Yet, to a great extent, how technological change

will spatially reorder economic activity will depend upon the type of function involved. Because

the nature of linkages differ depending on what is

being done (e.g., moving goods versus moving information, face-to-face contact versus electronic

contact), the next sections of this chapter examine

several different functions. These are front office

(customer interaction), routine back office (no direct customer interaction), goods production and

distribution, and complex back office.

Front Office Functions

Historically, the location of a large share of service

employment was dictated by local market demand. Branch banks, retail stores, customer service centers, and other consumer functions were

widely distributed to serve local demand. For example, retail stores and many personal services

(e.g., barbers, auto repair) usually located where

their customers were, although mail order catalogues allowed customers in remote locations to

buy goods. Developments in computing technologies, database access, and telecommunications

have increased the share of services that can be

conducted without physical proximity to the customer, although functions involving some transmission or manipulation of physical things are

likely to be bound by the location of their customers.

These customer access technologies have allowed a number of functions to be centralized out

of neighborhood or local sites. For example, many

banks have moved loan processing and other functions out of local branches to centralized customer

service centers, often without face-to-face contact

with the customer.114 Telephone technologies

have also made it increasingly possible to locate

114 In the 1970s, many banks sorted and sent checks to their customers. Now this function is done in centralized check processing centers.
110 | The Technological Reshaping of Metropolitan America

telemarketing and other phone functions in distant

locations. For example, Omaha and San Antonio

are centers for a large number of telemarketing

firms.115 Similarly, when residents of London call

to inquire about processing city parking ticket

fines, the calls are processed in a small city in

Northern England.

Many of these functions will now be accessed

by consumers directly, often from home. Thus,

major banks, software companies, and information service companies are all gearing up for what

they expect to be a major new market in distribution of financial services via the information

superhighway. The transition away from traditional local retail structures and toward direct customer access seems likely to continue, as

customers grow more comfortable handling a

wider range of financial transactions without faceto-face contact.

Routine Back Office Functions

The functions that can be farthest apart spatially

are generally those that are the most routine, the

most information-based (as opposed to involving

the physical transfer of goods or paper), and the

least customer-oriented. Back office work, or routine work not directly dealing with customers,

makes up a large share of this work. Historically,

large-scale back office functions were behind the

front office, usually in the central business district

(CBD). This was true for several reasons. First,

the CBD was the best place to assemble a large

number of workers because of public and private

transportation advantages. Second, the large volume of paper and personal transactions required

proximity with both front office and back office

managerial and professional functions. The back

office was like an assembly line where paper was

processed and information added at certain places

(the way parts are added to a car during assembly).116

Because the linkages between routine back office functions and customers and other firms are

relatively limited, they have been somewhat more

footloose than front office or managerial and professional back office work. Moreover, the routinized nature of the work has meant that information

technologies were applied early, facilitating the

spatial decentralization of work. The growing

share of information in digital form able to be easily transmitted electronically, along with effective

intrafirm communications, has meant that many

back office functions can more easily be physically separated from front office and complex back

office work with small losses in overall efficiency.

In addition, information technology is one factor

in the growth of average firm and establishment

size in the service sector, making it easier for companies to split off routine functions from more

complex functions and put each in its optimal

location.117

Information technologies are enabling a larger

share of back office work to be physically separated from where paper is processed or people interact. For example, the U.S. Postal Service is

testing optical character readers (OCR) to read addresses on mail, which is then bar coded and automatically sorted to its appropriate substation.

Addresses the reader cannot recognize are digitally photographed and transmitted to a computer

screen where a person manually types the address

into a terminal.118 In Washington, D.C., OCR

sorting takes place at the central mail facility, but

the manual address entry is done in Greensboro,

North Carolina, where wage rates are lower.119

Workers view images of letters as they are sorted

115 “Business Services,” Business Facilities, Febuary 1995, pp. 18-22.

116 Mitchell L. Moss, “The Information City in the Global Economy,” paper presented for the Third International Workshop on Innovation,

Technological Change and Spatial Impacts, Cambridge, England, 1990.

117 U.S. Department of Labor, op. cit., footnote 15.

118 Bill McAllister, “Automated Sorter Wins Letter Carriers’ Praise,” Washington Post, April 1994.

119 “Neither Rain, Nor Snow, But Bad Info?,” Washington Post, July 22, 1994.
Chapter 4 Technological Change and Employment Location | 111

in Washington and enter correct addresses, which

are in turn electronically transmitted back to be

bar coded on the piece of mail.120

Goods Production and Distribution

Processing goods involves four main components: production, transportation, distribution,

and sales. Within production, it is worthwhile to

distinguish between technologically advanced,

complex production and more routine production.

The development of mass production technologies has allowed decentralization, both within this

country and overseas, of a considerable share of

routine production. Many manufacturing firms

have spun off low-skill assembly and warehousing functions to low-cost regions, in part because

telecommunications facilitates communication

between physically distant headquarters and these

branch facilities.121 In contrast, as manufacturers

shift to more flexible production and move further

back on the product cycle, localization economies

become more important, favoring core locations

closer to markets, suppliers, and a skilled, adaptable workforce.122 In addition, high-technology industries are more likely to locate in metropolitan

areas.123 The creation of these technologicallybased production complexes, referred to by some

as “technopoles,” is driven in part by the increasing need for technologically-based manufacturers

to interact on a close basis with suppliers, customers, competitors, and other institutions (including

universities and research institutes).124 This need

for agglomeration economies means that most are

in metropolitan areas.

Within wholesale trade and distribution, information and telecommunications capabilities

allow firms to deliver goods much faster than before, allowing in turn a consolidation of distribution facilities. These larger distribution facilities

tend to locate outside the core of large metropolitan areas in areas with lower land and labor costs.

Similarly, technological change allows freight

transportation functions to consolidate and serve

wider markets from fewer areas.

Complex Office Work

Even though information technology builds linkages in “cyberspace” that at least weaken, if not

substitute for, physical space, not all functions are

amenable to such ethereal linkages. Many functions, though supplemented by information

technology linkages, still depend upon face-toface proximity. These are more complex functions

that are non-routine in nature, and are usually

largely undertaken by managers, professionals,

and executives in industries such as accounting,

law, consulting, R&D, and corporate and regional

headquarters offices. In addition, innovation and

development of new products and services is a

non-routine function that in most industries is predominately a metropolitan function—in many

cases, an urban core function. Information

technology appears to be bringing about an increase in the share of more complex functions and

120 These facilities can also located in distressed urban areas if the costs of living are low enough, and if, in some cases, incentives are provided. For example, the City of Gary, Indiana, is using HUD funding to construct a 20,000-square-foot building to be leased to the Postal Service

for use as such a remote encoding facility.

121 Allan J. Scott, Metropolis: From the Division of Labor to Urban Form (Berkeley, CA: University of California Press, 1988).

122 Ann Markusen, “Sticky Places in Slippery Space: The Political Economy of Postwar Fast Growth Regions,” paper presented at the Harold Innis Centenary Conference on the Spatial Constitution of Economic Activity, University of Toronto, Sept. 1994; also David L. Barkely and

Sylvia Hinschberger, “Industrial Restructuring: Implications for the Decentralization of Manufacturing to Nonmetropolitan Areas,” Economic

Development Quarterly, vol. 6, No. 1, 1992.

123 In addition, manufacturing sectors traditionally classified as market-oriented, that reduce costs by locating near customers, are also likely to locate in metropolitan areas. These include, for example, newspaper printing, sand and gravel production, and recycling operations.

124 Manuel Castells and Peter Hall, Technopoles of the World (New York, NY: Routledge, 1994).
112 | The Technological Reshaping of Metropolitan America

employment by changing labor requirements,

product and service offerings, the product (and

service) cycle, and the innovation process.125

Traditional localization economies of clusters

of firms in similar industries continue to be important for these non-routine and more innovative

functions. Although information technology is increasingly being used in these activities, it does

not substitute for close physical proximity or faceto-face contact, but supplements it due to the complex and highly varied nature of the interactions

and information being transferred. Face-to-face

interactions are still critical in many industries and

functions. In some industries, such as accounting

and consulting, professionals usually meet in the

offices of their clients. In contrast, in industries

such as banking and legal services, which still

tend to be concentrated in urban cores, clients usually meet in the service provider firms.126

IMPACTS OF NEW TECHNOLOGY ON

RURAL, URBAN, AND SUBURBAN

ECONOMIES

Predicting the future is difficult. New and powerful information and telecommunications technologies continue to be developed and their impacts

on industrial and residential location are still

evolving. However, based on the analysis of individual industries (chapters 5 and 6), and individual worker telecommuting (chapter 7) and the

location of telecom infrastructure (chapter 7), it is

possible to see how advanced technologies are

changing the locational patterns of individuals

and industries, and, on the basis of this, to predict

how these changes are likely to affect metropolitan economies in the United States over the next

10 to 20 years.

❚ Urban/Rural Growth

Information technology and telecommunications

are making the location decisions of an increasing

share of the economy less dependent upon face-toface contact and close proximity with customers,

suppliers, and competitors. In large part, this reduced dependence and concomitant rise in a company’s ability to be “footloose” with respect to

location invites speculation about the radical decentralization of jobs out of metropolitan areas.

Indeed, there are many examples of either back

office or consolidated front office functions locating overseas. For example, several U.S. insurance

companies have followed New York Life’s lead in

establishing life insurance processing operations

in Ireland. They benefit from relatively low wage

rates for well-educated workers with mathematical and computer skills, and a lower employee

turnover rate.127 Some have proposed that shopping malls and office complexes have their closed

circuit TV cameras monitored in real time by lowcost labor in Africa.128

Some argue that higher skill functions will also

be increasingly conducted electronically from

overseas locations. Yet so far this appears to be

confined to a few specific functions, particularly

computer programming. For example, Motorola

has established computer programming and design centers in India, China, Singapore, Hong

Kong, Taiwan, and Australia.129 Similarly, the

number of computer programmers working in India for companies located in the United States has

125 National Academy of Sciences, Information Technology in the Service Sector (Washington, DC: National Academy Press, 1994).

126 William B. Beyers and David P. Lindahl, “Competitive Advantage and Information Technologies in the Producer Services,” paper presented at the American Association of Geographers meeting, 1994, San Francisco, CA.

127 Richard McGahey, Mary Malloy, Katherine Kazanas and Michael Jacobs, Financial Services, Financial Centers: Public Policy and the

Competition for Markets, Firms and Jobs (Boulder, CO: Westview Press, 1990), p. 231.

128 N. Bannister, “Networks Tap Into Low Wages,” The Guardian, Oct. 15, 1994.

129 Keith Bradsher, “Skilled Workers Watch Their Jobs Migrate Overseas,” New York Times, Aug. 28, 1995, p. A-1.
Chapter 4 Technological Change and Employment Location | 113

grown. This is consistent with locational patterns

in programming, which has been done off-site for

a large number of industries. As discussed below,

however, this does not signal the beginning of an

overseas migration of skilled U.S. jobs.

In addition, some functions locate in smaller

towns of the United States. For example, Rosenbluth Travel, one of the largest travel agencies in

the nation and headquartered in Philadelphia,

moved its reservations center (which employs 200

people) from downtown Philadelphia to Linton, a

small town in North Dakota, largely to save on labor costs but also because of concerns about labor

quality. Functions that require relatively lower

skills and a high percentage of clerical workers,

such as telemarketing, where operating costs must

be kept to a minimum, and which have limited

travel needs and limited needs for other services,

are more likely to locate in smaller places.130

Yet, in spite of the notable examples of some

jobs going overseas or to rural areas, technological change is not likely to lead to widespread export of jobs or to a rural renaissance like that of the

1970s. There are several reasons why. First, much

of the work that goes overseas is relatively routine

and low-skilled and is most amenable to elimination by automation. For example, much of the

manual processing of grocery store coupons is

conducted in Mexico. However, new technologies

and bar coding on coupons may allow coupons to

be scanned and the information automatically sent

electronically to the manufacturer for reimbursement, eliminating these manual data entry jobs.

Similarly, in 1981 American Airlines moved its

ticket processing center from Tulsa to Barbados.

However, if ticketless travel becomes widespread,

many of these jobs would be eliminated.

Second, firms may not want to lose control of

operations and may worry about security of operations. This is especially true in banking and credit

card operations. Realistically, the range of functions that can be transferred overseas is probably

limited. It would not make sense, for example, to

send domestic payment transactions overseas

simply to reduce labor costs. Indeed, representatives of a major U.S. bank interviewed indicated

that the bank is planning to consolidate in the U.S.

certain data processing activity it now performs

overseas.

Third, customer service is becoming more important. For example, in insurance, most companies want to co-locate claims processing and

customer service.131 As a result, firms are hesitant

to place these functions overseas where there may

be problems with language, accents, cultural attitudes, and skills, all of which would make it harder to establish a rapport with customers.

Even though information technology is making

it easier for work to be done at a distance, at least

in the foreseeable future many operations will locate in metropolitan areas, albeit usually suburbs

and mid-size metros. There are a number of important reasons why.

1. Technology allows many service functions

to gain greater economies of scale. Many

companies are establishing “central utility”

offices, each of which carries out specific

functions. In the past, many service companies created separate profit centers where

each product had its own center. Now many

firms are trying to consolidate operations, in

part to be able to “cross-sell” and get better

staff and equipment utilization rates. The recent increase in integrated data systems that

contain complete customer records accessible by customer name or ID number increases the ease of cross-selling. In addition,

as firms reduce middle managers, remaining

managers have increased spans of control

130 Ranald Richardson and Andrew Gillespie, University of Newcastle upon Tyne, “Advanced Communications and Employment Creation

in Rural and Peripheral Regions: A Case Study of the Highlands and Islands of Scotland,” paper presented at the Information and Telecom

Tectonics conference, Michigan State University, Mar. 21, 1995.

131 “Trends in Insurance Company Location — and Relocation,” New York: Moran, Stahl, and Boyer, 1994.
114 | The Technological Reshaping of Metropolitan America

and are responsible for more operations.

Dispersing these operations spatially makes

it more difficult to manage them. Similarly,

new technologies are allowing freight transportation and distribution functions to consolidate in smaller numbers of sites.

These consolidated centers are usually located in metropolitan areas. For example,

when Aetna Insurance consolidated its 55

claims adjustment centers to 22, virtually all

of the 23 closed offices were located in

smaller cities, and the remaining 22 were in

larger metropolitan areas. Similarly, a major

bank that currently does loan processing out

of 92 local branches plans to establish two

central loan processing centers, both in large

metropolitan areas. A credit card company is

considering consolidating from eight locations for credit card processing, including

credit analysis and marketing, into one center in a major metropolitan area. Mergers

also stimulate consolidations and closures.

For example, a major East Coast insurance

company recently selected a site for a new

data center that would consolidate operations now located at a half-dozen sites

around the country—several of them facilities the company had inherited when it acquired a number of smaller carriers in

smaller cities. Nike’s distribution centers are

located in Portland, Oregon, and Louisville,

Kentucky.

As a rule, larger offices and facilities are

in larger cities, while smaller cities house

smaller offices.132 In deciding which branch

facilities to close in a consolidation, firms

are often hesitant to close larger branches,

since they would need to lay off large numbers of valued employees and hire and train

others in the smaller, expanding office. As a

result, the more common pattern is to close

smaller offices in smaller cities and towns,

and build up larger offices in metropolitan

areas. In addition, because of downsizing,

many firms have excess space in metropolitan areas that can be filled through consolidation. For example, an East Coast

insurance company located its new data center in a midwestern city because the largest

of the several data processing facilities it

planned to consolidate was already located

in this city.

2. Metropolitan economies have larger, more

diverse, and more skilled labor markets,

which gives firms access to a sufficient number of qualified personnel.133 Many firms attach as much importance to the availability

of qualified personnel as they do to cost, for

both non-routine and routine functions. Indeed, one leading relocation consultant says,

“Workforce availability is the number one

factor in locating back offices. Cost is number two.” However, these factors do not remain fixed over time. For example, because

of the rapid growth in back office jobs in

Wilmington, Delaware, by the late 1980s,

banks that had built new back office facilities there were expressing concern about

their ability to find qualified personnel.134

In addition, as technology restructures work

132 The larger the metropolitan area, the larger the size of the producer service firm. Andrew J. Kremenec and Roger Cohn, “Business Services Within a System of Cities,” paper presented at the 22nd annual meeting of the Mid-continent Regional Science Association, Chicago, May

31, 1991, cited in William Testa, “Producer Services: Trends and Prospects for the Seventh District,” Economic Perspectives, Federal Reserve

Bank of Chicago, vol. XVI, No. 3, May/June 1992.

133 A number of large corporations have moved their information services departments out of expensive central city or large metropolitan

locations to medium-sized metros. A major reason for not moving to smaller or rural areas is the difficulty of attracting highly skilled information technology employees. Jim Daly, “How To Staff IS” Forbes ASAP, 1995, pp. 26-29.

134 Gi-Yong Gang, Corporate Restructuring and Urban Economic Development Policy: Delaware Back Office Strategy and the Wilmington Metropolitan Area (University of Delaware, unpublished Ph.D. dissertation, Fall 1993), p. 125.
Chapter 4 Technological Change and Employment Location | 115

and automates many routine jobs, many jobs

are becoming more skilled.135 In fact, managerial and professional employment grew

from 22 percent of total employment in 1972

to 30 percent in 1994.136 As a result, the increasing share of services with informationbased employment means that metropolitan

locations are important.

3. Since there are more customers in larger

metropolitan areas than in smaller ones,

firms choose to expand in larger metros to

minimize distance from the customers. The

delivery of services through face-to-face

contact from a large central place is more

economically efficient than from a smaller

place. Similarly, even though goods distribution is undergoing consolidation, the

need to be near large numbers of customers

means that it is not going to rural areas.

4. Many firms are reluctant to locate back office operations in places with poor access.

As one bank executive noted, they want to

keep operations within a two- or three-hour

drive, since they want to be able to drive out

and back in a day to “kick the tires.” This is

part of the reason for the rise of back offices

in places like Albany, New York, Wilmington, Delaware, and other cities close to large

metros such as New York and Philadelphia.

Access is also a factor leading to many back

office functions locating in places with good

air travel. Staff, in particular sales staff, need

to travel to customers, while corporate management needs to be able to fly in to inspect

facilities. Because corporate decisionmakers fly so much, air access is often important

in location decisions. Metros have an advantage because they are usually served by more

and cheaper flights and by more jets and

fewer propeller planes. Many firms, for example, have limited their search to metropolitan areas to which major airlines offer

direct, point-to-point jet service from their

headquarters. Airline deregulation appears

to have strengthened air transportation from

large metropolitan areas hosting hub airports. Similarly freight transportation and

distribution relies on infrastructure (ports,

intermodal facilities, air express) usually located in metropolitan areas.

5. A firm might want to locate an operation that

processes large volumes of paper or collects

funds, rather than just data—processing

credit card remittances, for example, or

mailing monthly statements to mutual fund

shareholders—near a major regional postal

facility, most of which are located in metropolitan areas. However, if electronic commerce becomes widespread this factor will

become less important.

6. Metropolitan areas offer an environment

conducive to innovation and learning,

which, as technology increases the importance of continual product and service development, is an advantage to many more

firms. Innovation is also more likely to occur

in communities or regions marked by vigorous competition among a multiplicity of local firms than in places where one or just a

few firms are dominant; and in places where

large numbers of sophisticated, demanding

buyers are concentrated.137 Moreover, rapidly changing technologies and markets

mean that interfirm cooperation is increasingly important, and this cooperation is enhanced by locating in large and mid-sized

135 Thierry Noyelle, Beyond Industrial Dualism: Market and Job Segmentation in the New Economy (Boulder, CO: Westview Press, 1987).

p. 81.

136 U.S. Department of Labor, Bureau of Labor Statistics, unpublished data, 1995.

137 Michael E. Porter, The Competitive Advantage of Nations (New York: Free Press, 1990), pp. 154-157; Annalee Saxenian, Regional Advantage: Culture and Competition in Silicon Valley and Route 128 (Cambridge, MA: Harvard University Press, 1994).
116 | The Technological Reshaping of Metropolitan America

metropolitan areas.138 This is just as true of

the financial community in Wall Street as it

is of the microlectronics industry in Silicon

Valley. Such competitive conditions have

long been characteristic of major financial

centers like New York and Chicago. The

concentration of wholesale banking and investment banking firms in New York City,

for example, has helped make New York the

leading center of innovation in global finance.

❚ Inter-Metropolitan Differences

Consistent with historical patterns, new information and telecommunications technologies are

making more economic functions footloose, at

least with respect to the choice of metropolitan

areas in which to locate. These technologies are

making it easier to locate many operations in any

region of the country, which is likely to lead to increasing factor-price equalization between regions. Historically, some regions had

monopolistic advantages stemming from agglomeration economies, location near natural resources, transportation, and most recently from an

advanced telecommunications infrastructure.

However, as information technology allows more

functions to be done at a distance or to be consolidated, these competitive advantages are likely to

lessen, and lower-cost regions, providing they

have sufficient external economies (e.g., air travel, transportation, labor force) are likely to grow.

Moreover, as discussed in chapter 7, widespread

diffusion of an advanced telecommunications infrastructure, at least to the top 50 to 100 metros,

will further reduce the inherent advantages of the

largest places. The advantages once held by some

higher-cost metropolitan areas is likely to decline

and lead to concentrated dispersal to a larger number of metropolitan areas. However, this dispersal

is highly selective and uneven, and not all places

will be able to succeed, particularly those places

that have not managed the transition to the postindustrial metropolis. Places whose economic

base remains in declining activities, particularly

older manufacturing and traditional services, are

likely to continue to experience economic hardships.

Once technology enables more locational freedom, the search by firms for lower-cost locations

is likely to continue to reshape regional employment patterns, in part leading to higher rates of

growth for many lower-cost smaller and mid-size

metros.139 For example, wages are almost onethird (32 percent) higher in large cities over

500,000 inhabitants than in smaller places.140 According to one study in 1991, locating a

300,000-square-foot facility that employs 1,000

clerical and operating personnel in the Phoenix

area rather than San Francisco would save $6.35

million annually—just in space and payroll costs.

Between New York City and Tampa the differential is even greater—$11.25 million per year (see

table 4-2). Such cost differences were a significant

factor in Salomon’s choice of Tampa as a site for

its new back office complex. The average annual

salary of Salomon’s back office staff in New York

City was $39,000, compared to $23,600 in Tampa.141 Consistent with these patterns, some Sunbelt areas that have grown rapidly during the past

decade, such as Phoenix and Dallas, have seen

some of their cost advantage disappear.

138 Saxenian, ibid.

139 For example, Beyers found that there was a relative shift of professional service employment toward more medium-sized places and

away from the largest metro areas. William B. Beyers, The Producer Services and Economic Development in the United States, (Washington,

DC; Economic Development Administration, 1989).

140 Edward Glaeser and David C. Mare, “Cities and Skills” unpublished manuscript, Harvard University, 1994.

141 Columbia Business School, “Salomon Brothers,” unpublished case, 1994.
Chapter 4 Technological Change and Employment Location 1117

1992 1991 Average

population office clerical

Metro area (million) lease rate (per s.f.) salary 1991

New York City 19.7 $39.25 $22,500

Los Angeles 1 5 28.00 22,200

Chicago 8.4 34.50 19,700

San Francisco 6.4 24.50 22,800

Dallas-Ft. Worth 4.2 18.00 19,500

Miami-Ft. Lauderdale 3.3 30.00 18,400

Phoenix 2,3 20.00 17,800

Tampa-St. Petersburg 2.1 21.75 16,500

Kansas City 1.6 19,00 18,100

Columbus 1.4 20.50 17,600

San Antonio 1.4 13.50 16,600

Salt Lake City 1.1 18.00 16,700

Albany 0.9 16.50 21,500

SOURCES. U.S. Department of Commerce, Bureau of the Census, Metropolitan Area Data Book, 1994; and Fortune, Nov 4, 1991

This means that many operations that seek to

reduce costs will not locate in historically highcost metros such as New York, Boston, Los Angeles, and San Francisco, but instead will locate

in less expensive metros, many in the mid-parts of

the country. In fact, geographic centrality aids operations, by reducing average air travel distance,

and enjoying a central time zone. Geographic

wage and other cost differentials will continue to

encourage office relocation to low-cost regions

until an equilibrium is reached or approached.

Finally, if localization economies are weakened by advanced information technologies and

telecommunications, urbanization economies and

diseconomies may become more important. Large

metros continue to provide advantages for industry, including large labor markets, frequent and

cheap air transportation, and availability of repair

and technical services. Advantages for individuals include high-quality medical care, cultural and

educational institutions, and a large and diverse

labor market. At the same time, the diseconomies

of urbanization include high costs of living and

doing business, crime, pollution, traffic congestion, and lack of access to open spaces. The interplay between economies and diseconomies of

large metros may play a more important role in

shaping the future of metropolitan areas.

As, or perhaps because, technologies allow

more locational freedom, development may be becoming more uneven, with places that made the

transition to the post-industrial metropolis (see

chapter 3) doing well, while places that have not,

continuing to decline.142 Places with the advantages described above—including a skilled, moderately priced labor force; low diseconomies (e.g.,

crime, congestion, and environmental pollution);

an industrial base of advanced innovative companies; and high quality of life—will continue to do

well. In contrast, places without these advantages

are likely to continue to lose out, and risk a continuing cycle of decline as reduced advantages (both

public and private) lead to reduced economic

142 IT and telecom appear to be leading to similar patterns of uneven development in the United Kingdom as well. See John Goddard, "New

Technology and the Geography of the UK Information Economy,” in John Brotchie, Michael Batty, Peter Hall, and Peter Newton, Cities of the

21st Century: New Technologies and Spatial Systems (London: Longman, 1991).
118 | The Technological Reshaping of Metropolitan America

growth, which in turn reduces advantages even

more.

In an era of rapid technological change, metropolitan areas and cities that succeed—grow in

population, jobs and incomes—will be places that

have successfully managed to adapt to the new

technology system. In contrast, metros, cities, or

parts of cities that will not or cannot adapt run the

risk of being left behind to face stagnation or decline. Adaptation of people, institutions, and the

built environment will be important to urban core

survival (see chapter 9).

❚ Central City Prospects

Many core city economies have grown in the last

15 years, but others have either stagnated or lost

employment. As discussed in chapter 3, much of

the revival of central cities in the 1980s was due

to dramatic growth in producer services on the one

hand, and increased foreign immigration on the

other. Yet, the perception has grown that American cities, particularly the urban cores of many

large metropolitan regions, are in trouble, and

may not be sustainable over the long term, drifting

downward in spirals of joblessness and business

failure, revenue shortfalls and declining services,

crime, racial strife, and ungovernability, with

middle-income families leaving while the

wealthy wall themselves off in protected enclaves.

Technological change is likely to continue to

impact urban cores. By letting more of the economy be operated at a distance, it threatens the economic well being of many central and inner cities,

and inner, older suburbs of metropolitan areas.

The historic dominance of the central city is giving way to a much more dispersed pattern of

growth in which economic activity is spread

throughout the metropolitan areas in other nodes

and centers (what some term “edge cities”). Yet,

this growth is uneven in most places. Some parts

of the metro, usually a select group of outer suburbs and even exurban locations, are growing fast

and becoming home to fast-growing companies,

while other parts, particularly many parts of the

central city and inner suburbs, are suffering from

job loss, disinvestment and poverty. Nevertheless,

there are a number of important changes that are

facilitated by technology.

The New Metropolitan-Wide Economy

First, it is clear from looking at urban settlement

patterns in the late 20th century that the model of

the core city as home to most of the productive capacity in the metropolitan area no longer describes

most metropolitan areas. Today, as industry has

become spread throughout the metro region in

large agglomerations, the metropolitan area as a

whole is the functioning economy (see table 3-4).

One result of, and cause of, the rise of metropolitan-wide economies is that technology is enhancing the locational freedom of firms within

metropolitan areas. At one time, most core cities

had historic advantages stemming from agglomeration and reduction of travel that compensated

for their high costs. However, technological

change and other factors are reducing the privileged position of the core, in some sense making

it one of several “edge cities” within the metropolis.143 By making the spatial location decisions of

firms less relevant, technology has accentuated

the tendency of many industries for jobs to follow

people. Quality of life as well as cost become

more important factors. As a result, the traditional

monopoly of center cities as the location for many

firms is likely to evaporate. Central cities increasingly have to compete on other factors, including

cost, niche markets (such as tourism), and amenities.

Weakened Central City and Inner-Suburb

Economies

There are a number of technological factors that

will put the economies of central cities, particularly outside the central business district, and inner

143 For example, see Aydan Kutay, “Effects of Telecommunications Technology on Office Location,” Urban Geography, vol. 7, No. 3,

1986, pp. 243-257.
Chapter 4 Technological Change and Employment Location | 119

suburbs at risk. First, as discussed above, technology is reducing the importance of distance for

many functions, particularly more routine functions. As a result, firms have the freedom to find

lower-cost locations with cheaper land, buildings

and labor. These are often in outer suburban or exurban locations or in mid- and smaller-size metros. Moreover, such locations provide firms an

opportunity to avoid the diseconomies of crime,

traffic congestion, and air pollution endemic in

many urban core areas. In addition, because

technology also leads to consolidation in larger facilities, and in some cases requires new and larger

facilities, many routine goods and services industries are locating in the outer suburbs or exurban

and satellite areas at the edge of metros, where

larger and cheaper parcels of land are available.

Technology also enables a greater share of

“non-traded” or “residentiary” functions to be

centralized and moved. As a result, many of the

jobs that cities and inner suburbs could rely on because of local spending (e.g., branch banks, local

phone service centers, insurance agents), are likely to disappear, having been centralized and located either in other regions or in outer suburban

jurisdictions. In large part this is caused by the

shift from local service delivery to distribution of

products from regional or even national service

centers, a practice that favors lower-cost locations

outside older urban areas. Places that cannot capture these or other new functions will be at risk of

decline.

These technological and economic trends suggest that the non-central business district portions

of many central cities and their inner suburbs will

continue to be the weakest part of metropolitan

economies for at least the next two decades, and

that their relative competitive position will get

worse without economic development policies.

Core Specialization: Innovative and Complex

Service Functions

In addition to weakening many core economies,

technological change and other factors contribute

to a restructuring of urban core economies, particularly in the central business district, as places

containing more specialized functions employ

people with higher skill and education levels. As

routinized work moves out of central cities, the

economic base is increasingly shaped by more

complex, higher-end office work, including managerial and professional functions. There are several reasons for this.

First, while technology allows work to be routinized, and hence moved, it also supports, especially in the services, the continuous creation of

new products. For example, beginning in the late

1970s, U.S. financial institutions began to move

beyond the automation of routine processes and to

use computer technology to create new products

and services—a process that continues to this day.

This is important because, if product cycle theory

applies to services, it suggests that innovative

functions tend to be done where they were developed. Just as manufacturing establishments producing new goods tend to be located in more

urbanized areas,144 innovative functions in services tend to be located in the larger urban areas.

Innovative activities in established centers usually have greater access to the specialized skills, detailed market knowledge and support services

needed for the development and introduction of

new products and services. Many innovative

firms continue to need the kind of stimulating and

supportive environment in which they first

arose.145 In addition, established service centers

may also provide the best location from which to

access potential customers for new services.

144 R.D. Norton and J. Rees “The Product Cycle and the Spatial Decentralization of American Manufacturing,” Regional Studies, vol. 13,

1979, pp. 141-151.

145 This is not to say that there are no innovative small firms in rural areas, but rather that within companies that are multi-locational, innovative functions tend to be located in metropolitan areas.
120 | The Technological Reshaping of Metropolitan America

Second, the rise of globalization, in both

manufacturing and services,146 has meant that a

larger share of the U.S. economy is devoted to

command and control functions. These include

headquarters of multinational companies as well

as large producer service firms (e.g., legal service,

consulting, engineering) with clients across the

globe. These high-level functions are naturally attracted to a small number of global cities, including New York, San Francisco, and Los Angeles.

Finally, even though managerial and professional offices continue to disperse throughout the

metropolitan area, many are still concentrated in

central cities because these locations facilitate

face-to-face communications. As Richard Meier

wrote: “The need for face-to-face contact offers

perhaps the best explanation for the strong attraction retained by the urban center.”147 For example, functions such as law, corporate banking,

securities trading, and professional services (e.g.,

accounting, advertising) are more concentrated in

central areas of large metropolitan areas than other

firms (see table 3-4). These operations have a high

percentage of managerial and professional workers and require the support of large banks, law

firms, accounting, advertising, and courier and

postal services on a regular basis.148 Their need

for frequent outbound and inbound travel nationally and internationally reinforces their presence

in large metropolitan areas.

In spite of the importance attached to face-toface contacts in binding offices to the central business district, little empirical work has been done.

One study, now 15 years old, of firms in downtown Toronto sheds some light on differences in

contact between sectors.149 The sectors with the

greatest number of face-to-face linkages were corporate banking and legal services. In contrast, life

insurance had a very low level. These data are consistent with locational patterns of these industries

in the last 20 years (see chapter 3).

Yet, as discussed above, a number of new

technologies at least conceptually have the potential to reduce the importance of spatial proximity

in communication. For example, portable computing and phones, e-mail and Internet connections, fax, and video phones all make

communication over distance easier. Potential

new technologies such as ubiquitous computing,

high-definition displays, and high-speed and

high-capacity communications will accelerate

this trend. While these technologies make it easier

and cheaper to communicate over distance, there

are at least two reasons to think that these technologies may not substitute for a large share of faceto-face needs.

First, the extent to which these technologies

can replicate face-to-face communication is not

clear. Such communication has not only richness

and contextual advantages, but also includes informal, “water cooler” conversations, and meetings over lunch. Technology developers are

working on devices to overcome these limitations,

such as video phone systems that randomly call

other group members for informal, spontaneous

chats, and ways to allow users to enter “hallways”

for conversation on e-mail. As work groups gain

more comfort with these systems, they may be

willing to use them over a distance. However, to

date, the ability of these systems to foster productive relationships at a distance has not been proven. In addition, relatively little is known about

how organizational learning occurs. As more

functions and sectors in the economy adopt flexible production modes and continuous innovation

strategies, organizational learning becomes in146 U.S. Congress, Office of Technology Assessment, International Competition in Services, OTA-ITE-328 (Washington, DC: U.S. Government Printing Office, July 1987).

147 Richard L. Meier, A Communication Theory of Urban Growth (Cambridge, MA: MIT Press, 1961), p. 64.

148 Thomas Black, The Changing Office Workplace (Washington, DC: Urban Land Institute, 1990).

149 G. Gad, “Face-to-Face Linkages and Office Decentralization Potentials: A Study of Toronto,” in P.W. Daniels (ed.) Spatial Patterns of

Office Growth and Location (New York: John Wiley, 1979, pp. 277-323).
Chapter 4 Technological Change and Employment Location | 121

creasingly important. The extent to which this can

occur in distributed settings is not clear.

Second, some industries and functions may be

more willing to use these systems and decentralize

than others, probably depending upon the extent,

nature and criticality of communications, and the

extent of cost competition in the industry. Professionals such as doctors, lawyers, architects, engineers and scientists, who depend upon

face-to-face communications, may be especially

resistant. One anecdote illustrates that proximity

may continue to be important. An attorney in a

mid-sized Washington, D.C., law firm recently

moved to a more spacious and plush office at the

other side of the building, requiring a short walk

to the rest of her colleagues. After about two

weeks of feeling “isolated” the attorney asked to

return to an office next to her colleagues. It is not

likely that any kind of technology advance, at least

in the next decade, will overcome the need for

proximity in these situations.

These technologies do appear to facilitate communications between groups located in different

central locations. For example, Xerox is using an

e-mail and video conferencing system to facilitate

cooperative R&D efforts among groups of scientists and engineers around the world. Similarly,

consulting firms such as Arthur Anderson use Lotus Notes to communicate and work cooperatively

among its offices worldwide. In both these cases,

the workers involved are in central locations (e.g.,

Palo Alto, New York).

Core Specialization: Industrial Niches Based

on Flexible Specialization

The predominant effect of technological change is

toward dispersion of activities, particularly the

more routinized ones. However, technologies

may also create specialized niche functions,

which, if they do not give urban core areas an

edge, at least may help compensate for their disadvantages of cost, congestion, etc. Many of these

niche functions are related to innovation, flexibility, speed of delivery and response, and other factors, often described as flexible specialization.

Yet, even if these opportunities become economically and technologically feasible, they are likely

to remain a niche function, targeting specific markets.

Within manufacturing, there are several important developments that could help urban cores at

least retain manufacturing employment. First, increases in recycled products, in part brought about

because of better technologies for recycling and

reuse, can provide urban areas with markets for

some processes. By locating in cities, recycling

industries are locating close to the natural resource

because urban areas already produce large

amounts of recyclable waste. Second, the increasing importance of design and innovation can provide important niches for some urban

manufacturing. For example, New York’s role as

a center for arts and design spawns customized

manufacturing that relies heavily on the design

component. Finally, the growth of computer- integrated manufacturing (CIM) and other flexible

technologies appears to reduce optimal facility

size, allowing smaller sites to be profitably used

(see chapter 6). This reduces land and building

costs, reducing pressure to migrate to areas with

lower-cost land; thus, locating within the confines

of urban factories and warehouses becomes more

feasible.

Within distribution, some specialized opportunities are emerging. For example, there may be

opportunities to develop smaller distribution facilities serving more concentrated markets in central-city locations. Hospitals in some cities, for

example, have moved to a “stockless purchasing

system” —one of the more aggressive applications of just-in-time distribution. As more businesses and institutions implement just-in-time

and direct-replenishment supply programs, opportunities to locate relatively small, specialized

distribution centers in or near central cities should

increase.

In freight, the next decade could see smaller facilities in or near central cities that are designed to

handle short-haul and specialty cargo. In intermodal rail and truck freight, the short-haul economics

will make sense only if the truck trips at either end

are short as well. This argues for keeping termi-
122 | The Technological Reshaping of Metropolitan America

nals as close as possible to customers—and if

short-haul service attracts enough volume to justify them, for multiple terminals, which may be located in central or inner city rail yards.

Urban Economies and Skills

Technology will likely continue to lead routine

work and goods-related work to disperse from the

core, and at the same time concentrate highly

skilled professional and managerial jobs in the

core. In addition, technology is creating many

more skilled jobs regardless of location. As a result, there is a growing mismatch between the

location of the new skilled economy and the large

and rapidly growing population of lower-skilled

and often minority residents in urban cores.

In many industries future jobs will on average

be more skilled. For example, as the insurance industry uses more technology and less labor, the

skill requirements of their labor force increase.

Not only are organizations leaner, they must respond faster and they must complete tasks correctly the first time. In flat organizations there is no

place to refer difficult questions, catch errors, or

develop successors through on-the-job training.

Employers expect technical proficiency in operational aspects of the business. Moreover, in many

service sectors, many lower-skill office jobs are

disappearing and in their place are more complex

customer service and back office jobs. Customer

service employees are increasingly required to

have the right personality to respond to customers,

have the right speech patterns, be able to solve

problems on the spot, and have a lot of product

knowledge. In addition, perceived or actual work

ethic differences can play a role.

Business responses echo this change. One bank

executive from a large midwestern city noted:

“We are thinking about moving more routine work

out of the city since labor costs are high, and getting good-quality labor is hard. The graduates of

the public schools are very bad, and as a result, we

need to retrain people to read, write, and communicate.” In a 1991 survey of financial services

CEO’s conducted for the New York City Partnership, 82 percent of those surveyed said that the

quality of entry-level workers was either “extremely important” or “somewhat important” in

their choice of locations for their operations—and

71 percent said they believed the quality of entrylevel workers in New York City was worse in 1991

than it had been five years earlier.150

As a result, cities face a challenge in how to

bridge what appears to be a growing gap between

the skills required for employment in advanced

services concentrated in urban cores, and the limited skills that many young big-city residents

bring to the job market.

Urban Infrastructure and Buildings

Because new technologies are changing the organization of work and the nature of production

processes, the potential for a mismatch between

infrastructure developed for the mass production

metropolis and the infrastructure needs of the

post-industrial metropolis is significant (see chapter 9).151 Much of the urban redevelopment efforts

undertaken by core cities in the 1980s was to adapt

urban infrastructure and buildings designed for industrial and goods-handling functions to fit the

needs of an information-based services economy.

However, these mismatches are likely to continue

for two reasons. First, because technological

change threatens to reduce economic activity in

some urban cores, there is likely to be increased

vacancy and underutilization of the built environment, including infrastructure and buildings. In

part, this is driven by the fact that fast-growing industries in both manufacturing and services are increasingly located in the suburbs. Moreover,

150 Price Waterhouse, “Survey of New York City Executives in Six Industry Sectors,” (New York: New York City Partnership, Growth Strategies Project, December 1991), p. B:4.

151 Richard Barras, “Technical Change and the Urban Development Cycle,” Urban Studies 24, 1987, pp. 5-30.
Chapter 4 Technological Change and Employment Location | 123

while the practice of office “hoteling” is unlikely

to be adopted for more than a small share of office

functions, it could serve to reduce office demand,

particularly in urban cores (see chapter 7).

The changing nature of demand for infrastructure is also likely to lead to underutilization. For

example, one reason for the high rates of business

suburbanization is that facilities in the suburbs are

usually more readily adapted to current technology. In some service sectors, buildings that can easily be reconfigured, especially to accommodate

fiberoptics and other wiring, are increasingly important. In many older buildings it is difficult to

wire for computers and telephones and to change

wiring. Similarly, old retail downtown stores with

narrow fronts and deep backs make less sense with

today’s greatly reduced inventories. Just-in-time

delivery (JIT) allows for different store shapes.

Many new back office “transaction factories” in

the services require a large floor plate in large horizontally laid-out buildings, in contrast to the highrise office complexes in the core. Freight

transportation and distribution facilities increasingly require larger facilities, which are more

available in the suburbs. Also, the move to a flow

system in wholesale trade through practices like

cross-docking, requires new configurations of

buildings quite different from older, smaller, multi-level, urban warehouses (see chapter 6).

Manufacturing increasingly requires smaller facilities, continuing the trend that makes many large

factories obsolete. Physical infrastructure also

sometimes does not accommodate new technology. For example, the trend toward larger trucks

will further erode the already-tenuous position of

many older cities as regional or national distribution centers. Bridges, tunnels, and arterial highways in these cities were in many cases not

designed to accommodate trailers as large as those

in use today, let alone even larger vehicles.

❚ Outer Suburban and Exurban Prospects

Over the next two decades many outer suburbs of

metropolitan areas will continue to be the healthiest part of the metropolitan economy and the

strongest parts of the national economy. Job

growth is likely to continue, in part driven by relocations out of the central city and inner-suburbs,

but also by faster rates of expansion. Suburban jurisdictions housing this growth will by and large

enjoy fiscal health. However, they may be hard

pressed to find the resources to pay for the expansion, especially if they do not make new development pay all the associated public costs (e.g.,

roads, schools). (See chapter 9.) These will be

places that will need little or no assistance from

state or federal governments to promote development. Residential development is likely to continue to expand at the peripheries of most

metropolitan areas, leading to increased urban

sprawl and lower-density developments. These

trends in business and residential location, as discussed in chapter 8, are likely to exacerbate a number of problems, including outer suburban traffic

congestion, consumption of open space, and increased gasoline consumption.

Business Suburbanization

The locational freedom gained by advances in intrafirm communications technology will likely

lead to a further dispersal of firm activities, with

an increasing share of routine and even non-routine back office activities in the suburbs. There are

a number of factors that lead business to choose

suburban locations.

First, though rent gradients may have declined

in the last two decades, in most cities central city

office rents, land costs, and parking costs are still

higher than in the suburbs. For example, in Philadelphia, base rents for class A office space in Center City are about $20 per square foot, compared

to $12 to $15 in the suburban edge cities of Great

Valley, King of Prussia, or Conshohocken. Yet,

this cost differential appears to be evening out as

demand for central city space slackens. In some cities, costs in the central city are cheaper than many

premium suburban locations. For example, the

preferred office locations for many companies in

Atlanta are those on the north side side, even

though they command premium rents. Suburban

sites also often offer campus-like rural environments.
124 | The Technological Reshaping of Metropolitan America

Second, taxes are often higher in central cities.

For example, in Philadelphia, taxes and maintenance costs are at least $1 per square foot higher

in Center City. Moreover, some cities levy a wage

tax. Philadelphia’s current wage tax is 4.96 percent for city residents and 4.31 percent for suburban residents. Suburban employers routinely

recruit workers by mentioning that even at the

same salary they will have more take-home pay

from the new job than from their old job in the city.

Third, as many core cities adjusted to a more

service-oriented economy, the demand for skilled

office workers increased, driving up wage rates in

the city. Often city residents, and particularly minority residents, accustomed to blue collar jobs

did not have the skills needed for the white collar

jobs available. The suburbs, on the other hand,

provided a pool of college-educated women interested in returning to work, particularly to jobs

with more flexible hours and shorter commutes.152 By moving offices to the suburbs, employers could fill positions faster and at lower

wages. Increasing suburban labor force participation rates narrowed this differential during the

1980s, but many employers did relocate during

that time. Now, the issue is not labor cost, but labor quality, as employers continue to question the

performance of many center city schools and

doubt that the essential skills can be found among

city residents. As technological advances continue to raise the skill requirements in many industries, employers are more likely to find suitable

employees in the suburbs. Moreover, many service workers already live in the suburbs and therefore prefer suburban office locations as well.

Location in the suburbs minimizes commutes for

many workers, especially middle- and higher-level workers.

Fourth, there has also been a shift in what real

estate means to corporate images, and suburban

locations have become more amenable to administrative functions. Historically, many companies

used large office buildings as a way of projecting

corporate image. At the turn of the century, many

banks and insurance companies built monumental, imposing office towers to convey to customers

images of security and financial soundness. Later,

office towers became images of modernity and

prosperity. Transamerica’s corporate headquarters

is the well-known pyramid building in San Francisco. At 527 feet, the Traveler’s Tower in Hartford was visible from much of the Connecticut

countryside. I.M. Pei’s design made the still-taller

John Hancock Tower in Boston a famous building

even without the notoriety of its collapsing windows. However, such considerations seem to have

lessened considerably. For example, one reason

for Sears’ decision to build the Sears Tower, the

tallest building in the world at the time, was to enhance its corporate image and obtain the advertising good will from it. However, when the Sears

Merchandise Group moved to a campus-like location in suburban Hoffman Estates, it abandoned

the Sears Tower.

Residential Dispersion

Residential dispersion to the outer suburbs and exurban areas is also likely to continue, if not accelerate. Forces driving this include cheaper land in

these peripheral locations, which means more affordable and larger houses and allows more Americans to live in low-density residential settings.

Technological change is facilitating this.

Because technology is enabling increased business suburbanization, greater numbers of workers

can live even further out in exurban locations and

still commute to jobs at the edge of metropolitan

areas. As the number of workers telecommuting

increases, residential dispersion is likely to increase even more (see chapter 7). Most of these

telecommuters, however, will not be telecommuting from home five days a week. Rather they will

be telecommuting perhaps two to three days a

week from home, or from telecommuting centers

152 For example, see K. Nelson, “Labor Demand, Labor Supply, and the Suburbanization of Low-Wage Office Work,” in Production, Work,

and Territory, Alan Scott and Michael Storper (eds.) (Boston, MA: Allen Unwin, 1986).
Chapter 4 Technological Change and Employment Location | 125

at the edge of metropolitan areas. As a result,

workers will still have to live in or near metropolitan areas so as to commute to telework centers or

to their offices in metros. Thus, reduced work time

in central offices is not likely to lead to significant

deconcentration of population to rural areas far

from metropolitan areas. However, because an increasing proportion of workers will commute

fewer days to central locations, they can choose to

live in houses farther from urban cores.

Another force affecting dispersal will be the

length of the work week. If productivity signifi

cantly improves because of new information

technologies, the work week might drop to four

days a week. Already, many companies let workers work four days per week, with longer hours per

day. Commuting only four days a week to central

locations would slightly increase the ability to live

farther out. Finally, advances in intelligent transportation systems should reduce congestion and

commuting times, allowing even more residential

choice (see chapter 7).
Technological

 Change and the

Location of

 Information-Based

Service Industries

ver the past 20 years, information-based service industries have become an important component of the U.S.

economy. For example, increased employment in most

central cities in the 1980s was driven by the rise of producer services.1 22 A key question today is whether producer services will follow manufacturing out of the central city. In large

part, technology has allowed manufacturing to decentralize, and

is playing a similar role in freight transportation and wholesale

distribution (see chapter 6). Many argue that technology will do

the same for producer services.

The application of new information technologies is transforming the operations of many of the functions in information-based

service industries, potentially leading to significantly new locational patterns. This chapter examines the impact of technological change on the locational patterns of six industries: financial

services, insurance, securities trading, telecommunications, professional services, and data processing. In 1994, these industries

employed approximately 8.4 million workers see (table 5-1).

FINANCIAL SERVICES

Since the 18th century, the delivery of financial services—the creation, management, lending, borrowing, trading, and investment

of money—has been one of the most important economic functions of America’s cities. But in the last 20 years, advances in in1 Marie Howland, “Producer Services: Will They Follow Manufacturing Out of Urban

Centers?,” Economic Development Commentary, vol. 15, No. 3, 1991.

2 This section is based in part on a report prepared for the Office of Technology Assessment on financial services. Hugh O’Neill. Real Places and Virtual Money (New York,

NY: Appleseed, March 1995.)

| 127
128 I The Technological Reshaping of Metropolitan America

Industry SIC Codes Employment

Telephone Communications 481 860,000

Banking 60, 61 2,542,000

Securities trading 6 2 493,000

Insurance 63, 64 2,180,000

Selected professional services 2,095,000

Legal 8 1 950,000

Accounting 8721 515,000

Engineering 8711 630,000

Data processing and preparation 7374 233,000

TOTAL 8,400,000

SOURCE. U.S. Department of Labor, Bureau of Labor Statistics,

Employment and Earnings (Washington, DC: Bureau of Labor

Statistics, May 1995)

formation and communications technology have

altered the geography of finance. Some functions

long associated with major financial centers have

been progressively decentralized; others now take

place on a global scale; and some seem to have escaped the boundaries of space altogether, as transactions that once took days of face-to-face

interaction to finalize are now conducted by clicks

of a mouse. The changes in finance brought on by

the twin revolutions in information and communications have affected the financial services industry in America’s cities in complex ways. While

older cities have lost some routine processing

functions, advances in technology have reinforced their importance as centers of international

finance and financial innovation. Strength in these

areas could be a source of continued growth, even

as many routine functions continue to migrate to

lower-cost locations.

Banking can be roughly divided into three

functions: 1) back office retail and wholesale, 2)

front office retail (e.g., branch banking), and 3)

front office wholesale (e.g., corporate banking).

Technology affects all three functions, but its

locational impacts have been felt most strongly in

back office retail functions.

■ Routine Back Office Functions

The earliest applications of computer technology

in financial services involved the relatively

straightforward automation of existing work. But

managers soon began to see that computers offered opportunities not just for automating existing routines, but also for broadening the range of

activity that could be routinized, and in turn automated. In addition, technology, combined with

liberalized regulations on interstate banking, allowed banks to become larger, and in the process

created large back office functions that could be

organizationally, and even physically, separated

from corporate headquarters functions.

Back office functions include check clearing,

remittance processing, credit card processing, and

wholesale banking processing. Telecommunications and information technology have allowed

the former three processes to be routinized and

physically separated from other bank functions.

While back office wholesaling functions have remained closer to front office functions, new

technology may weaken the linkage.

In many cases, this separation has resulted in

migration of routine processing operations away

from high-cost urban areas. This relocation away

from major financial centers—to areas with lower

labor costs, less expensive office space, and in

some cases lower taxes—has been one of the most

visible and most commonly noted impacts of

technological change on the location of financial

services. 3 These new locations have included new

suburban sites, or even more remote locations in

smaller metropolitan areas.

In some cases, such as credit card payment

processing and international money transfers, automation has also created new economies of scale,

with dominant providers concentrating routine

processing activities in a few very large processing centers. American Express, for example, does

all its credit card processing in three large facili3 The most popular example involves Citibank’s movement in 1981 of much of its credit card processing activity from Huntington, NY

(Long Island) to Sioux Falls, SD. Similarly, a number of other cities have emerged as back office centers, including Phoenix, AZ, Omaha, NE,

and Wilmington, DE.
Chapter 5 Technological Change and the Location of Information-Based Service Industries 1129

ties, and has announced plans to consolidate into

just two. Chase, the world’s leading provider of

international money transfer services, processes

all such transactions in just two locations—

Brooklyn, New York, and Bournemouth, England.

In addition, as the trend toward disaggregation

of financial functions has progressed, the facilities

of third-party processors have also become an important element of the financial services industry

processing infrastructure. These third-party processing activities are dispersed in many locations

that are often far removed from the country’s leading financial centers. For example, First Data Corporation, the world’s leading third-party

processor of bank credit card transactions, has facilities in 17 metropolitan areas throughout the

U.S. (see table 5-2).

While credit card processing often takes place

in small or mid-sized metros or suburbs of larger

metros, a large number of banks process checks in

downtown locations, including BancOne in Phoenix, First Chicago in Chicago, PNC in Philadelphia, and NationsBank in Baltimore. For

example, First Chicago has a large back office operation in the Loop for remittance processing

(processing checks sent to corporate bank customers). There are several reasons why check processing has remained centralized. First, clearing

checks rapidly is essential, both because of Treasury Department rules and the need to debit other

banks quickly in order to gain extra days of interest. As a result, many check processing facilities

locate near the main postal distribution center,

which is normally in or near the downtown. In addition, downtown locations in cities with Federal

Reserve Regional Banks are optimal, since banks

take checks to the Fed to trade with other banks.

Finally, in many cities, banks collect checks from

their branches in the afternoon, and driving into

the city is easy and central.

However, continued technological progress,

coupled with changes in regulatory requirements,

Omaha, NE (2) Sioux Falls, SD

Los Angeles, CA Lynchburg, VA

Atlanta, GA Washington, DC

Baltimore, MD Boston, MA (3)

St. Louis, MO (2) Providence, RI

Kansas City, MO Dallas, TX

Philadelphia, PA San Francisco, CA (2)

Charlotte, NC Phoenix, AZ (2)

Tulsa, OK (2)

SOURCE: First Data Corporation.

could change the geography of these processes.

For example, financial institutions since the late

1980s have been using digital image processing

systems for a variety of purposes-to create, store

and transmit high-quality images of original documents such as checks, credit card charge slips,

stock certificates, claim forms, or virtually anything else. Notable examples include replacement

of paper files with digitized images; and American Express use of imaging technology to reproduce charge slips on its monthly billing statements.

New technologies in check processing may affect the location of facilities. Currently, when

banks receive a check drawn on another bank they

send it to a central processing facility, which encodes the amount on the check, which in turn

sends it to the paying bank, which then sends it

back to the customer. Because this is an expensive

process, banks are exploring technology to reduce

costs. 4 Image technology processes electronic

images of checks rather than the checks themselves. Transferring images instead of the checks

themselves may influence location, since the facilities will no longer have to be in areas with good

mail and overnight air service.

4 Thomas B. Steiner and Diego B. Teixeira, Technology in Bunking: Creating Value and Destroying Profits (New York, NY: Business One/

Irwin, 1990), p. 49.
130 I The Technological Reshaping of Metropolitan America

Number

Bank City of Jobs

First Interstate

Security Pacific

Discover Card Services

Chase Manhattan

Chase Manhattan

Citibank

American Express

Bankers Trust

CitiCorp

Selected banks1

Phoenix, AZ

Phoenix, AZ

Phoenix, AZ

Phoenix, AZ

Brooklyn, NY

Sioux Falls, SD

Salt Lake City, UT

Jersey City, NJ

Tampa, FL

Wilmington, DE

220

700

1,200

2,000

4,600

3,500

850

1,400

600

13,560

SOURCE: Office of Technology Assessment, 1995

1 Based on calculations by Gi-Yong Yang and Robert Warren, “Beating

the World System? Back Office Agglomeration as an Urban Economic

Strategy, ” paper presented at the Annual Meeting of the Urban Affairs

Association, March 1994

Image processing still requires bringing checks

to central locations for scanning, but the images

could be sent to a remote location for further processing (e.g., manually encoding checks, comparing check amount with bill, crediting the amount).

For example, a major credit card company uses an

automatic check reader and power encoder to read

checks and encode them. Checks the machine cannot accurately read are imaged and sent over wire

to workers who see the picture of the check on

their screen and type in the amount, which is in

turn sent back to the encoding machine for magnetic check encoding. In this case, the workers are

next door in another room, but the technology

could enable workers to be off site. Similarly,

electronic check presentment, by which banks receiving a check drawn on another bank transmit an

image of the check rather than the check itself,

could reduce the need for check processing to be in

central locations downtown.

In theory, it would be possible to use image

technology to support distributed work, even cottage work, through images sent directly to terminals in the worker’s home. However, while

technically feasible, banks are likely to resist

home work because of the security safeguards that

sensitive information demands.

With some notable exceptions, such as Citibank’s move to Sioux Falls, most U.S. financial

firms have located their customer service facilities, data centers, and routine transaction-processing operations (with the exception of check

processing) in mid-sized or larger metropolitan

areas-places like Charlotte, Tampa, Dallas-Fort

Worth, Salt Lake City, and Phoenix (see table

5-3.) The choice of these areas reflects the high

priority given to an adequate labor force and, to a

lesser extent, good air transportation access. The

sites chosen for such facilities, however, are usually in suburban communities within these regions, or on the outskirts of their central cities.

Relatively few cities have succeeded in attracting

back office operations other than check processing to older downtown areas.

While some retail back office functions have

tended to migrate away from central city locations, wholesale back office functions, with a few

exceptions, have stayed closer to corporate front

offices, in part because they have been slower to

automate and routinize functions which still involve the physical transfer of paper and are very

time-sensitive. In addition, in some lines of business that are particularly sensitive, or particularly

risky, or that require highly specialized knowledge—such as currency trading—those functions

may remain closely tied to major financial centers,

even as they take on a more routine character.

For example, Shearson and Irving Trust located

new processing facilities in Manhattan. Bankers

Trust moved its back offices to Jersey City, just

across the Hudson from Lower Manhattan financial district, and Paine Webber went to nearby

Weehawken, New Jersey. Similarly, First Chicago

opened two support facilities during the

1980s—both in its home city. There are of course

exceptions. In 1983 J.P. Morgan located a new operations and data processing center in the suburbs

of Wilmington, Delaware. However, because of

the closer ties between corporate front and back

office functions than is the case in retail banking,

older cities have so far managed to hold onto much

of the back-office activity associated with whole-
Chapter 5 Technological Change and the Location of Information-Based Service Industries | 131

sale finance activity and some more sophisticated

types of third-party processing. However, new

image technologies may make it possible to move

some of the wholesale back office functions that

have so far been kept close to downtown.

❚ New Retail Functions

Historically, retail banking has served as a residentiary economic function, providing jobs in the

local area in direct relation to local demand. However, retail banking is undergoing significant

changes. For example, for many routine bank

transactions, automatic teller machines have replaced face-to-face encounters with bank employees. Home banking is likely to reduce them

even more. Other technologies such as direct deposit, electronic funds transfer, and debit cards all

reduce retail branch employment.

In addition, bank branches have become less

and less important in the delivery of all kinds of

retail banking services. Many products, such as

mortgages, are now distributed through centralized service centers, often without face-to-face

contact with the customer; loan officers and other

customer service personnel answer telephones

and access loan processing software and other information electronically.

For example, 15 years ago, the Bank of America provided a wide range of consumer and smallbusiness services at more than a thousand

branches. After a series of consultant studies documented the inefficiencies inherent in this approach, the bank began a far-reaching overhaul of

its California retail division. By the mid-1980s,

130 branches had been closed. The number of

branches that took consumer loan applications

was reduced to 150.5 Middle-market commercial

lending was taken out of the branches, and consolidated in 46 corporate loan offices. Processing of

home mortgage applications was also removed

from the branches, and concentrated in 48 home

loan centers; and mortgage servicing was centralized in a single facility. This restructuring led to

the elimination of 9,000 retail-division jobs. Similarly, Signet Bank has consolidated its loan approval process into two hub offices in Richmond,

Virginia, and Columbia, Maryland (an outer suburb of Washington).

A generation ago, small-town banks and neighborhood branches, often designed to suggest a

cross between an ancient temple and a medieval

fortress, were for most Americans the archetypal

brick-and-mortar manifestation of the country’s

financial system. Today, the structure that would

best symbolize their connection to that system

would be an unseen, anonymous building in a remote suburban office park, occupied by a credit

card processing operation or a mutual fund telephone service center. The shift from local service

delivery to distribution of products from regional

or even national service centers has tended to favor both lower-cost locations outside older urban

areas and suburban locations near mid-size and

large metropolitan areas. The transition away

from traditional local retail structures and toward

direct customer access seems likely to continue, as

customers grow more comfortable handling a

wider range of financial transactions without faceto-face contact. Citibank reports that in 1987, 73

percent of U.S. households surveyed said they

preferred to conduct financial business through

face-to-face contact; by 1994, those preferring

such contact had declined to 52 percent.6

❚ Corporate Banking

Technologies have helped routinize some production and at the same time remove many front office retail functions from local areas, allowing

both to be more locationally flexible. However,

for three reasons, technologies appear to have re5 Richard Vietor, “Bank of America and Deregulation,” in Samuel L. Hayes (ed.) Financial Services: Perspectives and Challenges (Boston,

MA: Harvard Business School Press, 1993), p. 182.

6 Catherine Allen, “Smart Cards and Financial Services: Overview and Legal Implications,” presentation to the American Bar Association

Consumer Financial Services Committee, Park City, Utah, January 1995.
132 | The Technological Reshaping of Metropolitan America

inforced the urban and central city position of corporate banking.

First, advances in communications and computer technology have allowed financial services

firms to gain access to more, better, and more

timely information. These advances have greatly

reduced the cost and increased the speed of international financial transactions, and have made

possible the development of new techniques for

managing the risks involved in lending, borrowing and investing across national borders. Opportunities for globalization that new technologies

offer have reinforced the important role that major

cities play as centers of financial innovation. For

example, foreign banking activity in the United

States still remains highly concentrated in a few

large cities. America’s major financial centers—

most notably New York—have also been able to

maintain their preeminent position in international finance, despite rapid technology-driven

growth in global financial services. While New

York thus remains unrivaled among U.S. cities as

a world financial center, other cities are also participating in the growth of global finance. Los Angeles, Chicago, Miami, and San Francisco all

have significant concentrations of foreign banking activity, with Los Angeles in particular benefiting from the growth of trade with Asia, and

Miami from its role as a gateway to Latin America.7

Second, technology has facilitated the creation

of a whole new range of financial products. Beginning in the late 1970s, U.S. financial institutions

began to use computer technology to support the

creation of new products and services—a process

that continues to this day. Early examples of new

products made possible by computer technology

include adjustable-rate mortgages, money market

accounts, and cash management accounts. As the

process of technological innovation accelerated,

so did the introduction of new products. Between

1977 and 1982, for example, the Bank of America’s retail division introduced five new products

for depositors; between 1982 and 1983, it introduced 18.

In contrast to routine processing functions,

most financial institutions keep the development

and launching of new products and services closely tied to headquarters. And just as innovation has

become more important to the competitive position of individual firms, so the role of leading cities as centers of innovation (such as New York,

Charlotte, Chicago, and San Francisco) has become more important to their role in the financial

services sector. Firms located in established centers usually have easier access to the specialized

skills, detailed market knowledge, and supportive

services needed for the development and introduction of new products and services. Established financial centers may also provide the best location

from which to access potential customers for new

services.

New product development often requires highly specialized skills—such as the ability to model

how a new type of security will perform under a

variety of conditions—that may not be readily

available outside the leading financial centers.

Moreover, those who develop and launch new

products often require the assistance of other specialists—experts in banking and securities law,

market research or risk management, for example.

Such expertise is usually found most readily in

areas where the financial services industries are already concentrated. So are the formal and informal sources of information—from meetings of

trade and professional associations to conversations at the gym or local watering hole—that help

to foster continuous innovation. For all of these

reasons, much of the activity related to innovation

in finance is likely to remain concentrated in just a

few major cities.

Third, most corporate banking functions remain in the central business district (CBD) because agglomeration economies are more

7 In 1993, 87 percent of the 965 foreign bank branches and offices in the U.S. were located in nine cities. These are in order of size, New York,

Los Angeles, Chicago, Miami, San Francisco, Houston, Atlanta, Washington, DC, Seattle, and Boston. American Banker, Apr. 12, 1994, pp.

12-37.
Chapter 5 Technological Change and the Location of Information-Based Service Industries | 133

important to these wholesale and more non-routine functions. They require a concentration of

highly specialized knowledge, and ready access to

up-to-the-minute information. They need an infrastructure of supporting facilities and services

both within individual firms or institutions and in

the community at large—international legal and

accounting expertise, access to satellite connections, major international airports. Moreover,

firms often seek to syndicate bank loans or new securities issues, or otherwise bring partners into

their deals. This process works most efficiently

when the principal players are concentrated in one

location downtown.

INSURANCE8

With good reason, Morton Keller’s 1963 history

of life insurance companies observed: “Few artifacts of this corporate age are more impressive

than the buildings of large life insurance companies. Their local offices stand in a thousand communities. Regional headquarters share the

skylines of a dozen American cities; Hartford,

Boston, and Philadelphia house major firms.”

These buildings were monuments, intended to be

as lasting as the companies themselves. In 1995,

however, though home offices of many of the

long-established giants remain, many of their employees are elsewhere. Once considered a stable

employer, the insurance industry is now undergoing continual re-engineering. Technology is one

of a number of factors contributing to dramatic

changes in the organization and location of insurance work. As a result, the presence of large insurance offices in American cities can no longer be

taken for granted. As company managements

search for more efficient combinations, they will

locate facilities in new places and hire new employees.

The insurance industry employs almost 2.2

million people: 536,000 by property-casualty insurance companies, 833,000 by life and health insurance companies, and nearly 665,000 by

insurance agencies, brokers, and service organizations. This employment can be roughly divided

into three functions: 1) routine back office (e.g.,

underwriting and claims processing); 2) front office retail (e.g., insurance agents, claims adjusters,

customer service); and 3) more complex back office (e.g., marketing, administration, and investment). Technology is affecting all three functions,

but, like financial services, its locational impacts

are being felt most strongly in back office retail

functions.

❚ Routine Back Office Functions

As the insurance industry grew in the 1950s and

companies serving the entire country began to develop, many companies established decentralized

organizational structures to be close to the customer. For example, during the 1950s Prudential

pioneered the decentralization of home office operations. Part of their reason for decentralizing

into a regional management system was that “the

very distances which mail, notices, inquiries, and

premiums had to travel would be appreciably cut

down,” and regional centers could provide swifter

service within its territory. Moreover, insurance

records were kept in paper form, requiring relatively close proximity between the records and

personnel such as underwriters and agents. In the

late 1950s, the president of Connecticut General

insurance stated, “Our processes resemble light

manufacturing, but rather than assembling metal,

wood, or plastic objects, we assemble pieces of

paper.” Thus, minimizing distance and time that

both mail and insurance personnel had to travel

was a key in the decentralization of the industry.

During the 1980s, insurers introduced database

management systems to collect interrelated data,

minimize data redundancy, allow updates regardless of the data’s physical storage location, and enhance recoverability and security. The typical

insurer is now midway in conversion to a relation8 This section is based in part on a report prepared for the Office of Technology Assessment. Robert Gibbons, The Changing Location of the

U.S. Insurance Industry: The Role of Technological Change, May 1995.
134 | The Technological Reshaping of Metropolitan America

al database will allow access to complete customer information regardless of line of business.

Online access to policy and claim files has

weakened the traditional need for proximity in insurance operations. Optical scanning and imaging

technology also has great potential to reduce paperwork barriers to distributed work since virtually all information could be online. Scanning is

widely used now to process policy applications

and premium collections, and as the cost decreases, scanning could be applied to claims processing as well. Finally, more companies are

increasingly relying on phone and mail to communicate with policyholders. Branch offices serve

less purpose when a telephone call accomplishes

the same task, whether it is over 20 miles or 2,000

miles.

For example, Aetna recently put a large share of

its policies on databases accessible by PC anywhere in the Aetna system. Because of this, they

were able to consolidate a number of operations

that had historically been more dispersed. For example, they reduced 55 branch claims offices to

22, and shrank underwriting centers by a similar

amount. The result is that there is less need for

face-to-face contact between company employees

in claims processing. Claims processors can tap

into underwriting computer files when they process claims. In addition, agents and field adjusters

can communicate electronically with the claims

office through fax machines, e-mail, and modems

linked to portable computers.

A principal motivation for such consolidation

is to achieve economies of scale and save money,

particularly on overhead such as buildings, management, and support staff, and to spend a greater

share of resources on operations.9 For example,

CIGNA is consolidating four offices in Florida

into one in Tampa. Allstate is undergoing a gradual consolidation of 28 policy processing centers

into three centers in Charlotte, Dallas, and Columbus. After considering Orlando and Nashville,

CNA decided to centralize policy processing in

Reading, Pennsylvania. Reading’s advantages included low costs and easy access to population

centers of the Northeast, and a well-educated labor

force. Similarly, Travelers established two centers

processing personal lines of insurance in Knoxville, Tennessee, and Albany, New York. Both are

cities where costs are low and where Travelers already had offices (see table 5-4).

In fact, within the space of a few years, seven

insurance companies established new operations

in Albany, creating about 6,700 new jobs. None of

these facilities were located in downtown Albany,

however. One was in an essentially suburban area

just inside the city limits; and the others were located in outlying communities such as Colonie,

North Greenbush and Malta.10 These suburban

areas can more readily provide the large-floorplate, relatively low-cost-space firms want, as

well as easier access by auto. While insurance offices are relocating to lower-cost cities, and usually to suburban locations near them, they are also

closing many small field offices. Sales offices and

claims offices in many small towns everywhere

are disappearing.

❚ Front Office Functions: Agents, Claims

Adjusters, and Customer Service

The insurance business, particularly propertycasualty insurance, has three types of front office

operation: marketing, claims, and customer service. These are the parts of the industry traditionally located closest to the customer. However,

technology and industry reorganization may be

changing this, allowing more work to be done in

centralized service centers.

Insurance companies use two main systems to

reach customers with their products—local agents

and direct response (e.g., direct mail, media ad9 “Trends in Insurance Company Location — and Relocation,” Moran, Stahl, and Boyer, New York, 1994.

10 Kevin O’Connor, “Back Office Operations Located in the Capital Region” (Albany, NY: Center for Economic Growth, 1994), unpublished memo.
Chapter 5 Technological Change and the Location of Information-Based Service Industries 1135

Company Initial location New location

Intra-Metropolitan

General Re New York City Connecticut suburbs

NAC Reinsurance New York City Connecticut suburbs

Chubb New York City New Jersey suburbs

Crum & Forster New York City New Jersey suburbs

Fireman’s Fund San Francisco Suburbs

Colonial Penn Property and Philadelphia downtown Suburbs

Casualty

Fidelity Mutual Philadelphia downtown Suburbs

Penn Mutual Philadelphia downtown Suburbs

Aetna Claims Center Philadelphia downtown Suburbs

Life of Georgia Atlanta downtown Suburbs

TransAmerica P&C Los Angeles downtown Woodland Hills, CA

Inter-Metropolitan

Hanover Insurance New York City Worcester, MA

Royal New York City Charlotte, NC

Liberty Mutual Boston Portsmouth, NH

TransAmerica Life Los Angeles Kansas City, Charlotte, NC

TIG Insurance Woodland HiIIs, CA Dallas, TX

Date

1970s

1970s

1970s

1970s

1982

1980s

1983

1980s

1990s

1985

1988

1968

1986

1980s

1994

1994

vertising). Local agent distribution systems are

expensive and because of increased cost competition in the industry, insurance firms are trying to

find ways to reduce agent functions or in some

cases bypass them altogether. Technology is playing a key role. For example, just like ATM machines, automated kiosks in places such as

shopping centers may prove to be cost-effective

distribution channels for routine lines of personal

insurance. Similarly, a number of insurers are now

experimenting with online marketing. For example, using CompuServe, Continental offers

48-hour quotes for personal auto and homeowners

insurance, as well as online claims reporting and

policy changes. The introduction of home electronic commerce is a threat to the independent

agent system, as customers would have greater

ability to communicate directly with regional offices about policies and claims.

Direct response functions are also growing.

The largest direct response insurer is USAA, but

others include TIAA, GEICO, and Colonial Penn.

In addition, many companies are establishing

centralized customer service centers. For example, many insurance companies, including Aetna

and Prudential, have established a toll-free number for direct loss reporting. When a caller calls a

nationwide number, the telephone switch identifies the area code of caller and automatically

routes it to a regional office that services the claim.

The centralized customer service and processing

centers that are emerging in personal lines can operate efficiently from any location with the necessary telecommunications infrastructure and a

suitable labor pool. As a result, front office insurance employment is likely to be less evenly distributed according to population, and instead be

concentrated in centers in metropolitan areas.

In contrast, much commercial insurance business still requires periodic personal interaction

among policyholders, agents, underwriters, managers, and reinsurers. They may communicate

more frequently by fax or telephone, but they still

expect occasional personal encounters, and still

need locations close to their customers. Serious

property and liability claims often require on-site

inspection, while life and health insurance claims

can be handled from a central location.
136 | The Technological Reshaping of Metropolitan America

❚ Complex Back Office Functions

There are a number of more complex insurance

functions that have tended to locate in head or regional offices. These include marketing management, some underwriting, claims management,

accounting and statistical, legal, actuarial, top

management, investments, and computers and

software support. However, unlike some industries, such as banking, where the need for face-toface functions is more important, localization

economies in these complex insurance functions

appear to be less important. Insurance companies

have less need for face-to-face interactions with

other companies, either their competitors to cooperate on deals, or their suppliers. In large part, this

is because much of the industry involves processing information, as opposed to crafting deals.

The biggest factor explaining home office locations in the industry is inertia. The home offices of

most insurance companies are still near where the

company began. Companies have expanded into

new buildings and larger quarters, but only a small

minority have moved across state lines. Regulatory implications add to the costs of moving to

another state, but local connections and established facilities usually sufficed to keep companies where they were.

However, as cities became more crowded, insurance companies began to reconsider the cost of

big downtown offices. These cost pressures were

especially apparent in the most costly cities (e.g.,

New York, San Francisco, and Boston). Rising

costs prompted insurers to relocate not only thousands of routine back office jobs out of these cities, but to also consider moving managerial and

professional jobs out as well (see table 5-3).

There have been several major moves. Royal

Insurance, a fixture in Manhattan for years, relocated its home office to Charlotte, North Carolina,

in 1986 to cut its operating expenses. It paid generous relocation benefits plus the acquisition costs

of the new facility in Charlotte, plus all the other

expenses related to the relocation, from the proceeds of the sale of its building in Manhattan.

With the move, its annual property taxes declined

from $2.3 million to $1.2 million, and utility costs

from $2 million to $600,000. Similarly, when

Transamerica Property & Casualty was acquired

by TIG to become TIG Insurance, management

moved from the Los Angeles suburbs to the Las

Colinas area of Dallas, reducing its rent from $30

per square foot to $16.

SECURITIES TRADING AND INVESTING

The securities trading and investment industry has

undergone shifts similar to other informationbased service industries. Selling functions were

distributed around the country close to customers,

while back office and trading and investment

functions were concentrated in the downtowns of

the largest cities, particularly New York. Both

these patterns have changed, in part due to the

introduction of information and communications

technology.

❚ Retail Functions

New communications technologies have given

rise to new modes of delivering financial products

and services. In recent years, innovations such as

digital call distribution systems, telephone keypads and screen phones have enabled banks, brokerage firms and mutual funds to broaden the

range of services that clients can access by phone.

The mutual fund industry has revolutionized

the way financial products are distributed. In the

late 1970s, companies such as Fidelity, Vanguard

and Dreyfus began to recognize the possibility of

adopting direct marketing techniques to the sale of

mutual funds, allowing them to escape their dependence on retail stock brokers. Mass-media advertising, direct mail, and telephone sales have

become the industry’s principal means of distribution. Dreyfus, for example, still has 20 retail outlets of its own in major cities around the country,

but makes by far the greatest share of its sales

through direct marketing. Products are distributed

nationwide from just two centers, and ongoing
Chapter 5 Technological Change and the Location of Information-Based Service Industries | 137

contact with investors is maintained through a

single, nationwide telephone service center in

Uniondale, Long Island. Fidelity similarly serves

customers nationwide from a facility near Dallas,

and Vanguard from suburban Philadelphia. Moreover, online brokerage accounts are rapidly growing, allowing investors to place “buy” and “sell”

orders from a PC at home.11

❚ Back Office Functions

In contrast to banks and insurance companies, the

securities industry has tended to keep its automated back office operations closely tied to headquarters. For example, in New York, the largest

firms all developed processing facilities in Manhattan—although usually not at the same site as

their headquarters. Some firms have moved, however, to suburban locations. For example, the Securities Industry Automation Corporation used to

provide its computerized clearing and reporting

services from a facility in lower Manhattan, but

now is located in Metrotech, an office complex in

downtown Brooklyn. Paine Webber moved its operations from Manhattan to nearby Weehawken,

NJ. However, relative to banks, automation was

for many securities firms a new phenomenon.

Nevertheless, some data centers have migrated.

Dean Witter located its principal data center in

Dallas, and Charles Schwab located its major data

center in Phoenix. In addition, a few companies

have moved other back office functions. In 1988

Salomon chose Tampa as the location for its principal back office facility.12

❚ Trading and Investment Functions

Historically, securities trading and investment has

been a face-to-face enterprise, largely concentrated in urban downtowns. Technological change

is reinforcing this, but also potentially threatening

it. First, information technology has facilitated the

creation of such new products as stock index futures, derivatives, and synthetic securities. Moreover, one of the most important financial market

trends of the past decade—securitization, or the

conversion of all kinds of assets from home mortgages and credit card receivables to commercial

real estate into securities that can be bought and

sold—would not have been possible without the

use of sophisticated computer programs. In the

mutual fund industry, intense competition for the

individual investor’s dollar has fueled a continuing spiral of new product introduction; between

1985 and 1990, the 20 leading mutual fund companies in the U.S. introduced more than 500 new

funds.13 As in banking, these innovative activities

tend to be located in the downtowns of central cities of major metropolitan areas.

However, advances in information and communication technology as well as the standardization of real-time market information and research

available online have the potential to change

this.14 For example, SEC electronic filing requirements for companies have meant that researchers

and stock analysts don’t have to be in the core to

gain the information. Moreover, the advent of

computer and high-speed telecommunications

technology made possible the creation of an everwidening range of options for investors to buy and

sell securities without going through the established exchanges. The National Association of

Securities Dealers Automated Quotation System

(NASDAQ), launched in 1971, triggered the rapid

growth of the “over-the-counter” market.

11 According to one estimate there are almost 625,000 online brokerage accounts and this is expected to reach 1.3 million by 1998. Vanessa

R. O’Connell, “Brokerage Firms are Moving Into Cyberspace.” Wall Street Journal, July 6, 1995, p. C-1.

12 Columbia Business School, “Salomon Brothers,” unpublished case, 1994.

13 Erik R. Sirri and Peter Tufano, “Competition and Change in the Mutual Fund Industry,” in Samuel L. Hayes (ed.), Financial Services:

Perspectives and Challenges (Boston, MA: Harvard Business School Press, 1993).

14 John E. Bodenman, “Dispersal of the Institutional Investment Advisory Industry in the United States, 1983-1993,” paper presented at the

American Association of Geographers Annual Meeting, Chicago, Illinois, Mar. 17, 1995.
138 | The Technological Reshaping of Metropolitan America

Automation of trading systems has the potential to both reduce trading employment and allow

it to relocate. For example, Bernard L. Madoff Investment Securities handles about 5 percent of the

daily trading volume of stocks listed on the New

York Stock Exchange. But rather than going to the

floor of the Exchange, the trades are routed

through Madoff’s own proprietary trading system. An even more revolutionary system was

launched in 1991 by the Arizona Stock Exchange,

which handles only a fraction of one percent of the

volume of shares traded each day on the New York

Stock Exchange, but does so in a completely automated way. At a prescribed hour, participating

firms and institutions can post bid and asked

prices for blocks of a specific stock. The system

then arrays bids and offers into textbook-style demand and supply curves; the price at which the

curves intersect is the price at which trades are

executed. Systems like Instinet allow large institutional investors to trade directly with one another, without using an exchange, broker, or dealer at

all.15 According to an earlier OTA study, “electronic trading systems may be the stock exchanges

of the future.”16 If so, these systems will come

into direct competition with today’s face-to-face

markets.

Finally, as in other information-based industries, technology is facilitating consolidation. In

securities, institutional investment management

firms account for an increasing share of investment transactions, rising from 20 percent in the

1960s to approximately 80 percent today.17 Traditionally, New York has been home to most of these

firms, but in the last decade, firms in San Francisco, Los Angles, and Boston have gained share.18

Because of increased access to information electronically, these firms are able to more widely disperse. But this dispersion out of New York has not

been scattershot in nature; rather, it could be described as concentrated dispersal, where the industry is dispersing to a larger number of sites, but

these are generally in central cities of a moderate

number of major metro areas.19

TELECOMMUNICATIONS

The telecommunications industry is in the middle

of a transformation from a set of regulated utilities

to that of a more competitive and high-tech market, and in this transformation the large telephone

companies are reorganizing and looking to cut

costs and increase labor and capital productivity

in every part of their businesses. These companies

are therefore cutting and relocating workers in the

face of increasing competition, enabled by new

technologies that allow more centralization and

control of activities.20 Because of these parallel

trends and the lack of data, it is not always clear

which areas have fared better or worse through

this transformation. Rural areas, however, have

clearly lost telecom employment due to this transformation.

Part of what is driving this downsizing is the

geographic rationalization of the industry. Fol15 United States Congress, Office of Technology Assessment, Electronic Bulls and Bears: U.S. Securities Markets and Information

Technology, OTA-CIT-469 (Washington, DC: U.S. Government Printing Office, September 1990), p. 46; Securities and Exchange Commission,

Division of Market Regulation, Market 2000: An Examination of Current Equity Market Developments (Washington, DC, January 1994), pp.

II:11-13.

16 U.S. Congress, Office of Technology Assessment, U.S. Banks and International Telecommunications, OTA-BP-TCT-100 (Washington,

DC: U.S. Government Printing Office, October 1992), p. 25.

17 Bodenman, op. cit., footnoote 14.

18 Ibid.

19 Ibid.

20 For example, since August 1993, Bell Atlantic announced cuts of 5,600 jobs; AT&T announced cuts of up to 15,000 jobs over two years;

US WEST announced it would cut 9,000 jobs over three years. Since 1990, employment in Telecphone Communications has dropped from

913,000 to 858,000 in 1994. (U.S Bureau of Labor Statistics, Employment and Earnings, March issues, and Supplement to Employment and

Earnings, August 1989 and August 1992.)
Chapter 5 Technological Change and the Location of Information-Based Service Industries | 139

lowing divestiture, the Regional Bell Operating

Companies (RBOCs) varied nationwide in their

technical and managerial operations. State regulations also varied: some states (for example, in the

Northeast) required separate operating companies

in each state, while others (such as in the South

and West) were more tolerant toward multistate

operations. The different RBOCs acted as different companies with their own organizational

structures. Many RBOCs are therefore only now

reorganizing to consolidate their sub-regional operations left over from pre-divestiture days. For

example, while Bell Atlantic Pennsylvania now

operates as one business in the state, before deregulation it operated as three companies in three regions in the state.

Employment in the telecommunications industry can be divided into three areas: 1) routine front

and back office (e.g., operators, billing and repair

inquiries, customer service); 2) non-routine front

office (e.g., repair, maintenance, and marketing);

and 3) complex back office.

❚ Routine Front and Back Office

Call completion and directory assistance may be

considered routine tasks, as well as customer-service personnel functions such as billing or

changes in service. Similar tasks aimed at particularly important business customers or involving

advanced services, however, may require considerable technical expertise and problem-solving.

Nevertheless, many of these activities such as

marketing can be standardized in ways that make

them more routine than other activities.

The telephone companies have automated

many customer service and other functions by using new call processing equipment, and transferring inquiries to large megacenters via the

industry’s own telecom infrastructure. Automated

call management (ACM), voice mail, and interactive voice response (IVR) equipment allow telephone companies to play recordings to callers,

accept touch-tone or voice inputs, and triage calls

in complex ways. Calls can be transferred to the

next available assistant and even across time

zones as the need requires. These applications are

linked to other technologies. For example,

centralized billing allows customer service representatives to call up information on the customer’s

account and process it in real time. In most telecom companies 10 years ago, customer service

representatives had to access paper records; now

any service representative in the company can

gain online access to any customer record. Much

of the call-completion, directory assistance, and

customer service functions are automated and

computer-assisted, so that workers in those positions do not have to be located near the customer

and are not limited by a local paper-based record

keeping system. Most companies are moving to

computerize all records.

The technology as well as the reorganization of

the industry has led most companies to create larger, centralized customer service centers. These

centers are usually specialized in five activities:

call completion operators, directory assistance,

network management, customer service representatives (for ordering, billing, and queries), and accounting and billing. Companies are centralizing

into megacenters in order to gain economies of

scale—trimming employees and other costs. In

addition, a smaller number of managers can more

easily manage consolidated functions. As companies downsize management, remaining managers

have increased spans of control, making management of dispersed offices more difficult.

Consolidations of consumer and small business centers are more common, since these activities are more routine and less sensitive than those

for large customers. For example, NYNEX reorganized more than 133 offices for their customers

into seven regional centers. Ameritech is consolidating 83 consumer and small business sales and

service centers to 21 locations. US WEST announced plans in 1993 to consolidate its customer

service workers from 563 sites into 26 centers, including Denver, Phoenix, Minneapolis, Seattle,

Salt Lake City, Boise, Omaha, and Portland. GTE

has operations widely dispersed across the U.S.,

but has consolidated its operator megacenters to

only five locations: Erie, Pennsylvania; Lexington, Kentucky; Winsfield, Missouri (located out-
140 | The Technological Reshaping of Metropolitan America

side of St. Louis); California; and Hawaii. Bell

South has three network management centers in

suburban sites in Atlanta, Nashville, and Charlotte. These were consolidated from previous operations distributed throughout its nine-state

region. Bell South’s consumer customer service

centers are more distributed, however, including

14 in Georgia alone.

Long distance providers have also consolidated

operations. AT&T has six megacenters for its residential customer service line, several more for

small businesses, network management, and callcompletion operations. Relatively new competitors such as Sprint and MCI built megacenters into

their networks from the beginning, locating them

in lower-cost regions of the country. Sprint, for example, has centers located at Jacksonville, Florida; Dallas, Texas; Kansas City, Missouri;

Phoenix, Arizona; and Winona, a small city in

Minnesota.

As companies consolidate operations, the general trend, as in other industries, is to expand larger operations, usually located in mid-size and

larger metropolitan areas, and close smaller ones,

usually located in smaller towns. As a result, between the cuts in employment and the relocation

to megacenters, rural areas have lost workers to

urban areas.

Before central electromechanical switches,

many operators for the former Bell system worked

out of their homes with mechanical patchboards.

Today, after a series of centralizations, the telecom

industry could once again return to home work,

completing the cycle of centralization and decentralization. Interestingly, such a decentralization

would be enabled by the same technology that enabled the current centralization. That is, calls and

information could be transferred to virtually anywhere, whether to a central megacenter or to dispersed homes or telework centers. In contrast, the

original decentralized homeworkers were limited

to the neighborhoods they were serving by the

technology of the time. Since many of the activities are already monitored by computer, oversight

of employees in a common location may not be

necessary and many tasks could therefore be performed at home or in telework centers. Telework

is particularly attractive for filling off-shift positions as companies turn more toward 24-hour service, as well as for ordinary routine and

non-routine workers. Such a pattern of decentralization would allow companies to gain the benefits of centralization (e.g., economies of scale of

operations, centralized customer access) with the

benefits of decentralization (lower space utilization costs and lower wages).

❚ Non-Routine Front Office

The telecom industry must locate many workers

where its plant is located and where it can market

and support high-profile customers. Marketing

includes customer sales, especially business marketing. Plant operations include installing and

maintaining the local telecommunications infrastructure, engineering, network administration,

testing, and other tasks associated with the

switches and the main trunk lines. Roughly onethird of the jobs in telecommunications are plantrelated jobs involved in the production,

construction, and maintenance of equipment and

lines.

New technologies are altering the number and

location of plant operation jobs, and are likely to

reduce the number of jobs in this area. A Department of Labor 1990 forecast note that the greatest

relative decline in employment for the industry

will be for installers and repairers as a result of

such technological improvements as fiberoptics,

digital switches, modular equipment, quick-connect features on cables, and the off-loading of

many tasks to the customer.21

In addition, technology allows many of these

functions to be performed remotely. In the past,

installers wired buildings and homes, and had to

21 U.S. Department of Labor, Bureau of Labor Statistics, Outlook for Technology and Labor in Telephone Communications, Bulletin 2357

(Washington, DC: U.S. Government Printing Office, 1990).
Chapter 5 Technological Change and the Location of Information-Based Service Industries | 141

go into the field for most of the diagnostics and repair. Today, installers perform many functions remotely at the central office. Much of the network

management, including troubleshooting and adding new features, can be supervised and performed in remote locations.

There are a number of technologies that enable

this. The most striking is the digitization of internal telephone operations, which allows providers

enormous flexibility in the management of their

systems. Digitization means that voice communications are converted from analog signals coming into the switching office to binary (“on/off”)

signals, which usually are converted back to analog before they reach the other user. Yet another

development in digitization and switching leads

to the centralization of the operating system software. This development, called “advanced intelligent network” (AIN), eliminates the need to

replace the software in all the (standardized)

switching equipment—itself a costly process.

Instead, the carrier can change the software in only

certain central “nodes” within a region. The effect

of the developments in digitization is a net decrease in installation and maintenance using analog switching equipment.22 Remote switches, for

example, can be controlled through larger

switches at central facilities, removing the need

for on-site personnel.

Automation of system troubleshooting allows

computers to diagnose problems so that humans

do not have to intervene. If there is a break in a fiberoptic transmission line, for example, a computer

in the command center can detect the interruption,

re-route all following transmissions through new

paths, and narrow down the possible failure

modes. In many cases, a failure in a switching facility can be identified, and a technician is sent

only to replace or repair the part. In the past, local

technicians were on call to identify and repair such

problems. For example, Pacific Bell has successfully tested a circuit box technology that can determine if trouble in phone lines is in the customer’s

home or on the outside line for which the company

is responsible, significantly reducing the number

of repair visits.

One result is the growth of network management centers. These centers monitor local switching and switching between company facilities,

manage emergency routing, monitor weather and

disaster information, diagnose network problems,

and so forth. Since metropolitan areas contain the

bulk of telecom customers, the decrease in plantrelated workers may indicate a net decrease in

these occupations in metro areas. However, rural

areas may be even harder hit, because the big providers may perceive that such workers are better

placed in metro areas where they can gain efficiencies by responding to a wider region. For example,

US WEST and GTE are both selling and swapping

many rural territories to create contiguous or more

densely populated territories.

❚ Complex Back Office

Corporate operations include planning, accounting and finance, procurement, information management, legal services, and so forth. These

operations are almost always located in major

metropolitan areas, and often in downtown locations. The headquarters of the RBOCs and major

long-distance providers are all located in large

metropolitan areas, and most are in central business districts. For example, Bell Atlantic (Philadelphia), Bell South (Atlanta), US WEST

(Denver), Pacific Telesis (San Francisco) and

AT&T (New York) are all located in the central

business districts of these cities. Some others,

such as MCI (Arlington, Virginia) and Southwestern Bell (Irving, Texas), are in edge cities of large

metropolitan areas.

PROFESSIONAL SERVICES

In the last two decades, professional services (e.g.,

legal, accounting, engineering, computers) have

grown significantly, particularly in metropolitan

22 Anthony Ramirez, “GTE Says It Will Cut 17,000 Jobs,” New York Times, Jan. 14, 1994, p. D1.
142 | The Technological Reshaping of Metropolitan America

areas and central cities. Some sectors, such as legal services, appear to have been important components of central business district revitalization.

Other sectors, such as computer services, appear

to have contributed to the increase in suburban office growth.

Much of the work in services such as law, architecture, accounting and consulting involves individualized, non-routine craft work. Many

employees are “front office” professionals—lawyers preparing individual cases, accountants auditing accounts to produce financial statements,

consultants producing reports. These functions

are impossible to automate, but technology, such

as the personal computer, can increase efficiency.

For example, in 1986, 7 percent of attorneys had

computers on their desk, while 76 percent had

them in 1993.23 Back office support includes clerical and para-professionals jobs.

Because of the non-routine and complex nature

of these functions, professional services are still

overwhelmingly located in metropolitan areas. In

1985, producer services, (including professional

services) accounted for 20 percent of employment

in metropolitan areas, but only 9 percent in nonmetropolitan areas.24 Law firms, especially large

firms, are predominately located in central cities

of large metropolitan areas. For example, in 1989,

59 percent of employment in the largest 492 law

firms was in nine central cities of the largest U.S.

metropolitan areas.25 Seventy-four percent of

software industry employment is in the top 25

metropolitan areas.26

There are several reasons for this concentration

in metropolitan areas. First, firms want to be near

clients. One survey of legal, architectural and engineering, and management consulting firms

found that face-to-face conversations with clients

or in-person delivery of documents was a principal way of delivering services to clients.27 For example, the accounting firm of Ernst and Young has

offices in almost 200 U.S. cities because of the

need to be close to their clients—largely businesses. Accountants must visit clients and in some

cases spend considerable time on their premises

going through financial records for auditing and

tax work.

Second, a high percentage of firms (legal, 83

percent; accounting, 76 percent; and engineering,

77 percent) collaborate with other service firms

and institutions in producing their services.28 The

importance of collaborative work within law

firms, and also interactions with clients, courts,

and other law firms, has led law firms to concentrate in metropolitan areas. Moreover, legal work

involving litigation must maintain close linkages

with district and federal courts, while legal work

related to financial transactions maintains linkages with banks, both of which are located principally in central cities of metropolitan areas.

In addition, unlike banking and insurance sectors, professional service firms are less likely to

move support and back office functions to separate locations outside the CBD. For example, lawyers want support staff nearby since the staff

directly support legal work, unlike back office

work in insurance and banking, which processes

transactions. However, some accounting firms

have moved some back office functions such as

computing facilities to suburban locations.

23 Larry Hirschhorn and Bob Gutman, “The Future of Law Firms,” report prepared for the Office of Technology Assessment, 1994.

24 William Beyers, “Trends in the Producer Services in the USA,” in Services and Metropolitan Development ed. P.W. Daniels (New York:

Routledge, 1991).

25 Barney Warf and Chand Wije, “The Spatial Structure of Large U.S. Law Firms,” Growth and Change, Fall 1991.

26 Edmund A. Egan, “Spatial Concentration and Networking in the U.S. Computer Software Industry,” paper presented at the 1994 Association of Collegiate Schools of Planning Conference, Tempe, AZ, Nov. 4, 1994.

27 William B. Beyers and David P. Lindahl, “Competitive Advantage and Information Technologies in the Producer Services,” paper presented at the American Association of Geographers meeting, 1994, San Francisco, CA.

28 Ibid., p. 40.
Chapter 5 Technological Change and the Location of Information-Based Service Industries | 143

There are four technological developments in

professional services that could affect location.

First, an increasing share of work and information

is in electronic form, making it possible for professionals to do some remote working. In law, online or CD-ROM legal research allows firms to

access legal information without having to maintain expensive law libraries. In addition, law firms

are also increasingly using image technology to

enter legal documents into a computer format,

producing significant savings on document search

time. Many clients are now transmitting documents to legal firms electronically. Court documents are increasingly being filed electronically.29

Similarly, accounting firms are experimenting

with image technologies that would allow documents to be accessed by computer. In theory, as

these technologies reduce paper transactions in favor of electronic ones that enable online access to

documents and information, these firms should be

able to work from more remote locations or to facilitate part time telecommuting by attorneys and

accountants. Conversely, these linkages could

make it possible for centralized professional service firms to serve clients that are more dispersed.

For example, as corporations decentralized to suburban areas, law firms remained generally concentrated in urban cores, in part because they could

communicate with clients through phone, overnight mail, and fax.

Second, expert systems can improve productivity in some sectors, particularly in the more

routine segments. For example, computers can

mechanize and automate relatively simple work

such as estates and trust. Expert systems are also

emerging that make legal knowledge available to

novice legal practitioners. Whether this will enable lower-skilled legal staff (e.g., legal secretaries) to do more legal work is unclear.30 In

addition, it is possible that knowledge-based systems could be used to outsource the production of

some legal documents.31 These “document

houses” are likely to locate in urban areas, although not necessarily in the core, to be near expert legal and computing personnel. This could

reduce locally-based legal employment, which

tends to do more routine legal work.

Third, information networks and shared work

systems are increasingly allowing professionals

to cooperate on work in different locations. For

example, the accounting firm Price Waterhouse

uses Lotus Notes to allow personnel from different offices to work collectively on one project.

Similarly, DuPont is developing an information

network for its 50 outside legal firms so that outside and in-house counsel throughout the country

can draw upon a common database of filings,

briefs, research documents, and strategy notes.32

Similarly, scientists and engineers are using such

tools to collaborate across distances. “Virtual” experimental communities or “collaboratories” that

permit real-time interaction among researchers

have also emerged.33 For example, Xerox has

created an internal research group of researchers

in Britain, Los Angeles, Rochester, and Palo Alto

to cooperate on a particular technical problem that

Xerox earlier had not been able to address because

the expertise to do so was distributed among these

four sites. The researchers communicate via video

conferencing and e-mail. Even though most professional services employees are still located in

metropolitan areas, they can now cooperate with

29 For example, the State of Maryland has introduced a program to encourage lawyers to file all court documents electronically (Government Technology, July 1995).

30 ABA Journal, September 1993, p. 88.

31 Hirschhorn and Gutman, op. cit., footnote 23.

32 Ibid.

33 U.S. Congress, Office of Technology Assessment, International Partnerships in Large Science Projects, OTA-BP-ETI-150 (Washington, DC: U.S. Government Printing Office, July 1995).
144 | The Technological Reshaping of Metropolitan America

clients and others located in other metropolitan

areas.

Simiarly, the increased use of electronic mail

and fax, and the expected growth in telephone and

video conferencing, are making communication

between clients and professionals easier. Because

such technologies make it easier to communicate,

they may allow increased movement of these activities out of high-cost central business districts to

suburban sites. However, because these services

are unlikely to replace direct contacts with clients

when client interaction is required, many functions located in metropolitan areas to serve a regional client base are unlikely to move to new

areas.

DATA ENTRY AND PROCESSING

The computer services industry, including data

entry and processing, employed 233,000 people

in 1994 in routine tasks such as keying of mailing

lists and receipts and more complex tasks such as

payroll and tax return processing.34 While about

78 percent of the population lived in metropolitan

areas in 1987, over 95 percent of data entry and

processing employment in the U.S. was in metro

areas, most of it providing non-routine processing

and entry.35

Although most data entry and processing employment is located in metro areas, routine data

entry jobs are more concentrated in exurban and

rural areas and developing nations, since they consist of more labor-intensive, low-skill data entry

tasks, especially when labor cost is a key factor

and contacts with clients are routine. Firms generally are able to communicate with clients largely

through mail and courier services to obtain hard

copy, which they in turn enter into the computer.

Companies then return data either by telephone

line (larger companies) or by mailing computer

tape or disks (smaller companies). Generally,

firms in urban areas are not competitive in data

entry because of the high labor costs. Rural areas

in the U.S. are generally competitive in work that

requires a quick turnaround, while overseas locations such as Barbados and Jamaica, where wages

are about half of rural U.S. wages, compete in

work that does not require immediate response.

More complex work, which makes up the bulk of

data processing work, occurs largely in metropolitan areas, in large part because of the need for close

communication with clients.

Technological change is likely to reduce the

amount of routine work, while increasing its overseas share, and increase the proportion of work

that is complex, and done largely in large and midsize metropolitan areas. First, improvements and

cost reduction in image technologies are eliminating the quick turnaround advantage currently held

by rural firms and allow overseas locations to be

competitive. Images of documents increasingly

will be able to be sent cheaply to offshore locations for data entry. Jamaica, for example, has invested in image transmitters and satellite

transmission, and has access to digital switching

and fiberoptic circuits to the United States. Second, new technologies are displacing manual data

entry tasks. For example, developments in optical

character recognition technology (OCR) have the

potential to reduce manual data entry. Moreover,

point of transaction data entry will reduce subsequent manual data entry. Finally, as routine data

entry operations become more automated, data

entry firms are offering more specialized services,

such as tax preparation and consulting and software development.36 As firms do more of these

functions, they choose metropolitan locations, in

part to be close to clients, but also to attract more

skilled labor.

34 This section is based on Marie Howland, “Technological Change and the Spatial Restructuring of Data Entry and Processing Services,”

Technological Forecasting and Social Change, vol. 43, 1993, pp. 185-196.

35 Ibid.

36 Ibid.
Technology and Location

of Freight Transportation,

Distribution, and

Manufacturing Jobs

nnovations in transportation and production technology

have significantly affected the spatial distribution of the

goods sector and have led to decentralization of activities

away from older urban cores. Many believe that in contrast

to services, particularly information-based services, the manufacturing, transportation, and distribution sectors are less affected by

the current revolution in information technologies. However,

new information, transportation, and production technologies are

in fact contributing to the decentralization of these sectors. Much

of the goods production, transportation, and distribution jobs that

core cities have depended upon will continue to decentralize to

outer suburban and exurban areas and to lower-cost, smaller and

mid-size metropolitan areas. Yet, for some operations, particularly those involving more flexible and smaller-scale production and

distribution, technology appears to be providing urban core areas

with some niche functions.

The goods sector is particularly important for urban economies

because the jobs often more closely match the skills of residents.

The migration of manual labor jobs—whether in manufacturing

or in service sectors such as transportation and wholesaling—has

meant that most are located in the suburbs or smaller metros. This

chapter examines how technological change has affected the location of three industries: freight transportation, wholesale trade,

and manufacturing (see table 6-1).

| 145
146 I The Technological Reshaping of Metropolitan America

1994

Manufacturing 18,472

Railroads

Trucking

Courier service

Water transport

■ Marine cargo handling

■ Other

Air Cargo

■ Air couriers

■ Other carriers

Freight services

241

1,564

285

167

5 4

113

202

108

94

171

Total freight transport 2,389

Public warehousing 127

Wholesale trade 6,229

SOURCE: U.S. Department of Labor, Bureau of Labor Statistics,

Employment and Earnings, July 1995; and DR1/McGraw Hill,

U.S. Freight Transportation Forecast to 2003 (Alexandria, VA:

American Trucking Association Foundation, April 1995).

FREIGHT TRANSPORTATIONI

Since colonial times, American cities, as centers

of trade and transportation, have been central to

the nation’s economy. From New York in the age

of the Erie Canal and the clipper ships, to Chicago

and Kansas City in the railroad age, to the rise of

Los Angeles and Seattle as centers of Pacific Rim

trade, cities have been made and remade by

changes in patterns of trade and in the technologies of transport. The next decade will be no exception, though it may not witness changes as

dramatic as the birth of the trans-Atlantic jet or the

beginning of the container revolution. Nevertheless, technological innovations will continue to

affect the location of freight transportation, as

well as the number and character of employment

opportunities in America’s cities.

Freight transportation consists of three main

activities: 1) loading and unloading transportation

vehicles at docks, ports, depots, and airports; 2)

transporting the goods in vehicles (ships, rail,

truck, airplane); and 3) freight services (e.g.,

freight forwarders). Historically, employment in

all three areas tended to be located in urban areas,

primarily because the infrastructure, particularly

of ports and rail yards, and later airports, was

there. Moreover, freight was also dispersed regionally, with most major coastal (ocean and inland) metros having their own ports, most metros

having their own airports, and a large number of

cities having truck and rail depots and transfer

points. New technologies in freight have changed

and will continue to change the spatial location of

freight activities, particularly unloading and loading, both within metropolitan areas and between

regions.

Within metropolitan areas, changes in the

technologies of goods movement and distribution

have shifted these activities from central city locations to the periphery, driven by considerations of

cost, access, and land availability. This trend is

likely to continue, for several reasons. First, as

transport vehicles and handling equipment become larger and more capital intensive, facilities

need larger and cheaper parcels of land. Second,

traffic congestion and infrastructure restrictions

limit the ability of many of the larger trucks and

trains to enter core cities, or make it more difficult

to regulate their access.

Competition for freight transportation and distribution is expected to intensify between regions.

In part, this is due to increasing concentration and

consolidation of shipping and of rail and air

freight, as new information technologies allow

control and scheduling from centralized locations,

and as freight infrastructure becomes more capital

intensive. Increasing capital intensity means a

1 This section is based on a report prepared for the Office of Technology Assessment on freight transportation. Hugh O’Neill. "The Impact of

Technological Change on the Location of the Freight Transportation Industry” (New York, NY: Appleseed, July 1995).
Chapter 6 Technology and Location of Freight Transportation, Distribution, and Manufacturing Jobs | 147

smaller number of more advanced facilities can

handle larger throughputs more economically.

Widespread deregulation of freight transportation

has also increased competition and contributed to

the spatial reordering of the industry.2

The days are gone when all that was needed to

gain a freight job was a strong back and a willingness to work hard. With the adoption of more expensive and complex equipment, large numbers of

lower-skilled urban workers can no longer easily

be employed in freight handling. Moreover, future

advances in technology are likely to require even

higher skill levels.

❚ Shipping and Ports

There are four main technological trends in shipping: increased containerization, larger ships,

more advanced port infrastructure, and application of information technology to tracking goods

movement. The development of the container was

a major change.3 Even though containerization is

already widely used, the range of products

shipped through containerization is expected to

grow as container technology is adapted to handling a wider variety of goods. Container ships are

expected to increase in size as shipping companies

seek to realize the economies of scale that containers make possible. The first generation of container ships typically carried 600 to 800 boxes; by the

late 1970s, ships carrying more than 2,000 TEUs

(20-foot equivalent units) were common. By

1990, ships with a capacity of 4,000 TEUs were

plying the world’s major trade routes, and some

analysts expect that the cost-per-ton-mile of shipping containers in 5,000 TEU vessels will fall to

levels comparable to that of bulk shipping. In addition, shipping companies and terminal operators now use computerized vessel stowage and

terminal layout programs to plan the loading and

unloading of cargo. Computerized preparation

and processing of cargo release documents, in

some cases using voice recognition systems, helps

speed the movement of trucks into the terminal

and back out again. These trends are concentrating

shipping in even fewer ports, and encouraging the

location of newer port facilities away from urban

cores.

Port Consolidation

Prior to the container revolution, central-city ports

along the Atlantic, Gulf and Pacific coasts and, to

a lesser extent on the Great Lakes, handled most of

the nation’s cargo trade. Their proximity to major

markets minimized the need for inland transportation. Steamship lines usually called at ports in all

the major markets, since moving the cargo by sea

was usually easier and cheaper than unloading and

repacking it for shipment by land.

With the advent of containerization, the shipping industry’s requirements changed dramatically. Ports that handled smaller cargo volumes often

found it difficult to finance the large up-front investment required to handle containers. As the

shift from break-bulk carriage to containerization

took hold, older, smaller ports on the East and

West coasts lost traffic to new container ports in

places such as Port Newark/Elizabeth, New

Jersey, Oakland, Los Angeles and Long Beach.

Containerization also affected the balance of trade

between eastern and western ports. It was only

with the advent of containers that true intermodal

movement—relatively easy movement of boxes

from ships to rail, and then to trucks for final delivery—became possible. The introduction of

doublestack trains made “mini-landbridge” service—rail transport of containers from West Coast

ports to East Coast markets—increasingly attractive. Minibridge routing was faster and allowed

2 M. Kuby and N. Reid, “Technological Change and the Concentration of the U.S. General Cargo Port System: 1970-1988,” Economic

Geography, vol. 68, 1992, pp. 272-289.

3 Shipping goods by container has meant a dramatic increase in goods handling productivity. As a result of containers, terminal handling

costs declined from 55 percent of the cost of international shipping to 15 percent. Paul W. Chilcote, “The Containerization Story,” in Mark J.

Hershman, Urban Ports and Harbor Management (New York: Taylor & Francis, 1988), p. 130.
148 | The Technological Reshaping of Metropolitan America

carriers to avoid the Northeast’s higher-cost ports,

which helped offset the higher line-haul cost of

minibridge.

With stack trains carrying a rising flood of

Asian goods to East Coast markets, East Coast

ports—including New York, Philadelphia, and

Baltimore—saw their share of the nation’s maritime trade decline. Atlantic Coast ports handled

61 percent of the country’s maritime trade in 1962;

their share declined to 40 percent by 1987. Over

the same period, the Pacific Coast ports’ share

rose from 13 to 46 percent.4 Ports on the Gulf

Coast also saw their share of maritime trade decline, as shippers and carriers often found it more

cost-effective to serve this part of the country via

rail connections to the major load centers. The rise

of efficient intermodal service linking ships to

trucks and rail also dealt a severe blow to maritime

traffic on the St. Lawrence Seaway and the Great

Lakes; by 1990, the Great Lakes ports combined

share of America’s maritime trade had declined to

less than 1 percent.

For several reasons, the trend toward larger

container ships will reinforce the concentration of

maritime trade in a limited number of large “load

center” ports. First, the economics of large ships

favor limiting the number of port calls a vessel

makes; fewer calls mean shorter transit times, better utilization, and more “turns” per ship. Larger

ships, moreover, naturally favor ports that consistently generate enough traffic to keep them filled.

The proliferation of large ships will also require

substantial investments in the ports that serve

them. Ships carrying 5,000 TEUs or more require

drafts of 46 or even 50 feet. Ports that require extensive (and expensive) dredging, such as Newark/Elizabeth and Oakland, could be at a

significant disadvantage relative to those whose

harbors have greater natural depth (e.g., Seattle).

Since the value of lower ocean transit costs can

be negated if containers wind up sitting on the

ground for several days, shipping companies and

terminal operators have an incentive to invest in

equipment to expedite the movement of large volumes of containers—such as a new generation of

faster, more powerful cranes. However, given the

cost of such equipment, they also have an incentive to limit the number of locations in which its

installation is necessary.

Finally, the relentless shift from break-bulk to

containerized cargo will reinforce the trend toward concentration that is driven by larger ships.

The decline of break-bulk will leave smaller ports

with fewer opportunities to specialize in the handling of non-containerized niche cargoes such as

automobiles, coffee, and cocoa.

Decrease in Central City Port Activities

Container-ships need linear berths, backed up by

broad expanses of open land, rather than old-fashioned finger piers. As new container facilities

were developed on the periphery of major port cities, once-bustling inner-city piers declined. In

some cities they were converted to other uses; in

some they were left to decay.

No city offers a better example of the intra-regional impact of containerization than San Francisco. Dominant in West Coast maritime trade

since the days of the Gold Rush, the city’s economy was built around the cargo piers that framed its

waterfront. But despite its maritime roots, San

Francisco was slow to grasp the implications of

the container revolution. While the Port of Oakland, its competitor across the bay, invested heavily in a new container terminal in the 1960s, San

Francisco continued to invest in its break-bulk terminals. By 1979, Oakland was handling 10 times

4 Scott Campbell, “Increasing Trade, Declining Port Cities: Port Containerization and the Regional Diffusion of Economic Benefits,” Helzi

Noponen, Julie Graham, Ann R. Markusen (eds.), Trading Industries, Trading Regions: International Trade, American Industry and Regional

Economic Development (New York, NY: Guilford Press, 1993), p. 221.
Chapter 6 Technology and Location of Freight Transportation, Distribution, and Manufacturing Jobs | 149

the container volume handled in San Francisco. In

the following decade, the value of Oakland’s cargo traffic quadrupled, while that of San Francisco

fell by 35 percent.5

Across the continent, developments in New

York paralleled those in the Bay Area. The finger

piers flanking Manhattan and the Brooklyn waterfront were ill-equipped to handle containers. Marine cargo traffic quickly shifted to newly built

container terminals across the harbor, in Newark

and Elizabeth, New Jersey.6

Increased containerization could put at risk

some smaller urban core facilities that have managed to survive by handling break-bulk niche cargo. Since the mid-1980s, for example, New

York’s South Brooklyn Marine Terminal has had

no business other than handling break-bulk shipments of cocoa. Loss of its cocoa trade would

probably mean the end of maritime activity at

South Brooklyn.

Perhaps most importantly, the transition to

larger ships will favor those areas that offer direct

access to rail service and to interstate highways.

Because these ships are so large, and unloading

and transport speed at the next stage is so critical,

locations that cannot offer such service are likely

to wither. Moreover, as discussed below, the rise

of double-stack trains serving ports means that cities served by a single rail line with clearances too

low to accommodate double-stack trains will suffer. Similarly, locations with poor highway access

will also lose market share. At least a few older cities are likely to lose the last vestiges of their role

as working cargo ports.

❚ Air Cargo and Airports

Just as technological change redefined the geography of the maritime industry, so has it contributed

to a redistribution of air cargo activity. In this case,

however, the result has been to disperse air cargo

activity across a larger number of hubs and gateways, rather than to concentrate it. This dispersion

has been fueled by the significant growth in air

cargo itself, in part because of the rapid emergence

of integrated all-cargo carriers after Congress deregulated the air cargo industry in 1977. By 1987,

a half-dozen integrated carriers—Federal Express, UPS, Emery, Airborne, Burlington, and CF

Air—had carved out a powerful position in the domestic air cargo business. The volume of cargo

they handled grew by more than 400 percent in

just a decade; their combined employment grew

six-fold. Their combined fleet grew from 59 jets in

1977 (most of them small) to 402 a dozen years

later (two-thirds of them 727’s and DC-8’s).

Information technology has been essential to

the rise of the integrated air cargo carriers, and in

particular to the growth of small package express

services. The rapid delivery and high reliability

these companies offer would be impossible without aggressive use of technology throughout their

operations. The use of sophisticated information

systems to manage the delivery of packages “end

to end” led to the rise of integrated carriers such as

United Parcel Service and Federal Express. UPS,

for example, pioneered the use of “delivery information access devices” or DIADs—hand-held

computers that allow drivers to input information

about a shipment into the company’s computer

system at the point of pick-up or delivery. In addition, bar-coding has made it possible for the express carriers to automate some of the sorting that

occurs at their primary and secondary hubs. It also

allows them to track the movement of packages

through their networks, and to share this information with their customers.

Regional Patterns

Just as with other modes of transport, the increasing importance of air cargo has contributed to the

emergence of such new centers of national and international commerce as Memphis, Miami, and

Louisville (see table 6-2). Initially, all of the integrated carriers pursued a similar strategy—es5 Ibid.

6 B. Warf and L. Kleyn, “Competitive Status of U.S. Ports in the Mid-1980s,” Maritime Policy and Management, vol. 16, 1989, pp. 157-172.
150 I The Technological Reshaping of Metropolitan America

Federal Express Memphis, Term.

United Parcel Service Louisville, Ken.

Emery-Purolator Dayton, Ohio

Airborne Express Wilmington, Ohio

Burlington Express Ft Wayne, Ind.

CF Air Indianapolis, Ind.

SOURCE Office of Technology Assessment, 1995

tablishing hub-and-spoke systems for collection

and distribution of packages, and making intensive use of information and communications

technology to manage the flow of cargo in real

time. All of them chose airports in or near the Ohio

Valley and the Mid-South for their primary hubbing operations. Hubbing out of this region was

efficient because its central location minimized

the distance to most of America’s people and businesses. Moreover, the cost of doing business in

this region was considerably lower than it was in

older air cargo centers such as New York, Chicago, and Los Angeles. 7 Most of these sites also offered access to the large work force required to

support the integrated carriers’ labor-intensive

hubbing operations. The number of people UPS

employs in its Louisville hubbing operations

(about 13,000) is greater than the number of active

longshoremen at all East Coast ports combined.

The growth of the two largest integrated carriers was so rapid, however, that by the mid- 1980s it

was becoming clear they could not continue to

channel nearly all their air traffic through Memphis and Louisville. The next step in the evolution

of the system was a series of regional hubs. Federal Express established regional operations in Oakland, Indianapolis, and Newark, New Jersey;

UPS, in Philadelphia and Ontario, California.

Just as advances in information technology

have made possible the integrated carriers’ complex hubbing operations—as well as the highspeed, highly reliable service immortalized in

FedEx’s tag line about “absolutely, positively”

getting there overnight-so is information technology making possible a network of regional hubs.

The ability to maintain central control over information-and the ability to make transactions

appear seamless to customers, regardless of how

they are routed—”is a prerequisite for the decentralization of operations. Advances in information

technology make it possible for carriers, transportation managers, and shippers to centralize

control of information, even as they decentralize

operations.

Even with rapid expansion of regional hubs, air

cargo operations have remained in metropolitan

areas largely because the major airports handling

passenger traffic are there. However, recently

there has been increased interest in all-cargo airports. Such airports, in theory, would not have to

be located in high-cost metropolitan locations.

For example, the state of North Carolina has plans

for a 15,000-acre complex combining an all-cargo

airport and an industrial park, called Global Transpark, to be located in Kinston, a rural community

in the state’s economically distressed eastern region.

However, the concept of all-cargo airports has

generally met with considerable skepticism in the

air cargo industry, particularly proposals to locate

new cargo airports in rural areas that do not generate any substantial air cargo of their own.8 In 1991

about 50 percent of all cargo was carried in the bellies of passenger planes; and Boeing’s annual aviation forecast projects this will increase to 58

percent by 2005. Relatively few cities or regions

generate enough freighter traffic to sustain a separate facility. Moreover, airlines that provide both

belly and freighter service-such as KLM and

7 Peter Spaulding, “Reinventing the Air Cargo Wheel,” Portfolio, Autumn, 1988, pp. 21-22.

8 Considerations such as these led the FAA in 1991 to conclude that: “ ....cargo will remain concentrated at very busy airports near major

population centers where there is ample capacity available to shippers in the baggage holds of airliners.... Efforts to develop regional air cargo

airports at other locations will involve considerable expense and financial risk.” Department of Transportation, Federal Aviation Administration, A Feasibility Study of Regional Air-Cargo Airports, August 1991, p. 7.
Chapter 6 Technology and Location of Freight Transportation, Distribution, and Manufacturing Jobs | 151

Lufthansa—much prefer to have the two types of

flights serviced by the same cargo terminal facilities, rather than duplicating facilities at separate

passenger and cargo airports. And even all-cargo

carriers such as Federal Express have a strong incentive to share basic airport infrastructure such as

runways, roadways, and utilities with passenger

airlines. The fact that most cargo activity occurs at

late-night and early-morning hours, when passenger traffic is light, reinforces the logic of such

sharing. Finally, cargo terminals at smaller airports may not have the volume of traffic needed to

justify investment in complex automated systems.

Nevertheless, the recent success of Rickenbacker International Airport in Columbus, Ohio,

and the beginnings of air cargo service at Alliance

Airport in Fort Worth, suggest that cargo airports

can work in some circumstances. Perhaps the

most important is that the region the facility will

serve already have a substantial traffic base, or at

least be well-positioned to generate new traffic;

these regions are usually larger and mid-size metropolitan areas.

Decentralization to Outlying Airports within

Metropolitan Areas

Metropolitan airports have become major centers

of goods movement and distribution, but these activities generally takes place either at outlying

locations within the central city, or in the outer

suburbs. In metropolitan areas that have both older, smaller downtown airports and larger, newer

(that is, post-World War II) airports farther out, air

cargo and related distribution activity tend to be

concentrated at the larger facilities—at Kennedy

rather than LaGuardia, Dulles rather than National, O’Hare rather than Midway, Dallas-Fort Worth

rather than Love Field. Newer airports, such as Alliance and Denver, are even farther from the urban

core.

Moreover, in some cases the growth of cargo

handling and distribution at these airports has attracted support-service businesses, such as freight

forwarding and customs brokerage, that had previously been concentrated in downtown areas. In

1970, 79 percent of all employment in this industry in the New York metropolitan area was concentrated in Manhattan, but by 1986 Manhattan’s

share had declined to 31 percent. Nearly half of the

region’s freight-forwarding and customs brokerage jobs were located in the area around Kennedy

Airport, in Queens and Nassau counties.9 Chicago

has seen a similar migration from downtown to

suburban areas near O’Hare.

❚ Railroads

Although the major railroads will continue to

make investments to increase the capacity of older

intermodal terminals in or near central cities, a

substantial share of the growth in longhaul intermodal traffic could be shifted to very large terminals built on greenfield sites on the fringe of major

metropolitan areas. There are a number of innovations in rail service that are contributing to this decentralization.

First, though most train cars have not increased

in size, they can haul more freight, largely because

of double-stack container trains—trains that haul

containers on specially designed rail cars that are

slung lower than conventional cars and permit

stacking of one container atop another.10

In addition, in a continuing effort to compete

with conventional trucking services, railroads and

intermodal companies are developing technologies aimed at making rail intermodal service more

competitive at distances under 800 miles. A number of innovations reducing the time spent in

9 Cathy Lanier, “The Nature of Trade-Related Services in the New York-New Jersey Region and the Influences on Their Location,” Port

Authority of New York and New Jersey, October 1990, p. 21.

10 Double-stack service has grown rapidly since its introduction just over a decade ago. In April 1984, American President Companies

started the first regular service, with just one train per week from Los Angeles to Chicago. By early 1995, about 250 double-stack trains per week

were linking 86 metropolitan areas in the U.S., Canada and Mexico. Gerhardt Muller, Intermodal Freight Transportation, 3rd edition (Landsdowne, VA: Eno Transportation Foundation/Intermodal Association of North America, 1995), p.71.
152 I The Technological Reshaping of Metropolitan America

Burlington Northern opened the James J. Hill Center, located on a 350-acre campus in Fort Worth,

Texas, in April 1995. The new complex, which will ultimately employ about 870 people, is replacing

seven regional dispatch centers that had previously managed the flow of traffic over BN’s 22,000-mile

network,

At its heart is a single 45,000-square-foot room, dominated by nine 18-by-24-foot screens, on which

are displayed constantly changing real-time maps of the railroad’s operations. They show where trains

are, whether they are on-time, and weather conditions throughout the system. Individual dispatchers

monitor train operations both on computer screens and by voice contact with train crews; a dispatcher

in Fort Worth can type instructions into the system that will result in a switch being thrown a thousand

miles away. Other specialists watch over BN’s signaling systems, keep track of power consumption,

and manage the deployment of personnel.

Burlington Northern planned the Hill Center with plenty of room for expansion. The railroad is now

considering centralizing its marketing operations in the same location. ’

1 Jack Burke, “BN Inaugurates Network Operations Center,” Traffic World, May 1, 1995, pp. 36-37

transferring cargo from one mode to another have

helped spur the growth of intermodal traffic. Several equipment manufacturers have developed vehicles that can travel both on rails and on the

highway. The only version that has seen any extensive commercial use to date is called the RoadRailer. It is, in effect, a highway trailer to which a

specially designed set of rail wheels can be attached.

Rail operations have also benefited greatly

from the development of real-time information

systems that monitor the movement of equipment,

deploy it more efficiently, and keep track of its

performance. Today, all of the major railroads

manage their operations through automated train

control systems, or ATCS. These systems are

often managed from a single nerve center. The

newest of these is Burlington Northern’s operations center in Fort Worth, opened in April 1995

(see box 6-l).

Decentralization of Operations

After several years of sustained growth in longhaul intermodal traffic, and with growth expected

to continue during the next decade, many of the

nation’s railroads are scrambling to increase the

capacity of intermodal terminals in major metropolitan areas. In some cases, this has meant modernization and expansion of older rail yards

located in or near the central city. CSX Intermodal, for example, is now expanding its terminal in

Little Ferry, New Jersey—less than 10 miles from

midtown Manhattan—by about 80 percent.l1

Conrail has sought to speed the flow of traffic

through its South Kearney, New Jersey, terminal-the busiest intermodal rail facility on the

East Coast—by expanding its gate complex and

making more extensive use of automation. 12

However, several carriers have chosen a different strategy—very large intermodal terminals at

11 “speed at the Tracks,” Via, Port of New York-New Jersey, March/April 1995, p. 27.

12 John H. Perser, “Intermoal Terminals of the Future will Offer Myriad of Choices, Demand Careful planning,” Traffic World, April 18,

1994, p. 37.
Chapter 6 Technology and Location of Freight Transportation, Distribution, and Manufacturing Jobs | 153

greenfield sites on the periphery of major metropolitan areas. In 1994, the Santa Fe Railway

opened a 575-acre terminal near Alliance Airport,

on the outskirts of Fort Worth. The terminal has

three tracks, each 6,000 feet long, with truck lanes

in between; Santa Fe officials say the terminal has

a capacity of 300,000 container lifts per year. The

new facility replaces three smaller Santa Fe yards

in Dallas and Fort Worth. Santa Fe has also built a

new 269-acre terminal in Willow Springs, Illinois,

to relieve congestion at its Corwith Yard in Chicago; and Norfolk Southern is developing a new

800-acre terminal west of Atlanta.

Although there is still considerable room to increase the capacity of older intermodal terminals

by speeding the flow of traffic, greenfield sites

could prove increasingly attractive as the volume

of long-haul traffic rises. New yards on such sites

can be designed from scratch to maximize the efficiency of intermodal operations much more easily

than retooling a yard originally designed for box

cars. Long parallel tracks such as those at Santa

Fe’s Alliance facility make it possible to work

several mile-long double-stack trains simultaneously without breaking them down. Roadways

and terminal gates can be designed to move trucks

in and out more quickly; and outlying sites often

permit truckers to avoid the street and highway

congestion that characterizes the metropolitan

core. Finally, in some cities it is difficult to move

double-stack trains in and out of rail yards, due to

low bridge heights.

❚ Trucking

One of the main changes in trucking has been the

increase in the size of trucks. In 1984, most new

trailers manufactured in the United States were 48

feet long; only about 1 percent were longer. By the

early 1990s, the most common length for new

trailers was 53 feet.13 Fourteen states had enacted

legislation allowing 57-foot trailers on some highways. The width of trailers permitted on the interstate system was also increased from 96 to 108

inches.

Decentralization of Trucking

The past several decades have seen a shift in the

trucking industry away from the city center. This

trend reflects a number of other changes that have

occurred in the economy of metropolitan areas. In

port cities, for example, drayage companies have

tended to follow maritime activity to new container facilities away from the downtown waterfront.

The shift of manufacturing away from central cities has also led to a shift in trucking, as firms followed their industrial customers to outlying areas.

Ready access to interstate highways has also been

a factor in truckers’ location choices. Land costs

are also important, particularly for less-thantruckload carriers, who need terminals for breaking down and consolidating shipments.

The trend toward larger trucks will further

erode the already-tenuous position of many older

cities as regional or national distribution centers.

Bridges, tunnels and arterial highways in these cities were in many cases not designed to accommodate trailers as large as those in use today, let alone

even larger vehicles. Much of New York City, for

example, is already off-limits to 102-inch-wide

trailers; other cities, including Philadelphia and

Boston, also strictly limit access by large trucks.

In many cases, truck shipments bound for New

York City are delivered to terminals in northern

New Jersey, then transferred across the Hudson in

smaller “straight trucks.”

❚ Urban Core Freight Niches

Although the trend is for continued dispersion

of freight activity to lower-cost metros and to outlying areas within metros, there are three areas

where urban cores may continue to play a role.

First, while many freight services, particularly air

freight, have moved to the suburbs, other freight

services have remained downtown. In part, this is

because of the proximity to other firms in down13 Gerhardt Muller, op. cit., footnote 10.
154 | The Technological Reshaping of Metropolitan America

town locations. Second, many freight terminals

have sunk costs of infrastructure in urban areas,

making it expensive to move. For example, Conrail has just introduced a new generation of container stackers—the world’s largest—at its

Croxton Yards facility in New Jersey, just a few

miles west of midtown Manhattan. Such largescale physical investments exert inertia to stay in

these locations. Similarly, large ports have invested in container cranes, electronic processing

systems, and land-based infrastructure. In addition, in some cities where the large freight airport

is still close to the urban core, these cites continue

to provide jobs. For example, New York’s Kennedy airport, with a total land area of 5,000 acres, has

plenty of space available on which to develop air

cargo facilities.

Third, just as specialty and flexible manufacturers appear to have competitive niches in urban

cores, so too do specialty freight carriers. As a result, the next decade could see smaller facilities in

or near central cities that are designed to handle

short-haul and specialty cargo. In shipping, a new

generation of faster, smaller vessels now being developed might complement very large container

ships by providing feeder service from smaller

ports to large load centers. In addition, because

they need not aggregate the massive volume of

cargo required for economical operation of very

large container-ships, smaller, faster vessels could

operate more effectively in “point-to-point” service. Whether smaller, faster vessels—such as

those now being developed by FastShip Atlantic—can succeed in capturing a significant share

of America’s maritime trade remains to be seen.

In intermodal rail and truck freight, the shorthaul economics will make sense only if the truck

trips at either end are short as well. This argues for

keeping terminals as close as possible to customers, and if short-haul service attracts enough volume to justify them, for multiple terminals. For

example, the “Iron Highway” system that CSX Intermodal will begin testing this summer between

Chicago and Detroit will use an existing 10-acre

yard in Chicago.14 Because they provide a roll-on,

roll-off system, Iron Highway terminals will not

need elaborate and expensive lifting equipment;

they will, however, emphasize moving trailers in

and out quickly. Whether new forms of intermodal

service can be truly competitive with trucks at distances of 300 to 500 miles remains to be seen.

Even if it succeeds, short-haul intermodal is likely

to remain a niche service, targeting specific markets. But it could provide some small-scale opportunities in central cities—and could offer

central-city shippers some new opportunities for

moving their goods.

Finally, not all types of trucking have declined

in central cities. In New York, for example, even

as trucking companies serving the city’s shrinking

manufacturing base were declining, courier services linked to the city’s services sector were expanding. The high value of the goods carried by

these companies, and the premium placed on

timely delivery, make it easier to justify the high

cost of New York City terminal space. UPS, for

example, has several terminals in the city, including one on the lower west side of Manhattan.

WHOLESALE TRADE AND

DISTRIBUTION15

The spatial distribution of wholesale employment

has remained decidedly metropolitan over the last

25 years, with the share of employment in metro

areas hovering around 88 percent (compared to 82

percent for all U.S. employment). However, like

freight transportation, goods distribution is undergoing technological change that could lead to relocation or consolidation of facilities in

14 The Iron Highway is a train of articulated rail cars that, when linked, form one continuous surface. This “highway” makes it possible for

conventional tractors to pull trailers directly on and off the train, using sliding ramps.

15 This section is based on a report prepared for the Office of Technology Assessment on wholesale trade and distribution. Amy Glasmeier

and Jeff Kibler, “Turning Stocks into Flows: The Effects of Technological Change and Transportation Deregulation on the Location of Wholesale Employment in the U.S.,” July 1995.
Chapter 6 Technology and Location of Freight Transportation, Distribution, and Manufacturing Jobs | 155

lower-cost areas away from urban cores. Information and telecommunications capabilities allow

firms to deliver goods much faster than before, allowing in turn a consolidation of distribution facilities. Regional competition for distribution

business is likely to intensify, as the trend toward

consolidation puts this activity in play. Moreover,

as technologies enable faster and more responsive

delivery and as distribution facilities get larger,

they will tend to locate outside the core of large

metropolitan areas.

❚ Technological Change

The wholesale trade industry is in the midst of a

technological revolution that is speeding up the

flow of goods and moving the wholesale industry

from a system of stocked warehouses close to population and industry centers, to one of fewer larger-scale distribution centers serving large

geographic areas. Much of this change is made

possible by information technology, which allows

goods to be moved quickly to where they are needed. There are several important technologies.

Electronic data interchange (EDI), or computer-to-computer information interchange, significantly improves the amount, timeliness, and

quality of data transfer. Companies communicate

order shipment information with vendors, suppliers, transportation carriers, and customers.16 EDI

can compress time for the wholesaler and facilitate a more flexible distribution system. Moreover, through EDI, demand can be communicated

in real time from the point of need to the point of

supply, enabling wholesalers, distributors, and

manufacturers to react more quickly to demand.

Use of EDI in public/contract warehouses is expected to double by the year 2000.17

If EDI links the transactions of firms, bar coding is how information is exchanged. Bar coding

is improving logistics and inventory control by

improving data collection accuracy, reducing receiving operations time and data collection labor,

and integrating data collection with other areas.18

Companies can assign items more quickly to the

warehouse, warehouse personnel can prepare orders more rapidly, deliveries are more accurate

and timely, and there are fewer claims to process.

A warehouse receiving area equipped with a barcode system can check in 300 cartons per hour,

compared to 120 cartons per hour manually.19 Future innovations in bar coding will allow greater

amounts of information to be stored in ever smaller spaces and will dramatically reduce administrative and order preparation time. The use of bar

coding and scanning systems is expected to rise

from 15 to 81 percent by the year 2000.20

A third major area of technological change is

mechanization of distribution facilities, commonly through a conveyor system. Warehouse automation is expected to climb from 17.8 percent in

1990 to 54.7 percent by the year 2000.21

These technological changes have facilitated

the development of new practices, including the

development of “just-in-time” (JIT) delivery systems where goods are delivered to their destination at the time and in the quantities that they are

needed. Just-in-time systems demand that suppliers and transport providers deliver materials fast,

16 John J. Coyle, Edward J. Bardi, and John C. Langley, The Management of Business Logistics, 5th edition (St. Paul, MN: West Publishing

Company, 1992).

17 Arthur Anderson and Company, Facing the Forces of Change 2000: The New Realities in Wholesale Distribution. (Washington, DC:

Distribution Research and Education Foundation, 1994), 244 pp.

18 A bar coding is a series of black and white bars of varying width, whose sequence represents letters or numbers. This sequence is a code

that computer-controlled electronic scanners can translate into information such as shipment origin and destination, product type, and price.

19 Coyle, Bardi, and Langley, op. cit., footnote 16.

20 R.V. Delaney and B. La Londe, Trends in Warehousing Costs, Management, and Strategy (Oak Brook, IL: Warehousing Education and

Research Council, 1993).

21 Arthur Anderson and Company, op. cit., footnote 17.
156 | The Technological Reshaping of Metropolitan America

frequently, and with a high degree of reliability.

Right behind JIT, in the retail apparel industries,

came Quick Response (QR) where the manufacturer and retailer share point-of-sale data from the

retailer’s cash register to coordinate the flow of inventory from plant to store. For example, K-Mart

has adopted a Quick Response program with its

vendors. The percentage of goods shipped using

QR/JIT is expected to increase almost threefold,

from 14.4 percent in 1994 to 39 percent in the year

2000.22

Another new approach is “cross-docking,” a

practice pioneered by Wal-Mart. In cross-docking, shipments of goods arriving at a warehouse or

distribution center are not put into storage at all,

but are instead immediately broken down and reorganized for re-shipment to other destinations. A

warehouse operated by an apparel retailer, for example, might during the course of single morning

receive shipments from a dozen manufacturers,

break them down and recombine them for distribution to a hundred stores before the end of the

day. Today, only the most sophisticated distribution centers have such systems; during the next

decade, they will become increasingly common.

❚ Regional Concentration of Distribution

Functions

These new technologies and practices allow

wholesale distributors to serve several urban markets from a centralized distribution facility. New

information technologies and practices allow

products to be delivered to the customer much

more quickly than before. Moreover, the declining

real cost, increased reliability, and increased speed

of many forms of transportation (particularly integrated, all-air cargo operations), mean that distributors do not need to be close to the final customer.

These changes are making it possible for distributors to remain functionally close to customers,

without being geographically close. Finally, automation is leading to consolidation since facilities must be larger to support dedicated automated

equipment and achieve economies of scale.23 For

example, it is much easier and less expensive to

operate sophisticated warehouse systems in three

locations than in 12. By consolidating distribution

facilities, companies cut costs and improve quality control, without sacrificing customer responsiveness.24

Over the past decade, firms in many industries

have consolidated their logistics function. Fifteen

years ago, most consumer-packaged goods companies operated 10 to 15 stocking locations.

Today, most have consolidated operations in five

to seven locations (see table 6-3). National pharmaceutical and medical products distributors, for

example, previously operated up to 90 locations;

today, the three major distributors have between

45 and 48 facilities, with plans to consolidate further to between 30 and 35 locations.

Some firms have concentrated their operations

in just a few (or even just one) large distribution

center. Nike, for example, ships shoes and apparel

to retailers throughout the country through three

distribution centers—a 400,000-square-foot facility (for shoes) near its Beaverton, Oregon,

headquarters, and two in Memphis (with a combined total of 1.4 million square feet of space)

handling apparel and shoes, respectively. Distribution operations for The Limited, a major apparel retailer, are even more centralized, with

more than 3,500 stores nationwide supplied from

a single, massive distribution center near its Columbus, Ohio, headquarters. In addition to its

proximity to headquarters, Columbus offered a

central location, frequent double-stack intermodal

service from the West Coast, air cargo facilities,

22 Ibid.

23 W. Copacino, “Back to Market-Based Warehousing,” Traffic Management, vol. 32, No. 10, October 1993, p. 29.

24 Robin Pano, “Pull Out the Stops in Your Network,” Transportation and Distribution, August 1994, pp. 38-40.
Chapter 6 Technology and Location of Freight Transportation, Distribution, and Manufacturing Jobs 1157

Company Business Consolidation

AT&T Wireless communications equipment Consolidated international distribution from Columbus,

Denver and Oklahoma City in a new 250,000-square-foot

facility in Columbus.

Canon Copiers, fax machines Consolidated five regional warehouses into one national

distribution center in Memphis in 1993.

Nike Athletic Shoes and Apparel Consolidating 31 distribution centers into a single center

in Lakdaal, Belgium.

Dress Barn Apparel retailing Moved from four warehouses in New Jersey and Connecticut into a new 51O,OOO-square-foot distribution center in

Suffern, NY.

SOURCE Office of Technology Assessment, 1995.

and easy access to the interstate highway network. 25

For U.S. cities and regions, this change in distribution patterns has profound implications. If facilities no longer have to be physically close to the

customer to be functionally close, companies can

be much more selective about the locations from

which they distribute. Distribution increasingly

becomes an “export” function--one for which regions must compete—rather than a component of

each region’s local service sector.

What factors will drive regional competition

for distribution activity? The variables taken into

account in classical warehouse site selection analyses—proximity to markets and to sources of

goods, land, and labor costs—will still be relevant 26 

. But as firms more strongly emphasize

cycle-time compression and reliability of response, other factors are likely to become more

important. For companies that ship many of their

products on a just-in-time basis, proximity to an

air express regional hub may be essential; others

may require easy access to a double-stack intermodal terminal. Winners in this competition are

likely to be regions that offer the best combination

of access to large markets, frequent and extensive

multimodal transportation service, good local access to transportation hubs, a first-class telecommunications network, a high-quality labor force,

and competitive costs—and that have a coherent

strategy for developing distribution business.

Increasingly, these are likely to be in smaller or

mid-sized metropolitan areas in the 100,000 to

250,000 population range. For example, Sioux

Falls, South Dakota, is a small metropolitan area

with a growing cluster of distribution operations,

including those of Nordic-Track and Gateway

2000. The cost of operating a 350,000-squarefoot, 225-employee distribution center is $2 million to $2.5 million less in Sioux Falls than in

metropolitan Minneapolis or Chicago, even after

the higher cost of shipping into and out of Sioux

Falls is taken into account.27

■ The Increase of Distribution Functions

in Peripheral Areas

During the past two decades, most of the growth in

warehousing and distribution has occurred on the

periphery of America’s metropolitan areas. For

several reasons, this trend is likely to continue,

driven by the technologies and operational prac25 Apogee Research, Inc. Case Studies of the Link Between Transportation and Economic Productivity (Bethesda, MD: January 1991), p.

34.

26 Coyle, Bardii and Langley, op. Cit., footnote 16, p. 429.

27 Tom Andel, “Market Reach Grabs Shippers,” Transportation and Distribution, June 1995, p. 54.
158 | The Technological Reshaping of Metropolitan America

tices described above, combined with increasing

consolidation.

First, information technology and new practices reduce order transmittal and processing time

and provide a larger window of transportation

time, allowing facilities to locate in peripheral

areas of metros with lower land and labor coststwo

large components of warehouse costs.

Second, traditional wholesaling buildings in

the urban core are often not suitable for automation, regardless of cost. Thus, one major effect automation may have on the wholesale industry is

the abandonment of many older, multi-level, urban warehouses, since in most cases it is more

cost-efficient to build a new facility. Also, automation, along with EDI and bar-coding technology, is used in most cross-docking facilities,

which are structured very differently from traditional urban warehouses.

The ideal modern warehouse is designed to

maximize efficient material handling and storage.

These structures are single-level facilities with

high ceilings. The high ceilings, along with racking systems, provide efficient upward storage.

The internal layout is designed for one-way flow

of product, with the inbound and outbound functions at opposite ends of the building.

In general, older urban warehousing structures

are multi-leveled and have lower ceilings than

modern facilities. Many in the industry believe

that, in most cases, renovating older urban warehouses is not cost-effective because of the extreme

structural changes required for these buildings to

be operationally efficient.

Even with cross-docking, which can be implemented in lower volume and smaller facilities,

there are likely to be problems converting older

urban warehouses. An efficient cross-docking operation requires a structure with a number of shipping and receiving doors. In addition, internally,

the building must be designed to allow the unidirectional flow of product. Many urban structures have an inadequate number of dock doors,

and are not designed for a flow-through system.

The increasing average size of warehouses and

distribution facilities, driven by consolidation,

leads to decentralization because larger parcels of

land are needed. In central cities or close-in suburbs, especially in the more urbanized areas of the

Northeast, it may be difficult to find suitable large

sites. Even where sites are available that can support large, modern distribution facilities, high

land costs provide a powerful incentive to locate

on the metropolitan fringe.28

Finally, because facilities are being transformed into distribution hubs, a single-level,

highly automated cross-docking facility is best located in areas of low congestion with access to

major transportation routes. These are often in the

outer suburbs. Moreover, the continuing evolution of the trucking industry will also work against

older central cities as locations for distribution

centers. Since most distribution facilities are at

least partly dependent on long-haul trucking for

both receipt and shipping of goods, their owners

naturally want to take advantage of any measures

that might reduce trucking costs. This means that

locations offering unrestricted truck access will be

more attractive than locations to which the largest

trucks—whether as a result of regulatory restrictions or as a result of infrastructure limitations—

do not have access. Companies planning to

develop large distribution centers will thus tend to

prefer sites with direct access to highways (usually interstates) on which very large vehicles—trailers more than 53 feet long, or more than 13.5 feet

high, as well as doubles and triples—are permitted to operate.

However, just as with intermodal freight terminals, there may be opportunities to develop smaller distribution facilities serving more

concentrated markets in central-city locations.

Hospitals in some cities, for example, have moved

to a “stockless purchasing system”—one of the

28 Ann Strauss-Weider, “The Changing Face of Regional Warehousing,” Portfolio, Summer 1989, p. 32.
Chapter 6 Technology and Location of Freight Transportation, Distribution, and Manufacturing Jobs | 159

more aggressive applications of just-in-time distribution. Very little material is kept on the premises; the hospital-supply contractor makes several

deliveries to each hospital it serves during the

course of a day. The contractor may “pick and

pack” specific items not just for individual departments within a hospital, but even for specific closets and supply bins.29 This system relieves

hospitals of inventory and storage costs, and of the

need to manage an internal distribution system.

However, the need to make multiple deliveries

each day, and the need to be able to respond quickly in emergencies, means that there are advantages

to the distributor in being located close to the hospitals it serves. One of New York’s leading medical supply companies, for example, now serves

New York City hospitals from a distribution center in the South Bronx; and two other supply companies are now contemplating the establishment

of similar facilities in the city. As more businesses

and institutions implement just-in-time and direct-replenishment supply programs, opportunities to locate relatively small, specialized

distribution centers in or near central cities should

increase.

In addition, in some cases, however, ingenious

designs can lead to innovative reuses of urban

warehouses. For example, Space Technology, Inc.

is renovating urban facilities to achieve functional

warehouses. In Long Island, New York, the company is using a patented technology called the E-Z

Riser to raise the roofs of urban structures. To

solve the problem of lack of facilities for crossdocking and throughput distribution, some real

estate entrepreneurs are using innovative marketing techniques that undertake feasibility studies

and offer design plans for reuse of large vacant urban properties. Clark Properties, a St. Louis-based

real estate company, is in the business of renovating urban industrial property. One such renovation was an abandoned General Motors plant.

“This plant was transformed into the 160-acre

Union Seventy Center, a self-contained industrial

park with major warehousing and distribution operations. The Union Seventy Center represented a

renovation of three million square feet of space.

Clark Properties estimates that it will return 3,000

jobs to the St. Louis area. It already has attracted

three major carriersJ.B. Hunt, Schneider National, and North American Van Linesall of which

made Union Seventy Center their St. Louis terminal.”30 Large abandoned factories with good

transportation access may provide an opportunity

for some older central cities to attract some distribution jobs.

MANUFACTURING

Much has been written about the decline of

manufacturing in older regions and cities in the

United States. Starting first in New England in the

mid-1970s, and spreading next to the industrial

Northeast and Midwest in the late 1970s and early

1980s, metropolitan areas increasingly faced the

wholesale restructuring and decline of older mass

production industries, including steel, autos, lumber and wood products, oil and gas, and textiles. In

addition, much manufacturing production moved

from the old urban environments of the Frostbelt

to the new cities and suburbs of the Sunbelt; in

many cases, manufacturing left America altogether, exported to low-wage developing nations.

There are a number of technological reasons for

the decentralization and deconcentration of

manufacturing employment.31 First, improvements in transportation have aided decentralization. Much manufacturing originally located in

cities because of accessibility to energy, ports,

railroads, markets, and, via waterways and rail,

raw materials. Modern shipping technology, commercial aviation, interstate highways, and large

29 Apogee Research, Inc., Case Studies of the Link Between Transportation and Economic Productivity (Bethesda, MD, January 1991), p.

21.

30 E. J. Muller, “Urban Logistics,” Distribution, vol. 91, No. 4, April 1994, pp. 68-70.

31 Manufacturing includes a wide range of diverse industries with different locational patterns. This chapter focuses largely on discrete

goods producers (e.g,. automobiles, textiles, electrical equipment) and not on process industries (e.g., chemicals, petroleum, paper).
160 | The Technological Reshaping of Metropolitan America

refrigerated trucks obviated industry’s need to remain in the city, so that other factors, including labor and land costs, came into play in location

decisions. In particular, the interstate highway

system meant that manufacturers could choose

from a larger selection of places. Also, as firm size

grew and manufacturers were more likely to sell to

many cities, the importance of the central city as

the point of easiest access to the city market diminished.

Second, changes in production technology affected plant location. In the early and mid-part of

this century, widespread electrification meant that

factories could locate virtually anywhere in the

United States and have access to electricity. Later,

mass production technologies meant large plants

with production laid out on one level. The old

three- or four-story city plant was not appropriate

to mid-20th century industrial production. For example, in the New York City region, factories built

before 1922 averaged 1,040 square feet, increasing to 2,000 square feet between 1922 and 1945,

and after the war to 4,550 square feet.32

In addition, as industries matured and reached

the end of their product life cycle, manufacturing

decentralized. According to product life cycle

theory, products go through stages from innovation, to growth, to standardization.33 In its early

entrepreneurial and innovative stages, industry

often requires design, engineering, inventive, and

financial talents more likely found in the city. In

the second stage of development, highly skilled

urban workers with craft and technical know-how

refine the product and begin production in small

batches for small markets. But once production is

standardized and mechanized and aimed at mass

markets, a moderately skilled or even unskilled

workforce can do the job. This last stage implies

dispersal to where land, labor, and energy are less

costly than in the city.34 Moreover, as firms substituted capital for labor, more capital-intensive

firms were able to secure needed labor in less populated areas.

Yet, for two reasons, technological change in

manufacturing has not meant a movement away

from metropolitan areas altogether. First, hightechnology industries have concentrated more in

urban areas, although largely in the suburbs. Second, technologically advanced enterprises are

more likely to locate in urban areas, in part to be

near suppliers, skilled workers, and other sources

of innovation.

❚ High-Technology Industries

Employment in high-technology industries, such

as electronic equipment makers, aircraft, semiconductors, telecommunications equipment, and

instruments, has grown much faster than in lowtechnology industries. High-tech manufacturing

is more concentrated in metropolitan areas than

lower-tech industries.35 In 1982, 88.6 percent of

high-tech employment was located in metropolitan areas.36 For example, Barkely found that hightechnology manufacturing grew faster between

1975 and 1982 in metropolitan areas than in nonmetro, and within metros, the suburban counties

of large metropolitan areas grew the fastest.37

Within large metropolitan areas, high-tech industries appear to be more suburbanized than lowtech industries (see table 3-5). Moreover,

32 Robert Fishman, Bourgeois Utopias: The Rise and Fall of Suburbia ( New York: Basic Books, 1986), p. 196.

33 U.S. Congress, Office of Technology Assessment, Technology, Innovation, and Regional Economic Development, OTA-STI-238 (Washington, DC: U.S. Government Printing Office, 1984).

34 John Rees and J. Norton, “The Product Cycle and the Spatial Decentralization of Manufacturing,” Regional Studies, vol. 13, 1979, pp.

141-151.

35 OTA, Technology, Innovation and Regional Economic Development, op. cit., footnote 33.

36 David L. Barkley, “The Decentralization of High-Technology Manufacturing to Nonmetroplitan Areas,” Growth and Change, Winter,

1988.

37 Ibid., p. 17.
Chapter 6 Technology and Location of Freight Transportation, Distribution, and Manufacturing Jobs | 161

innovative high-technology industries were even

more likely to grow faster in metro than non-metro areas.38

❚ Flexible Production Manufacturing

In the last 15 years much has been written about

computer-integrated manufacturing (CIM).39 A

central feature of all components of CIM is the integration of computer-based information technologies into the production system. There are a

number of technological components involved: 1)

design and engineering technologies, including

computer-aided design/computer-aided manufacturing (CAD-CAM), including digital CAD; 2)

fabrication machinery, including computer-numerically controlled machines and robots; 3) automated materials handling, including automated

storage and retrieval systems and automatic

guided vehicles; 4) automated sensors, in particular for inspections and testing; and 5) communications systems, including Local Area Network

(LAN) systems to communicate within the plant

and with suppliers and customers.40 These

technologies allow firms to produce in more flexible ways than standardized mass production.

Computer-aided manufacturing helps firms

achieve efficiencies normally associated with

long, dedicated production runs, but with shorter

production runs. This kind of production is wellsuited to small innovative firms that are involved

in dense supplier and cooperative networks.

Relative to firms using less advanced technologies, flexibly specialized firms are more likely to

be in metropolitan areas.41 There are a number of

reasons for this. First, flexible technology systems

depend on the availability of sophisticated design

and engineering talent, which is often found within metropolitan regions. Moreover, these firms

often need to be near customers. For example, one

study of manufacturing found that the New York

City region was more oriented to small and medium-sized firms capable of quick turnaround on

customized products.42 Second, as FMS systems

are adopted, the ratio of fixed costs (e.g., machines, software programming) to variable (e.g.,

labor, power) increases. Because these firms compete less on cost and more on other factors, such as

quality, innovation, and response time, they face

fewer pressures to move production to lower-cost

peripheral areas.43

Third, these firms often enter into cooperative

arrangements with other producers or suppliers,

and the density and proximity offered by metropolitan areas are ideal for the growth of such agglomeration economies. In many cases, small

flexibly specialized firms cooperate in order to

defray the costs of expansion and technological

modernization, and to exchange technical and

38 Ibid, p. 20.

39For example, see John A. Alic, “Computer-Assisted Everything? Tools and Techniques for Design and Production,” Technological Forecasting and Social Change, vol. 4, 1993, pp. 359-374.

40 Timothy Dunne, Technology Usage in U.S. Manufacturing Industries: New Evidence From the Survey of Manufacturers (Washington,

DC: Center for Economic Studies, Bureau of the Census, U.S. Department of Commerce , November 1991, CES 91-7).

41 David L. Barkely and Sylvia Hinschberger, “Industrial Restructuring: Implications for the Decentralization of Manufacturing to Nonmetropolitan Areas,” Economic Development Quarterly, vol. 6, No. 1, 1992; see also Allen J. Scott, “The New Southern California Economy:

Pathways to Industrial Resurgence,” Economic Development Quarterly, vol. 7, No. 3, August 1993, pp. 296-309.

42 Telesis, Inc., Strategic Audit of the NY/NJ Manufacturing Sector, prepared for the Port Authority of New York and New Jersey, 1988, cited

in Mitchell L. Moss, Hugh O’Neill, Timothy Bates, and John Kedeshian, Made in New York (New York, NY: Taubman Urban Research Center,

New York University, 1995).

43 Ramchandran Jaikumar, “Postindustrial Manufacturing,” Harvard Business Review, November-December 1986, pp. 69-76.
162 | The Technological Reshaping of Metropolitan America

market information. For example, textile and apparel manufacturing in Los Angeles and New

York appear to thrive, in part because of close contact with designers that allows them to produce

new designs rapidly.44

Finally, computer-integrated manufacturing

(CIM) and other flexible technologies appear to

reduce optimal facility size, allowing smaller sites

to be profitably used.45 The average manufacturing establishment declined from approximately

50 employees in 1977, to 42 in 1992.46 This reduces land and building costs, reducing pressure

to migrate to areas with lower cost land; thus, locating within the confines of urban factories and

warehouses becomes more feasible.

Finally, in the case of companies pushing for

flexibility, employees find themselves engaged in

a wider range of frequently changing tasks, putting a greater premium on alertness and diligence,

as well as continuing on the job learning.47 As a

result, firms choose to locate in metropolitan areas

to be close to higher skilled workers.

❚ The Persistence of Urban

Manufacturing and Its Future Prospects

Though new manufacturing process technologies

based on information technologies helped slow

the decentralization of manufacturing employment away from large, higher-cost metropolitan

areas, it has not necessarily meant that manufacturing is staying in urban cores. In fact, high-tech

manufacturing appears to be highly concentrated

in suburban counties. However, technological

change does open up the possibility of some urban

manufacturing niches.

There are a number of reasons why some

manufacturing remains in urban areas.48 First, inertia; that is, many manufacturers in cores stay because they are already there, and moving is too

expensive or bothersome. However, sooner or later, the owners of “inert” businesses retire or die,

close their plants, and disperse their employees.

Second, some manufacturers, such as printing,

food processing, construction materials, and arts/

entertainment equipment are located in cities to

serve local markets.49 Similarly, recycling firms

are on the increase in urban areas in order to be

near supplies of consumer and business waste.50

For example, in New York City, Pratt Industries,

an Australian-owned company, has leased a

30-acre site on Staten Island and has recently announced that it intends to build a plant employing

400 people making linerboard and corrugated

boxes. At $250 million, it is one of the largest

manufacturing investments in New York City in

several decades. The access to a reliable and concentrated supply of raw material (mixed waste paper) was a key factor in their location decision.

Third, manufacturing dependent upon rapidly

changing designs or with need to be close to upscale customers may do well. The importance of

design—one of the factors that plays a role in the

persistence of manufacturing in New York—also

appears to explain a modest revival of city

44 David Friedman, “Getting Industry to Stick: Enhancing High Value-Added Production in California,” unpublished manuscript May

1992, p. 7.

45 Jaikumar, op. cit., footnote 43.

46 U.S. Department of Labor, Bureau of Labor Statistics, unpublished data.

47 U.S. Congress, Office of Technology Assessment, Worker Training: Competing in the New International Economy, OTA-ITE-457

(Washington, DC; U.S. Government Printing Office, September 1990).

48 Kenneth E. Poole and Caroline Samuels, “Manufacturing Trends in America’s Larger Cities,” in Urban Manufacturing: Dilemma or

Opportunity? (Washington, D.C.: National Council for Urban Economic Development), pp. 21-28

49 B.M. Nicholson, Ian Brinkley and Alan W. Evans, “The Role of the Inner City in the Development of Manufacturing Industry,” Urban

Studies, vol. 18, 1981, pp. 57-71.

50 Hugh O’Neill and Megan Sheehan, Exploring Economic Development Opportunities in Recycling, (New York, NY: Urban Research

Center, New York University and Appleseed, August 1993).
Chapter 6 Technology and Location of Freight Transportation, Distribution, and Manufacturing Jobs | 163

manufacturing in the Great Lakes region and in industries like automobiles and steel that were once

key urban manufacturing sectors. Two recent

studies describe a process of “reindustrialization

within deindustrialization” or manufacturing “reconcentration” in the old industrial Midwest.51

Hicks argues that Japanese manufacturers who

build plants in the Midwest may not locate in central cities, but nonetheless make use of design,

toolmaking, and engineering skills to be found in

the region’s cities.52 Similarly, textile manufacturing in Los Angeles was spawned by design requirements. Los Angeles garment manufacturers

required two things: high-quality, well-designed

textiles, and just-in-time production that could

satisfy the demand for seasonal clothing changes

and sophisticated fashion. These manufacturers

provided a local market for textile specialists from

around the world—Iran, Korea, Western and Eastern Europe, and the eastern United States—all of

whom converged in Los Angeles in the mid-1970s.

Fourth, the need for close linkages to other

firms, including service firms, may give some urban areas a competitive edge. Linkage to the service sector helps to explain the persistence of

another industry—entertainment-related manufacturing—crucial to the Los Angeles economy.

The movie and television industry in Los Angeles

now consists of many small firms, linked together

regionally with corporate distributors on one end,

and a host of suppliers and sub-suppliers on the

other end.53

Finally, cities provide a pool of workers, many

often immigrants, willing to work at low-wage

manufacturing jobs (e.g., clothing apparel, leather

goods). There are two reasons why the informal

economy in manufacturing is generally an urban

phenomenon. First, it makes use of low-wage but

often highly skilled immigrant labor (e.g., Dominicans trained to sew, Asian cooks, Mexican

and Brazilian metalworkers), especially undocumented aliens, who are now readily found in large

cities. Second, it is comprised of small businesses

whose start-up costs, plant spatial needs, and

function in the larger economy are well-suited to a

densely populated city location.54

New York City, for example, exemplifies many

of the elements that make for the persistence and

perhaps for the vitality of urban manufacturing.

New York has a number of firms that remain because of inertia—e.g., Farberware cookware,

which has been in the same building in the South

Bronx for more than 50 years. New York City’s

density also provides an internal market for some

kinds of manufacturing such as customized food

supply and commercial bakeries. New York’s role

as a center for arts and design spawns customized

manufacturing that relies heavily on the design

component, that can adapt to cyclical changes in

fashion, and that produces for niche markets. This

helps to explain why industries like fashion apparel, leather goods, fabricated metals, specialized

and upscale furniture manufacture, cosmetics,

crafts and manufacture attendant upon movie

making, and specialized textiles are doing well in

New York. New York’s strong service sector likewise stimulates certain kinds of manufacturing

such as commercial printing, paper-related products, construction materials, office furnishings,

arts/entertainment equipment and supplies.55

51 Richard Florida, “The Economic Transformation of the Industrial Midwest,” Draft Paper, Carnegie Mellon University, August 1994; and

Donald A. Hicks, Beyond Global: Innovation and Adjustment in U.S. Automobile Manufacturing (Washington, D.C.: American Enterprise

Institute, 1994).

52 Hicks, ibid.

53 Susan Christopherson and Michael Storper, “The Effects of Flexible Specialization on Industrial Politics and the Labor Market: The Motion Picture Industry,” Industrial and Labor Relations Review, vol. 42, No. 3, April 1989, pp. 331-347.

54 Saskia Sassen, “The Informal Economy,” in John Mollenkopf and Manuel Castells (eds.) Dual City: Restructuring New York (New York,

NY: Russell Sage Foundation, 1991), pp. 79-102.

55 Mitchell Moss, op. cit., footnote 42.
Telework, Intelligent

Transportation Systems,

and Telecommunications

Infrastructure

n addition to workplace technologies, there are other

technologies that could have a significant impact on the spatial distribution of jobs and homes. This chapter examines

three such technology systems: telework, intelligent transportation systems, and telecommunications infrastructure. Telework, which lets people work in distributed locations, including

at home, is expected to increase, with potentially large impacts on

where employed people live. Intelligent Transportation Systems

(applying information technologies to surface transportation)

could reduce congestion on metropolitan highways and improve

traffic flow, similarly allowing people to live in outlying locations without spending more time commuting. Advanced telecommunication infrastructure is becoming highly dispersed

across the country, enabling industrial development elsewhere

than the largest metropolitan areas.

TELEWORK AND ITS EFFECT ON METROPOLITAN

AREAS

The terms “telework,” “telecommuting,” “distributed work,” and

“teleprocesses” all refer to the substitution of transportation by

the use of telecommunications and other information technologies, but these terms are often used to mean different things. The

terms “telecommute” and “telework” were coined in 19731 and

are better known than the other terms, but the distinctions are

blurring.

1 Jack M. Nilles, “Telecommunications and Organizational Decentralization,” IEEE

Transactions on Communications, vol. COM-23, No. 10, October 1975, pp. 1142-1147.

| 165
166 | The Technological Reshaping of Metropolitan America

Telecommuting means the partial or complete

substitution of an employee’s normal working

hours in a traditional office or other workplace by

the home or alternative workplace such as a neighborhood telework center. Telecommuting reduces

commuting time and is accomplished through information technologies.

Telework includes telecommuting, but also includes some self-employed people who work at

home and mobile workers who use information

technologies and telecommunications to do their

jobs.2 A teleworker may use a laptop and modem

at the customer’s site to conduct business; a telephone, fax, computer, and/or modem to work out

of a permanent office located in the home; or a cellular telephone to conduct business while in a vehicle. As the broader concept, telework is more

relevant to the overall study.

“Hoteling” is often a component of telework,

and refers to two or more mobile workers sharing

office space in a traditional office or telework center. Hoteling saves office costs but requires special

workspace arrangements, as well as sophisticated

telephone and computer networking tools. The offices should offer temporary or portable storage

by the rotating workers, and should be able to

route calls and electronic transactions to the worker, wherever he or she may be.

”Distributed work” is the use of telecommunications and other information technologies to

perform work at a distance but not necessarily outside of an office.3 In particular, distributed work

specifically includes group activities—such as videoconferencing and networked information resources—that allow people from distant locations

to work together. Distributed work can cut travel

costs, and perhaps more importantly, permits

work to be done that previously could not have

been done at all, or only at great expense or inconvenience. In contrast, telework emphasizes the

substitution of a home or other remote or mobile

environment for the traditional office, although

the difference is often difficult to distinguish and

may eventually become meaningless.

Finally, a teleprocess is defined as an arrangement in which a remote transaction is performed

by anyone (not just a worker) and is facilitated

through the use of telecommunications (see figure

7-1).4

2 “Home work” or “home-based” work refers to any form of work at home—whether using information technologies or not. “Mobile work”

or “nomadic work” may occasionally use a home or traditional office, but the primary focus of the work is to be in transit between locations

(such as taxi drivers and truckers), on the customer’s site (such as case workers, field service representatives, construction workers, etc.), or in

other variable locations (such as reporters, video crews, police, etc.). “Remote work” can be defined as “work done by an individual while at a

different location than the person(s) directly supervising it,” and includes most types of mobile work and home work, including telecommuting.

“Flexiplace” is part of a terminology that accounts for flexibility in time and space. That is, traditional work arrangements concern a relatively

fixed time and place. “Flex-time” arrangements use the traditional work location, but allow the worker to be present at different times to reduce

traffic congestion, etc. Flexiplace involves traditional working hours but flexible work location—thus, remote or mobile work. Finally, “flexwork” allows both time and location to be flexible.

3 See Charles E. Grantham and Larry D. Nichols, “Distributed Work: Learning to Manage at a Distance,” The Public Manager (Winter

1994-1995), pp. 31-34; Lee Sproull and Sara Kiesler, “Computers, Networks and Work,” Scientific American, September 1991, pp. 116-123;

National Research Council, Research Recommendations to Facilitate Distributed Work (Washington, DC: National Academy Press, 1994).

4 Teleprocesses include telework and distributed work (moving the workers), but also teleservices, which uses telecommunications to

change the location of customers. The set of teleprocesses includes such activities as electronic funds transfers, electronic data interchange

(EDI), remote sensing, distance education, telemedicine, and the use of on-line and recorded information (see chapter 4). Teleprocesses could

be extended to include perhaps all but personal telecommunications transactions. U.S. Department of Energy, Office of Energy Research, Beyond Telecommuting: A New Paradigm for the Effect of Telecommunications on Travel (Springfield, VA: National Technical Information Service, September 1994).
Chapter 7 Telework, Intelligent Transportation Systems, and Telecommunications Infrastructure 1167

Teleprocesses

SOURCE Office of Technology Assessment, 1995

■ Motivations for Telework

There are several reasons for the adoption of telework. 5 First, the worker can benefit, through reduced commuting time, a more flexible work

schedule, more time with family, lower fuel costs,

and possibly more freedom of choice in where to

live. Telework can also increase opportunities for

disabled workers and others who are limited in

mobility.

Second, organizations can also benefit. Proponents claim that telework brings many immediate

benefits to organizations, such as improving individual productivity, improving employee morale,

reducing employee turnover, and reducing office

space. However, some of the productivity increases noted in pilot studies have not considered

the overall productivity of the organization. For

example, an individual worker may greatly improve his or her own productivity by working at

home, in part because many of the interruptions—

e.g., telephone queries—are offloaded to fellow

employees who remain in the office. Also, in the

case of long-term, full-time telework, the employee may become isolated from the organization and his fellow workers, and his productivity

may drop.

Third, proponents argue that metropolitan regions and society at large benefit from widespread

telework because of reductions in traffic congestion, pollution, and energy use. To the extent that

travel is reduced, accidents may also be reduced.

Not all of these benefits can be demonstrated,

however, and others note that businesses will

adopt telework based on its merits for business,

not on its broad social impacts.

Some commentators fear that telework will

create a growing group of itinerate information

workers who work on limited-term contracts

without the benefits and security that accompany

full-time employment. In exchange for flexibility,

they may be less able to negotiate favorable terms,

since each contract could be negotiated individually by the employer. The concern is that ultimately such contract-based telework may become

imperative rather than optional for many workers,

leading to increasing instability for workers, and

decreased loyalty and institutional memory for

employers.

■ Tasks Amenable to Telework

As this report uses the term, three categories of

jobs are appropriate for telework: routine information-handling tasks, mobile activities, and professional and other knowledge-related tasks. One

estimate suggests that 40 percent of the workforce

in the United States could telework at least some

of the time, but of these workers, many may not

prefer or be suited for telework, or their managers

may not encourage telework. 6

■ Routine information-handling tasks. Workers in these positions perform well-defined

5 See, for example, Mitchell L. Moss and John Carey, “Information Technologies, Telecommuting, and Cities,” Cities in Competition: Productive and Sustainable Cilies for the 21st Century, John Brotchie, Mike Batty, Ed Blakely, Peter Hall, and Peter Newton (Eds.) (Sydney, Australia: Longman Australia, 1995).

6 Jack Nines, personal communication, Aug. 8, 1995.
168 | The Technological Reshaping of Metropolitan America

tasks using telephones, facsimile machines, or

computers with modems in such a way that

their tasks are not tied to a physical location.

Thus, a customer service worker who uses a

computer to answer telephone queries or input

information into a computer from toll-free telephone calls may be a candidate for telework.

Directory assistance, dispatching, and data

entry may also be suited for telework. On the

other hand, if specific paper or other resources

tied to a central location are necessary to complete the tasks (e.g., many library tasks), telework is not appropriate.

 Mobile activities. Field service representatives, delivery personnel, field salespersons,

and others perform their duties at the customers’ or vendors’ site and may not require an office environment except for occasional

meetings or to use shared resources. Many employers use telework arrangements for such

workers to encourage more direct contact with

customers and to save on the costs of unoccupied offices while the workers are offsite (hoteling).

 Professional and other knowledge-related

tasks. “Knowledge workers” manipulate, analyze, or otherwise process information in a nonroutine manner and may spend many hours

with telephone, facsimile, computer equipment, and/or paper documents. Thus, consultants, translators, marketing personnel, authors

and editors, software engineers, executives,

and others may telework from home or while

traveling. This set of tasks overlaps with the

other categories. For example, a consultant can

work both at home and at a customer site, making that worker both a professional and a mobile worker. Likewise, many tasks are not

clearly routine or non-routine, such as translation services and some customer service tasks.

❚ Technologies Necessary for Telework

The technologies required for home-based telework are relatively commonplace. For most teleworkers, a laptop or personal computer with a

modem, electronic mail software, facsimile

equipment, and traditional telephone service are

enough. For the employer, current computer networking and/or call distribution equipment is

often adequate. Some applications, however,

benefit from or require faster data transmission for

file transfers or videoconferencing. In such cases,

current digital telephony services, including

ISDN (Integrated Services Digital Network) service, is generally adequate, although such services

are not necessarily available or affordable to

homes or in certain areas. Desktop videoconferencing equipment is becoming less expensive, but

the demand for video communications is not yet

clear. While these advanced technologies may facilitate the further adoption of telecommuting,

they may or may not become widespread, even if

costs continue to decrease.7

More advanced telework applications are possible, including advanced technologies for highperformance computing and networking. For

example, a scientist may wish to process data entered from a collaborator at another location using

software resident on a computer at a third location,

and display the results at his or her computer. Such

applications use the most advanced information

technologies available today.8 Ultimately, the

widest range of information technologies could be

applied to telework, just as they are currently applied to the wider set of teleprocesses, including:

7 Some argue that videoconferencing will have the appeal of the telephone and the television, and will therefore eventually become pervasive. On the other hand, many videoconferencing efforts have failed, and the technology could have a general appeal more like quadraphonic

stereo. Also, the telephone provides privacy and mobility that the videophone does not. Finally, it is not clear over what period its adoption will

occur, since to some extent an established infrastructure of equipment is necessary to make video calls.

8 See, for example, C.E. Thomas, J.S. Cavallini, G.R. Seweryniak, R.J. Aiken, T.A. Kitchens, D.A. Hitchcock, M.A. Scott, and L.C. Welch,

“Virtual Laboratories: Collaborative Environments and Facilities On-line,” paper presented at the IEEE 1995 Conference on Real-Time Computer Applications in Nuclear and Plasma Physics, East Lansing, MI, May 22, 1995.
Chapter 7 Telework, Intelligent Transportation Systems, and Telecommunications Infrastructure | 169

cryptographic tools; advanced data transmission

protocols for special applications; satellites for

distance education, remote sensing, or geographic

positioning; and virtual reality tools.

The shift from paper-based to computer-based

document systems within industry facilities telework (see chapter 5). For example, electronic file

management systems that rely on electronic imaging allow an increasing share of back office workers to review customer and other files, make

comments and changes, and send the files to

another worker for the next step in processing, all

on desktop computers. Similarly, “groupware”

programs facilitate the sharing of electronic resources for workers who collaborate on projects.

Transforming the work itself so that an increasing

share can be conducted using personal computers

increases the mobility of the work and makes telework cheaper.

The widespread application of the most advanced technologies for telework is uncertain,

however, since the current cost of high-speed digital transmission and advanced computer networking equipment is out of range for most telework

applications. Moreover, a great deal of telework

arrangements use only basic information technologies that are currently available; existing

technology is sufficient to sustain substantial

growth in telework for the next several years.

❚ Telework and Management

Telework is only one component of a larger movement to change the way organizations operate—

often referred to as “reengineering” and

“reinvention.” Organizations may reorganize, relocate offices, redefine their markets, create new

types of relationships with customers and vendors, eliminate workers and middle management,

incorporate information technologies in new

ways,9 as well as implement telework.

Telework ultimately will affect not just measures of individual productivity, but the performance of an enterprise in ways that are impossible

to attribute to telework alone. For example, a hoteling arrangement may force salespeople to meet

more directly with customers, increasing sales.

Or, more flexible working arrangements may lead

to improved employee morale and therefore better

service, a better reputation, and more business. In

particular, telework requires that organizations

manage by results instead of physical presence in

the office, which may lead to better worker performance, even for those workers who are not teleworking. Thus, attempts to measure the positive

effects of telework on individual productivity are

useful, but the business case for telework does not

necessarily succeed or fail based on individual results.

Many hoteling arrangements design office

space to promote “water cooler” discussions and

interactions among employees who may visit the

shared office only one or two days per week. Employees who are absent from the traditional office

will need contact with their coworkers that may

only partially be accommodated by videoconferencing, electronic mail, and other new media. It is

not clear to what extent these media can substitute

for direct human contact.10

Many commentators claim that managers are

slow to implement telework, but management

practices are nevertheless changing. However,

management must make a much greater change to

accommodate full-time, rather than part-time,

telework. Each organization must therefore discover its own balance between those activities that

9 See, for example, Thomas J. Allen, and Michael S. Scott Morton, Information Technology and the Corporation of the 1990s (New York,

NY: Oxford University Press, 1994).

10 It was once predicted that if computer programmers used terminals instead of punch cards, some socialization would be lost since the

programmers had to carry the cards to a central location for processing. However, most programmers continued to work in shared locations and

found other outlets for face-to-face interaction.
170 | The Technological Reshaping of Metropolitan America

are appropriate for telework, and those more appropriate for a traditional office.

❚ Telework Forecasts

Given the variety of definitions used in discussions of telework and related arrangements, and

the difficulty of obtaining data on many of these

activities, estimates of the number of existing arrangements and possible trends differ greatly.

Forecasts fall into two main types. One type uses

case studies, focus groups, and surveys to extrapolate findings to the nation at large. The other type

estimates on a national scale the maximum number of jobs and workers that are suitable for telework and infers the level of adoption based on

trends in the acceptance of telework by management and other factors. These different forecasts

then reference each other. These analyses contain

many assumptions, and any forecast must necessarily include a range of values for different scenarios.

The U.S. Department of Transportation (DOT)

estimates that there were two million telecommuters (1.6 percent of the labor force) in 1992, telecommuting an average of 1-2 days per week and

working mainly out of homes (99 percent).11 DOT

forecast that the number of telecommuters would

increase to 7.5 to 15.0 million by 2002, telecommuting an average 3-4 days per week, with about

one-half working from telework centers. This

amounts to about 5 to 10 percent of the forecast labor force.

The assumption about the trend toward telework centers versus work at home is challenged

by some telework experts. Given the option of

managing workers in a telework center or in their

homes, managers often initially choose the telework center as an intermediate or trial step so that

certain issues (such as liability or socialization)

can be managed in a traditional manner. Later,

these organizations may wish to allow more workers to telework from home as management becomes more comfortable with telework. Also,

many workers may have special reasons for teleworking from home. In any case, some forecast

that home-based teleworkers will predominate

over those in telework centers in the near and long

term.

It is difficult to collect information on the number of workers in telework centers. In comparison,

home-based telecommuting has been more easily

and accurately monitored using census and other

survey information, explaining why home-based

telecommuting is more widely recognized than

other activities.

A 1991 forecast estimated that the number of

U.S. telecommuters would grow to between 12

and 25 million by 2002.12 Importantly, this forecast portrays the growth as greatest in the early

years when the number of teleworkers is relatively

small, and as slowing to below 20 percent per year

in the mid- to late-1990s. The high estimate is

contingent on many factors, including:

 relatively rapid and complete acceptance by

management of telework practices;

 relatively rapid adoption of technologies that

may facilitate telework arrangements, such as

ISDN and desktop videoconferencing;

 adoption of federal, state, or local policies that

promote telework arrangements; and/or

 unpredictable local or global events, such as an

earthquake or a fuel crisis.13

❚ Effect of Telework on Urban Areas

Much of the discussion about the effects of telework on metro areas has focused on the possibility

of reducing traffic congestion, pollution, and energy consumption. The major focus of this report

11 U.S. Department of Transportation, Transportation Implications of Telecommuting (Washington, DC: U.S. Department of Transportation, April 1993).

12 Jack Nilles, JALA International, Inc., “Telecommuting Forecasts,” Los Angeles, CA, 1991.

13 When the Northridge earthquake struck Los Angeles in January 1994, for example, federally sponsored telework projects were quickly

adopted and continued for some time after the local infrastructure was repaired.
Chapter 7 Telework, Intelligent Transportation Systems, and Telecommunications Infrastructure | 171

is on the spatial redistribution of workers and residents as a result of telework, and the consequent

changes in travel patterns (rather than just on reduction of peak-hour congestion). However, very

little is understood about these changes, in part because telework is a relatively new phenomenon.

Most analyses of telework have focused on direct

effects (e.g., reduced commuting), rather than on

indirect effects such as reduced office space demand, relocation by telecommuters to outer suburban or exurban locations, and stimulation

effects on travel.

Savings in Office Space

Proponents of telework suggest that telework arrangements that share office space—hoteling arrangements—can save on office space costs for

the employer.14 As discussed earlier, management

acceptance of telework hinges on its business

case, and this cost savings provides a strong, but

not necessarily sufficient, motivation to adopt

telework.

Hoteling is successful in many applications

where field service technicians, sales representatives, or consultants are in the field much of the

day. Such employees have similar needs for information technologies and can therefore share office equipment. An example is the accounting

firm Ernst & Young, which, through hoteling, reduced its office space needs in Chicago’s Sears

Tower by over 10 percent.15 Other employees require dedicated space and equipment to perform

their work, even if they are not in their offices for

the entire workday. If only a few employees in an

office can practice hoteling, management may not

perceive sufficient savings to implement it, and in

any case, real estate cost savings would be marginal. Work practices, software, and office design

may evolve sufficiently to accommodate many

workers and managers who are uncomfortable

with hoteling at present, but the penetration of hoteling into the workplace will continue to be low

for the immediate future.

Residential Land Use Patterns

Some studies suggest that widespread adoption of

telework would lead to more decentralized land

use patterns, as residents choose to live farther

from dense metropolitan centers in exchange for

lower real estate costs, lower property taxes, and

more rural settings.16 However, little empirical

work has been conducted regarding this consequence of telework.

An early pilot project in California found that

in the first two years, there was no significant difference in household move patterns as a result of

telework arrangements.17 However, long-term effects are likely to be more pronounced than results

measured over the short term. Also, the telecommuters in that pilot study lived, on average, farther

from the traditional workplace than the workers in

the control group. Thus, the telecommuters may

have already relocated, and were using telecommuting to reduce their inconvenience.

It is not surprising that the first employees of a

firm to sign on to telecommuting programs may

be those who have the most to gain because they

live far from their jobs and have a long commute.

14 See, for example, U.S. General Services Administration, Office of Workplace Initiatives, “Interim Report: Federal Interagency Telecommuting Centers,” report to the House Appropriations Subcommittee on Treasury, Postal Service, and General Government, March 1995.

15 Interview with officials at Ernst & Young, October 1994. See also Michael Bagley, J. Mannering, and P. Mokhtarian, University of

California at Davis, Institute of Transportation Studies, “Telecommuting Centers and Related Concepts,” research report UCD-ITS-RR-94-4

prepared for the U.S. Federal Highway Administration and the California Department of Transportation, March 1994. According to the UC

Davis study, Ernst & Young expects eventually to shrink its office space nationwide by 2 million square feet, for a savings of $40 million per

year.

16 See, for example, Ajay Kumar, “Impact of Technological Developments of Urban Form and Travel Behavior,” Regional Studies, vol. 24,

No. 2 (1990), pp. 137-148.

17 California Department of General Services, “The California Telecommuting Pilot Project Final Report,” report prepared by JALA

Associates, Inc., June 1990.
172 | The Technological Reshaping of Metropolitan America

Later, people who do not live so far from their jobs

may begin to telework as accommodations become available to them, or when the benefits are

perceived to outweigh the costs.

Changing residential locations and land use

should not be viewed only in terms of decentralization, since the character of urban life is also

changing. While telework is most often promoted

as an antidote to the traditional suburb-to-centercity commute, metropolitan residents increasingly work in and commute between suburbs, which

have urban sub-centers of their own. Also, as discussed earlier, workers are not only applying telework in their work, but employers are applying

telecommunications in more of their operations,

and residents are using teleprocesses for more

than just work.

The impact of telework on residential location

also depends on whether the household has one

earner or two. Single-earner households are more

free to move to a new location than those with

two-earners, since not all workers will telework

full-time. Residents will also prefer to remain in

metropolitan areas for other reasons in the short

and long term, such as to keep children in a particular school or to be near family and friends.

Most importantly, the degree of decentralization depends on whether telecommuting continues to be part-time for most participants, or

whether it becomes predominantly full-time. In

the former case, participants could still live within

commuting distance of metropolitan areas, although this distance could be considerable for

some people. In the latter case, participants could

live almost anywhere, leading to a much wider decentralization of activities and a much larger impact on residential location.18

Those who think of telecommuters living in

idyllic, remote locations are generally thinking of

the full-time telecommuter. Most of the experts

with whom OTA spoke expect that full-time telework will remain a small fraction of overall telework, suggesting that telework is unlikely to

result in a widespread shift of households to rural

locations.

Changes in Travel Patterns

Perhaps the most comprehensive documents surveying telecommuting and telework are a series of

reports from DOT and the U.S. Department of Energy (DOE). DOT estimates that, by 2002, telecommuting could save 2.3 to 4.5 percent of annual

passenger-vehicle commuting miles traveled, or

about 0.7 to 1.4 percent of total annual passengervehicle miles traveled.19 The estimated number of

miles saved from telecommuting is nominally

large (17.6 to 35.1 billion miles per year or 1.3 to

2.5 billion trips in 2002). However, the total number of vehicle miles that Americans drive each

year is also increasing as women, young adults,

and immigrant populations incorporate more

driving into their lifestyles. The share saved from

telecommuting is therefore smaller than it would

be if current driving levels were fixed.

Even though the net effect of telecommuting on

traffic congestion appears relatively small

compared to the total vehicle miles traveled, small

reductions in the number of vehicles on highways

can have a great effect on congestion when traffic

is at saturation. That is, although greatly reducing

the number of vehicles on a nearly empty highway

has little or no effect on travel time, reducing the

number of vehicles on a crowded highway by only

a small amount can significantly improve travel

time. Thus, the adoption of telework will have the

greatest effect in metro areas with the biggest traffic problems. The 10 largest cities could account

for perhaps one-half of the benefits in delay reduc18 Jack M. Nilles, “Telecommuting and Urban Sprawl: Mitigator or Inciter?,” Transportation, vol. 18, 1991, pp. 411-432.

19 U.S. Department of Transportation, op. cit., footnote 11.
Chapter 7 Telework, Intelligent Transportation Systems, and Telecommunications Infrastructure | 173

tion, and the 75 largest cities for 90 percent of the

benefits.20

Furthermore, though telework may have a relatively small impact on the total number of trips, it

may redistribute the trips in time and location and

therefore reduce peak-hour traffic congestion

more than appears at first glance. Thus, traffic in

suburban areas and off-peak hours may increase,

but peak-hour congestion could decrease. The effect of telework could be to average traffic over

space and time.

Also, the effect of telework on peak-hour congestion, even if small, is nevertheless significant

if its cost is much less than the alternatives.21

DOE complemented the DOT study by examining the indirect effects of telecommuting,

and found that perhaps one-half of the forecast reduction may be negated by the indirect effect of latent demand.22 That is, as telecommuters avoid

vehicle use by staying at home or commuting to

neighborhood telework centers, others who previously avoided driving because of excessive traffic congestion will begin driving. Thus, if

reduction of traffic congestion is an objective,

telework arrangements should be part of a larger

effort that focuses on demand management, intelligent transportation technologies, and public and

alternative transportation. Demand management

efforts—such as congestion pricing of peak hour

traffic—could in turn increase the migration to

telework arrangements as traditional commuting

becomes more expensive.

More importantly, little is known about the

much larger stimulation effect of telework on

transportation, as noted in a later DOE study.23

Substitution effects are inherently easier to estimate than stimulation effects, since the substitutional behavior patterns can be identified, tracked,

and tested in pilot studies. On the other hand,

stimulation effects arise from innovations that

have not yet occurred. The following stimulation

effects from teleprocesses—including some telework applications—have been suggested, or are

already in progress.

 Demand for “just-in-time” (JIT) delivery will

generate more trips for homes and businesses,

which may be more geographically dispersed

than before; JIT is facilitated by teleprocesses

such as electronic data interchange and wireless dispatching.

 Teleworkers who spend more time at home may

generate trips for services such as home delivery of fast food, goods purchased through home

shopping, and trips to neighborhood stores that

would have otherwise been integrated into a

commute or walk near the central office.

 To the extent that telework enables increased

residential mobility, residences could become

more geographically decentralized. Thus, postal service, infrastructure maintenance, and other services could become less efficient (see

chapter 8). Moreover, decentralized residents

require longer trips when a commute is necessary, potentially driving more miles overall.

Telework Centers in Distressed

Neighborhoods

Most telework efforts are directed at workers who

live in suburban neighborhoods and who commute into the central city or to other suburbs.

Little effort has been directed toward arrange20 DOE ranked the following cities according to accumulated annual traffic delay reduction in 2010: Los Angeles (including Long Beach,

Pompano, and Ontario, CA), New York and Northeastern New Jersey, Chicago, Dallas-Fort Worth, San Francisco-Oakland, Detroit, Atlanta,

Houston, Washington, DC, San Diego, Philadelphia, and Boston. U.S. Department of Energy, Office of Policy, Planning, and Program Evaluation, Energy, Emissions, and Social Consequences of Telecommuting (Springfield, VA: National Technical Information Service, June 1994).

21 See, for example, Jack M. Nilles and Walter Siembab, JALA International, Inc., “Telecommuting and Vanpooling: Cost and Benefit Comparisons,” Los Angeles, CA, August 1992.

22 U.S. Department of Energy, Energy, Emissions, and Social Consequences of Telecommuting, op. cit., footnote 20.

23 U.S. Department of Energy, Beyond Telecommuting: A New Paradigm for the Effect of Telecommunications on Travel, op. cit., footnote 4.
174 | The Technological Reshaping of Metropolitan America

ments that allow workers in urban neighborhoods

to work at a distance with employers in the outer

suburbs, or to promote telework in distressed urban and suburban neighborhoods.

The Los Angeles County Metropolitan Transit

Authority has plans to operate two workstations in

its “Blue Line Televillage” to serve potential teleworkers in the South Central Los Angeles area.

The center currently provides a variety of services

to residents of distressed neighborhoods in that

area. The telework stations are viewed as an experimental project, with the intent of testing the

application before dedicating additional resources.

The Clinton Administration in its National Information Infrastructure program made brief

mention of such alternative telework arrangements. One suggestion was to establish “smart

Metro stops” that could serve as telework centers,

a center for public services, and an educational

center for residents.24 The U.S. General Services

Administration (GSA) is working with the National Housing Program to establish telework centers for federal and other employees in public

housing complexes, beginning in the Washington,

D.C., area, but no formal plans are yet in place.25

❚ Federal Programs and Policies

Affecting Telework

Federal policies and programs related to telework

fall into three categories: 1) pilot programs and research directed at promoting telework for federal

employees, or more broadly; 2) federal and other

policies that indirectly impact telework; and 3)

funding for state and local governments that can

be used for telework programs. Despite the fact

that the federal government is devoting resources

to promote telework, there is still no clear understanding of the costs and benefits of telework to

business, workers, and society, including impacts

on urban form.

Cost and Benefits of Telework

The various federal policies, programs, and statements on telework implicitly favor suburban and

rural areas.26 While there has been some discussion of teleworking from urban homes and centers

to suburban offices, most interest is predominantly in the other direction, and such discussions

often implicitly assume that dispersion of residents to more suburban and rural locations is universally beneficial. In practice, the allocation of

the benefits may or may not match the allocation

of costs for the various stakeholders.

Suburban and rural residents clearly stand to

gain the most from telecommuting arrangements

as they exist today. Workers who live well out of

metro areas typically benefit from lower housing

costs, reduced taxes, reduced crime, better

schools, and other amenities. If these workers also

can telecommute they save in fuel costs, tolls, and

commuting time (which in turn may save in such

items as day care expenses). In exchange, these

workers may pay some of the costs (through donated personal space,27 computer equipment,

telecommunications charges, or extra hours maintaining computer equipment). However, if they

work from a telecommuting center and still

occupy their old office space, then their employer

is paying more for total office space costs. Center

city residents can also telecommute, but the benefits to those residents may not be as great.

24 U.S. Department of Commerce, National Institute of Standards and Technology, The Information Infrastructure: Reaching Society’s

Goals—Report of the Information Infrastructure Task Force Committee on Applications and Technology, NIST Special Publication 868 (Washington, DC: U.S. Government Printing Office, September 1994).

25 Warren Master, U.S. General Services Administration, personal communication, Aug. 24, 1995.

26 This also appears to be the case in Europe, see European Commission, Directorate General XIII, “Europe and the Global Information

Society—Recommendations to the European Council,” Brussels, May 26, 1994. See also Bagley, Mannering, and Mokhtarian, op. cit., footnote

15.

27 If the personal space is in addition to traditional office space, however, the total cost also goes up by the amount of the donated personal

space.
Chapter 7 Telework, Intelligent Transportation Systems, and Telecommunications Infrastructure | 175

On a larger scale, the metropolitan area itself

may gain if widespread telework arrangements attract new businesses and residents because of improvements in quality of life, or if telework

enhances the competitive advantage of local businesses. Alternatively, if telework becomes widely

adopted, residential and business real estate in

many center city locations could become less

valuable, and urban governments could lose tax

revenue. None of this is at present well understood.

Some of the costs could be reallocated to reduce subsidies. A telecommuter who works out of

a telework center, for example, could pay some of

the expenses of the center. Such a scheme might

encourage employers to implement telework. On

the other hand, one survey has indicated that

workers would be strongly deterred from teleworking if their salary is cut (equivalent to being

charged additional costs).28

Further examination of the costs and benefits of

telework to stakeholders would allow policymakers to make better decisions.

Federal Telework Efforts

The federal government has a number of telework-related programs.29 The motivation for the

federal government includes energy conservation

(DOE), traffic management (DOT), pollution

control (Environmental Protection Agency—EPA),

facilities management and the federal work environment (GSA), and personnel management (Office of Personnel Management—OPM). The

general strategy has been to overlap these missions where common goals exist. In particular, the

federal government has promoted telework in its

own agencies as a means to manage its own resources better, as well as to set an example and to

promote telework more broadly. Thus, the central

federal activity has been the funding and implementation of pilot and other projects.

GSA and OPM have experimented with flexible workplace arrangements for over five years,

including a pilot project that was completed in

1992 and included more than 1,000 federal employees nationwide. Congress later appropriated

$6 million to GSA to establish pilot telecommuting centers around Washington, D.C., through

partnerships with local governments and industry,

to be completed in 1996.30 For example, in Hagerstown, Maryland, GSA worked with the city of

Hagerstown and Hagerstown Junior College,

while in Fredricksburg, Virginia, GSA worked

with the Rappahannock Area Development Commission. Following the 1994 earthquake in Northridge, California, GSA established three

emergency telecommuting centers in the Los Angeles region. More recently, GSA established telecommuting arrangements in Oklahoma City

following the bombing of the federal building in

April 1995.

GSA is also the lead agency implementing the

Federal Employee Clean Air Initiatives Act, intended to reduce federal employee reliance on

single-occupancy vehicles, including measures to

promote telecommuting. The Administration’s

National Performance Review also recommended

that OPM and GSA work with agencies to expand

flexible work arrangements for federal employees.31 The President’s Management Council

28 The reverse was not true; that is, increasing salaries for workers who were willing to participate did not seem to be a strong motivation to

telework. These hypotheses were based on survey questions and not actual program results. Adriana Bernardino and Moshe E. Ben-Akiva,

“Employer’s Perspective on Adoption of Telecommuting,” paper presented at the 1995 Annual Meeting of the Transportation Research Board,

National Academy of Sciences, session 163, Washington, D.C., January 1995.

29 Since this report considers federal policies that impact telework for its own or for other employees, this chapter does not explicitly describe private sector efforts in telework. For an overview of private sector efforts, see U.S. General Services Administration, op. cit., footnote 14.

30 Ibid., U.S. General Services Administration.

31 Vice President Albert Gore, Jr., Creating a Government that Works Better and Costs Less: Report of the National Performance Review

(Washington, DC: U.S. Government Printing Office, September 1993).
176 | The Technological Reshaping of Metropolitan America

is currently reviewing a proposal for a National

Telecommuting Project to be led by DOT and

GSA that would span three years and 30 metropolitan areas.32

DOE has sponsored several studies on telework

and related activities because of its interest in energy efficiency.33 In 1993, DOE asked the National Research Council to conduct a study on the

technological issues related to telework, broadening the focus to include distributed work and highperformance computing applications.34

Finally, the Clinton Administration’s Climate

Change Action Plan directs the EPA and DOT to

work together to promote telecommuting. Actions include: encouraging states to use the Intermodal Surface Transportation Efficiency Act of

1991 (ISTEA) to fund telecommuting programs

(see below), pilot projects for federal employees,

and issuing guidance to states wishing to establish

telecommuting measures.35

Federal and Other Policies Affecting Telework

 Telecom policy reform. Several experts noted

in interviews with OTA that perhaps the most

significant federal policy affecting telework is

the current telecommunications legislation.

Proponents suggest that—to the extent that affordable technology is important—telecom

policy reform could facilitate telework by making new technologies and services cheaper and

more widely available.

 Tax policies. Expenses for home computers,

telecommunications equipment, and other information technologies are allowed as tax deductions for home businesses, but for those

teleworkers who do not work primarily at home

the deduction may not be valid. Employers

could also receive tax deductions or credits for

telework programs that meet specified criteria.

However, in both cases it is not clear why teleworkers should receive preferential tax treatment relative to employees that live closer to

work and do not telecommute.

 Fair Labor Standards Act. Relatively few occupations are restricted on work at home because of federal labor laws, although many

states have restrictions on certain types of work

or the hours that an employee can work without

compensation. In many telework cases, such

provisions may be difficult to enforce.

 Labor union concerns. Labor unions have

been generally supportive of telework efforts,

but are concerned about several issues. First,

widespread teleworking could reduce the ability of unions to effectively represent workers

who telework outside a traditional workplace.

Second, employers may exhibit preferences to

allow some workers to telework, affecting equity. Third, electronic monitoring and other

techniques may increasingly be used to supervise employees, increasing stress and reducing

privacy. Fourth, employers may attempt to convert workers from career employment to contract work, reducing benefits and job security.

Finally, for some workers, telework could

mean a return to micro-management and the assignment of piecework, thus reducing the quality of work and upward mobility.

 Zoning. Some localities have restrictions on

the location of businesses in residential areas—

32 U.S. Department of Commerce, The Information Infrastructure: Reaching Society’s Goals—Report of the Information Infrastructure

Task Force Committee on Applications and Technology, op. cit., footnote 24.

33 Two studies were prepared in response to a requirement in the Energy Policy Act of 1992, in conjunction with the Department of Transportation: U.S. Department of Transportation, op. cit., footnote 11; and U.S. Department of Energy, Energy, Emissions, and Social Consequences of Telecommuting, op. cit., footnote 20. DOE later contracted for a study on policy and other implications teleprocesses, looking beyond the narrower applications of telecommuting and telework. U.S. Department of Energy, Beyond Telecommuting: A New Paradigm for the

Effect of Telecommunications on Travel, op. cit., footnote 4.

34 National Research Council, op. cit., footnote 3.

35 President William J. Clinton and Vice President Albert Gore, Jr., The Climate Change Action Plan, 1993.
Chapter 7 Telework, Intelligent Transportation Systems, and Telecommunications Infrastructure | 177

restrictions that technically include many telework arrangements.36 Many teleworkers

sidestep these restrictions by working discreetly from their homes, and local authorities generally overlook such violations.

 Congestion pricing of transportation. Tolls

for use of highways during rush hours could indirectly motivate workers to adopt telework.

Such policies could be instituted as part of a regional transportation plan not specifically oriented toward telework itself, and directed at

recovering some of the social costs of traffic

congestion from those who generate the traffic.

However, if congestion pricing significantly

reduced congestion, it would also make commuting more attractive. (See next section.)

 Demand management of energy. Policies that

encourage the pricing of energy use according

to demand could reduce costs for residents

while not at home, but increase costs for workers who telework from home. These increased

costs could reduce the motivation for teleworkers to work from home (if they are paying their

own energy costs), but also increasing the motivation for employers to reduce office energy

costs.37

 Liability. Official telecommuting programs

normally require a formal agreement between

employer and employee that puts responsibility for a safe workplace on the telecommuter,

and permits employer inspection with prior notice. Such an agreement may also limit the employer’s liability for workman’s compensation

to specific work hours and to specific areas of

the home. In cases lacking formal agreements,

however, the assignment of liability for a safe

workplace is less clear.

ISTEA Funding

Using Federal Highway Administration funds,

DOT can fund telecommuting projects through

the Intermodal Surface Transportation Efficiency

Act of 1991 (ISTEA). ISTEA funds can be applied

to support compliance of the Clean Air Act and to

improve the efficiency of local transportation infrastructures. Telecommuting programs qualify as

travel demand management, and funds can be

used to plan, develop, and market regional telework strategies. An example is an effort launched

by the California Department of Transportation to

create several telecommuting centers across the

state through partnerships with local governments

and the private sector.38 Local governments have

claimed, however, that the funds are not effective

as currently allocated, and that the local governments should be able to apply the funds toward

other telework-related expenses, e.g., toward

construction and operating costs.

METROPOLITAN IMPLICATIONS OF

INTELLIGENT TRANSPORTATION

SYSTEMS

The form of cities is the result of many economic

and social forces interacting in complicated

ways—the transportation system is not necessarily the primary driver of change.39 However, technological advances in transportation have had and

will continue to have profound implications for cities and societal institutions in general. Dramatic

changes in the shape of cities, in manufacturing

and service industries, and in societal opportunities occurred during the past century as transportation technology changed from horse-drawn

carriages to electric street cars to high-capacity

36 See, for example, JALA International, Inc., “Village One Telecommunications Feasibility Study,” report prepared for the City of Modesto, CA, October 1994.

37 Robert J. Aiken, John S. Cavallini, and Mary Ann Scott, “Energy Utilities and the Internet: Users or Providers?,” paper presented at the

Fifth Annual Conference of the Internet Society, Honolulu, Hawaii, June 27, 1995.

38 Bagley, Mannering, and Mokhtarian, op. cit., footnote 15.

39 This section is based on a report prepared for the Office of Technology Assessment on Intelligent Transportation Systems. David C.

Hodge and Richard Morrill, “Metropolitan Form Implications of Intelligent Transportation Systems,” July 1995.
178 | The Technological Reshaping of Metropolitan America

mass transit systems, and finally to automobiles,

trucks, and other motor vehicles.

The next major change in metropolitan transportation systems will come from the application

of information and automation technologies, rather than from fundamental changes in vehicle form

or the infrastructure. Enhancing transportation infrastructure capacity, travel decisions, and vehicle

safety through sensors, communications, computers, and electro/mechanical control technologies

is referred to as intelligent transportation systems

(ITS). ITS encompasses a wide range of applications and services, from synchronized traffic

lights to computerized road maps. Some of these

technologies have been deployed, some are now

being tested, and some are still only concepts.

Most of the near-term (next 10 to 15 years) applications of ITS aim to enhance or automate existing transportation functions and services, rather

than provide radically new operational characteristics. These applications include automated

transactions (e.g., paying tolls), traffic management and control, information for trip planning

and navigation, and improving vehicle and driver

performance.40

Chronic traffic congestion problems have been

the primary motivation for ITS programs. ITS

technologies offer two basic approaches for mitigating congestion: 1) increasing the effective capacity of road and highway infrastructure; and 2)

changing the demand for travel mode and time

through better information for ridesharing, transit,

and other trip decisions; new forms of transit services; and practical and cost-effective direct pricing of transportation infrastructure (e.g.,

congestion pricing). If either aspect of ITS is successful in significantly changing the real or perceived costs of transportation, it could have

implications for future metropolitan development.

❚ Key ITS Technologies

Of primary interest to this study are the elements

of ITS that could affect mobility and accessibility

in the near-term, and could consequently affect

metropolitan form. These ITS technologies and

services can be put into three groups: 1) automated

transactions, 2) traffic system management and

control, and 3) traveler information services.41

Advances in information management technologies—sensors; information processing; data networks; location and identification systems; and

data entry and display devices—underpin ITS.

The functions, technologies, and operational implications of these three ITS groups are described

briefly below:

Automated Transactions

Automated transactions can reduce the time and

costs for such tasks as toll and fare collections and,

especially for commercial vehicles, regulatory,

administrative and enforcement processes. Electronic payment technologies now allow drivers to

pay tolls without stopping or slowing from cruising speed. On transit systems, such technologies

mean passengers don’t have to provide exact

change; this speeds boarding times, and reduces

cash handling costs for transit operators. Development of digital cash systems42 should protect individual anonymity, often a concern with current

electronic payment methods that maintain data on

transaction location and time.

40 The “Automated Highway System” concept—hands-off, high-speed, high-density trips by automobile—would offer dramatically different operational characteristics than current highways.

41 A fourth area is “automated vehicle controls and sensors.” Automated vehicle control systems are not assessed because in the near- to

mid-term, they are unlikely to affect congestion, travel times, or mobility/accessibility. Certain safety, environmental, and energy-related systems are, however, discussed.

42 Digital cash is based on public key cryptography that allows a buyer and seller in electronic commerce to transact business without necessarily identifying themselves to one another. Secure electronic payment with high levels of anonymity (and low cost) is expected to be essential

for commerce on the Internet, and has received a great deal of recent attention.
Chapter 7 Telework, Intelligent Transportation Systems, and Telecommunications Infrastructure | 179

For commercial vehicles, roadside weight and

credential checks can be done automatically without stopping vehicles, and administrative processes such as obtaining permits and paying

registration and roadway fees can be accomplished electronically, thus reducing costs for motor carriers and state regulatory agencies.

Traffic System Management and Control

Surveillance and communications technologies

can improve the management of surface traffic.

Surveillance is achieved by widespread traffic

sensors such as induction loops, computer vision,

and vehicle transponders. Traffic management

centers process the information from sensors and

other sources, including vehicles in the system

acting as probes. The information is then used to

regulate traffic flow through signal timing and

freeway ramp controls, and to respond to accidents and other incidents. Vehicles need no new

equipment for these ITS applications.

Traveler Information Services

These systems acquire, analyze, communicate,

and present information to travelers, vehicle operators, and fleet managers on traffic conditions,

routes, and schedules. In conjunction with advanced traffic management, traveler information

systems could advise people while en-route about

traffic conditions, how to avoid blockages, and

where to find parking and other services.

Users will need special equipment to receive

this ITS service. Systems might include electronic

maps and electronic tourist guides supplied via

equipment in vehicles, homes, businesses, and

sidewalk kiosks. The more advanced en-route services will require wireless communication and information processing systems. Many commercial

truck fleets and public transit systems have

installed travel information technologies such as

routing and dispatching systems and automatic

vehicle location equipment. There is a growing

consumer market for global positioning systembased navigation for private automobiles. However, with the exception of broadcast radio and

some cellular phone services, there is not yet an

operational deployment of commercial technologies for route guidance based on real-time traffic

conditions.

❚ Spatial Location Implications of ITS

It is highly unlikely that ITS will “cause” changes

in urban form. Since good transportation is widely

available at a relatively low cost, new facilities or

changes in transportation technology have less

impact than they once did. Other forces are restructuring the physical form and organization of

cities, such as new technologies in industry, the reorganization of business, and demographic

changes. ITS is not so much a new transportation

technology as it is an extension, albeit potentially

a significant one, of motor vehicle operations. As

such, it may have a major role to play as an enabler, i.e., a technology which enables the other

forces to change metropolitan form.

Transportation Capacity and Land Use

ITS can have some impacts on land use by increasing the average, and in some cases the maximum,

vehicle-throughput capacity at certain bottlenecks

and routes. ITS does this by speeding toll collection, optimizing flow through and across signalized routes, and allowing road officials to detect

and resolve accident-causing delays more quickly. These technologies are likely to facilitate residential and commercial dispersion. Almost all

theoretical formulations of the impact of transportation investment assert that better transportation in an area will attract business and people, and

will spread out development because a greater distance can be covered in the same amount of time.

The stability of metropolitan commuting times in

recent decades provides evidence that this rela-
180 | The Technological Reshaping of Metropolitan America

tionship holds and that time is the ultimate

constraint on how people commute.43

A better transportation system may increase the

concentration of businesses in the center, but it

will almost certainly contribute to commutes over

longer distances by workers. Signal preemption

for buses, in combination with reserved lanes, can

significantly improve public transportation by reducing travel times; however, it seems very unlikely that these improvements will cause many

more people to switch to buses. Similarly, better

transportation will be supportive of more dense

development, but will not stimulate such developments.

Because metropolitan areas are not likely to be

outfitted with many more traffic signals and integrated traffic control systems in the foreseeable

future, gains in regional mobility will depend on

ITS information systems. The deployment of

driver information systems would support the decentralization of urban areas and a decline in public transit. Such systems would enable trip times

to become more predictable, and allow drivers to

avoid unexpected traffic jams.44 Already heavily

congested places would find little relief, however,

because of the lack of viable alternate routes.

Thus, the prospects for increasing maximum

highway capacity through information systems

are minimal. The benefits from information about

non-recurrent congestion would be more noteworthy, but would depend on the context. Medium-sized metropolitan areas with moderate

congestion and relatively good highway infrastructure are most likely to experience pressure for

decentralization through driver information systems.

Transportation Demand and Land Use

ITS technologies for electronic payment, location, and identification enable two categories of

pricing policies intended to allocate the costs of

transportation more efficiently.45 One option is to

charge vehicles directly for the amount of public

and private infrastructure they use, and possibly

for the environmental and other costs that transportation imposes on society at large, if the latter

can be quantified. The other option is to charge users for the congestion costs they impose on one

another, with the goal of directly influencing individual behavior and choices to allocate more efficiently the scarce resource of road and highway

access at peak periods. Reducing travel delays

through congestion pricing would lower the overall costs of those who value their time highly, and

raise total costs for others.

Transportation Infrastructure Pricing

Currently, the costs of public infrastructure for

transportation are not efficiently priced.46 That is,

the payment mechanism, such as gasoline tax,

does not necessarily correspond to the value of the

“infrastructure consumed,” which depends on vehicle weight, distance traveled, type of road, and

other factors (see chapter 8). There are also costs

that transportation users do not directly pay for,

but often do account for in their travel decisions.

The prime example is parking.

43 Geurt Hupkes, “The Law of Constant Travel Time and Trip Rates,” Futures, vol. 14, 1992, pp. 38-46; and P. Gordon, H. Richardson, and

M. Jun, “The Commuting Paradox: Evidence From the Top Twenty,” Journal of the American Planning Association, vol. 57, 1991, pp. 416-420.

44 Non-recurring congestion stems from random, unpredictable incidents such as traffic accidents, stalled vehicles, or weather conditions

that create temporary bottlenecks (capacity shortfalls).

45 ITS technologies may have a dramatic effect on the quality and efficiency of both fixed route mass transit and paratransit that could lead to

increased ridership. However, public transportation in most metropolitan areas, indeed in all but some of the largest historic urban centers, accounts for only a small fraction of urban travel, even commuter travel. While increased transit ridership should reduce the rate of congestion

growth, there is little expectation that ITS technologies alone could make transit so attractive as to reduce automobile congestion in metropolitan areas. Alternate transportation options, such as high-quality transit, would be an important element of any congestion pricing policy.

46 U.S. Congress, Office of Technology Assessment, Saving Energy in U.S. Transportation, OTA-ETI-589 (Washington, DC: U.S. Government Printing Office, July 1994), p. 12.
Chapter 7 Telework, Intelligent Transportation Systems, and Telecommunications Infrastructure | 181

In a previous study, OTA concluded that “these

costs could be fully recovered and/or more fairly

allocated among users. If subsidies were withdrawn, externalities ’internalized,’ and hidden

costs brought out into the open and directly

charged to motor vehicle users, the perceived

price of motor vehicle use would increase substantially and people would drive less.”47 Consequently, infrastructure cost pricing would

encourage more concentrated development and

in-fill, favoring locations with established transit

systems and road networks. Expansion at metropolitan peripheries would be more market driven,

as is the case for the few private toll roads currently planned or under construction in the United

States.48

Congestion Pricing

The impacts of a congestion pricing scheme on

land use depend on the geographic patterns within

a metropolitan area, the current patterns of travel

and congestion, and the nature of the scheme. In

places with very dense urban cores, congestion

pricing would probably reduce travel time to the

center. This would help sustain development in

such central business districts, but it would also

encourage dispersion of wealthier workers, business suppliers, and anyone willing to pay for the

privilege of traveling on otherwise congested

roads. In the short run, those whose time is less

valuable (e.g., the poor) would shift their travel

time or mode in response to the extra costs. Over

longer periods, congestion pricing would lead to

more concentrated residential development for

those with lower incomes, while higher-income

residents would be dispersed. Moreover, congestion pricing could lead to a movement of activities, such as retail, away from congested areas

because the cost of doing business may be too

high.

In conclusion, it is important to remember the

complexity of the role of transportation within

metropolitan areas and the tremendous amount of

heterogeneity that exists in metro areas. No one

knows what the long-term effects of congestion

pricing on urban form would be. And the reality is

that it is extremely unpopular politically.

TELECOMMUNICATIONS

INFRASTRUCTURE AND ECONOMIC

DEVELOPMENT

As more economic functions are conducted electronically, being able to transmit and receive large

amounts of information rapidly will be critical in

the competition for jobs and industry.49 Just as the

spatial distribution of the electrical power infrastructure helped shape urban development, so too

does the spatial distribution of the telecommunications infrastructure shape development today.

Moreover, like electrical power networks, advanced telecom infrastructure is rapidly diffusing

across the country, minimizing competitive differences based on infrastructure alone. This section examines the spatial distribution of the

telecom infrastructure and analyzes claims that an

advanced infrastructure is critical for local

growth.

❚ Defining Telecom Infrastructure

The physical component of the telecom infrastructure is particularly relevant to this assessment, since much of the information economy is

oriented toward the transmission of information,

particularly the technology that delivers informa47 Ibid., p. 109

48 For example, the Dulles Greenway, a privately financed tollroad in Northern Virginia, is scheduled to open in fall 1995.

49 See Mitchell L. Moss, “Telecommunications: Shaping the Future,” in America’s New Market Geography, George Sternlieb and James W.

Hughes (Eds.), 1987, pp. 255-275; and Mitchell L. Moss, “Telecommunications, World Cities, and Urban Policy,” Urban Policy, vol. 24, No. 6,

December 1987, pp. 534-546. See also Mark E. Hepworth, Geography of the Information Economy (New York, NY: The Guilford Press, 1990);

and Aharon Kellerman, Telecommunications and Geography (New York, NY: Halsted Press, 1993). OTA completed an earlier work on telecommunications and rural America in U.S. Congress, Office of Technology Assessment, Rural America at the Crossroads: Networking for the

Future, OTA-TCT-471 (Washington, DC: U.S. Government Printing Office, 1991).
182 I The Technological Reshaping of Metropolitan America

tion in the so-called last mile to the customer. The

provider may string cables (e.g., fiberoptic, coaxial, or twisted wire pair) to the customer, it may

transmit a focused beam (e.g., ground-to-ground

microwave, or earth-to-satellite microwave), or it

may transmit its information openly or in code

(e.g., cellular telephone, broadcast radio and television, satellite television). Each technology has

advantages and disadvantages. The marginal cost

per user of satellite transmission is low and it may

be optimal to reach remote or mobile users, for example, but its initial cost is high and some transmissions can be subject to atmospheric

disturbances. Cable transmission may be less expensive initially, but the marginal cost per user is

higher and the infrastructure can be damaged in

floods or earthquakes.

Switching equipment at central offices is equally important. The central offices transfer traffic

among residents and businesses, and through the

providers’ large-capacity trunk lines to other central offices. Special-purpose computer switches

route transmissions from one user to another,

whether that transmission is a telephone call, an

electronic mail message, or a video channel.

Switching capability adds capacity and flexibility,

but also complexity and cost.5o Table 7-1 displays

Switched Unstitched

Wireline Traditional telephone, Cable television

Electronic mail

Wireless Cellular telephone Broadcast radio/TV,

radio telephone, paging Satellite TV

some examples of transmission and switching

technologies. Point-to-point communication, for

example, has traditionally required central

switching and cable transmission in the last mile.

The cabled arrangement was well suited for

densely populated areas, while radio telephones

achieved the same purpose in remote rural areas.

Cellular telephones use switching and coded radio

broadcast to localized cells, offering mobility in

densely populated areas.51 The low-earth-orbit

satellite systems now in development will use

switching and satellite broadcast, expanding mobility to remote areas of the world.

The telecommunications infrastructure has advanced well beyond the traditional set of telephone wires and over-the-air broadcast. The

different transmission and switching technologies

allow each user to tailor the technology to the application. A user may prefer satellite transmission

for distance learning, for example, and wireline

systems for videoconferencing. In many cases, a

user may employ two complementary technologies to insure against downtime. Traditional voice

transmissions—which also include facsimile and

data transmissions using modems—are now completely digital or converted to digital form before

being switched.

Also important in the information infrastructure is a confusing and overlapping variety of service providers and equipment manufacturers.

Many of these providers resell to other providers,

sometimes through several intermediaries. There

are also numerous types of providers who own or

lease the physical infrastructure and provide enhanced services, including value-added services,

Internet features, and dial-up network services.

50 The importance of switching is demonstrated by comparing the costs of two systems. The coaxial cable that carries cable television delivers many more orders of magnitude bandwidth (capacity) to the user (about 500 MHz) than do the twisted wires used to deliver basic telephone

service (as low as 4 kHz for analog voice service). This tremendous capacity is necessary in order to deliver many channels of video programming. However, the basic cost of delivery of traditional (wired) telephone service and cable television service are comparable. The difference is

that telephone service requires dynamic switching and billing services not used in basic cable programming.

51 See U.S. Congress, Office of Technology Assessment, Wireless Technologies and the National Information Infrastructure, OTAITC-622 (Washington, DC: U.S. Government Printing Office, 1995).
Chapter 7 Telework, Intelligent Transportation Systems, and Telecommunications Infrastructure | 183

❚ Measuring Urban Telecom

Infrastructures

Little work has been done to characterize and

compare telecommunications infrastructure

across the United States at the metropolitan area

level.52 The publicly available information is usually only compiled at the regional or state levels,

and private-sector information is often scanty or

hard to get.53 Moreover, it is difficult to define and

measure the quality of the infrastructure, especially as the technologies become more arcane and

speculative. For example, the widespread availability of Integrated Services Digital Network

(ISDN)54 services in a particular region may be

viewed as progressive by some and as irrelevant

by others. Several parameters, however, may be

(or have been) used to measure infrastructures.

The most immediate measure of an infrastructure is the tangible investment in transmission media, including the number of miles per capita of

fiberoptic cable that connects central office

switches or customers,55 the miles of microwave

bypass routes, and the number of cellular telephone channels per capita. The installation of advanced equipment internal to the providers’

networks is also important, such as the percentage

of switches that use electronic, particularly digital, technology,56 the percentage of central office

switches with Signaling System 7 (SS7) software,

and the percentage penetration of advanced intelligent network (AIN) features.57

Measuring only the advanced components of

the infrastructure obscures, however, the value of

the older infrastructure such as traditional twistedwire cables or analog switches. Much of the established infrastructure is quite robust for modern

applications, or can be used in innovative ways to

squeeze more performance out of the sunk investment. Fiberoptic cable, for example, is the

technology of choice for carrying traffic between

telephone company central offices, but a custom

installation may be expensive overkill in an application where its full capacity is not used. Also,

measuring the number of households using the

copper wire or radiotelephone infrastructure is a

measure of universal access.58

The installed investment internal to the users’

local networks is also important, since many sophisticated users buy bulk services and do much

of the switching themselves, becoming providers

52 A recent Department of Commerce report notes that current indicators from the Federal Communications Commission do not show the

geographical distribution of basic telephone service, nor do they go beyond basic telephone service to include, for example, personal computers

and modems. U.S. Department of Commerce, National Telecommunications and Information Administration, “Falling Through the Net: A Survey of the ‘Have Nots’ in Rural and Urban America,” July 1995

53 Firms exist that sell information about installed fiberoptic cables, microwave paths, and wireless licenses in various metros. This information is gathered from publicly available information and news releases, and may overlook many private installations, or information about features and applications associated with the installations.

54 ISDN is a feature that allows more flexibility and faster data transmission than allowed by conventional analog telephone and modem

equipment. ISDN can use existing copper wire but requires digital equipment at the user’s and provider’s ends.

55 Several U.S. cities now claim to have the most miles of installed fiberoptic cable or cable per capita. These claims are difficult to verify and

subject to change, and demonstrate the importance of using a variety of parameters to measure the physical infrastructure.

56 Observers agree that the replacement of electromechanical switches with electronic switches is particularly important for modern services. Electronic switches can be based on analog or digital technology. Of these, digital switches are programmable and provide the most modern features.

57 The advanced intelligent network takes the programmability of digital switching one step further by allowing the provider to program

new features for the entire network from central points, avoiding costly and time-consuming installation of features at each switch.

58 See U.S. Department of Commerce, National Telecommunications and Information Administration, The NTIA Infrastructure Report:

Telecommunications in the Age of Information (Washington, DC: National Technical Information Service, 1991). See also Wireless Technologies and the National Information Infrastructure, op. cit., footnote 51.
184 | The Technological Reshaping of Metropolitan America

and sometimes reselling that capacity elsewhere.59 Measures of the users’ installed infrastructure might include the number or percentage

penetration of digital private branch exchange

(PBX) equipment60 and the total subscription to

advanced telecom features.

Industry also makes investment and location

decisions based on factors relating to the market

for telecom services that go beyond the nominal

availability of physical infrastructure. For example, a diverse selection of providers and services

may indicate a more sophisticated or innovative

market. Diversity may be crudely measured by the

number of locally available providers in various

markets such as long-distance and local telephony, cable television, cellular, value-added services, new personal communication services

(PCS), and satellite uplink services. Other market-related factors that figure into investment decisions include: the price structure of the services,

and the quality of service by the providers (e.g.,

the time delay for the installation of new features

by a particular provider).

General State of Urban Telecom

Infrastructures

Lacking data, in its interviews OTA found a consensus that the level of quality of telecom infrastructures in metropolitan areas across the United

States is not only relatively high, but also relatively uniform. While variations in the physical infrastructure and the markets clearly exist across the

country—and a more detailed analysis could

highlight the variations—these differences appear

to be relatively small compared to differences between, for example, some rural communities.

For example, most (if not all) U.S. metropolitan areas have local access to the Internet and online computer services such as Compuserve,

America Online, and Prodigy. Competitive access

providers (CAPs)61 such as Metropolitan Fiber

Systems, Teleport Communications Group, and

MCI Metro are expanding into an increasing number of metros and competing with the traditional

local providers. For example, while the CAPs initially served the most crowded markets such as

New York and Chicago, they have expanded to

smaller metros such as Omaha, Nebraska, and

Wilmington, Delaware. Telephone and cable

companies are competing to serve the video entertainment market wherever the new services are allowed and the residents are willing to pay.

A nominal review of news releases and maps

detailing the location of fiberoptic cable and advanced services across the United States indicates

a relatively uniform distribution from coast to

coast. All the major telephone companies have

their central offices substantially or completely

interconnected by fiberoptic cable. But, microwave or satellite transmissions are indistinguishable from fiberoptic transmission for many

common applications and the lack of fiberoptic

cable in an areas does not necessarily mean a lack

of quality infrastructure.62 Also, the long-distance

59 Some argue that such private investment should not be included in the infrastructure since its private nature precludes the leveraging

aspects of public infrastructures such as roads, canals, or electrical power systems. The difficulty lies in the complex ownership of the telecom

infrastructure, which is provided by an array of mostly private corporations, of which some have common carrier provisions and some do not.

The tradeoff between managing telecom operations internally or contracting-out the services from providers varies by company and with time

as the technology changes. Such internalization of the infrastructure, however, is more difficult for smaller, less-sophisticated businesses.

60 PBX equipment allows a customer to lease high-capacity circuits and perform some or all of its switching on premises.

61 Competitive access providers (CAPs) install all-fiber networks to connect customers to each other or to long-distance providers, bypassing the traditional local telephone company. A CAP may switch circuits for the customer, or it may simply interconnect locations and allow the

customer to switch circuits in-house. CAPs were established in the 1980s as fiberoptic cable transmission became competitive with microwave

transmission.

62 Microwave and satellite transmissions are particularly appropriate for mobile or other flexible applications, while fiberoptic transmission

is particularly appropriate for high-quality applications (such as commercial television feeds). Satellite transmission is also appropriate for

broadcasting.
Chapter 7 Telework, Intelligent Transportation Systems, and Telecommunications Infrastructure | 185

companies must pass voice, video, and data messages back and forth with the local telephone and

other providers. In some cases, these inter-company connections pose technical problems since different companies use different equipment and

provide different services. These differences limit

the accessibility of some services, despite the

presence of extensive fiberoptic cabling.

Furthermore, not all organizations need advanced telecom services and of those that do,

some of the largest customers may be able to receive whatever they wish regardless of the local

infrastructure. Large users may make special arrangements with the local providers. Companies

may also construct private telecom networks by

leasing channels wholesale from satellite or other

providers. Internalization of much of their telecom operations makes large users less dependent

on the local features of the public-switched network. The global nature of multinational corporations tends to make differences in the local public

infrastructure less relevant. Thus, snapshots of the

public infrastructure do not reveal much about its

flexibility.

The difference between the collective urban

and rural telecom infrastructures can be large,

however, depending on what is measured and

when. For example, in a 1993 survey only 55 percent of central offices in rural areas provided equal

access63 to competing long-distance providers—

an indication of the level of diversity of carriers—

compared to 97 percent of urban central offices.64

This parameter ranged from zero (in rural Maryland, Wyoming, and Utah) to 100 percent in rural

Connecticut. In that survey, digital switching was

relatively widespread, however, with an average

91 percent penetration in rural central offices (the

lowest being rural Arizona with 56 percent). The

average interconnection of central offices with

fiberoptic cable was 42 percent (with zero percent

in rural Massachusetts, Maryland, and Vermont),

and the penetration of SS7 software in rural central office switches averaged only 15 percent.

However, these penetration rates are increasing as

telephone companies modernize their networks.

❚ Telecom Infrastructure and Local

Economic Growth

Correlations Between Investment and Growth

Because of the perceived importance of the telecom infrastructure to local economic growth,

there has been considerable interest in statistically

demonstrating this relationship. It is often not

possible, however, to find a statistical correlation

between local investment in telecom infrastructure and local economic development. That is, the

relationship may exist, but it cannot necessarily be

mathematically demonstrated with the information provided.65 Statistical correlations are difficult to demonstrate because economic

development and investment are both affected by

many interrelated factors—the relationship itself

is not well-defined, even in principle. Also, effects

may be obscured by other factors in the regional

economy, by various delays before a cause results

in an effect, and by incomplete measures of the use

or quality of the infrastructure or of economic development.

63 In order to have access to different long-distance providers, the providers’ central offices must provide “equal access” for its users. Equal

access allows a caller to dial a five-digit code to access a particular long-distance provider, or to request that the local provider make a particular

long-distance provider their primary provider. The penetration of equal access in central offices is therefore an indicator of the availability of

alternatives to the traditional carrier.

64 The differences in these figures have decreased since this data was collected. National Exchange Carrier Association, “Building the Telecommunications Infrastructure in Rural America,” 1993.

65 Such an analysis might begin by stating a hypothesis, and then testing the hypothesis by applying statistical methods to the available data.

The hypothesis may be said to be valid if the analysis indicates it is valid to a chosen degree of confidence. Not demonstrating that correlation,

however, is not the same as statistically demonstrating the negation of the hypothesis, which must pass the same test. Therefore, demonstrating

the negation of the hypothesis may be equally difficult.
186 | The Technological Reshaping of Metropolitan America

Investment in infrastructure and economic

growth may each be driven, in part, by population

density, complicating the analysis. One study of

metros in Indiana found no statistically significant

difference between large and small metros in the

overall use of telecommunications and information technologies, possibly indicating that the

telecom infrastructure and metro population are

not correlated.66 Likewise, a study of rural counties in Washington and Oregon demonstrated that

a correlation exists between telecom infrastructure (particularly single-party service and electronic switches) and economic performance in a

manner not explained by population density

alone.67 However, the relationship of large to

small cities may be complex. Large metropolitan

areas, for example, may attract more informationintensive industries and, consequently, build

more infrastructure (indicating a correlation), but

the technology itself also serves to spread economic activity over a wider area (reducing the correlation).

One study of the variations among the different

regions served by the seven “Baby Bells” across

the United States did show that the regions were

statistically different from each other in terms of

the diffusion of new technologies.68 The study

evaluated several parameters including the

growth rates of kilometers per capita of fiberoptic

cable, basic and primary ISDN channels per capita, digital business lines per capita, and revenue

and employment growth in various informationrelated industrial sectors. The study suggests that

the greatest number of positive correlations of

new technology diffusion and sectoral economic

growth are in the NYNEX and Bell Atlantic regions, possibly due to the concentration and

growth of financial and information-intensive activities in the northeastern U.S. Several factors

complicate such correlations at the regional level,

however, including the averaging of growth rates

over entire regions.

These correlations do not prove that technology investment necessarily causes economic development, or vice versa, but simply that investment

and development are found together in certain

areas. Other studies have tested for causality in either or both directions: economic development

causing investment in telecom infrastructure, and

vice versa, with mixed results.69 Also, while the

uniformity of the telecom infrastructure across

metropolitan areas in the U.S. makes correlations

difficult at the local and regional levels, correlations have been clearly established between access to basic telephone service and economic

growth on the national scale, particularly in developing countries.70

Despite the difficulty in demonstrating statistical correlations between telecom investment and

66 Patrick Alles, Adrian Esparza, and Susan Lucas, “Telecommunications and the Large City-Small City Divide: Evidence from Indiana

Cities,” The Professional Geographer, vol. 46, No. 3, 1994, pp. 307-315.

67 That is, increasing population density did not seem to cause independent improvements in the telecom infrastructure and in economic

activity, with no direct correlation between the latter two. See E. Parker and H. Hudson, Electronic Byways: State Policies for Rural Development through Telecommunications (Boulder, CO: Westview Press, 1992).

68 Mark Welsh, Department of Geography, Florida State University, “Economic Restructuring and Divestiture: An Examination of Analog

and Digital Capital Development for the Regional Bell Operating Companies,” Mar. 21, 1995.

69 One study of two counties in Pennsylvania measured correlations between economic activity and two types of telecom infrastructure

investment (central office equipment and outside plant—cable and wire) by sampling data over two, three, and four years to observe a cause-effect relationship. Francis J. Cronin, Edwin B. Parker, Elisabeth K. Colleran, and Mark A. Gold, “Telecommunications Infrastructure Investment

and Economic Development,” Telecommunications Policy, August 1993, pp. 415-430. Another study taken from 45 nations over 13 years presented evidence to demonstrate both the effects of economic growth leading to telecom investment and the converse. Andrew Hardy, “The Role

of the Telephone in Economic Development,” Telecommunications Policy, vol. 5, No. 4, December 1980, pp. 278-286.

70 Robert J. Saunders, Jeremy J. Warford, and Bjorn Wellenius, Telecommunications and Economic Development, 2nd Edition (Baltimore,

MD: Johns Hopkins University Press, 1994).
Chapter 7 Telework, Intelligent Transportation Systems, and Telecommunications Infrastructure | 187

economic growth, observers nevertheless believe

that the relationship exists, but the improvement

of a local telecom infrastructure to a minimum

level (particularly the installation of digital

switching) may be necessary for economic development but not sufficient. That is, the widespread

notion that “if you build it, they will come” is not

necessarily true.

First, factors determining local economic

growth are complex and not dependent only on investment in telecom infrastructure. Second, there

is an effect of diminishing returns; investment in

basic infrastructure in less-developed communities or regions will naturally show the greatest returns, while additional investment in relatively

advanced areas may produce only marginal returns.71 Third, as more localities reach the threshold of investment to spur economic development,

that threshold provides less of an advantage for

each. Fourth, minimum thresholds of telecom investment—if they exist—may be difficult to discern and may change over time. Statistical

correlations demonstrated today may not apply tomorrow. Purchasers of advanced services are

often required to commit to a particular technology that may become quickly obsolete or overinvested, causing uncertainty.

Finally, businesses are often mobile and free to

relocate when conditions elsewhere become more

favorable. One expert told OTA that telecom-related back office jobs are “easy come, easy go,”

unlike heavy industry, medical centers, deep-water ports, or natural tourist attractions that are

more difficult or impossible to move. Thus, municipalities who see telecom as a tool for economic development must gain a large enough

competitive advantage to attract some key businesses, and then transform the economic growth

into a more permanent or diversified economy.

Importance of the Business Climate

As the telecom infrastructure becomes more evenly distributed, the behavior of providers, users,

and regulators becomes more important than the

differences among urban infrastructures—it is not

“what is there” but also “how it is used” that is important. Some regions and regional providers are

more responsive to business needs than others,

and businesses may make location decisions accordingly. In particular, if local public policy or

the private sector does not recognize the importance of stimulating user demand for new and advanced services, supply-side approaches alone are

likely doomed to fail.72 That is, by generating and

augmenting demand for services rather than generating infrastructure per se, “the deployment pattern for the infrastructure will be rationalized and

its utility will be maximized.” 73

These three parties—the users, providers, and

regulators—are interdependent. The providers

buy and sell each others’ services, and many large

businesses and institutions exchange extra telecom capacity with providers. The corporate decisions of large telecom providers reflect not only

specific market demands, but also the corporate

vision of its role in the evolving industry. For example, anticipating more competition, the large

telephone companies have been reorganizing

(from functional lines to lines of business) in part

to be more responsive to customer needs.74 Regulatory pressure, in turn, may be applied to balance

the short-term interests of providers with the longterm interests of the region. For example, regula71 Andrew Hardy, op. cit., footnote 69.

72 David Gibbs, “Telematics and Urban Development Policies,” Telecommunications Policy, May/June 1993, pp. 250-256.

73 Gail Garfield Schwartz, “Telecommunications and Economic Development Policy,” Economic Development Quarterly, vol 4., No. 2,

May 1990, pp. 88.

74 Other official and unofficial reasons include realignment toward new regulatory regimes, an appearance of responsivity to the financial

markets, and as a means to relocate workers and cut costs.
188 | The Technological Reshaping of Metropolitan America

tors may encourage the providers to interconnect

their networks and unbundle their services in order to provide more choices for users. Finally, innovative corporate and institutional “early

adopters” create demand for new and quality services. Also, special events such as Olympic

Games or a political convention force the infrastructure to a higher priority.

Telecom Investment and Distressed

Neighborhoods

Investment in telecom infrastructure is also relevant to economic growth at the neighborhood level, particularly as information technologies

disperse organizations and workers throughout

metropolitan areas. Some claim that telecom providers neglect low-income neighborhoods as they

upgrade the infrastructure, leading to lower levels

of economic growth in those areas.75 They argue

that regulators should pressure telephone companies to provide the same services to wealthy and

lower-income neighborhoods alike, in exchange

for the continuing use of public property as rightof-way, or regulatory relief.

.From the provider’s perspective, some difference in investment among neighborhoods and regions is inevitable as providers first invest in the

areas with greater demand or most capable of returning profits, and invest in lower-income areas

as the technologies become more mature and less

risky. Since advanced technologies such as ISDN

and other switched digital services are not standard and require new investment, providers have

held off on installation of such services to residential and low-income areas. Providers must

constantly make business decisions and take risks

based on the anticipated revenue potential of new

services and future competition, the current and

estimated operating and construction costs, and

public relations.

Moreover, much of the gap in investment in

distressed neighborhoods is irrelevant to growth

because basic phone service is usually available

and can be installed relatively quickly.76 Also, a

variety of technical solutions can often accommodate users who lack advanced services. For example, high-speed modems can transfer data over

traditional telephone lines at speeds acceptable

(and more affordable) for most business users, if

advanced services are not available. Likewise,

residents of distressed neighborhoods in metropolitan areas are not excluded from local Internet

access, unlike many rural users who must access

the Internet through long-distance calls.

Also, the income and expertise of residents of

disadvantaged neighborhoods is often the limiting factor rather than availability of telecom service.77,78 Contrary to the perception that personal

computing is widely accessible, innovative applications and computer networking require training and resources that are not necessarily available

in or relevant to the needs of distressed communi75 A 1995 Department of Commerce study found that the lowest telephone penetration levels were measured for households with incomes

under $10,000 annually, households under 25 years old, and households with less than a high school education. Central city households generally fared worse in all of these comparisons with respect to rural and urban households; however, comparisons across income, age, and educational levels each generally demonstrate larger differences in telephone penetration than location. See U.S. Department of Commerce, “Falling

Through the Net,” op. cit., footnote 52.

76 Wiring new cables in older buildings can sometimes be prohibitively expensive, however.

77 A Rutgers University study sponsored by Bell Atlantic suggests that low-income urban areas consume a disproportionately high amount

of premium features from the telephone company, but may not be able to afford them; and that inner-city residents may lose phone service

because of the unlimited and unpredictable cost of long-distance service and other usage-related calls, not because of the access cost of local

service itself. Milton Mueller and Jorge Reina Schement, Rutgers University, “Universal Service from the Bottom Up: A Profile of Telecommunications Access in Camden, New Jersey,” report prepared for Bell Atlantic, January 1995.

78 The average penetration of telephones in 1990 was estimated at 93.3 percent—about 6 million households are not connected at any given

time—but another large and unknown number lose and regain service throughout the year. U.S. Department of Commerce, The NTIA Infrastructure Report, op. cit., footnote 58.
Chapter 7 Telework, Intelligent Transportation Systems, and Telecommunications Infrastructure | 189

ties. In a similar fashion, school classrooms commonly do not have installed telephones, ready

access to copiers, computers with user-friendly

software, and Internet access, even though telephone service, copiers, software and Internet services are nominally available.

The main obstacles for residents and businesses in distressed neighborhoods are the capital

equipment costs and technical expertise to establish and maintain telecom applications, and to

some extent the ongoing expenses of standard

telephone service, rather than the access to basic

and advanced services per se. This does not mean

that investment in the physical infrastructure is irrelevant, but other factors should be recognized

and addressed as well, including education in

computer skills, business assistance, and increasing neighborhood security.

❚ Public Policy and Urban Telecom

Infrastructure

Public policy is vulnerable to proposals that are

technological fixes to complex problems but that

cannot adapt to technological and regulatory

change. Many proponents of early cable television, in particular, hoped for a decentralized, interactive medium that would solve many urban

problems. Instead it became a commercial success

only by imitating broadcast television. The early

claims for cable television, however, were not unlike claims made today for the Internet or for a fiberoptic infrastructure.79,80

There are many examples of state and federal

governments working to improve telecom infrastructure in order to promote economic development—successfully or not. For example, the state

of Iowa contracted to lay fiberoptic cables in the

ground to create its own high-capacity network for

public services such as distance education and

public administration. The state of North Carolina

worked through universities, industry, and telecom providers to expand its “information superhighway” for advanced applications. The

Canadian province of New Brunswick supported

an effort to install fiberoptic cable and modern

equipment to attract back office and other activities that operate remotely via telecommunications. State public service commissions and

related bodies are also reconsidering telecom regulation to promote investment in their regions,

balancing the interests of consumers and providers. The Clinton Administration has addressed

telecom and other information technology applications through its National Information Infrastructure (NII) program, and other countries have

been promoting similar efforts.

79 The concepts of “wired cities” and “electronic highways” based on the advent of cable television date back to this period. What has

changed is that the technologies are different, the market forces are recognized to have a greater role, and the field of stakeholders has widened.

The visions, however, are not necessarily less utopian. For example, in the 1970s it was hoped that cable television would provide more independent and diverse sources of content—promising over 100 channels, local home shopping, high-bandwidth information retrieval, interactivity, and more political participation. Instead, cable television became mainly a medium for commercial entertainment. See William H. Dutton,

Jay G. Blumler, and Kenneth L. Kraemer, Wired Cities: Shaping the Future of Communications (Boston, MA: G.K. Hall & Co., 1986); and

“Ralph Lee Smith, “The Wired Nation,” The Nation, May 18, 1970, pp. 582-606.

80 An early predecessor to today’s NII initiative was an interagency study on urban communications published in 1971. The study suggested

pilot applications including telemedicine, distance education, intelligent transportation systems, electronic delivery of public services, video

surveillance for public safety, and so forth. These applications are still relevant today, even though the specific technologies used to implement

them have changed over the 25 years since the report. The impact of telecom on economic activity in general, however, was not directly discussed. National Academy of Engineering, “Communications Technology for Urban Improvement,” report to the Department of Housing and

Urban Development (Washington, DC: National Academy of Engineering, June 1971. See Peter C. Goldmark, “Communication and the Community,” Scientific American, 1972, pp. 143-150
190 | The Technological Reshaping of Metropolitan America

Local governments have had a less pivotal role

as enablers of local economic growth through investment in telecommunications.81 As with other

public and private organizations and the telecom

industry itself, telecom was traditionally viewed

as a relatively static infrastructure. The local government role was generally limited to internal procurements; and negotiation with cable television

providers over rights-of-way, franchise fees, zoning regulations, institutional networks,82 and

channels set aside for public, education, or government (PEG) use.83

During the 1980s, some municipalities looked

to teleports as a parallel to airports and maritime

ports to spur economic and real estate development. A teleport is essentially a user or provider

that consolidates communications to and from

satellites. Unlike airports and maritime ports,

however, proximity to a teleport is usually irrelevant if the local terrestrial telecom infrastructure

can move information from the customer to the

teleport and back.84 Also, teleport providers resemble other telecom providers and services;

thus, U.S. teleport providers have not greatly involved the public sector except to meet zoning or

other land use restrictions. Finally, terrestrial fiberoptic cable eventually became competitive with

satellite communication for many business applications, changing the strategic importance of

teleports.

For example, New York City supported the

Staten Island teleport to retain back office jobs in

the New York metro. The teleport developed real

estate in conjunction with the installation of satellite earth stations for data transmission, connected

to Manhattan by fiberoptic cable and microwave

links.85 The cooperative effort eventually split off

its fiberoptic transmission functions into what is

today Teleport Communications Group (TCG—a

competitive access provider), and continued the

“dish farm” operations as a real estate development. One observer claimed, however, that the

Staten Island teleport was appropriate for its time,

and survived, but would not succeed if it were

created today, largely due to competition from

providers of fiberoptic transmission.

The Washington International Teleport, in contrast, did not play a role in real estate development. It evolved at first as a local microwave

interconnect company and soon began to operate

facilities to serve broadcasters and video programmers. It continues to serve as an intermediary or

gateway to move mostly video information from

earth to satellite and back. Because of its mid-Atlantic coast location, its gateway function now

serves countries on the “Atlantic Rim.”

81 “Despite the central role of cities as ’hubs’ of the burgeoning information economy, the nature, location and quality of urban telecommunications infrastructure was shaped entirely by telephone companies working within regulatory frameworks. This was in sharp contrast to the

central role often played by cities in the development of urban transport, water and public health infrastructure.” Stephen D.N. Graham, “The

Role of Cities in Telecommunications Development,” Telecommunications Policy, April 1992, pp. 187-193.

82 Institutional networks are arrangements with cable television providers for free access to private video and data channels for internal use

in exchange for franchise privileges and rights-of-way.

83 Some municipalities have custom-made telecom plans to their particular needs. For example, Boston minimized the repeated repair of its

congested city streets by planning and negotiating for extra capacity when first installing cabling. Los Angeles has a strong interest in accommodating telecommuting efforts to reduce congestion and pollution from commuter traffic. See Jurgen Schmandt, Frederick Williams, Robert H.

Wilson, and Sharon Strover, The New Urban Infrastructure: Cities and Telecommunications (New York, NY: Praeger, 1990).

84 European and Asian teleports are often modeled around real estate development, and integrate the teleport more completely with public

sector planning and development. This integration is in part due to the need to bring the entire local infrastructure up to international quality. In

the United States, in contrast, a stronger separation between public and private sector involvement is associated with a more competitive local

infrastructure, and consequent difficulty for some teleports in the new industry to show a profit. Karen J.P. Howes, “Teleports—Satellites, Fiber

and Compression,” Via Satellite, August 1993, pp. 26-34.

85 Gayle M. Horwitz, “New York’s Port of the Future: The Staten Island Teleport,” The Journal of Urban Technology, Fall 1992, pp. 69-86.
Chapter 7 Telework, Intelligent Transportation Systems, and Telecommunications Infrastructure | 191

Today, many U.S. municipalities are forming

telecom plans that at least recognize the significance of telecom to local development,86 and

some are particularly innovative in their attempts

to craft a local infrastructure that meets their interests. For example, the town of Blacksburg, Virginia, in conjunction with Bell Atlantic and Virginia

Polytechnic Institute and State University, created

the Blacksburg Electronic Village to extend the

university network to the residents of the town and

to the municipal government. Many cities have arranged with cable television providers to install

high-capacity institutional networks in partial exchange for rights of way within the city boundaries.87 Many cities have established planning

committees or policies to promote the local telecommunications infrastructure.88 Seattle, Washington, has debated a public role in financing and

installing its local telecom infrastructure, as has

New Orleans. Omaha is well-known as a capital of

telemarketing and data processing, not because of

a planned strategy but in part because of labor expertise that spilled over from the Strategic Air

Command facilities, and also because of state telecom policy reform.89

Most of the over 19,000 municipalities in the

United States do not have explicit policies, however. A survey conducted by the International

City/County Management Association of over

1,000 U.S. local governments found that only 5

percent had written telecommunications plans.

On the other hand, about 72 percent felt that the

“information superhighway” will have a positive

effect on economic development in their community, while only about 2 percent felt it would have

a negative effect.90

There are no federal telecom policies that are

directed explicitly toward urban areas. However,

Congress has recently considered legislation that

could pre-empt or limit local government control

over negotiating rights-of-way and franchises

with telecom providers. Local officials have expressed strong opposition to any further limitation

over local control, on the grounds that local governments should have maximum flexibility to negotiate terms that best fit their needs.91 Local

governments argue that the use of public rights-ofway should merit compensation, as with the use of

any property, particularly since the use of a rightof-way sometimes requires public expense to repair cumulative damage to streets. They have also

argued that the local community should be able to

require access to public, educational, and government (PEG) programming that providers may not

otherwise deliver. Thus, some argue that local

governments should be able to charge franchise

fees to direct-to-home satellite providers and telephone companies that provide television services

via telephone lines, even if they are not currently

using or paying for public rights-of-way. Franchise fees are important to local governments both

86 See Robert H. Wilson and Paul E. Teske, “Telecommunications and Economic Development: The State and Local Role,” Economic Development Quarterly, vol. 4, No. 2, May 1990, pp. 158-174.

87 For example, see City of New York, Department of Telecommunications and Energy, “Institutional Network Master Plan: Report to the

Mayor’s Telecommunications Productivity and Planning Committee,” October 1993.

88 For example, see San Diego State University, International Center for Communications, “San Diego: City of the Future—the Role of

Telecommunications,” March 1994.

89 “Omaha’s telemarketing industry developed there because its geographic location in the center of the country gave it a cost advantage in

the days of banded, WATS service.” It also had low labor costs and residents with mainstream dialects. “As it became a center of telemarketing,

the infrastructure in and around the city became more capacious and sophisticated.” Milton Mueller, listserv communication, Dec. 16, 1994.

90 Less than 2 percent of communities with populations under 10,000 had such plans. Lisa Huffman and Woody Talcove, International

City/County Management Association, “Local Governments Not Ready for the Information Superhighway,” Government Technology, vol. 8,

No. 2, February 1995, p.1.

91 See National League of Cities, “1994 National Municipal Policy: Transportation and Communications,” Washington DC, December

1993.
192 | The Technological Reshaping of Metropolitan America

as a source of revenue and as a means of local control over their infrastructure.

Others have argued that while some communities have negotiated very favorable agreements,

others have not, and the federal government is in a

better position to mandate a standard that all providers must meet. Providers claim that the establishment of a single nationwide standard may

minimize costs for providers that serve several

communities, as well as the collective costs for local governments. Telephone companies argue that

their delivery of “video dial-tone” is different

from cable television provision, and should be exempt from the PEG requirements.

Federal policy could also pre-empt local control over antennas for wireless communications.92

Local governments prefer to maintain control

over zoning and other arrangements that specify

how and where towers for cellular telephone and

other communications can be constructed. The industry contends that making these arrangements

with each community raises their costs and delays

implementation of the wireless infrastructure.

Several programs are not part of an urban

policy but are nevertheless relevant to urban municipalities (as well as rural communities) that are

seeking to promote local infrastructure. Through

its Telecommunications and Information Infrastructure Assistance Program (TIIAP), the National Telecommunications and Information

Administration (NTIA) in the Department of

Commerce provides matching funds for state and

local applications that enhance the local information infrastructure.93 These projects do not necessarily improve the local physical infrastructure

per se, but rather improve access to government

services and demonstrate innovative applications

in, for example, distance education, health care,

and digital libraries.94 NTIA also provides funds

through its Public Telecommunications Facilities

Program (PTFP) for public radio and television

broadcasting facilities, and the Department of

Education provides funds to school districts for

projects in distance education.

92 See Wireless Technologies and the National Information Infrastructure, op. cit., footnote 51.

93 The 1994 appropriation for TIIAP was $25 million, increasing to $62 million for 1995. The current Congress reduced that appropriation

to $45 million in the rescission package.

94 OTA examined the use of information technology to improve federal government services in U.S. Congress, Office of Technology Assessment, Making Government Work: Electronic Delivery of Federal Services, OTA-TCT-578 (Washington DC: U.S. Government Printing Office, September 1993); and William H. Dutton, University of Southern California, “Electronic Service Delivery and the Inner City: Community

Workshop Summary,” contractor paper prepared for the Office of Technology Assessment, National Technical Information Service, December

1992. See also Organization for Economic Cooperation and Development, Information Systems for Urban Management, 1993. For information

on community free-nets see Richard Civille, Miles Fidelman, and John Altobello, Center for Civic Networking, “A National Strategy for Civic

Networks,” Washington D.C.
Uneven Development:

Outer Suburbs

and Exurbs

he typical pattern of American urban development is one

of a vast, low-density, and fragmented urban region with

sprawling suburbs surrounding an aging, sometimes decaying inner core.1 As one extreme example, the Chicago

metropolitan area of eight million people now covers over 3,800

square miles, encompassing 265 different municipalities, 1,200

separate tax districts and parts of six counties and three states.

While the metropolitan population has grown only marginally

over the last decade (4 percent), land devoted to housing increased by 46 percent and land used for commercial purposes increased by 74 percent. Between 1970 and 1990, the city of

Chicago lost 17 percent of its population while the suburbs gained

24 percent, though the inner suburbs also lost population over the

two decades. At the same time, the city of Chicago has more than

2,000 vacant manufacturing sites.2

The relationship between urban form and the overall quality of

life in American cities has been debated for many years. Since at

least the 1970s, concerns about urban sprawl and its relationship

to taxes, the cost of providing services, and environmental issues

(the loss of farmland, air pollution, water quality, energy use) 

1 Kenneth Jackson, Crabgrass Frontier: The Suburbanization of the United States

(New York, NY: Oxford University Press, 1985); John Borchert, “Futures of American

Cities,” in J.F. Hart (ed.) Our Changing Cities (Baltimore, MD: Johns Hopkins University

Press, 1991), pp. 218-250; Larry S. Bourne, “Recycling Urban Systems and Metropolitan

Areas: A Geographical Agenda for the 1990s and Beyond,” Economic Geography, vol.

67, No. 3, 1991, pp. 185-209; Paul Knox, “The Restless Urban Landscape: Economic and

Socio-Cultural Change and the Transformation of Washington, DC,” Annals of the American Association of Geographers, vol. 81, 1991, pp. 181-209; and Anthony Downs, New

Visions for Metropolitan America (Washington, DC: The Brookings Institution, 1994).

2 The Economist, Oct. 15, 1994.

| 193
194 | The Technological Reshaping of Metropolitan America

have brought it to the top of the public policy

agenda in numerous states and localities. As a result, many places have adopted explicit land use

policies (and related provisions) to manage or

guide such growth. However, recently there have

been renewed questions about the effect of

sprawled urban development on the economy and

the problems of the central city. Some of this criticism has come from surprising sources. The Bank

of America, for instance, has recently questioned

the overall impact of urban sprawl on the California economy and the quality of life.3 Such questions have also been raised by researchers at the

Federal Reserve Bank of Chicago.4 Clearly, then,

it is time to take stock of the debate on urban form

and its relationship to the health of metropolitan

America generally, and the fate of central cities

and inner suburbs specifically.

Sprawled urban development is an outcome of

a number of factors, including market forces, social factors, and as discussed in chapter 4, technological advances. However, public policies at

many different levels, including federal housing

policy and local government infrastructural investment, also play a role. In particular, public

policy appears not to require that the full costs

associated with new development be paid by the

users. In addition, policies may not require that indirect costs (externalities) associated with sprawl

be borne by residents or businesses that generate

them. Externalities associated with dispersed development might include environmental degradation, traffic congestion, and reduced access to

open space. Because externalities are unpriced

they, too, distort the market and lead to economic

inefficiencies. Public policies and externalities

subsidize outer suburban and exurban development, raising the relative cost of development in

the urban core. (The urban core includes the central city, and inner, older suburbs of metropolitan

areas). At a time when America’s urban cores are

struggling with poverty, unemployment, and deteriorating infrastructures, underwriting the costs

of sprawl is particularly damaging. This chapter

investigates the nature and extent of the costs and

subsidies associated with urban sprawl.

WHAT IS URBAN SPRAWL?

The term urban sprawl has no accepted definition.

In popular usage it refers to low-density, often residential, development on the fringe of or beyond

the border of suburban development. However, it

need not have a locational component. In the classic Costs of Sprawl study, sprawl is defined as

standard single-family detached dwelling units at

a gross residential density of two dwelling units

per acre.5 Both Frank and the Environmental

Protection Agency define sprawl as residential development at a density of three dwelling units per

acre or less.6 Thus, sprawl can occur within the

boundaries of development, though it is more

likely to develop on the urban fringe where vacant

land exists, or beyond the fringe in the form of ribbon or leapfrog development.7 Moreover, sprawl

also encompasses commercial and industrial uses

and the relationship between different types of

land use. For this reason, Ewing prefers to define

sprawl in terms of accessibility between related

uses. He notes then that poor accessibility, and

3 “Beyond Sprawl: New Patterns of Growth to Fit the New California” (San Francisco, CA: Bank of America, Environmental Policies and

Programs, 1995); see also Downs, op. cit. footnote 1, and Jeff Gersh, “The Rocky Mountain West at Risk,” Urban Land, March 1995, pp. 32-35.

4 Jerry W. Szatan and William A. Testa, “Metropolitan Areas Spread Out,” Chicago Fed Letter, vol. 83, July 1994.

5 Real Estate Research Council, The Costs of Sprawl, Detailed Cost Analysis (Washington, DC: U.S. Government Printing Office, 1974).

6 James E. Frank, Costs of Alternative Development Patterns: A Review of the Literature (Washington, DC: Urban Land Institute, 1989);

Environmental Protection Agency (EPA), “Costs of Providing Government Services to Alternative Residential Patterns,” report prepared for

the Chesapeake Bay Program’s Subcommittee on Population Growth and Development, May 1993.

7 Alan Altshuler and Jose Gomez-Ibanez, Regulation for Revenue (Washington, DC: Brookings Institution and Lincoln Institute for Land

Policy, 1993). They note sprawl covers at least three types of development: continuous low-density, ribbon, and leapfrog.
Chapter 8 Uneven Development—Outer Suburbs and Exurbs | 195

thus sprawl, “may result from a failure to concentrate development and/or mix land uses.”8 Some

also define sprawl on the fringe in relationship to

disinvestment in the core. As SEMCOG notes, urban sprawl is ultimately a two-part process with

“sprawling low-density growth at the suburban

fringe and the concurrent disinvestment and abandonment of older/urbanized communities.”9

One measure of sprawl in the United States is a

comparison of relative city population densities

with cities in the advanced industrial nations of

Europe and Asia. With the exception of New York

City, residential densities in the United States are

below 20 persons per hectare, compared with 50

persons per hectare for European cities and 150

persons per hectare for Asian cities.10 Consequently, land is required in great quantities, and

increasingly so. For instance, in the Chesapeake

Bay watershed between 1950 and 1980, population grew by 50 percent, but the amount of land

used for commercial and residential purposes

grew by 180 percent.11 Similarly in Philadelphia,

where the population of the metropolitan area increased by 2.8 percent between 1970 and 1990,

the developed land area increased by 32 percent.12

CAUSES OF SPRAWL

Outer suburban and exurban sprawl results from

several sets of factors. Perhaps the most important

is the decentralization of employment. This decentralization is in turn a result of lower land and

development costs on the periphery, extensive

modern highway systems that lower transportation costs to outer suburban and exurban locales,

and the relative proximity of a good labor supply

that moved first to the edge for reasons of space,

privacy, and amenities. Moreover, as detailed in

chapters 4-7, technological changes will most

likely continue to facilitate this overall employment decentralization, which in turn permits even

greater numbers of people to live in the outer suburbs and exurbs but be within commuting range of

large employment sites.

Low-density suburban patterns are also partly

the result of residential preferences deeply embedded in a “long tradition of exclusionary

middle-class American urban values aesthetically

articulated in the marriage of town and country.”13

A great majority of Americans say they would

prefer to live in low-density, single-family housing given the choice,14 often 30 miles from a major city.15 The most extreme form of this

preference is the desire for a Jeffersonian rural

lifestyle, a factor behind exurban development.

Today, such a lifestyle need not mean being cutoff

from “urban” amenities in rustic isolation. On the

contrary, urban amenities are made feasible by improved technology, such as modern septic systems

8 Reid Ewing, “Characteristics, Causes, and Effects of Sprawl: A Literature Review,” Environmental and Urban Issues, Winter 1994, pp.

1-15.

9 Southeast Michigan Council of Governments (SEMCOG), “The Problem of ’Urban Sprawl,” Planning and Zoning News, vol. 10, November 1991, 5-10, p 6.

10 P.G. Newman and J.R. Kenworthy, Cities and Automobile Dependence: A Sourcebook (Aldershot, England: Gower Technical, 1989).

11 EPA, op. cit., footnote 6. As a result, in the Chesapeake Bay watershed between the mid-1950s and mid-1970s approximately 2,800 acres

of wetland were lost annually to new development. During this period Maryland lost 5 percent of its total wetlands and Pennsylvania and Virginia lost about 6 percent each.

12 Greenspace Alliance, “Toward a Green Space Legacy: A Call to Action in Southeastern Pennsylvania” (Pennsylvania Environmental

Council, Philadelphia, Pennsylvania, nd).

13 Ivonne Audriac, Anne H. Shermyen and Marc T. Smith, “Ideal Urban Form and Visions of the Good Life: Florida’s Growth Management

Dilemma,” Journal of the American Planning Association, vol. 56, No. 4, 1990, pp. 470-482.

14 Richard L. Morrill, “Myths About Metropolis,” in J.F. Hart (ed.), Our Changing Cities (Baltimore, MD: John Hopkins University Press,

1991), pp. 1-11, reports 80 percent.

15 Glenn V. Fuguitt and David L. Brown, “Residential Preferences and Population Redistribution: 1972-1988,” Demography, vol. 27, No. 4,

November 1990, pp. 589-600.
196 | The Technological Reshaping of Metropolitan America

that substitute for urban sewer systems, satellite

dishes that substitute for cable television, and

electronic home commerce that replaces in-store

shopping and services.

A third set of factors leading to decentralization

are conditions in the central city. A good deal of

the flight of households from urban to suburban

and exurban locales is attributed to the aversion of

middle-class white households to ethnic and racial

diversity. In addition, outward population shifts

can be attributed to increasing problems of crime,

the poor quality of the public schools, and decaying infrastructure in the urban core. Compare, for

instance, crime rates in the city of Baltimore and

the surrounding area of Baltimore County. In

1991 the crime rate as compiled by the FBI was

11,371 (per 100,000) and 6,650 (per 100,000), respectively. Crime rates in both jurisdictions have

risen since 1985, but the crime rate in the city has

grown much faster than in the county (+32.6 percent in the city versus +13.4 percent in the

county).16 Other metro areas show similar disparities.

In most cases one would expect older metropolitan areas, and particularly their central cities and

older suburbs, to be at a disadvantage in the market-based competition for growth and investment

relative to newer regions and the outer suburbs.

Already built-up urban areas pose certain obvious

difficulties simply because they are already developed. They also impose additional direct costs

(e.g., onsite purchase, preparation, cleanup, and

development approvals), and pose barriers to

changes in land use in comparison to undeveloped

greenfield sites (new development on previously

vacant land). However, the governmental environment in which the competition occurs—the

“rules” of the development game—appears biased

against older areas to a much greater extent than

the market would produce.

The final set of factors contributing to urban

sprawl, then, are governmental actions (subsidies)

and non-actions (in terms of externalities). The

potential sources of bias are many and difficult to

quantify. Indeed, no one has empirically evaluated

either the origins or the importance of this imbalance. Nevertheless, it is widely believed that a

myriad of government policies, including tax policies, depreciation allowances, building regulations and implicit subsidies, subsidize sprawled

greenfield development and discourage efforts to

reuse older urban and suburban land and infrastructure.17 Estimating these costs is especially

difficult because of poor data and a partial patchwork of existing studies on this subject. However,

though the magnitude of these disadvantages for

older areas is not known, reducing them could potentially be a significant step in aiding development and redevelopment of the urban core. The

rest of this chapter attempts to outline the magnitude of these subsidies and externalities.

BENEFITS OF URBAN SPRAWL

The increasing population of metropolitan areas

in the United States necessarily implies that metropolitan areas will grow outward. Researchers

have shown that when metropolitan areas grow

beyond a certain size, a polycentric urban form

is more efficient than a compact, highly centralized monocentric form, because it allows the clustering of land uses to reduce trip lengths and

congestion.18 Hence, relatively lower density development in a different form promises several

benefits.19

16 U.S. Bureau of the Census, City and County Data Book: 1988 (Washington, DC: U.S. Government Printing Office, 1988). And U.S. Bureau of the Census, City and County Data Book: 1994 (Washington, DC: U.S. Government Printing Office, 1994).

17 There are also sets of regulations that potentially contribute to sprawl. These include the Americans with Disabilities Act and laws aimed

at health and safety at work, which make it less costly to build an entirely new building than to buy an existing building and bring it up to the

standards demanded by these laws.

18 V. Haines, “Energy and Urban Form: A Human Ecological Critique,” Urban Affairs Quarterly, vol. 21, No. 3, 1986, pp. 337-353.

19 Frederick Steiner, “Sprawl Can Be Good,” Planning, July vol. 60, 1994, pp. 14-17.
Chapter 8 Uneven Development—Outer Suburbs and Exurbs | 197

To begin with, sprawl has allowed many

people, including the poor, to realize their preference for low-density living in part because land

costs are cheaper on the fringe than in the core.

Elements of that preference are the fact that new

suburbs are often safer (less crime), cheaper, and

give businesses more flexibility to grow (less regulation).20

The automobile-friendly suburbs also have

benefits for the individual and society.21 Indeed,

the overwhelming dominance of the automobile

suggests that many people are willing to pay both

the internal and external costs of automobile use.

Hence, as OTA notes: “Automobile use clearly is

perceived by many as having real benefits other

than those created by artificial incentives in comparison to the use of alternative modes or to the

option of not traveling.”22 The internal benefits to

individuals include comfort, flexibility, low doorto-door travel time, freight-carrying capacity (for

shopping trips), cheap long-distance travel, and

the aesthetic benefits of separated land uses. Perhaps more importantly, there are other positive external benefits which accrue to society as a whole.

Businesses might have more locational options,

thus improving economic efficiency. Consumers

might have access to superstores, which, through

greater economies of scale, offer lower prices.

And commuting to work by automobile releases

workers from dependence on the timetables of

public transit systems, allowing more flexible

work schedules (increasing the use of capital, and

hence its efficiency). Now with the decentralization of work as well as homes, it is suggested that

commutes will decrease in the long term with consequent savings of time and energy.23 (So far there

is no evidence this has happened.24)

Peiser argues that leapfrog urban development,

furthermore, is not a problem because leaving parcels of land undeveloped in the urban area in the

short run will increase land densities over the long

term, as these parcels increase in value and are

more intensively used.25 Peiser examined this hypothesis with data from three places: Fairfax

County, Virginia; Dallas, Texas; and Montgomery

County, Maryland. Montgomery County did not

conform to the hypothesis because its land use

regulations do not allow higher densities on the

leapfrogged parcels. The infill parcels in Fairfax

did generally conform to the hypothesis with

higher densities, and the results from Dallas were

mixed.

A Presidential commission established toward

the end of the 1970s to study urban development

also suggested that there are social and economic

advantages to sprawl. The commission suggested

that often development costs in the dense central

city are higher than in the less dense suburbs. This

results from expensive right of ways in the city

and the fact that replacing existing infrastructure

is likely to cause greater disruption and cost more

than suburban greenfield development. Moreover, the commission suggested that suburban residents are more likely to internalize public service

demands by buying similar services in the private

20 Bank of America, op. cit., footnote 3.

21 U.S. Congress, Office of Technology Assessment, Saving Energy in U.S. Transportation, OTA-ETI-589 (Washington, DC: U.S. Government Printing Office, July 1994), pp. 94-98.

22 Ibid., p. 95, emphasis in original.

23 P. Gordon, and H.L. Wong, “The Costs of Urban Sprawl: Some New Evidence,” Environment and Planning A, vol. 17, 1995, pp. 661-666.

24 Between 1983 and 1990 the average household vehicle trip increased from 7.8 to 9 miles and the average commute from 8.6 to 10.9 miles

(see Downs, op. cit., footnote 1). This is partly due to the fact that jobs have not spread out as much as housing and workers do not live near their

jobs, frequently cross-commuting from one suburb to another.

25 Richard B. Peiser, “Density and Urban Sprawl,” Land Economics, vol. 65, No. 3, 1989, pp. 193-204.
198 | The Technological Reshaping of Metropolitan America

market than if they lived in the city. This improves

the fit between demand and supply and decreases

demands placed on government financing.26

Finally, Bae and Richardson suggest that lowdensity development might have fewer environmental impacts and adverse health effects than

high-density development.27 They note that a local air shed is better able to deal with pollution

when spread out over a larger area.

COSTS OF SPRAWL: IS IT SUBSIDIZED?

Though there are many private benefits and some

public benefits to sprawl, there is also a range of

public and private costs. This section assesses the

evidence on the costs of alternative forms of urban

development and who bears them. In other words,

does suburban sprawl pay its own way or is it subsidized?28 If it is subsidized, to what extent do

these subsidies increase sprawl and, by extension,

weaken the development prospects of the urban

core? The costs can be broken down into direct

costs and externalities. Externalities are dealt with

in the next section. Table 8-1 summarizes the direct public and private costs of residential development. The current literature suggests that

sprawl costs more than compact development,

and that some of that cost is subsidized. Yet, some

of the extra cost of sprawl is borne by those who

live in the outer fringe and exurban areas, suggesting that the benefits are worth the cost to fringe

residents.

❚ Direct Costs of Sprawled Development

The direct costs of development fall into four major categories:

1. the onsite costs to improve the lot, including

the buildings and the connections from the

building to offsite public facilities;

2. primary facilities, called here neighborhood

services, which serve the development exclusively. This includes streets, water and sewer

lines within a neighborhood, street lighting,

and recreational facilities;

3. community costs (sometimes called secondary direct facilities), which serve an area outside the development but do not service the

region. This includes schools, trunk sewer and

water lines, fire stations, libraries, telephone,

cable TV, electricity lines, and police;

4. regional facilities, also known as secondary indirect facilities, such as regional roads and

highways, and central water and sewer facilities, including water reservoirs, central water

treatment and pumping stations, sewage treatment, central electricity and telephone services, solid waste disposal, mail, and regional

transit systems.

Estimating the cost of these facilities is difficult. To begin with, costs must be broken into several different components: capital costs; operation

and maintenance costs; precipitated costs, which

are costs incurred by a particular development (the

marginal cost); and full costs to the jurisdiction,

which are costs equal to precipitated costs plus the

allocated cost of inherited facilities.29 Precipitated costs and full costs rely on the difference between marginal and average cost when calculating

the service burden of a new subdivision. In an area

already partially built up, (or fully built up, but

26 President’s Commission for a National Agenda for the Eighties, Urban America in the Eighties: Perspectives and Prospects, (Washington, DC: U.S. Government Printing Office, 1980).

27 Chane-Hee C. Bae and Harry W. Richardson, “Automobiles, the Environment and Metropolitan Spatial Structure” (Cambridge, MA:

Lincoln Institute of Land Policy Working Papers, 1994).

28 This does not consider, as some environmental proponents would suggest, the case in which suburban sprawl pays its own way economically but nevertheless has adverse environmental (and social) consequences.

29 This accounting method was first developed by William L. Wheaton and Morton J. Schussheim, The Cost of Municipal Services in Residential Areas (Washington, DC: U.S. Department of Commerce, 1955). It is reviewed in Frank, op. cit., footnote 6.
Chapter 8 Uneven Development-Outer Suburbs and Exurbs |199

On-site

The building on the lot and the capital facilities on the lot that connect the

dwelling unit to the nearby offsite public facilities. These are nearly always

borne by the user but they maybe subsidized through mortgage and tax

policies.

Neighborhood costs

collector streets

water distribution lines

stormwater collector lines

streetlighting

sewer collector lines

recreational facilities

Community costs

roads

water and sewer trunk lines

stormwater trunk lines

electricity lines

telephone lines

education

emergency services (fire, police, and hospital)

libraries and parks

Regional costs

regional roads

central water and sewer treatment

central electricity and telephone facilities

solid waste disposal

other transportation (airport, transit)

SOURCE: Office of Technology Assessment, 1995.

with some abandonment) the marginal costs (or

precipitated or extra costs) of a new development

will be low, much lower than the average cost,

which is the cost of supplying services to the subdivision averaged across all users in a jurisdiction.

In an area where there is no existing capacity, the

marginal cost of supplying services to the new residents will be very high, though the average cost

will decrease as development proceeds.30 Attributing costs to a particular development, therefore,

is not easy. Indeed, calculating the public service

cost of a specific development to withstand legal

challenge has been quite difficult, and one that has

generally been easier to do on an average cost basis rather than a marginal cost one.31

Nevertheless, in the theoretical literature public

facility and service delivery costs of urban development are generally thought to vary with land

use type (commercial, residential, open space),

density, and distance (from services and other land

uses). To date, a good deal of the research on this

topic has focused on density, particularly at the

neighborhood level and to a lesser extent the community level. More recently, there have been attempts, particularly by state governments, to

assess the costs of the different development pat30 Marginal cost pricing is the economically most efficient way of pricing public services when average cost is rising, but average cost pricing is better when average costs are falling. J. Sonstelie and A. Gin “Residential Development and the Cost of Local Public Services, ” in J.M.

Johnson (cd) Resolving the Housing Crisis (Cambridge, MA: Ballinger, 1982).

31 R.W. Burchell and D. Listoskin, “FiscaI Impact Procedures and the Fiscal Impact Hierarchy: The Public Costs of Differing Types of Land

Uses,” paper prepared for the Annual Conference on Public Budgeting and Finance, Oct. 13-15, 1994, Washington, DC.
200 | The Technological Reshaping of Metropolitan America

terns at a greater spatial scale, and in which location is the more important variable. This work can

give a picture of metropolitan costs and subsidies,

though to some extent a detailed analysis at this

scale is still missing.

❚ Onsite Costs

The onsite costs of development include the

buildings and the connections from the buildings

to the offsite public facilities. Generally, the commercial and residential purchaser pays these costs

in full in the price of the building or house.32 However, the cost of homeownership is subsidized

through the federal tax code—by deductions of

mortgage loan interest, capital gains tax deferment, and property tax payments.33 The amount

of the subsidy is not insignificant. It is projected

for 1995 that the federal outlay for homeowner deductions will be $83.2 billion. By contrast, subsidies for renters (usually low-income renters) in the

form of public housing and rental assistance will

total $24.9 billion.34 Though tax subsidies to

housing shrank as a result of the Tax Reform Act

of 1986, the effect on renters was greater than on

homeowners. As a result, according to Follain and

Ling, the tax subsidy to regular residential rental

housing was all but eliminated by the Act.35 Not

only do homeowners receive more benefits than

renters, but high-income owners receive more

than low- and moderate-income owners. In 1993

households with annual incomes of more than

$100,000 received 38.9 percent of homeowner

subsidies, even though they only represent 5 percent of the population. Approximately 12 percent

of the subsidy went to the top 1 percent of the population, those earning over $200,000.36

What is the spatial effect of the homeowner

subsidy? It is generally agreed that in the past the

public sector encouraged low-density suburbanization through tax deductions, mortgage guarantees, and depreciation formulas favoring new

construction over the upgrading and repair of existing structures. That is, dispersed urban development was encouraged by large implicit

subsidies for homeownership and single-family

housing37 because, as Peterson notes: “The new,

low-density construction favored by tax laws is

obviously most suitable for location outside the

central metropolitan core.”38 Though the spatial

implications of the federal tax code have not been

studied more recently, it is reasonable to conclude

that this subsidy continues to sponsor sprawl.

Most of the homeowner subsidy goes to those

in the suburbs, where homeownership rates far exceed those in the central city, and houses are generally more expensive. For instance, in the

Washington, D.C., metropolitan area, the median

price of a house in the District of Columbia in

32 EPA, op. cit., footnote 6.

33 In fact Heilbrun notes that “U.S. tax law favors homeowners twice over,” because a homeowner does not pay tax on the net income gained

by occupying a self-owned property (that is the tax on income that would accrue from renting the house) and at the same time allows a tax

deduction on interest, property taxes, and the like. J. Heilbrun, Urban Economics and Public Policy. Third edition (New York, NY: St. Martin’s

Press, 1987), pp. 49.

34 Vicki Kemper, “Home Inequity,” Common Cause Magazine, Summer 1994, pp. 14-18. See also P. Marcuse, “The United States.” in W.

van Vliet (ed.), International Handbook of Housing Policies and Practices (Westport, CT: Greenwood/Praeger, 1990).

35 James R. Follain and David C. Ling, “The Federal Tax Subsidy to Housing and the Reduced Value of the Mortgage Interest Deduction,

National Tax Journal, vol. XLIV, No. 2, 1992, pp. 147-158.

36 Joint Committee on Taxation, U.S. Congress, Estimates of Federal Tax Expenditures for FY 1993-1998 (U.S. Government Printing Office, 1993); see also James M. Poterba, “Taxation and Housing: Old Questions, New Answers,” Empirical Public Finance, vol. 82, No. 2, 1992,

pp. 237-242.

37 John Pucher, “Urban Travel Behavior as the Outcome of Public Policy: The Example of Modal-Split in Western Europe and North America,” Journal of the American Planning Association, vol. 54, No. 4, 1988, pp. 509-520.

38 George E. Peterson. “Federal Tax Policy and the Shaping of Urban Development,” in Arthur P. Solomon (ed.), The Prospective City

(Cambridge, MA: MIT Press, 1980). See also Heilbrun, op. cit., footnote 33, pp. 48-49.
Chapter 8 Uneven Development—Outer Suburbs and Exurbs | 201

1990 was $121,700, while that in Fairfax County

was $213,000, and in the more distant suburb of

Prince William County, it was $137,700. Homeownership rates also vary dramatically by location. The percent of owner-occupied housing in

D.C. is 38.9 percent, while in Fairfax County and

Prince William County it is 70.7 percent and 71.0

percent, respectively.39 Assuming that income

characteristics are the same over all three jurisdictions, then Prince William receives more than

twice the homeowner subsidy that the District receives, and Fairfax County receives more than

three times the subsidy.40 These tax outlays subsidize low-density development, one aspect of

sprawl. By reducing the net cost of housing, as

household income grows, tax policy encourages

the over-consumption of owner-occupied housing

and the land that goes with it.41 Over-consumption allows a house buyer to buy a larger house on

a larger lot, an effect that increases with income.

It has also been suggested that in metropolitan

areas where home values increase with distance

from the center, the urban core is disadvantaged

by Section 1034 of the tax code, which allows

homesellers to defer tax liability on capital gains

when selling a home and buying another at equal

or greater value. For instance, 82 percent of homes

sold in the city of Cleveland in 1992 sold for less

than $65,000, while 85 percent of suburban homes

sold for more than $65,000. Bier and Maric argue

that in such an environment Section 1034 encourages people to move outward from the city toward

more expensive houses in the suburbs.42 They

also suggest Section 1034 is an obstruction to

people who want to move into the city from the

suburbs, due to the fact that they could suffer a

large tax loss if a capital gain is involved. Bier and

Maric estimated that movement outward by

homesellers under the capital gains provision is 16

percent greater than would otherwise be expected.

These results were later replicated in seven major

urban areas in Ohio.43

❚ Neighborhood Costs

Since the classic study Costs of Sprawl, a good

deal of analysis has focused on capital costs at the

neighborhood and to some extent community level, using hypothetical development prototypes.44

The main focus has been on the effects of density

on neighborhood and community public infrastructure costs, such as roads, sewers, education,

and fire. Though there is a good deal of disagreement on the assumptions and calculations for such

estimations, there is general agreement that decreased density leads to increasing public and private development costs.45 Based on previous

studies, Frank estimated the effect of density on

neighborhood and community capital costs.46 In

table 8-2, these costs are updated to 1992 dollars

and modified to coincide with the definition of

neighborhood services given above.47 These es39 U.S. Bureau of the Census, op. cit., footnote 16.

40 This does not take into account relative income levels which might make the relative difference between central cities and suburbs even

greater.

41 Frank DeLeeuw and Larry Ozalle, “The Impact of Federal Income Tax on Investment in Housing,” Survey of Current Business, December 1979, pp. 50-61; Jerry W. Szatan and William A. Testa, “Metropolitan Areas Spread Out,” Chicago Fed Letter, vol. 83, July 1994; Poterba

op. cit., footnote 36.

42 Thomas E. Bier and Ivan Maric, “IRS Homeseller Provision and Urban Decline,” Journal of Urban Affairs, vol. 16, No. 2, 1994, pp.

141-154.

43 The Ohio Housing Research Network, “The IRS Homeseller Capital Gain Provision: Contributor to Urban Decline,” Jan. 5, 1994. The

Ohio Housing Research Network, Cleveland, Ohio.

44 Real Estate Research Council, op. cit., footnote 5.

45 Ibid; Frank, op cit., footnote 6; EPA, op. cit., footnote 6.

46 Frank, op. cit., footnote 6.

47 EPA, op cit., footnote 6.
202 I The Technological Reshaping of Metropolitan America

Dwelling unit type and density Neighborhood costs Community costsa Total costs

SFD, 1 dwelling unit (du)/acre $33,700 $25,300 $59,000

SFD, 3 dus/acre $17,500 $25,200 $42,700

SF Clustered, 5 dus/acre $10,500 $25,200 $35,700

Townhouses, 10 dus/acre $7,200 $25,500 $32,700

Garden Apts, 15 dus/acre $4,600 $25,500 $30,100

High-rise Apts, 30 dus/acre $2,200 $13,900 $16,100

Mix, 12 dus/acre $6,300 $30,300 $36,600

al includes pollice, fire, solid waste collection and disposal, library, health, and general government 1992 dollars in cost/du Assumes 5 miles

distance to employment, sewage plant, water plant, receiving body of water from residential development

SOURCE Environmental Protection Agency, “Costs of Providing Government Services to Alternative Residential Patterns, ” report prepared for the Chesapeake Bay Program’s Subcommittee on Population and Growth, May 1993

timates clearly show what is logically expected,

that low density is related to higher neighborhood

costs. For instance, a single-family dwelling at

three dwelling units an acre is more than twice as

costly to serve than townhouses at 10 dwelling

units an acre.

By themselves, such cost differentials have no

inherent public policy implications. Some individuals and firms choose to purchase more expensive housing and buildings, while others chose

less expensive options, depending on income

preferences. However, it is a public policy concern

if lower-density development does not pay its own

way and is partially subsidized by others. Increasingly, homeowners pay for most, if not all, development cost through the imposition of impact fees

on developers, which are priced in the cost of a

dwelling unit.48 As Frank notes: "While large lots

increase the cost of development, those increases

are largely paid for by the occupants of that development in the form of the sale price of final dwellings rather than by existing taxpayers.”49

However, local government does incur greater responsibility for maintaining these interior collector streets, wastewater plants and the like.50

Although, in an increasing number of places,

homeowner associations effectively privatize operation and maintenance.5

1

■ Community Costs and Regional Costs

Based on the Costs of Sprawl study, Frank also estimated the effects of density on the capital cost of

community facilities. The definitions in his review do not coincide exactly with the definitions

given above, so some of the regional facilities are

included in community services. Moreover, distance is held constant. In the figures in table 8-2

(column 3), distance from major facilities is assumed to be five miles. The results show that the

cost of community and regional facilities per

dwelling unit does not vary much with density, the

exception being for high-rise apartments.

48 Altshuler and Gomez-Ibanez, op. Cit., footnote 7.

49 Frank, op. cit., footnote 6.

50 EPA, op cit., footnote 6, p. 5-2

51 Robeft Dilger, Neighborhood politics: Residential Community Associations in the American Governance (New York, NY: New York

University Press, 1992).
Chapter 8 Uneven Development—Outer Suburbs and Exurbs | 203

Another study of community and regional costs

was conducted for the state of Florida.52 The study

was designed to look more closely at community

and regional costs (labeled external costs), rather

than neighborhood (or internal) costs, and at land

use and distance relationships (urban pattern), not

density. Moreover, the study approach was to examine eight actual case study areas in Florida, as

opposed to hypothetical developments studied in

much of the previous literature. The study found

that compact and contiguous development is

much more cost-efficient than scattered and linear

development. It also found that significant subsidies exist for the more costly development (see

next section).

The case studies were chosen to represent five

types of development patterns:

1. Scattered—characterized by low density that

has leapfrogged past vacant land into a virtually

undeveloped area. These areas have few nonresidential support services and few public services (Wellington and Cantonment case study

areas);

2. Linear—low-density residential and mixeduse development extending outward from established urban area along major transportation

corridor. This includes decreasing land use intensities and heavy reliance on automobile access (Kendall Drive and University

Boulevard);

3. Satellite—moderate- to high-intensity mixeduse development in outlying suburban or exurban area with cultural and economic

relationships but physical separation from the

established major urban center (Tampa Palms);

4. Contiguous—moderate-density development

located adjacent to existing urban development. This category also includes some mixed

land uses, including non-residential support

services and some public services (Countryside

and Southpoint);

5. Compact — high-intensity development in a

major urban area with vertical development, redevelopment of underutilized parcels, and underused public facilities (Downtown Orlando).

Capital and operating costs were examined for

the most important community and regional services. It was found that it was cheaper to provide

public services to the more compact and closer-in

developments than those further out. As table 8-3

shows, the external capital costs for public facilities per unit are much lower for close-in, compact

development than they are for fringe, scattered,

linear and satellite development. Indeed, the cost

of servicing Wellington (a scattered, fringe development) is more than twice that of servicing

downtown Orlando.

This same Florida data can be interpreted in a

somewhat different way. If the compact and continuous cases are deemed planned, and the scattered, linear, and satellite are deemed unplanned

then it is possible to estimate the savings that

might accrue from a planned urban form (see table

8-4).53 Seen in this way, the Florida data show that

planned growth can save significantly on road

costs (60 percent over unplanned) and on utilities

(40 percent over unplanned), and in a minor way

on schools (7.4 percent over unplanned).

Another major state study headed by Robert

Burchell of Rutgers University for the state of

New Jersey attempted to calculate the costs

associated with implementing a state plan aimed

at concentrating urban development (known as

“IPLAN”), in comparison with the situation if

current development trends continued (a situation

labeled “TREND”). The study examined the two

different scenarios representing development under these plans for several different factors—eco52 James Duncan and Associates, Van Horn, Gray Associates, Ivey, Bennett, Harris, and Walls, Inc. and Wade-Trim, Inc., The Search for

Efficient Urban Growth Patterns: A Study of the Fiscal Impacts of Development in Florida. Report presented to the Governor’s Task Force on

Urban Growth Patterns and the Florida Department of Community Affairs, July 1989.

53 This is done by Robert W. Burchell and David Listoskin, “Land, Infrastructure, Housing Costs and Fiscal Impacts Associated with

Growth: The Literature on the Impacts of Sprawl versus Managed Growth.” Paper, Center for Urban Policy Research, Rutgers University, 1995.

This follows from their earlier work on fiscal impacts and simulations of growth in New Jersey, see footnote 54.
204 I The Technological Reshaping of Metropolitan America

Rank Study area Urban form cost

1 Downtown compact $9,252

2 Southpoint contiguous $9,767

3 Countryside contiguous $12,693

4 Cantonment scattered $15,316

5 Tampa Palms satellite $15,447

6 University linear $16,260

7 Kendall linear $16,514

8 Wellington scattered $23,960

average $14,901

SOURCE James Duncan and Associates, et al., The Search for Efficient Urban Growth Patterns: A Study of the Fiscal Impacts of Development in

Florida, report presented to the Governor’s Task Force on Urban Growth Patterns and the Florida Department of Community Affairs, July 1989.

Average of case studies Average of case studies Unplanned versus

under unplanned under planned planned development

Category of capital costs development development difference

$ %

Roads $7,014 $2,784 (+) $4,230 60.3

Schools $6,079 $5,625 (+) 454 7.4

Utilities $2,187 $1,320 (+) 867 9.6

Other $661 $672 (-) 11 1.7

Total $15,941 $10,401 (+) 5,540 36.7

Note

a

lncludes scattered, linear and satellite developments

b

lncludes contiguous and compact developments.

SOURCE James Duncan and Associates, et al., The Search for Efficient Urban Growth Patterns: A Study of the Fiscal Impacts of Development in

Honda, report presented to the Governor’s Task Force on Urban Growth Patterns and the Florida Department of Community Affairs, July 1989; Robert

W Burchell and David Litoskin, “Land, Infrastructure, Housing Costs and Fiscal Impacts Associated with Growth The Literature on the Impacts of

Sprawl versus Managed Growth, ” paper, Center for Urban Policy Research, Rutgers University, 1995.

nomic, fiscal, and environmental—from 1990 to quire $699 million less investment in roads, or 24

2010. 54 One part of the study examined the rela- percent less; $561 million less investment in wative cost of major infrastructure for New Jersey ter and sewer costs, a 7.6 percent saving; $173

over this time period. The findings are summa- million less investment in schools, 3.3 percent

rized in table 8-5. less.55

Overall, the study found that between 1990 and In summary, this work shows that there are sav2010 planned growth versus unplanned would re- ings from higher-density development that is lo54 New Jersey Office of State Planning (OSP), Impact Assessment of the New Jersey Interim State Development and Redevelopment Plan,

Report II: Reserch Findings. Trenton, NJ, 1992.

55 Burchell and Listoskin, op cit., footnote 52, pp. 15.
Chapter 8 Uneven Development-Outer Suburbs and Exurbs | 205

I

Trend versus planned

development

Growth/development impacts Trend development Planned development Difference 0/0

Roads

Local $2,197 $1,630 $567 25.8

State $727 $595 $132 18.2

Total Roads $2,924 $2,225 $699 23.9

Utilities—Water $634 $550 $84 13.2

Utilities—Sewer $6,790 $6,313 $477 7.0

Total Utilities $7,424 $6,863 $561 7.6

Schools $5,296 $5,123 $173 3.3

All Infrastructure $15,644 $14,211 $1,433 9.2

SOURCE’ Robert W. Burchell and David Listoskin, “Land, Infrastructure, Housing Costs and Fiscal Impacts Associated with Growth The Literature on

the Impacts of Sprawl versus Managed Growth. ” Paper, Center for Urban Policy Research, Rutgers University, 1995, based on Burchell et al. (1993)

“lmpact Assessment of the New Jersey Interim State Development and Redevelopment Plan. Report Ill: Supplemental IPIANAssessment. ” Apr 30,

1992.

Infrastructure Trend Planned development: findings from three Planned

cost category development major studies (in percent relative to unplanned development

growth)

Duncan Frank Burchell

Roads 100 40% 73% 76% 75%

Schools 100 93% 99% 97% 95%

Utilities 100 60% 66% 92% 85%

Other 100 10270 N A N A 10070

SOURCE: Robert W. Burchell and David Listoskin, “Land, Infrastructure, Housing Costs and Fiscal Impacts Associated with Growth: The Literature on

the Impacts of Sprawl versus Managed Growth. ” Paper, Center for Urban Policy Research, Rutgers University, 1995, based on James Duncan and

Associates et al., The Search for Efficient Urban Growth Patterns: A Study of the Fiscal Impacts of Development in Florida. Report presented to the

Governor’s Task Force on Urban Growth Patterns and the Florida Department of Community Affairs, July 1989; James E Frank, Costs of Alternative

Development Patterns: A Review of the Literature (Washington, DC: Urban Land Institute, 1989); and New Jersey Office of State Planning (OSP),

Impact Assessment of the New Jersey interim State Development and Redevelopment Plan, Report 11: Research Findings Trenton, NJ, 1992

cated near to existing community and regional

services. Burchell and Listoskin56 summarized

the locational costs found in the three studies:

0SP, 57 Frank, 58 and James Duncan Associates et

al. (see table 8-6). 59 Table 8-6 shows planned concentrated development saving 25 percent for

roads, 15 percent for utilities, and 5 percent for

schools. Coupled with the savings on the cost of

capital facilities derived from higher density, such

as that for townhouses at 10 dwelling units per

acre ($7,200) over single-family three dwelling

units per acre ($17,500), there are significant cost

differences between planned higher-density

growth and low-density sprawl (see table 8-2).

56 Ibid.

57 OSP op. cit., footnote 54.

58 Frank, op. cit., footnote 6.

59 James Duncan and Associates et a]., op. cit., footnote 52.
206 | The Technological Reshaping of Metropolitan America

Ladd has tackled the question of density and

public service costs in a different way. Using data

from 247 U.S. counties, Ladd constructs a regression model to examine the relationship between

public spending and population density.60 Controlling for a range of factors that might influence

public spending—such as income, poverty, and

number of school students—she finds that the

lowest costs are found at about 250 people per

square mile (ppsm), a predicted public spending

rate of $972 per capita (1982 dollars). Below that

density, costs increase to $1,111. However, above

that level public service costs rise to $1,153 at a

density of 1,250 ppsm, 19 percent more than the

cost at 250 ppsm. Unpredictably, as density rises

to 1,750 ppsm, costs drop to $1,040 per capita, but

then rise again in the densest counties.

Despite the overall ambiguity of the results, the

study suffers from several other problems. First,

as the author points out, the density variable measures only residential population and not the total

number of people placing demands on the public

sector. Ladd notes: “Public sector activities serve

people in their capacity not only as residents but

also as employees, commuters and recreationists.

Hence, a complete measure of the costs of different patterns of development should extend beyond

residential patterns alone to include the public

sector costs of the other activities that residents

might engage in.”61 Since employment has not

decentralized as much as population, high levels

of employment are found in places with high residential population densities. By ignoring the public service burden of places of employment and

recreation, the model overestimates the effects of

higher residential density on public spending.

Second, the model does not control for the age of a

county’s infrastructure. High-density counties are

by and large those with the oldest stock of infrastructure, which increases operating and maintenance costs. Third, as Ladd points out herself, the

model only accounts for average residential densities, ignoring the impacts of different development patterns such as compact development

surrounded by open space. Moreover, it is unclear

from this analysis if ribbon or leapfrog development contributes to public service costs or not. Finally, the analysis does not allow us to know if the

greater public service costs of high-density locales, if such is the case, are subsidized by others.

❚ Paying for Growth: Who Bears the

Costs of Community and Regional

Services?

The knowledge that low-density non-continuous

development engenders greater community and

regional costs leads to the next question, “Who

bears the cost of growth?” Do those who live in

scattered, fringe development bear the increased

public costs associated with that development, or

is there a cross-subsidy from other parts of society? If so, who pays?

In order to answer the question of who pays, fiscal impact analysis is often employed to examine

the relationship between the public costs of providing services and the revenues that the development produces. Fiscal impact studies show that

the residential development rarely pays its own

way. Burchell and Listoskin show that only highrise/garden apartments (with 1-2 bedrooms) and

age-restricted (retiree) housing will show a fiscal

surplus for a municipality.62 Townhouses, expensive and inexpensive single-family houses, garden apartments (with 3+ bedrooms), and mobile

homes will show a fiscal deficit. Such studies also

60 Helen F. Ladd, “Population Growth, Density and the Costs of Providing Public Services,” Urban Studies, vol. 29, No. 2, 1992, pp.

273-295.

61 Ibid., p. 292.

62 Burchell and Listoskin, op. cit., footnote 31.
Chapter 8 Uneven Development-Outer Suburbs and Exurbs | 207

indicate that commercial, industrial, and farm/

open land are likely to contribute more to a local

government’s tax base than they cost in services.63

However, some studies have found that even commercial and industrial uses eventually cost more

than they produce in revenue because they attract

added residential development.64 With the realization that residential development does not cover the cost of providing services, many localities

now impose charges in the form of developer exactions, which are passed onto consumers in higher home prices.

There are several problems with fiscal impact

analysis and exaction schemes: First, only some

sophisticated exaction schemes fully cover the

costs of providing community and regional services. 65 Moreover, most fiscal impact analysis

and exaction schemes are done on an average cost

basis, ignoring the effects of density and location.

As a result, outlying developments are subsidized

by other residents, leading to urban sprawl. Thus,

the fiscal drain of outlying development is usually

much greater than concentrated development. For

example, James Duncan and Associates66 calculated the cost-revenue ratio for the eight developments summarized in table 8-3. Table 8-7 shows

that only one produced more revenue than costs,

and that the scattered and linear developments had

much lower ratios than the compact and contiguous developments.

This evidence suggests that sprawl is less likely

to pay its own way than more compact development, increasing the demand for leapfrog development. 67 This conclusion concurs with Frank’s

assessment that: “In most communities, costs beyond the neighborhood level are not fully passed

on to the consumer as part of buying a house,

whether those costs are the extra amount induced

by leapfrogging or the normal ones associated

with contiguous development.”68

Rank Area Urban form Revenue:

cost ratio

1 Southpoint contiguous 1,36

2 Downtown compact 0.90

3 Countryside contiguous 0.78

4 Kendall linear 0.62

5 Tampa Palms satellite 0.45

6 University linear 0.43

7 Wellington scattered 0.43

8 Cantonment scattered 0.41

Average 0.68

SOURCE. James Duncan and Associates et al , The Search for efficient Urban Growth Patterns A Study of the Fiscal Impacts of Development m

Florida. Report presented to the Governor’s Task Force on Urban Growth Patterns and the Florida Department of Community Affairs, July 1989

63 Pennsylvania State University, “Fiscal Impact of Different Land Uses: The Pennsylvania Experience. “ Extension Circular 410, College

of Agricultural Sciences, Cooperative Extension, nd.

64 Dupage County Development Department, “Impacts of Development on DuPage County Property Taxes” (Wheaton, IL: DuPage

County Development Department, April 1991). See also the discussion on p. 33.

65 This is true for mainly legal reasons. An exaction must be directly linked to a cost of a development, which is hard to do with facilities

which are distant from the development.

66 James Duncan and Associates, et al., op. cit., footnote 52.

67 EPA, op. cit., footnote 6, p. 5-3.

68 Frank, op. cit., footnote 6, p. 42.
208 | The Technological Reshaping of Metropolitan America

Second, it is not clear who specifically pays the

price for fringe growth. Most of the cost of community and regional facilities is made up from

general local government revenues, although the

impact on different areas and different income

groups within a local jurisdiction is unknown. In

some places, such as the western United States,

central cities and suburbs are often in the same local government jurisdiction, as the city expands

by annexing land for development. As a result, if

public service prices are based on average costs

(through exactions) or by general revenues, then

taxpayers in the central part of the city will probably subsidize those on the fringe. One official of a

large western city told OTA that it costs the city

$10,000 in additional public costs to service a new

house on the urban fringe compared to serving a

new house in the core. Because fringe development is in essence being subsidized, and core development taxed to pay for it, the likely effect is to

exacerbate sprawl while weakening the development prospects in the core.69 In the eastern United

States, however, intense local government fragmentation means that jurisdictions are responsible

for providing their own services. In such areas, the

local government collects revenues to pay for new

development, hence there is less chance for subsidization from core to fringe. If new residents do

not bear the full cost, existing fringe residents and

businesses pay the remaining cost of new development, which is a reason for no-growth movements in many suburbs.

Moreover, some of the costs of these facilities

are subsidized by other local governments or other

levels of government (state and federal). Often

these are not taken into account. For example, the

Florida study did not determine the costs of spillover impacts on other local governments in the

metropolitan region. As Burchell and Listoskin

note: “Fiscal impacts are projected for the public

jurisdiction(s) where growth is taking place—the

municipality, township, county, school district,

and any special districts.”70 Moreover, state and

federal governments also sometimes subsidize

this growth. For instance, the New Jersey study

notes that planned growth would save the state

$90 million in road costs over the 20-year study

period.71 There would also be savings to local

government and school districts, some of which

would accrue to the state through a lowering of intergovernmental transfers. Moreover, the federal

government might save on lower transfers to

states and localities to finance highways and water

and sewer facilities. As Ewing notes: “Though

less true today, federal funding of waste treatment

systems (and related regulations that led to excess

capacity) contributed to the sprawl of the 1960s,

1970s, and early 1980s.”72

Finally, fiscal impact analysis focuses on direct

costs for municipalities, ignoring other costs, such

as phone and electricity provision, and indirect

costs known as externalities. (See table 8-8)

❚ Other Services

The pricing of public and private utilities also understates the costs of providing services to suburban and exurban residents. There are good reasons

for providing such things as telephones, mail,

electricity, and gas at an average cost throughout

a metropolitan region: health and safety and,

through having a comprehensive mail and phone

system, prevention of social and economic isolation. Universal service can also lead to overall

economic gains. Although there have been few

careful studies of marginal costs of utility provision in metropolitan areas, the evidence does sug69 Of course, in such “elastic” cities, local government revenues are generated from a much broader tax base which may lead to a healthier

fiscal situation. (See David Rusk, Cities Without Suburbs, Baltimore, MD: Johns Hopkins Press, 1994).

70 Burchell and Listoskin, op. cit., footnote 31, p. 3.

71 OSP, op. cit., footnote 54.

72 Ewing, op. cit., footnote 8, p. 5.
Chapter 8 Uneven Development-Outer Suburbs and Exurbs | 209

Resident/consumer

direct consumer (resident/consumer of goods)

indirect consumer (consumer of goods)

Local government

residential taxpayer in local jurisdiction of development

residential taxpayer in another local jurisdiction

business taxpayer in local jurisdiction of development

business taxpayer in another local jurisdiction

State

state taxpayers

Federal

federal taxpayers

SOURCE: Office of Technology Assessment, 1995.

gest that fringe suburban and exurban

development is subsidized,73 largely because utility and other services are provided on an average

cost basis.

Pricing policies for telecommunications services illustrates this. One regional Bell operating

company provided a rough estimate that

compared to the monthly costs of serving customers in the central business district, it costs twice as

much to serve households in the rest of the central

city, and approximately 10 times as much to serve

households on the urban fringe. However, because

of Public Utility Commission regulations, all customers pay the same basic rate for local service.

Today, the cost of providing telephone service to

rural areas is $30.9 billion, but rural customers

only pay $22.2 billion, a subsidy of $8.7 billion.

An estimate of the cost changes engendered by the

eradication of this subsidy through “deaveraging”

urban and rural customer payments is that urban

costs per line would drop by $3.80 per month, and

rural costs would increase by $19.03. Moreover, if

rural users were required to pay the $8.7 billion,

the loss of penetration (those that have service but

would not with the additional cost) would be 7.3

percent (though the characteristics of this group

are unclear, that is, if they are the poorest or most

isolated). The cost of supplying service to these

7.3 percent would be $0.7 billion. So the same level of penetration could be had for a saving of $8.0

billion. 74

It also appears that electricity, gas, cable TV,

commercial delivery service, and postal delivery

likewise cost more for suburban and exurban development, and are partially paid for by central

city and inner suburban customers. A study conducted in the early 1970s of the additional cost of

services for a leapfrog subdivision over a contiguous subdivision in Lexington, Kentucky, found

that by bypassing five tracts of suitable land the

public and private costs increased by $272,534 per

year (in 1973 dollars) .75 Part of the increase was

made up of increased costs of providing telephone

service ($13,93 1), electricity ($937), mail deliv73 U.S. Congress, Office of Technology Assessment, Technology and the American Economic Transition: Choices for the Future, OTAET-293 (Washington, DC: U.S. Government Printing Office, 1988).

74 Carol Weinhaus, et al., “Redefining Universal Service: The Cost of Mandating the Deployment of New Technology in Rural Areas.”

Presentation at the NARUC Meeting, July 181994, San Diego, CA. See also Organization for the Protection and Advancement of Small Telephone Companies, Keeping Rural America Connected: Costs and Rates in the Competitive Era (Washington, DC: OPASTCO, 1994).

75 R.W. Archer, “Land Speculation and Scattered Development: Failures in the Urban-Fringe Market,” Urban Studies, vol. 10, 1973, pp.

367-372.
210 I The Technological Reshaping of Metropolitan America

Service Total additional costs Who paid the additional costs

per annum (1973 $)

Water $8,766 Consumers, Lexington area

Gas 1,013 Consumers, Lexington area

Telephone 13,931 Consumers, statewide

Electricity 937 Consumers, statewide

Sanitary sewerage 9,016 City taxpayers

Refuse collection 638 City taxpayers

Fire protection 208 City taxpayers

Police protection 7,425 City taxpayers

Mail service 374 Federal taxpayers

School bus service 737 County taxpayers

Commercial delivery service 54,677 Consumers, Lexington area

Automobile community 172,207 Development’s residents

Bus commuting 2,483 60% by consumers, Lexington area

40% by development’s residents

Road and street maintenance 122 County taxpayers

Total $272,534

SOURCE R W Archer, “Land Speculation and Scattered Development Failures in the Urban-Fringe Market, ” Urban Studies, vol. 10, 1973, pp.

—

367-372

ery ($374), and commercial delivery services

($54,677). (See table 8-9.)

COSTS OF INDUSTRIAL DEVELOPMENT

Because residential growth does not generally pay

its own way, many jurisdictions compete for industrial and commercial facilities to help pay for

municipal services. Indeed, most revenue impact

studies of industrial and commercial facilities

show that they have a strong positive impact on

municipal finances.76 McDonald et al. have questioned whether this is true in the long run as new

employment attracts new residents.77 However,

Oakland and Testa more recently found that business development does not cause tax burdens to

rise. 78

At the local level business subsidies seem logical. Even when such subsidies are factored in, the

fiscal impact on the locality is often positive, although the field of local economic development is

replete with cases where localities have provided

more incentives than they will receive in benefits.

The problem with incentives is two-fold: 1) cities

and states are increasingly caught in bidding wars

where they must provide higher and higher incentives to a larger share of companies; 2) these bid76 Burchell and Listoskin, op cit., footnote 30.

77 John McDonald, Charles Orlebeke, Ashish Sen, and Wim Wiewel, “Real Estate Development and property Taxes in DuPage County:

Final Report.” Project #342. Chicago, IL: University of Illinois, School of Urban Planning and Policy, Center for Urban Economic Development, February 1992.

78 William H. Oakland, and William A. Testa, “Does Business Development Raise Taxes: An Empirical Appraisal,” Economic Perspectives, vol. XIX. No. 2, 1995, pp. 22-32.
Chapter 8 Uneven Development—Outer Suburbs and Exurbs | 211

ding wars disproportionately hurt central cities

and older inner suburban communities.

Moreover, it is one thing for companies to leave

the center city to move to the outer suburbs because land costs or rents are cheaper. Market

forces are operating well here. However, it is quite

another thing when financially well-off suburban

jurisdictions provide financial incentives to induce companies to move out of the city. Though

there are many cases where companies would

have moved even without incentives, there are

others where the incentives tip the balance. For

example, Brooks Sausage, a minority-owned and

largely minority-employee firm, formerly located

in the South Side of Chicago, was offered significant incentives to relocate its facility to a smaller

city in Wisconsin. It moved and laid off its Chicago workforce.

Even when cities are able to “win” these suburban/central city bidding wars, the cost can be quite

high, particularly for cities struggling to keep tax

rates low or service levels high. For example, New

York City has provided huge incentives to companies to keep them from moving to the suburbs:

these included $235 million to Chase Manhattan

Bank; $98 million to the National Broadcasting

Company; $97 million to Citicorp; $85 million to

Drexel Burnham Lambert; and $74 million to

Shearson Lehman Hutton.79 In the last several

years, New York has provided over $362 million

in tax breaks and other concessions to four companies to keep them from moving to either New

Jersey or Connecticut.80 Moreover, it is not uncommon for companies to use the threat of relocation as a lever to extract incentives from

financially strapped central city or inner suburban

jurisdictions. For example, one vice president of a

large regional bank told OTA that while the bank

was planning to locate a new check processing facility in the downtown, it was also planning to

threaten to locate nearby in an adjacent state in order to leverage incentives from the city government.

Moreover, state incentive policies, which have

grown rapidly in the last two decades81 are largely

tilted against central cities. States provide a variety of incentives, including free land, subsidized

training, tax breaks, tax exempt industrial development bonds, low interest loans, and other incentives. Virtually no states use incentives to target

new investment to distressed areas, particularly in

cities. In contrast, because states use incentives

largely to attract new industry to the state or retain

existing industry, they are unwilling to use incentives selectively to steer companies to distressed

parts of the state, urban or rural. Rather, because

many companies choose suburban and exurban

locations, these funds simply reinforce that pattern. For example, the state of Virginia and the city

of Manassas, an outer suburb of Washington,

D.C., are providing close to $100 million to a joint

venture by IBM and Toshiba to establish a semiconductor fabrication plant. In some cases, states,

in an effort to keep companies within the state,

will subsidize companies that are moving from

distressed central cities to prosperous suburbs.

For example, the state of Illinois provided Sears

with $110 million to move out of the downtown,

where a large share of its workforce was central

city residents, to Hoffman Estates, an outer suburb

of Chicago with little public transportation access

for potential workers from the central city. Motorola announced the establishment of a large facility in Harvard, Illinois, some 70 miles from

downtown Chicago, and the state will be providing incentives to the plant. Utilities also provide

79 U.S. Congress, Office of Technology Assessment, After the Cold War: Living With Lower Defense Spending OTA-ITE-524 (Washington,

DC: U.S. Government Printing Office, February 1992).

80 Corporation for Enterprise Development, Bidding for Business: Are Cities and States Selling Themselves Short? (Washington, DC:

CFED, 1995).

81 Keon Chi, “State Business Incentives,” State Trends Forecasts (Lexington, KY, Council of State Governments, June, 1994).
212 | The Technological Reshaping of Metropolitan America

subsidies. For example, the regional utility serving Harvard, Illinois, is providing incentives in

the form of reduced power costs to Motorola.

Federal policies also exacerbate this. The federal government lets states and localities bid for federal facilities. The most famous of these was the

bidding war for the location of the now canceled

Superconducting Supercollider. More recently,

the Securities and Exchange Commission located

in Washington, D.C., was offered millions in incentives by Maryland and a suburban jurisdiction

if they moved out of the District. Moreover, in

some cases, cities use federal funds, including

HUD community development block grant funds,

to lure firms to their communities. For example,

Harvard, Illinois, asked the state for several million dollars in federal funds to expand sewer lines

when it attracted a new Motorola plant.82

Finally, to the extent that suburban jurisdictions attract new business (thereby decentralizing

jobs), suburban employment development indirectly subsidizes suburban residential development, as well as hurts central city job

opportunities. Clearly, decentralization of jobs

has allowed people to live further from the center

of a metropolitan area by keeping commuting distances manageable for those living on the fringe,

and has helped to keep residential taxes and impact fees down.

AUTOMOBILE SUBSIDIES

It is generally acknowledged that low-density

U.S. cities are heavily reliant on the automobile.

Indeed, in U.S. cities only 4 percent of passenger

miles are traveled on public transit versus 25 percent in Europe. And Americans also travel much

more than Europeans in private vehicles. In 1980

Americans in cities traveled 13,000 km per person

in highway vehicles versus 7,400 km per person

in European cities. This led to much greater energy use. In 1980 U.S. cities averaged 59,000 megajoules (mj) per capita of gasoline consumption

versus 13,000 mj per capita for European cities.

These factors are in large part related to urban

structure.83 To what extent, if any, is automobile

use subsidized? Does any automobile subsidy

subsidize suburbanites, and how does it compare

with subsidies for other forms of transportation

and for residents of other areas?

Hanson argues that improvements in transportation decrease the costs of living further from

the center and hence have sponsored sprawl.84

Further, he argues that the costs of providing automobile infrastructure are not fully priced in the

market. That is, automobile use (and hence suburbanization) is subsidized through government

revenues and externalities. This is true even if one

figures in registration fees and use fees. Hanson

calculates that for the city of Milwaukee in 1987,

local government general revenues provided $81

million of the $107 million of direct highway expenditures, with the remainder coming from state

aid. That amount is $133 per capita and 21 percent

of the net property tax burden.

For Madison, Wisconsin, Hanson also calculated indirect subsidies, including air pollution,

water pollution from salt use, personal injury and

lost earnings associated with accidents, land use

opportunity costs for land removed from other

uses, and petroleum subsidies. These amounted to

a subsidy of $23 million in 1983, twice the direct

subsidy (expenditures on road construction and

maintenance, etc.) of $11.7 million. He also notes

that compared with the automobile subsidy of

$105 per capita in Madison, the subsidy of transit

and elderly/handicapped transit is $22 per capita.

If state aid is included the transit subsidy is $57 per

capita.85

82 Wim Wiewel and Joe Persky. “Rejoinder to Hill and to Bendick and Geiger,” Environment and Planning, vol. 12, 1994, pp. 494-496.

83 Newman and Kenworthy, op. cit., footnote 10; OTA, op. cit., footnote 21, pp. 204-212.

84 Mark E. Hanson, “Automobile Subsidies and Land Use,” Journal of the American Planning Association, vol. 58, No. 1, 1992, pp. 60-71.

85 Ibid.
Chapter 8 Uneven Development--Outer Suburbs and Exurbs | 213

OTA has previously estimated automobile subsidies, including road costs, free parking,86 accidents, and the monopsony cost of importing oil.87

OTA estimates that accidents cause $30 billion

annually in property damage, medical expenses,

and foregone wages that are borne by the non-responsible party and are not paid by automobile insurance, nor legal redress.88 Free parking is a

subsidy because it is a tax-free fringe benefit for

employees and a tax-deductible expense for businesses that provide it.89 Taking all of these into account, OTA estimates that motor vehicles pay

about 73 to 88 percent of the monetary costs of

motor vehicle use. If the non-monetary costs are

added, including the externalities: “Motor vehicle

users paid openly for 53 to 69 percent of the social

(public plus private) costs of motor vehicle use,

both monetary and non-monetary, excluding the

value of time.”9° Thus OTA concludes: “If subsidies were withdrawn, externalities ‘internalized,’

and hidden costs brought out into the open and directly charged to motor vehicle users, the perceived costs of motor vehicle use would increase

substantially (by 14 to 89 percent, depending on

whether nonmonetary costs and other factors are

included), and people would drive less.”91

Another question asked is whether motor vehicle users pay for the public services they receive

(apart of the total cross-subsidization). OTA concludes that for the nation as a whole: “Motor vehicle users paid for 62-72 percent of public

expenditures for highway infrastructure and

services, not counting military expenditures.”92

In 1990, they paid $70.3 billion to $72.3 billion

for highway infrastructure and services out of

public expenditures of $98 to $115.9 billion.

The Nationwide Personal Transportation Survey (NPTS) of 1990 shows that households in the

U.S. in the central city make fewer trips (1 8.2 percent less), make on average much shorter trips

(18.8 percent shorter), and travel far fewer miles

by private vehicle (35.9 percent fewer) than

people within the MSA but outside the central

City. 93 Actually calculating the cost of driving by

place of residence, however, is extremely difficult. Because core residents drive less, they may

be less subsidized than suburban and exurban

drivers. For example, Newman, Kenworthy, and

Lyons 94 in a study of Perth, Australia, found that

gasoline usage increases dramatically the further

away from the center one is (see table 8-10). Assuming that gas use is closely related to the full social cost of automobile use, fringe suburban

drivers appear to be more heavily subsidized than

closer-in suburban drivers and presumably more

than central city drivers. However, because of the

Location Gasoline consumption (Iitres)

Inner suburbs 737

Middle suburbs 823

Outer suburbs 1164

SOURCE: P.W.G. Newman, J.R. Kenworthy and TJ Lyons, “Transport

Energy Use in the Perth Metropolitan Region Some Urban Policy implacations, ” Urban Policyand Research, Vol. 3, No 2, 1985, pp 4-15

86 It is estimated that 1-2 percent of automobile travelers pay for parking in a day.

87 OTA, op. cit., footnote 21, pp. 106-108.

88 OTA, op. cit., footnote 21, p. 106.

89 Pucher, op. cit., footnote 37.

90 OTA, op. cit., footnote 21, p. 109.

91 Ibid.

92 Ibid, p. 110.

93 U.S. Department of Transportation, Federal Highway Administration, 1990 NPTS Databook, volume 11. (Washington, DC: Offi

Highway Information Management, Federal Highway Administration, 1994).

94 P.W.G. Newman, J.R. Kenworthy and T.J. Lyons, “Transport Energy use in the Perth Metropolitan Region: Some Urban Policy

tions,” Urban Policy and Research, vol. 3, No. 2, 1985, pp. 4-15.
214 | The Technological Reshaping of Metropolitan America

high costs of density and congestion, the cost of

one mile of city driving may be more expensive

than one mile of suburban and exurban driving.95

Similarly, calculating the costs of transit by residency is also extremely difficult. Transit is heavily subsidized by local, state, and federal

government. Indeed, in percentage terms, transit

is subsidized more than automobiles, because

fares covered only 43 percent of operating costs

(in 1990).96 However, it might be argued that subsidies to mass transit subsidize suburban commuters, particularly those commuting to the central

city, as well as city dwellers. Thus, it is unclear

what proportion of the annual mass transit subsidy

goes to city dwellers and what proportion goes to

suburb and exurban residents.

SUBSIDIES TO THE CENTRAL CITY

Some argue that cities receive large transfer payments from federal and state governments that

more than make up for the implicit subsidies that

go to the outer suburbs and exurban areas to sponsor sprawl. Studies do indeed show that central cities receive greater intergovernmental transfers

per capita than do suburbs. The Advisory Commission on Intergovernmental Relations found

that in the 37 largest metropolitan areas in 1981

central cities received $705 per capita, whereas

the areas outside the central city received $451, a

ratio of 1.63.97 Since then the gap between central

cities and suburbs has declined to 1.53 in 1987.98

Some of these transfer payments undoubtedly

go to subsidize the somewhat higher costs of infrastructural maintenance and development in the

core, and possibly to more inefficient city government bureaucracies. However, most of the “extra”

money the cities receive from higher levels of

government appears to be a result of the large percentage of poor residents they contain. Higher

concentrations of the poor in the central city place

greater burdens on government than the non-poor,

including additional demands for welfare, medical programs, housing assistance, and social services. Thus, monies from the federal and state

governments represent a subsidy to the poor

people of the cities, not the cities themselves. If

the poor moved to the suburbs, the local governments of the suburbs would receive the transfer

payments now going to the cities. The argument

that subsidies to the poor represent an unfair advantage to cities (because of the transfer payments, which help to support the poor) is therefore

not accurate.

Despite the high level of outside aid, central cities continue to tax their citizens at a much higher

rate in relation to income than do suburban jurisdictions. For every dollar spent by suburban governments in 1987, $1.51 was spent by central city

governments. This compares with $1.40 in 1981

and $1.47 in 1977. This results from several factors: first, even after taking into account federal

and state payments, providing services to the poor

costs cities money; second, the fact that cities also

provide services demanded by suburban residents

that work in the city. This is the so called “municipal overburden.” At the same time, because of the

concentration of the poor in the central city relative to the suburbs, the tax base in the central city

is significantly lower, even when the enormous

value of the central business district is taken into

account.99 Thus, to generate the same revenue, the

city’s tax rate needs to be higher than that in the

suburbs. As flight to the suburbs continues and

state and federal aid to local governments has fallen, the fiscal disparities between the central city

and the suburbs have increased. The tax burden

95 In contrast, though, city roads are used more intensively, thereby generating more revenues per mile (gas taxes) than suburban roads.

96 OTA, op. cit., footnote 21, p. 190.

97 Advisory Commission on Intergovernmental Relations, Fiscal Disparities: Central Cities and Suburbs, 1981 (Washington, DC: ACIR,

1984).

98 Roy Bahl, “Metropolitan Fiscal Disparities,” Cityscape, vol. 1, No. 1, 1994, pp. 293-306.

99 Ibid.
Chapter 8 Uneven Development—Outer Suburbs and Exurbs | 215

has increased in the central city relative to the suburbs, from a ratio of 1.18 in 1981 to 1.55 in

1987.100

EXTERNALITIES ASSOCIATED WITH

SPRAWL DEVELOPMENT

In addition to direct subsidies, there are also a

number of indirect costs borne by others because

of sprawling development, costs economists call

negative externalities. These include environmental degradation (air, water, and land), traffic congestion, and reduced access to open space.

❚ Air Quality

One element of environmental quality often

linked to urban spatial structure is air quality.101

Indeed, it is often believed that because of greater

automobile use a sprawling urban form has a deleterious impact on air quality, a cost not passed on

to drivers. It is true that as metropolitan decentralization has proceeded, people rely more and more

on private vehicles for both work and non-workrelated trips. Moreover, environmental externalities (for example CO2 emissions) are closely

related to automobile use. Yet, the relationship between sprawl and declining air quality as a result

of increased automobile use is much less clear.

Bae and Richardson note that greater automobile use does not necessarily lead to worsening air

quality.102 For one reason, longer distances traveled in the suburbs are offset by faster speeds.

They argue that vehicle hours traveled are more

important than vehicle mile traveled (VMT). Second, lower per capita emissions due to high densities in a small area may have more environmental

impact than higher per capita emissions in a lowdensity environment because of the ability of a local airshed to absorb pollutants, and the fact that

pollution levels increase exponentially, not linearly, as the percent of capacity absorbed rises. Thus,

higher-density neighborhoods are more likely to

be more polluted neighborhoods.103 More spreadout metropolitan regions might therefore have

better air quality because of the ability of the atmosphere to deal with the pollutants. Third, automobile pollution is strongly related to the number

of trips, with a major part of auto pollution deriving from cold starts. More compact cities and

those with a better mix of land uses reduce VMT

significantly more than the number of trips. For

instance, a recent study in San Diego found that by

balancing jobs and housing, VMT would be reduced by 5 to 9 percent, traffic congestion would

decline by 31 to 41 percent, but vehicle emissions

would only be cut by 2 percent. This resulted from

only a small reduction in the number of trips

(though the length of the trips was shorter).104

In its study of different urban forms, the New

Jersey State Planning Agency found that the more

compact urban development scenario, IPLAN,

did not significantly improve air quality over the

continuation of urban sprawl.105 They found that

improvements in air quality from cleaner fuels,

more efficient engines, more stringent emission

inspection, and more cars with anti-pollution devices dwarfed the improvements deriving from

land use.

100 Ibid.

101 Most agree that automobiles are a major source of metropolitan air pollution. In the Los Angeles basin in 1987, for instance, it has been

estimated that automobiles accounted for 43.8 percent of the emission of reactive organic gases, 60.4 percent of nitrogen oxides, 87.8 percent of

carbon monoxide, 25.8 percent of sulfur oxides, and 4.9 percent of PM10 particulate matter (see South Coast Air Quality Management District,

1991 Air Quality Management Plan, [El Monte, CA: SCAQMD, 1991] Table 3-1).

102 Chana-Hee C. Bae and Harry W. Richardson, op. cit., footnote 27.

103 Ibid, pp. 3-4.

104 San Diego Association of Governments, “Jobs/Housing Balance and Transportation Corridor Densities,” Regional Growth Management Strategy, Appendix 3, 1991, San Diego, California.

105 OSP, op cit., footnote 54.
216 | The Technological Reshaping of Metropolitan America

❚ Land

Another potential externality of sprawl development is the rapid conversion of land from rural to

urban uses. For example, in northeastern Illinois

(around Chicago), the region’s population increased by 4.1 percent between 1970 and 1990,

but residential land use increased by 46 percent.

Views differ on the extent to which this conversion is a result of market imperfections and government intervention. The relative weight of

subsidies to urban and rural uses would seem to

suggest that farmland near urban areas is undervalued for agricultural uses and overvalued for urban uses, pushing the urban/rural border further

out than would result from a perfect market.106

There are three main concerns about the loss of rural land: the impact on agricultural production, the

impact on the environment, and the amenity value

of rural land.

Clearly, the development of rural land will have

an impact on agricultural production. Most agree

that in terms of raw acres, even in the face of rapid

development, U.S. cropland is adequate to meet

demand both here and abroad for the foreseeable

future.107 It is estimated that there are about 540

million acres of arable farmland, of which about

400 million acres are in cropland. Estimates of

cropland needed for food production by the year

2000 range from 22 million acres to 113 million

acres. Hence, some argue that a doubling of urban

land uses would not significantly affect the supply

of arable land.108 However, about 48 million of

the 250 million acres of prime agricultural land are

within 50 miles of the 100 largest urbanized

areas.109 As Ewing observes: “Lands most suitable for growing crops also tend to be most suitable for ’growing houses’ (being flat and

historically near human settlements).”110 Thus,

with urban conversion of prime agricultural land

there would be a slight increase in agricultural

production costs because of farming more marginal lands with greater inputs.111 Moreover, the conversion of agricultural land is more important and

more costly in some regions than in others, and

thus protecting land in those areas might be of a

somewhat higher priority. For example, the Bank

of America reports that between 1982 and 1987

the Central Valley in California, the most productive agricultural region in the state, lost 500,000

acres of productive farmland to development. And

in the Central Valley, costs to agriculture from urban pollution exceed $200 million a year.112

Development on rural land can also affect environmental quality. Undeveloped land helps to

control flooding, cleans the air, and provides habitat for wildlife. Though it is difficult to assign a

dollar value to these things, their benefits are

nonetheless real. The New Jersey study looked at

the differential impacts of development on environmentally frail lands defined as steep slopes, forests, and critical sensitive watersheds. New

Jersey’s simulation of different development

106 For example, in 1989 federal government commodity supports totaled less than $20 billion, while in the same year federally backed

mortgage loans issued exceeded $150 billion.

107 Rutherford H. Platt, “The Farmland Conversion Debate: NALS and Beyond,” The Professional Geographer, vol. 37, No. 4, 1985, pp.

433-442.

108 William Fischel, “Urban Development and Agricultural Land Market,” in John Baden (ed), The Vanishing Farmland Crisis: Critical

Views of the Movement to Preserve Agricultural Land (Lawrence, KS: University Press of Kansas, 1984).

109 Danile R. Vining, Thomas Plaut, and Kenneth Bieri, “Urban Encroachment on Prime Agricultural Land in the United States.” International Regional Science Review, vol. 2, No. 2, 1977. See also Arthur C. Nelson, “Preserving Prime Farmland in the Face of Urbanization: Lessons from Oregon,” Journal of the American Planning Association, vol. 58, No. 4, 1992, pp. 467-488.

110 Ewing, op. cit., footnote 8, p. 11.

111 Platt, 1985, op. cit., footnote 103.

112 Bank of America, op. cit., footnote 3.
Chapter 8 Uneven Development-Outer Suburbs and Exurbs | 217

Changes in pollutant loading

1990-2010 as a result of IPLAN

implementation

Pollutant (in tons) Percentage change

Bio-chemical oxygen demand -3,382 -27.7

Total phosphorous -77 -43,5

Total nitrogen -1,052 -42.6

Zinc -29 -21.9

Lead -19 -10,2

SOURCE New Jersev Office of State Planning (OSP), Irnpact Assessment of the New Jersey Interim State Development and Redevelopment Plan, Report II: Research Findings. Trenton, NJ 1992

forms in New Jersey found that IPLAN would affect only 20 percent of the frail lands that would be

affected by TREND development.

Biodiversity is an important issue in the conversion of land from rural to urban uses. As Beatley points out: “In recent years habitat loss has

become the primary threat to biodiversity as the

extent of human settlements continues to

grow.” 113 Indeed, more than 700 endangered or

threatened species are listed on the Endangered

Species Act, and the number continues to grow.

Although it is difficult, if not impossible, to quantify the costs to society of decreasing biodiversity

and include them in a benefit-cost analysis, there

are arguments for conservation other than the ethical and aesthetic. These include the potential

scientific, anthropological, and medicinal benefits of species. For example, the bark of the yew

tree, found in the northwestern U. S., has been

found to be an effective treatment for certain types

of cancer (see Beatley, 1994, for other examples).

Finally, there is a loss associated with the amenity value of rural land with its conversion to urban uses. That is, the time or cost of traveling to

the country for urban dwellers increases with lowdensity developmental.14

■ Water Quality

Urban development also impacts water quality.

The amount of pollutants in storm water runoff is

related to the type of land use, which is related to

density and the level of imperviousness, and the

hydrological characteristics of the soil. More intense uses engender more pollutants, and large impervious surfaces lead to greater pollution.

However, higher-density uses cause less pollution

and impervious surface overall because less land

is used. Moreover, the type of soil influences the

amount of pollution found in storm water runoff.

The New Jersey study of different urban development patterns found that compact development

(IPLAN) would generate significantly less pollution than sprawled development (TREND) for all

categories of pollutants. The reduction ranged

from over 40 percent for phosphorous and nitrogen to 10 percent for lead (see table 8-1 1). The

study notes that in some places where development is particularly dense, water quality will deteriorate, but in general water quality will be better

with planned growth than with unplanned development.

113 Timothy Beatley, Habitat Conservation Planning: Endangered Species and Urban Growth (Austin, TX: University of Texas press,

1994), p. 2.

114 Jerome B. Rose, “Farmland Preservation Policy and Programs,” National Resources Journal, vol. 24, No. 3, 1984, pp. 591-640.
218 | The Technological Reshaping of Metropolitan America

❚ Costs of Travel: Congestion

Another externality associated with sprawl is congestion. As OTA noted: “Congestion costs can be

considered an externality to the extent that drivers

during congested periods impose costs on all other

drivers sharing the road, but do not account for

these costs in their decisions to drive. Congestion

also adds to environmental and energy costs because stop-and-go driving both wastes fuel and

generates more pollution per mile than free-flowing driving.”115 As with the relationship between

sprawl and air pollution, the link between sprawl

and congestion is complex. High-density cities

generate less VMT per capita, since trips are shorter and more are possible by modes other than automobiles. However, high density also leads to high

levels of congestion. Thus, congestion on its own

is a positive externality for sprawled development. However, recent empirical evidence suggests that travel times are shorter and travel costs

lower where trips are shorter but more congested.

116

❚ Exclusionary Zoning

In the U.S. system of government, localities have

enormous power over local land use through subdivision regulation, zoning, and building codes.

The rationale for this system of control is that the

market fails to take account of the negative effects

(externalities) of development on one parcel on all

the surrounding parcels. These regulations, however, can be used to exclude the poor, and result in

a strict separation of land uses. Although these

things may increase home prices, a great benefit

to people who live in the jurisdiction, they create

social costs that are not borne by those who benefit. These costs include increased commuting

times for the low- and moderate-income people

who work but cannot live in the area, increasing

community costs and air pollution, and also increased travel costs between related uses for those

who do live in the community.117

SUMMARY

Technology is enabling firms and residents to increasingly disperse both to lower-cost metros and

to suburban and exurban locations in metros. This

has a number of benefits such as cheaper land, less

congestion, and allowing workers to live closer to

work. However, there are also a number of costs

which this development pattern engenders, including increased infrastructural and environmental costs. Economic theory suggests that as long as

this new development pays the marginal costs of

development, then these development patterns

promise to be efficient. However, it appears from

this analysis that for many reasons peripheral development does not pay the full costs, and is often

subsidized by others, including businesses and

households in the urban core. This suggests an allocative efficiency loss, plus a unnecessary weakening of development prospects in the core, since

the result is to raise their relative costs of development there. The total magnitude of these costs is

still quite unclear. The foregoing analysis suggests that sprawled development raises infrastructural costs in the range of 10 percent to 20 percent.

Environmental costs are much more difficult to

estimate and some are impossible to quantify. Unfortunately, the above analysis does not estimate

these costs in relation to total costs. Indeed, they

may be relatively small in regard to total annualized costs of development. Moreover, sprawled

development is not totally a function of costs, but

bound up with deeply embedded preferences.

Hence, a total accounting for the costs of sprawled

development may still not change development

patterns. Nevertheless, such costs are important to

look at for the health of metropolitan America.

115 OTA, op cit., footnote 21, p. 93.

116 Ewing, op. cit., footnote 8.

117 Downs, op. cit., footnote 1.
Uneven Development:

New Challenges

for the

Urban Core

s discussed in chapters 4-7, technological change in addition to other economic, political, and social phenomena

is redistributing people and opportunity across the American metropolitan landscape. Outer suburban and exurban areas, on the whole, have prospered in this redistribution,

gaining large increases in population and both high-skilled and

lower-skilled jobs. At the same time, the position of the urban

core has become more precarious. The growth of producer services and some population increases through immigration have

kept core economies viable. Nevertheless, problems of poverty,

crime, and infrastructure abandonment have become increasingly

entrenched. This chapter examines some of the mechanisms that

account for the problems of the urban core and discusses possible

sources of renewal. Finally, the chapter focuses on the issue of

brownfields—abandoned, often contaminated, commercial and

industrial sites—which is a major impediments to improving job

opportunities in the core.

TECHNOLOGICAL CHANGE AND URBAN

ADAPTATION1

The close relationship between cities and technology—including

transportation, infrastructure, telecommunications, process

technology and industrial and work organization—leads to mismatches and conflicts. Productive systems, especially in marketbased economies, are characterized by their fluidity and openness

to change, particularly stemming from the introduction of new

1 This section is based in part on Brian Berry, “Classification Systems for U.S. Cities,”

report prepared for the Office of Technology Assessment, January 1995.

| 219
220 | The Technological Reshaping of Metropolitan America

technology systems. Enterprises die and are born,

contract and expand, move and reorganize, develop new products and adopt new process technologies. Likewise, although slower to change, the

population’s income, demographic characteristics, skills, and lifestyles also change and evolve,

leading to new preferences for choices of regions,

cities and neighborhoods.

In contrast, cities and their institutions adapt

more slowly. Without adaptation, buildings can be

abandoned or underutilized and land can become

vacant. Institutions can become rigid and poorly

suited to new challenges. Workforce skills and capacities can diverge from new workplace needs.

Moreover, for some segments of the population,

especially lower income groups, adapting to economic change is difficult, resulting in mismatches

between skills, attitudes, and opportunity. Because these population groups are more heavily

concentrated in certain regions and parts of metros, these places have felt the effects more profoundly.

As a result, there are two problems with adaptation. First, cities designed to fit old production

systems cannot change as quickly. Second, and as

a result, new production systems often locate in

new places and spaces built to fit new systems

more closely. Moreover, the ability of places to

adapt to change depends on a number of factors,

but perhaps none so important as the speed of

change in production systems. When production

systems are evolving slowly or along linear, well

trod-paths, most cities have an easier time keeping

up. In contrast, when production systems are

transformed in sudden, discontinuous ways, as

has happened a number of times in the history of

America, and appears to be happening today, cities have a harder time adapting. For the speed as

well as the discontinuity of the change brings new

infrastructure needs and systems, new sectors and

jobs with their own locational imperatives, and

new process technologies that change locational

calculus. The results are mismatches, with some

places well-suited to new production systems

growing rapidly, and others less well-suited growing more slowly or even declining.

The history of the American economic system

is littered with failed enterprises that, because of

the nature of their products, processes or management systems, were unable to adapt and went out

of business to be replaced by firms better suited to

the new environment. Likewise, some cities have

been well-positioned or able to adapt while others

have not. Some places will be able to adapt more

easily than others because their location, infrastructure, business or population are more suited

to the new environment. In addition, because adaptation is first and fundamentally a manmade

process of investment and disinvestment, some cities will simply be organized to do better than others. Thus, the history of American cities is in one

sense a story of cities growing and prospering during certain technological epochs and then either

adapting to the next phase, or not making the transition and declining or stagnating in real or relative terms.

OTA concludes that the current wave of technological change will continue to cause metropolitan

areas to grow. The United States. is not undergoing and will not undergo in the immediate future a

radical deconcentration of employment and population to small towns and rural areas. Nevertheless, the advantages of some higher-cost, and

usually the largest, metropolitan areas, such as

New York, Boston, Los Angeles, and San Francisco, are weakening. The national redistribution of

economic activities due to sectoral and residential

change is also having a dramatic effect on the location of jobs and residences within metropolitan

areas. As late as the 1960s, most core cities had advantages stemming from agglomeration and

centrality (in terms of travel from the suburbs) that

outweighed their high costs. However, technological change and other factors have reduced and

continue to reduce the privileged position of the

core, in some sense making it one of several “edge

cities” within the metropolis. By widening the potential number of sites available for business location, technology has accentuated the tendency for

jobs to follow people to the suburbs, reducing investment and jobs in many urban cores. Moreover,

urban core economies, particularly the central
Chapter 9 Uneven Development: New Challenges for the Urban Core | 221

business district, increasingly contain more specialized functions employing skilled and educated

people. In contrast, lower-skill work—particularly in goods production, transportation and distribution—has increasingly migrated away from

the core to the suburbs. These changes have led to

reduced opportunities for low- and moderate-income urban residents and to reduced investment

and an increasing underutilization of the built environment (land, buildings and infrastructure),

with resultant fiscal problems for many urban core

governments.

JOB OPPORTUNITIES FOR URBAN CORE

RESIDENTS

The weakening of many urban economies and the

change in their sectoral and occupational composition will affect the economic opportunities

available to low- and moderate-income core residents, particularly minorities.

First, as discussed in chapter 3, a number of

metropolitan areas have experienced economic

decline or stagnation, in part because they have

been unable to adapt adequately to the new economy. In these economies, unemployment is higher

for low- and moderate-income persons in the urban core than for similarly placed people in

healthier metropolitan economies. There seems to

be a positive correlation between overall metropolitan growth and growth in most portions of the

metropolitan area, including the central city.

People are attracted to a metropolitan area and

then are dispersed throughout the region, depending on the competitive advantages of the different

parts. In the 1980s central cities within fast-growing metros did better than central cities within

slower-growing metros.2 Thus, urban core problems of unemployment and poverty tend to be

worse in the stagnant or declining metropolitan regions of the Northeast and Midwest as compared

to the South and West.

Second, problems exist with the structure of

job opportunities for low- and moderately-skilled

workers, even in healthy metropolitan economies.

The spatial mismatch between the suburban

location of new jobs, especially blue collar jobs

and jobs requiring lower education and skill levels, and lower-skilled, often minority residents in

the core has increased in the last two decades.3

The spatial mismatch hypothesis is controversial,

but scholarly research does seem to indicate that

spatial mismatch has gotten worse in the last decade as more low-skilled jobs than low-skilled

workers have migrated to the suburbs, an effect

which is more pronounced for blacks than for

whites.4 Whites appear to adapt to spatial change

more easily than blacks by being more able to relocate to the suburbs. Furthermore, research

shows that decentralization is not offset with longer commuting among blacks and central city residents.5 On the contrary, blacks and inner-city

residents travel shorter distances to work than

suburbanites but take considerably more time

traveling to work and when searching for work.

Indeed, Holzer, Ihlanfeldt, and Sjoquist found that

the time spent traveling per mile for black central

2 Mark Alan Hughes, “Formation of the Impacted Ghetto: Evidence from Large Metropolitan Areas, 1970-1980,” Urban Geography, vol.

11, No. 3, 1990, pp. 265-284; Timothy J. Bartik, Economic Development and Black Success (Washington, DC: U.S. Department of Commerce,

Economic Development Administration, 1993).

3 Harry Holzer, Keith R. Ihlanfeldt, and David L. Sjoquist, “Work, Search, and Travel Among White and Black Youth,” Journal of Urban

Economics, vol. 35, 1994, pp. 320-345; Keith R. Ihlanfeldt, “The Spatial Mismatch Between Jobs and Residential Locations Within Urban

Areas,” Cityscape, vol. 1, No. 1, 1994, pp. 219-244; John F. Kain, “The Spatial Mismatch Hypothesis: Three Decades Later,” Housing Policy

Debate, vol. 3, 1992, pp. 371-460; Christopher Jenks and Susan E. Mayer, “Residential Segregation, Job Proximity, and Black Job Opportunities,” Lawrence E. Lynn, Jr. and Michael M. McGreary (eds.), Inner-City Poverty in the United States (Washington, DC: National Academic

Press, 1990).

4 Hispanics appear to fall between non-Hispanic whites and blacks. See Keith R. Ihlanfeldt, “Intra-urban Job Accessibility and Hispanic

Youth Employment Rates,” Journal of Urban Economics, vol. 33, 1993, pp. 254-271.

5 Holzer et al., op. cit. footnote 3.
222 | The Technological Reshaping of Metropolitan America

city residents is twice that of suburban whites,

partly because more whites use their own car to

get to work than do blacks (69 percent for whites

versus 43 percent for blacks), who are more dependent on public transportation. Poor residential

and transportation mobility inhibits job accessibility. Job decentralization, moreover, also inhibits the flow of information about job

opportunities, because information regarding job

opportunities decreases with distance. Many jobs

are discovered through informal social networks

and much hiring is done on the basis of personal

knowledge of job candidates or referrals. Because

inner city residents do not live near suburban jobs,

they may have more difficulty getting vital information about openings, as well as support during the application process.

Spatial mismatch, then, has a number of important effects on the employment of central city residents, which are particularly pronounced among

blacks. Most importantly, it leads to greater and

longer unemployment among low-skilled central

city residents. The duration of unemployment is

25-30 percent longer for blacks than whites, as the

former are more heavily concentrated in central cities.6 Spatial mismatch also leads to lower wages

in the central city because a large supply of lowskilled workers bids wages down. And for those

who do commute, job decentralization increases

the cost of commuting, lowering the net pay of

central city residents working in the suburbs. Spatial mismatch is not the only cause of major employment problems for disadvantaged urban

residents, but it does contribute to difficulties.

Third, as production has reorganized, in part as

a response to technological change, skill and

educational requirements for many jobs in metropolitan areas, particularly in central cities, have

increased. As a result, the skills mismatch between the skills and educational levels of urban

core residents and urban core jobs has increased.

The skill level of jobs in many industries is rising,

and likely to continue to rise. For example, as the

many information-based service industries use

more technology and less labor, the skill requirements of the labor force increases. Not only are organizations leaner, they must respond faster and

they must complete tasks correctly the first time.

In flat organizations there is no place to refer difficult questions, catch errors, or develop successors

through on-the-job training. Employers expect

technical proficiency in operational aspects of the

business. Moreover, in many service sectors,

many lower-skill office jobs are disappearing and

in their place are more complex customer service

and back office jobs. Customer service employees

increasingly must have the personality to respond

to customers, conventional speech patterns, be

able to solve problems on the spot, and know the

products thoroughly. In addition, perceived or actual work ethic differences play a role.7 In many

functions, such as customer service, advanced

computer technologies make work much more demanding, for example, by eliminating pauses to

rest as customers’ files take time to come up on the

terminal.

As discussed in chapter 3, these sectoral

changes are reflected in the transformation in

educational levels of central city employees (regardless of place of residence). Employment opportunities for those with a high school education

or less, a larger proportion of whom are found in

the urban core, have declined dramatically. Skills

and spatial mismatch have combined to lower employment rates, particularly among minorities.

Though not the only cause, unemployment among

male high school dropouts and high school graduates is a big contributor to central city poverty,

which has risen rapidly over the past 20 years.8 In

addition, a contributing factor to the declining

6 Ibid.

7 U.S. Congress, Office of Technology Assessment, Worker Training: Competing in the New International Economy, (Washington, DC:

U.S. Government Printing Office, September 1990).

8 William Julius Wilson, The Truly Disadvantaged (Chicago: University of Chicago Press, 1987)
Chapter 9 Uneven Development: New Challenges for the Urban Core| 223

With nearly 40,000 people employed by companies doing business at the port, and many thousands

more working in nearby port-related enterprises, Port Newark-Elizabeth, located on the New Jersey side

of the New York-New Jersey port, is one of the New York area’s most important centers of commerce In

response to concerns expressed by port businesses about their need for better-trained personnel, the

New York-New Jersey Port Authority, in cooperation with the community colleges of Essex and Union

counties, established the Jobsport Educational Institute.

Jobsport offers a mix of basic and specialized training programs They include GED courses, workplace literacy training, English as a second language—increasingly important m a community in which

immigrants represent a steadily growing share of the labor pool—and training in computer information

systems. One of Jobsport’s most innovative programs is geared to training front-line supervisors in

transportation, distribution and other trade-related businesses. The program covers topics such as motivating workers, delegating authority, dealing with “problem” employees, and union relations

Jobsport also provides more specialized training programs at the request of individual employers—

for example, training in the processing and preparation of imported automobiles for distribution to dealers, and training of customer relations staff. The programs can be conducted either at Jobsport’s training center, or at the employer’s facilities

In addition to its training programs, Jobsport offers residents of the communities around the port—

which include some of the poorest neighborhoods in the New York metropolitan area—an easily accessible source of information about employment opportunities in port-related businesses

earnings and employment prospects of the central its applicability to industry needs. Some have sugcity poor, particularly minority poor, is their increasing isolation into racially and economically

segregated neighborhoods. The end result is, as

Hughes notes, the concentration of poverty and

the reconcentration of opportunity.9

IMPROVING OPPORTUNITIES FOR

URBAN CORE RESIDENTS

There are three general approaches for improving

the fortunes of residents of the urban core who

have been hardest hit by contemporary economic,

technological, and spatial change. First, following

from the notion of skills mismatch, is improving

the education and skills of core residents. Improving the performance of urban schools is a critical

task. However, attention must not only be paid to

the quality of public education in the core, but also

gested the need for enhanced technical training

and apprenticeship programs for the non-collegebound. l0 An example is the New York-New

Jersey Port Authority’s Jobsport program, which

offers a notable example of cooperation between

a transportation agency and local educational

institutions in meeting the human resource needs

of goods movement enterprises, while at the same

time helping local residents gain access to job and

training opportunities (see box 9-l).

Second, following from the idea of spatial mismatch, is the need to improve the access of central

city residents to suburban jobs. This can be done

either by improving transportation links between

the core and the suburbs or by helping core residents move to the suburbs. Given the difficulty of

“opening up the suburbs,” at least in the short-run,

9 Mark Alan Hughes, “Luncheon Address: Reverse Commuting in a Policy Context” in American Public Transit Association, Access to

Opportunity: Linking Inner-City Workers in Suburban lobs (Washington, DC: American Public Transit Association, 1994).

10 U.S. Congress, Office of Technology Assessment, Learning to Work: Making the Transition from School-to-Work, OTA-EHR-637

(Washington, DC: U.S. Government Printing office, September 1995).
224 | The Technological Reshaping of Metropolitan America

Hughes suggests a mobility strategy would help

the inner-city poor reach suburban jobs, thereby

lowering unemployment and poverty rates.11

Clearly there is an important role for public mass

transit in this regard. However, efforts need to go

beyond this to also improve linkages with employers.12 For instance, Ihlanfeldt agrees that programs that enable more efficient job searching and

provide incentives for employers to improve accessibility to urban blacks are necessary. But, because inner-city residents are often limited in their

access to jobs due to dependence on public transportation, he argues, there is a need for privatization, allowing entrepreneurs or private/public

partnerships to provide reverse commute services.

An example is development of shuttles running

from public transportation nodes along major suburban roads to take commuters to and from places

of work. Suburban employers might also take a

role in providing transportation for their employees as participants in public/private partnerships.13

Analysts stress that these strategies are more effective when complemented by others such as the

Earned Income Tax Credit to supplement wages of

entry-level jobs, making employment a more attractive option and offsetting the transportation

costs of longer commutes.14 Resolving spatial

mismatch also demands improving the job information systems which might supply inner-city

residents with information on suburban job openings and help create matches between the two.

Often non-profit intermediary organizations can

play an important role, not only to screen perspective job seekers but also to work with employers to

identify openings. For example, Suburban Job

Link in Chicago performs this role to link disadvantaged residents on the near-west side to suburban employers.

The third general approach to improve the fortunes of core residents is by providing new job opportunities in the core through a variety of

“reurbanization” strategies. Reurbanization refers

to increasing the level of use of, and capital investment in, urban land and infrastructure. Reurbanization does not imply a return to a traditional

monocentric urban form. A more likely outcome

of reurbanization is a multinodal urban structure

in which revitalized suburban centers are encouraged. Nor does it necessarily imply an increase in

net population densities, although gross densities

are expected to increase through a more effective

use of vacant and marginal lands.

FACTORS FACILITATING

REURBANIZATION

Over the past decade there have been a number of

economic and demographic forces driving reurbanization. There are some small pockets of revitalization based on gentrification by middle- and

upper-income households and the revitalization of

working- and middle-class neighborhoods into vibrant ethnic immigrant enclaves. Richard Nathan

has called these places “zones of emergence.”15 In

New York City, for example, Korean, Chinese,

and Japanese businesses have revitalized the

Flushing neighborhood. It may be that these quiet

11 Mark Alan Hughes, “Employment Decentralization and Accessibility,” Journal of the American Planning Association Jornal, Summer

1991, pp. 296-97. See also American Public Transit Association, op. cit., footnote 9.

12 Stephen Blake, “Inner City Minority Transit Needs in Accessing Suburban Employment Centers,” (Washington, DC: National Association of Regional Councils, 1990).

13 Keith R. Ihlanfeldt, “The Spatial Mismatch Between Jobs and Residential Locations Within Urban Areas,” HUD Regional Growth and

Community Development Conference, 1993, pp. 25-6. See also Robert J. Klein, “Access to Jobs: A Public Transit Agency’s Initiative for Privately Operated Service,” Transportation Research Record, vol. 1349, pp. 118-120; and Sandra Rosenbloom, “Reverse Commute Transportation: Emerging Provider Roles,” (Washington, DC: U.S. Department of Transportation, March 1992).

14 Ihlanfeldt, ibid.

15 Richard Nathan, A New Agenda For Cities (Annapolis Junction, MD: National League of Cities, 1994).
Chapter 9 Uneven Development: New Challenges for the Urban Core | 225

changes are what constitute real revitalization.

Wolman, Ford, and Hill argue that big, physical

redevelopment projects downtown seem like successful change, but on the whole do not translate

into increased economic well-being for residents.16

Reurbanization might also be based on a number of competitive strengths, which if enhanced,

could help cities maintain employment. First,

many downtowns still have strong agglomeration

economies. Providers of higher-order business

services are clustered downtown, making it easier

for face-to-face learning and innovation to occur.

In addition, the central business district (CBD) is

still a prestigious location in most metros. The

best hotels are often downtown; exclusive clubs

where business leaders can meet and exchange information and develop informal networks are normally located downtown; and an address such as

“Wall Street” or “Michigan Avenue” is still desirable for some businesses. The relative centralization of higher-order business services shows that

agglomeration economies are still an important

source of competitive advantage. While this will

continue to be a source of strength for central cities, advances in information technology are likely to weaken its importance (see chapter 4).

Moreover, the producer services boom of the

1980s is unlikely to be repeated.

Second, in many older cities, such as Philadelphia, New York and Chicago, transit provides excellent accessibility to the CBD, particularly for

lower-level employees, thus enhancing its attractiveness as a business location. Although passengers are often not enthusiastic about the quality of

service, regional rail lines in many cities do provide a viable alternative to driving into the city. In

most cases, tickets cost less than parking, and in

some cases travel time is less. The transit advantage many core cities enjoy may become more important if Clean Air Act mandates for employer

trip reduction programs are enforced. Many

states, for example, enacted employer trip reduction programs requiring large employers in nonattainment areas, normally the largest

metropolitan areas, to submit plans that would increase the ratio of employees to vehicles arriving

at their work sites. The Employer Trip Reduction

Program may favor center city employers, since

more of their employees use mass transit. It may

also encourage more experiments with telecommuting.

Third, while in many metros the cost of land

and labor in central cities is higher than in the suburbs, market forces are likely to lead to some readjustment. In a number of cities, the glut of office

spaces in the CBD combined with strong demand

in the suburbs, has meant that companies can

move to new offices at very low cost. For example, in 1987, net rent for the Sears Tower was

$22-26 per square foot, while operating costs were

$6.50 and taxes $8.50. However, because of the

movement of Sears to the suburbs and the glut of

Class A and B office space in the downtown, it

now rents for $22 gross, while net rent is now

close to $1 per square foot.17

Similarly, in many metros it is hard to get workers in the suburbs, particularly for lower-wage

routine jobs, since so many firms have moved

there. For example, in Milwaukee, where metropolitan unemployment rates are 3.8 percent, a

number of manufacturers have expressed interest

in locating a portion or all of their employment in

the central city in order to access the urban labor

force, as long as environmental (brownfield) and

crime problems can be solved.18

If core and suburban costs begin to converge,

cities will increasingly rely on firms that are pay16 Harold L. Wolman, Coit Cook Ford III, and Edward Hill, “Evaluating the Success of Urban Success Stories,” Urban Studies, vol. 31, No.

6, 1994, pp. 835-850.

17 Discussion with Philip Domenico, John Buck Co. (Building manager, Sears Tower), September 1995.

18 Sammis White, M. Marc Thomas, Nicholas A. Thompson, “Changing Spatial Patterns of Employment Location: Milwaukee, Wisconsin,

1979-1994,” report prepared for the Office of Technology Assessment, 1995.
226 | The Technological Reshaping of Metropolitan America

ing less rent and employing lower-wage workers.

Just as rural America was the site of much lowwage manufacturing because of cheap labor and

land, America’s urban cores may become home to

low-wage manufacturing and services, particularly those tied to markets or agglomeration economies. Rural areas that rely on a low factor cost

strategy can gain needed jobs and development,

but have difficulty increasing standards of living.

The same may become increasingly true for cities.

Property utilization strategies that companies

employ may also benefit the core. For example, as

companies attempt to minimize the cost of doing

business, many eliminated leased space in favor of

ownership. The glut of low-cost buildings in the

core may be attractive to many companies; that is,

owning office space in the central business district

may be cheaper than leasing space in the suburbs.

For example, Colonial Penn Life Insurance, a

long-established tenant leasing in downtown

Philadelphia, had been looking for a new location

for its headquarters and was considering the suburbs. However, it was able to buy a building close

to its current one in the downtown at a very low

cost. Total costs, including renovation, were less

than half of buying or constructing a building in

the suburbs.

Finally, politics, regulations, image and civic

commitment keep many companies in the core,

even if suburban locations are cheaper. Major employers in many cities are often sensitive to the

city’s position, and they know they will win political and public goodwill by keeping offices in the

city. Regulatory bodies and union pressure also

keep employment in the core. For example, when

Provident Mutual merged with Covenant Mutual,

the company began to move employment out of

downtown Philadelphia to the suburbs, but the

Pennsylvania Insurance Commissioner approved

the merger on the condition that no more than 100

jobs leave. Public Utility Commissions have

placed similar pressures on telecommunications

operations.

FACTORS INHIBITING

REURBANIZATION19

There are a range of factors that are likely to inhibit reurbanization. The most obvious constraint is

economic: first, the high costs of site acquisition,

preparation and rebuilding; and second, the absence of a strong demand for inner-city locations

and older buildings. Urban America already has

an excess supply of serviced land and building

space.

These problems are exacerbated by a series of

institutional constraints that add to the expense of

using land in the core. In older districts, titles to

property are often obscure, missing, contested, or

tied up in court. Any attempt at large-scale redevelopment invariably involves the acquisition of

sites in multiple ownership, thus multiplying

costs and legal difficulties. Moreover, most older

urban districts also are enmeshed in a myriad of

overlapping and often contradictory institutional

regulations affecting the use of land and buildings

and the provision of public goods and services. In

combination these tend to freeze urban landscapes

in their current state. The rigid nature of zoning is

a case in point, and other examples include occupancy standards, building bylaws, fire codes, and

parking requirements.

Third, most inner cities are characterized by

relatively high property and business taxes and

high fees for services compared to their suburban

counterparts. In the absence of region-wide or

state-level revenue sharing, these taxes serve as a

severe impediment to redevelopment and adaptive reuse, and a major stimulus to extensive suburbanization. With the loss of many middle-class

residents to the suburbs and the continued decline

of state and federal aid to local governments, fiscal disparities between the central city and the

suburbs have increased. In 1987, residents in central cities paid 25 percent more per capita in taxes

than residents in the suburbs. Adjusted for income

the difference is 44 percent, increasing from just

19 This section is based in part on Larry S. Bourne, “Reurbanization and Urban Land Development: U.S. Cities in a Comparative Context,”

report prepared for the Office of Technology Assessment, May 1995.
Chapter 9 Uneven Development: New Challenges for the Urban Core | 227

18 percent in 1981.20 Tax rates in central cities are

higher than in suburbs because of higher social

service costs, declining residential tax bases, increased infrastructure maintenance costs, and

sometimes less efficient government. For example, tax rates on office space in DuPage County

outside Chicago are about one-third of rates in

Chicago. In Philadelphia, taxes and maintenance

costs are also at least $1 per square foot higher in

the CBD. Moreover, many cities levy a wage tax.

Philadelphia’s current wage tax is 4.96 percent for

city residents and 4.31 percent for those who only

work in the city.

The general absence of a strong demand for inner-city locations and older buildings in most

American cities is made worse by the prevailing

images of suburbia as places for living and increasingly for business, and of central cities as

places to avoid because of decay and crime. Yet,

many firms report that they would stay downtown

if it were safer and more attractive. One innovation to improve the image of the central city is the

business improvement district, or BID.21 These

are ostensibly private organizations that are allowed to tax commercial property within prescribed districts in order to provide extra police

protection, sanitation, and other management

functions. Now operating in the central business

districts of many large cities (among them New

York, Philadelphia, and Baltimore), they have

been effective in combating “crime and grime”

within their districts, but not in the larger community where the problems are much worse. Such

privatization innovations are not limited to the

CBD. In Chicago, for example, local officials

have considered making design modifications to

existing industrial areas to make them more secure. In many older areas a number of manufacturing firms are often located in small, detached

buildings along several city blocks. One proposal

would close off a number of streets to create an industrial park with one secured entrance.

Finally, in the view of many local government

authorities, the most important constraint on reuse

and redevelopment is environmental. Authorities

cite excessively high and rigid standards for environmental cleanup of older sites (especially contaminated industrial sites), the uncertainty of

downstream cleanup costs, and the potential legal

and financial liabilities associated with cleanup.

This is generally discussed in terms of the issue of

abandoned land and buildings known as brownfields. The rest of this chapter is devoted to this issue.

UNDERUTILIZATION OF URBAN CORE

INFRASTRUCTURE: THE PROBLEM OF

BROWNFIELDS

The extent of misallocation and underutilization

of urban land and buildings and the premature writedown of investments in the built environment is

largely unknown. Municipalities do not keep data

on the number of vacant sites, let alone the underuse of land and buildings. A number of cities,

among them Pittsburgh, are beginning to develop

inventories of larger unused sites that might be

useful for commercial or industrial users, with the

aid of geographic information systems technology. Despite the absence of documentation, there is

general agreement that vacant, derelict and abandoned land and buildings in older cities are significant and growing.

The city of Detroit, perhaps more than any other city, illustrates the scale and complexity of land

and building abandonment. Since 1950, the city

has lost more than 50 percent of its manufacturing

base. Its population has declined from 1.9 million

in 1950 to about 1.0 million in 1990, and slipped

from 45 percent of its Metropolitan Statistical

20 Roy Bahl “Metropolitan Fiscal Disparities,” Cityscape, vol. 1, No. 1, 1994, pp. 293-306.

21 William J. Mallett, “Managing the Post-industrial City: Business Improvement Districts in the United States,” Area, vol. 26, No. 3, 1994,

pp. 276-287.
228 | The Technological Reshaping of Metropolitan America

Area (MSA) population to less than 21 percent.

Given that the population of the entire southeast

Michigan region has remained more or less stable

since 1970,22 the impact on the city of continued

population and employment decentralization has

been dramatic. Because Detroit’s most rapid

growth took place later than most industrial centers in the Northeast, its initial building and population densities were lower, and thus the amount

of land and infrastructure left idle by the rapidly

declining population, housing stock and industrial base is huge. Some estimates, provided by local researchers and supported by other sources,

suggest that over 30 percent of the physical land

area of the city is either vacant or near-vacant and

is increasing.

Like Detroit, the Pittsburgh story of massive

deindustrialization, blight, and long-term economic adjustment is well known.23 Once the

country’s iron, steel, and coking center, with the

highest proportion in the country of its labor force

in manufacturing (40 percent), Pittsburgh’s industrial structure has been in decline since World War

II. The population of the city, once over 677,000,

is now less than 380,000. The city is also politically fenced in; it is one of 130 municipalities within

Allegheny County, and is set within an equally

fragmented urban region. In the last twenty years

it has lost over 60 percent of its manufacturing

jobs.24 (The decline has been greater for many

smaller communities along the Monongahela

River). As a consequence, and given its restricted

site, Pittsburgh has inherited a massive problem of

vacant and underused property, much of it contaminated, as well as an outmoded industrial landscape and infrastructure. In the eight-county

Pittsburgh region there are approximately 450

abandoned and possibly contaminated sites, with

an average size of 2.5 acres, totaling 1,125 acres or

2 square miles. This does not include small vacant

lots.25

The existence of potentially contaminated and

abandoned property is not a new problem in many

metropolitan areas, especially older, central cities

and suburbs. Where industry has closed or moved,

land and buildings are left behind, idled, or underutilized, jobs are lost, and local tax revenues reduced. Recently, significant attention has focused

on these sites, referred to as brownfields, and the

problems associated with their cleanup and reuse.

The Environmental Protection Agency (EPA) defines brownfield as: “abandoned, idled or underused industrial and commercial facilities where

expansion or redevelopment is complicated by

real or perceived environmental contamination.”26 Often the sites were, or may still be to a

lesser extent, used for industrial or commercial activities where hazardous substances were handled, manufactured, or stored. The extent of

contamination at brownfield sites ranges from low

or moderate to extremely hazardous. Even abandoned properties with no contamination can suffer

from the stigma of brownfields until a site assessment determines they are clean. Even then, properties with poor development potential may

remain underutilized.

A small number of brownfield sites may have

high levels of contamination and are candidates

for addition to the EPA’s National Priorities List or

similar state priority lists. A large number of con22 Southeast Michigan Council of Governments (SEMCOG), Land Use Tools and Techniques (Detroit: SEMCOG, 1994).

23 R. Beauregard, P. Lawless, and S. Deitrick. “Collaborative Strategies for Reindustrialization: Sheffield and Pittsburgh,” Economic Development Quarterly, vol. 6, No. 4, 1992, pp. 418-430.

24 Evan Stoddard, “Urban Redevelopment and Environmental Recovery: The Experience of Pittsburgh,” paper presented at the International Soil Congress, Austria, September 1994.

25 Discussion with Joel Tarr, Carnegie Mellon University, July 1995.

26 Timothy Fields, Jr., Deputy Assistant Administrator, Office of Solid Waste and Emergency Response, U.S. Environmental Protection

Agency, “Federal Agency Brownfields Initiatives,” presented at the Environmental Law Institute’s Redeveloping Brownfields Workshop,

Washington, DC, Mar. 28, 1995.
Chapter 9 Uneven Development: New Challenges for the Urban Core | 229

taminated sites will never be put on these lists because they are not badly enough contaminated or

have not been evaluated. Information about many

sites is currently unavailable. The threat to public

health from brownfield contamination varies

widely (and is unknown in some cases), depending on the nature and extent of contamination, the

exposure patterns, and the use of the site and surrounding area.

Estimates of the number of brownfield sites in

the United States vary from tens of thousands to

nearly 450,000 sites; the number of acres involved

is equally uncertain. The sites vary from less than

one acre to hundreds of acres. Many sites are concentrated in the Northeast and Midwest but

brownfields are also common in the South and

West and represent a wide variety of past industrial and commercial uses. Brownfields are frequently identified with distressed urban areas,

particularly central cities and inner suburbs. Many

of these areas have undergone deindustrialization,

leaving abandoned and contaminated lands and

buildings, making redevelopment difficult. In all

cases, as a known or potentially contaminated site,

brownfield property is worth less than property

known to be clean.

Some metropolitan regions have recently initiated brownfield inventories. Chicago, for example, has identified over 2,000 brownfield sites in

its metropolitan region, involving approximately

1,500 acres of underutilized land, which is nearly

18 percent of its planned industrial acreage.27 On

the West Coast, Portland has identified approximately 40 sites involving nearly 400 acres of underutilized land.28

Brownfields complicate economic development in many communities. In large part, this is

because legal uncertainties attend brownfields, including difficult and costly cleanup requirements,

cleanup standards, liability, and the availability of

financing. Thus, brownfields contribute, in part,

to reduced economic development and job creation in urban areas, particularly in central cities

and older suburbs. Brownfields may also lead to

development of previously unused land on the urban fringe, creating urban sprawl, traffic congestion, and loss of open space.29

Brownfields are getting more attention now

partly because old, abandoned infrastructure, such

as factories, mill sites, and warehouses, were not

considered a threat to either human health or the

environment until the mid-1970s when concern

about contamination rose.30 Over time and with

the creation of the Superfund law in 1980 in the

wake of Love Canal, the complicated environmental and liability issues surrounding many of

these properties became better known.

Addressing the problem of brownfields is a

complex task partly because of the many stakeholders who are interested in these sites. Brownfield discussions involve property owners,

developers, bankers, environmental consultants,

insurance providers, environmental and community development organizations, and regulators

from all levels of government. Each stakeholder

group has interests and concerns that must be considered in the context of the alternative perspectives represented by other parties. Based on a

review of the brownfields literature and reports

from the major brownfields forums recently under

27 U.S. Congress, General Accounting Office, Reuse of Urban Industrial Sites, GAO/RCED-95-172, (Gaithersburg, MD: General Accounting Office, June 1995).

28 Institute for Responsible Management, Inc., “State Brownfields Policy and Practice,” Conference Proceedings, Boston, MA, January

1995, p. 57.

29 Bourne, op. cit., footnote 19.

30 In 1976, the Resource Conservation and Recovery Act was enacted by Congress, and New Jersey adopted the New Jersey Spill Compensation and Control Act, a state “superfund” law.
230 | The Technological Reshaping of Metropolitan America

way (in Chicago and Cuyahoga County, Ohio),

there appears to be some agreement on the primary issues and on avenues for improvement.31

❚ Technical Issues

The technical issues involve accurately assessing

the type and extent of contamination, and deciding on cleanup standards and procedures. When

the level of cleanup and the remediation process

are unclear, uncertainties about time and money

arise and impede action. In addition, the difficulty

of fully and accurately assessing site contamination contributes to uncertainty about liability, because future owners may be responsible for

cleanup of prior contamination.

In order to address remediation at brownfield

sites, regulators must determine what level of initial site investigation is necessary to identify the

type and extent (or absence) of contamination.

Identification generally begins with a Phase I Site

Assessment during which environmental consultants are often engaged to examine government

and other historical records, perform site reconnaissance, and interview owners, occupants, and

others associated with the site. If a Phase I assessment reveals evidence of contamination, a Phase

II assessment may be conducted, including sampling of soil and groundwater. Until Phase II is

complete, the exact level of the hazard posed by

the site is not known, nor is the potential for enforcement action under federal or state Superfund

laws; this means the potential remediation costs

are unknown.

The uncertainties related to environmental remediation are especially troublesome for the developer who must meet a budget and schedule to

stay in business. Depending on a state’s procedures for managing hazardous waste cleanup and

the characteristics of a given site, identifying and

cleaning up contamination ranges from a fairly

straightforward to cumbersome and time-consuming process.

❚ Legal Liability

Legal liability at brownfield sites is also sometimes a barrier to cleanup and redevelopment. The

potential for liability associated with hazardous

waste sites is especially complicated by complex

and often overlapping laws at the federal and state

levels. Depending on the type and extent of contamination, as well as the current capacity (active

or inactive) of a brownfield site, enforcement action may be warranted under the federal Superfund program, state superfund programs, the

Resource Conservation and Recovery Act

(RCRA),32 and other federal and state environmental laws.33

The law most often associated with liability at

brownfield sites is CERCLA, later amended in

1986 as the Superfund Amendment and Reauthorization Act (SARA).34 The statute was passed in

order to identify and clean up chemical spills and

abandoned hazardous waste sites that pose a threat

to human health and the environment. CERCLA

is particularly significant due to its far-reaching

enforcement capability. It applies strict, joint and

31 U.S. Congress, Office of Technology Assessment, State of the States on Brownfields: Programs for Cleanup and Reuse of Contaminated

Sites (Washington DC: Office of Technology Assessment, June 1995).

32 42 U.S.C. Secs. 6901-6992.

33 For example, sites involving contamination with petroleum-based chemicals are typically treated under state laws specifically created to

address this problem.

34 Public Law 99-499, 100 Stat. 1613 (1986).
Chapter 9 Uneven Development: New Challenges for the Urban Core | 231

several, and retroactive liability to the environmental cleanup of hazardous substances.35 The

law identifies a number of parties that may be held

responsible for a site cleanup including:

 current owners or operators of contaminated

property,

 owners or operators of property at the time it

became contaminated,

 persons who arrange for treatment or disposal

of hazardous substances, and

 transporters of hazardous substances.

Few exemptions exist within CERCLA’s liability scheme, and court interpretations and decisions have exacerbated concerns of liability risk

for certain parties.36 To a lesser extent, other federal environmental laws add to the uncertainty

about liability, along with state Superfund and

other property cleanup and transfer laws.

Within this legal framework, any association

with a hazardous waste site implies some level of

uncertain liability. This real or perceived threat of

liability often deters interested parties (especially

lenders and developers) from undertaking any

transaction necessary to clean up and redevelop a

brownfield site. There are few assurances available at the federal or state level to protect a private

party from enforcement action at a hazardous

waste site, although some EPA and state voluntary

cleanup programs have begun such initiatives.

❚ Financial Issues

Even if technical and legal uncertainties are

solved, assessing and cleaning up contaminated

brownfield sites can be expensive and can limit redevelopment of these sites. Brownfield sites are

often categorized in three ways:

 economically viable sites where market demands will promote redevelopment and even

cleanup if necessary;

 sites that have development potential with incentives or financial assistance for assessment

and cleanup; and

 sites that have extremely limited market potential, even if they were cleaned up.37

Financial issues are particularly complicated at

brownfield sites because of the ultimate costs of

assessment and remediation, the risk of liability,

and limited public and private resources.

Hazardous waste cleanup costs are often uncertain and unusually high. Though data is limited on

cleanup costs at brownfield sites, reports range

from tens of thousands of dollars to millions of

dollars. Even estimating the cost of remediation

and development can require a site assessment

that may be too expensive for smaller, less valuable sites.38 Even the most thorough site investigations cannot guarantee an upper bound to

remediation costs. Some stakeholders discover

additional contamination during remediation, adding to the project cost.

Another financial barrier to brownfield cleanup

is the uncertainty arising from the real and perceived risk of liability for cleanup costs. Since

many stakeholders don’t know what liability they

can incur if they become involved at a brownfield

site, they are often reluctant to become involved at

35 All liability requires proof of a causal link between a party and the harm. Strict liability means a party does not have to be found negligent

in order to be found liable. Joint and several liability means that any single responsible party can be required to pay for all the cleanup costs at a

hazardous waste site, even if other parties contributed to the contamination. Retroactive liability means that parties can be held liable for contamination that occurred before the law was passed.

36 One case that is often cited is U.S. v. Fleet Factors Corp. (901 F2d 1550, 11th Cir 1990), in which the court found that a lender could be held

liable for cleanup if the lender participated “in the financial management of a facility to a degree indicating a capacity to influence the corporation’s treatment of hazardous wastes.”

37 Chicago Brownfields Forum participants also recognized an additional type: “currently operating sites that are in danger of becoming

brownfields because historical contamination discourages new investment and lending.” This is discussed in Chicago Brownfields Forum,

“Initial Report of Workgroups Review Draft,” Mar. 31, 1995.

38 Phase I Site Assessments cost $1,000 to $5,000, while Phase II Assessments average $50,000 to $70,000.
232 | The Technological Reshaping of Metropolitan America

all. Lenders are especially hesitant to make loans

on properties where hazardous materials were

once handled or will be in the future,39 and developers fear they may be held liable for cleanup

costs. The prospects of working with contaminated property as collateral in cases of foreclosure

or bankruptcy dampen interest in brownfield activity.40

Finally, there is an apparent lack of public and

private resources available to promote brownfield

cleanup and redevelopment. While some states

provide financing mechanisms, such as public

grants, low-interest loans, and tax incentives,

these resources remain limited as brownfield sites

continue to be identified and left unaddressed.

❚ Community Concerns

Brownfields do not exist in isolation. Brownfield

property is often located in distressed communities and in close proximity to other businesses, retail districts, or residential areas. A brownfield site

may attract illegal dumping, and if left unsecured

and open to the public, can turn into makeshift

playgrounds for neighborhood children or temporary shelter for the homeless. Thus, contaminated

brownfields pose a threat to human health and the

environment. Even uncontaminated brownfields

are usually unattractive, and can lower property

values in the area. Brownfields may also result in

increased insurance rates for neighboring properties.41

While community groups are usually interested

in promoting the cleanup and redevelopment of

brownfields in their neighborhoods, they expect

some assurance that remediation will protect their

health and the environment. The public’s concern

includes protection during the cleanup, as well as

at the final remediated site. When considering the

prospects for site redevelopment, community

members have a stake in the use planned for the

property. In a few recent cases, concern about the

potential for new jobs and economic development

of a neighborhood brought forward numerous

groups interested in being included in the decision-making process.42 Thus, communication between the responsible parties and community

members about the risks at a site and the plans for

its redevelopment may prove essential to the success of a project.

39 Survey results of the Independent Bankers Association of America showed that one out of five of its members reported a mortgage loss or

default on commercial property as a result of contamination on the site. In addition, seven out of 10 banks reported that they will not offer certain

classes of loans due to environmental liability concerns. James Boyd and Molly K. Macauley, “The Impact of Environmental Liability on Industrial Real Estate Development,” Resources, No. 114, Winter 1994.

40 However, new Community Reinvestment Act (CRA) regulations (60 FR 22156, 22160) recognize loans for financing the cleanup or

redevelopment of industrial sites in low- or moderate-income communities as credit toward meeting the act’s requirements. This could help

expand lender involvement at brownfield sites.

41 A. Siewers, “The Building Blocks of Ruin,” Chicago Sun Times, Mar. 14, 1993.

42 Cara Jepsen, “Retooling South Works,” The Neighborhood Works, March 1995.