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ESSAYS ON ISSUES JULY 1994 NUMBER 83 THE FEDERAL RESERVE BANK OF CHICAGO Chicago Fed Letter Metropolitan areas spread out O ur population continues to move away from rural areas and into m etro politan areas. As it does so, the shape and governance of m etropolitan areas are changing in several significant ways. The density of our living and working space is falling as jobs and people continue to spread outward from the central city. In the process, the central city typically loses popula tion, especially middle class residents, to suburban communities. And as population leaves the central city, a growing share of residents is being represented by small suburban govern ments plus a m ultitude of overlapping “special district” governments. For much of the population, the out ward spread of urban housing and jobs reflects a rising standard of living brought about by this century’s tech nological advances, including quick and comfortable auto travel and en hanced telecommunications. How ever, many observers believe that this outward spread is produced not only by technological change but also by public policies, regulations, and tax codes. For example, policies that enable or encourage local governm ent fragmentation in m etropolitan areas can contribute to overexpansion and lead to land use decisions that are not in the best interests of the overall m etropolitan area. This Chicago Fed Letter describes such changes that are taking place in the nation’s large met ropolitan areas; it also outlines the attendant policy issues. Growth or sprawl? U.S. m etropolitan area population has relentlessly spread out throughout this century. Today, this fact is apparent in the many abandoned businesses and pulled outward by changing technolo houses within our central cities even as the outer boundaries of the devel gy and infrastructure of inland freight transportation. Rail and water trans oped m etropolitan area move in portation has increasingly given way exorably farther from the center. These observations reflect more than to truck transportation, which can population growth and abandonm ent more easily accommodate remote m anufacturing sites. of central cities. In fact, the growth of urbanized land area within m etro Despite these unobjectionable rea politan boundaries has generally sons behind urban deconcentration, outpaced population growth; that is, many observers believe that public people and jobs are moving to areas policies have pushed cities toward with progressively lower densities (see undesirable “sprawl.” As examples, figure 1). they point to environmental regula tions that are harshest on long-devel By itself, lower density is little cause oped urbanized areas, a federal tax for concern. There are several rea sons to expect that consum ption of hous 1. Population density of urbanized areas ing (and its associated land) should grow rapidly in m etropoli 6,000 --------------------tan areas. Even a stag 1970 nant population would normally experience increased dem and for housing—both land and structures—with rising incomes. In addition, the changing demographics of U.S. population have fa vored the growth in _____i_________i_________i_________i_________i________ housing. Average household size de Urban Areas of the United States and Puerto Rico, 1990, creased from 3.3 to 2.6 persons from 1960 to 1991, for example, as code that favors housing consump baby-boomers reached adulthood, tion, and a public finance system that and as the num ber of adults living allows motorists to evade the full costs alone increased because of higher of their driving. divorce rates, delayed age of first marriage, and an increasing inci Federal, state, and local governments dence of older adults who maintain have all subsidized auto travel in sev their own household.1 eral ways. While motorists bear the costs of vehicle m aintenance, time Jobs have followed residences to the waiting in traffic, and gasoline, they suburbs, since jobs follow workers do not bear the full costs of roadand a growing residential population related services such as emergency demands ready access to retail and vehicles, police and traffic control, or personal services. Industrial and the auto-related court system, nor all distribution jobs have also been persons per squa re m ile C h icago D etroit M ilw aukee Des M oines Indianapolis Source: U.S. D epartm ent of Comm erce, Bureau of the Census, CPH-S-1-2 (Decem ber 1993). the environmental problems that m otor vehicles cause. Motor vehicle and road use taxes such as gasoline taxes, highway tolls, and vehicle li cense taxes are fashioned on the prin ciple that motorists should pay their own way when they decide to drive. But by some estimates, fuel and vehi cle taxes cover only 60% of the cost of building and maintaining roads.2 The end result is excessive vehicle use, along with the associated tendency toward sprawling land use. Some part of urban sprawl has also been attributed to misguided environ m ental regulation. The 1980 Com prehensive Environmental Response, Compensation, and Liability Act (“Su perfund”) attem pted to accelerate environmental improvement by re quiring cleanup of all contam inated sites and funding cleanup of the worst ones. However, older urban areas— where many contam inated sites are located—report disappointing results, and cleanup of the worst areas has fallen well short of expectations. At the same time, the pace of cleanup and redevelopment of less severely contam inated sites has perhaps been slowed rather than accelerated. By adding an uncertain assignment of liability and more stringent cleanup standards to contam inated sites, Su perfund legislation has encouraged development—and perhaps contami nation—in urban fringe and “green field” sites. Incentives to purchase ever-distant suburban housing have also contrib uted to the movement outward. Sev eral features of the federal tax code encourage the overconsumption of owner-occupied housing (and land) as a household’s income grows. The deductibility of home mortgage inter est, coupled with deductibility of local property taxes on residential proper ty, have been estimated to increase average housing consum ption signifi cantly through implicit subsidy of im puted rental costs.3 Similarly, home buyers moving up to more expensive homes tend to look out ward toward distant suburban loca tions rather than purchasing closer in.4 Federal tax code allows capital gains on a home resale to be deferred or Columbus, Ohio, are still expand ing in this way. However, either by neglect or by state legislative intent, many central cities have become “landlocked,” or surrounded by sub urban incorporation so that annex ation is no longer possible. Because the boundaries of most central city governments cannot expand, the outward movement of people and jobs has m eant that a larger fraction of m etropolitan population resides under municipal governments or special service districts, which are generally less populous than central cities (see figures 2 and 3). In some respects, the rising role of smaller m etropolitan area govern ments may improve the quality of life in those areas. A governm ent with fewer constituents may be more re More governments sponsive to their needs, and if constit State policies that have allowed subur uents tend toward homogeneity in ban governments to flourish have also their preferences, local governm ent been implicated as contributing to can customize services to fit local urban sprawl.5 The nation’s central wants and conditions. However, cities must provide services to the smaller m etropolitan governments poor such as public aid, health care, can have a negative impact on local education, and housing. These servic land use decisions. These decisions es are public goods in a broader sense are frequently controlled by local than just being delivered by govern “general purpose” governments such ment. Provision of services to the as towns, villages, or municipalities. poor is desired by and benefits the The benefits (costs) of local land use public at large; that is, residents decisions can extend well beyond the throughout the m etropolitan area municipal boundaries, while the costs place a value on having their neigh (benefits) are borne locally. If this is bors provided for and given a chance the case, local decisions made in the to succeed economically. However, local interest may be detrim ental to even though everyone benefits from the region at large, or less beneficial the provision of services to the poor, than they should be. A common those who can afford to often choose example is the siting of necessary to migrate out to sub urbs where the service costs they bear are 2. Number of governments their own, and not Special those of the less wellMunicipal districts off. As people migrate 1992 1957 1992 Metropolitan area3 1957 for these financial reasons, population 248 315 333 605 h ica g o and jobs spread farther CDes 41 21 42 38 M o in e s out while public servic D e tro it 23 46 106 120 es to the poor may be 62 28 136 In d ia n a p o lis 70 underprovided. 59 65 15 39 M ilw a u k e e In earlier times, many aDefined identically for 1957 and 1992. central cities grew by Source: U.S. Department of Commerce, Bureau of the Census, annexing adjacent Census of Governments (various years). land; indeed, some cities such as Phoenix as long as the owner purchases a next home of equal or greater value. High er-priced homes tend to be located in suburban locations rather than closer in where land costs are often higher, and where the stock of homes may be older, smaller, and more depreciated. In the process of accelerated disposal of both homes and commercial build ings near the center of m etropolitan areas, the public capital stock—roads, bridges, water, and sewers—is also prematurely abandoned or un derused. As development pushes outward toward the periphery of ur ban areas, public services are often duplicated, thereby adding to the overall cost of living in m etropolitan areas. 3. Central city population as a share of metropolitan population Indianapolis* Milwaukee * The city of Indianapolis consolidated with Marion County in 1970. Source: U.S. Department of Commerce, Bureau of the Census, Census of Population (1960-90). public facilities such as landfills, in cinerators, roads, and energy trans mission facilities. Local communities frequently exhibit the so-called NIMBY response (“not in my back yard”), a desire to prevent the local siting of such facilities even when the broader geographic benefits may be considerable. Conversely, small suburban areas often woo cleaner commercial, office, and retail developments because these developments may bring bene fits in the form of local taxes and jobs. Such development strategies may not be optimal for neighboring communi ties, however, because the attendant jobs draw population to those com munities, perhaps straining their resources for public services such as roads and schools. In the larger con text of m etropolitan growth, such locally based decisionmaking to en courage local development may thus perpetuate urban sprawl, to the detri m ent of the entire m etropolitan area. Concluding comments As the configuration of our m etropol itan areas markedly changes, many observers perceive that our land use and administrative choices may be misguided. If this is so, one can envi Indianapolis consolidated into one body in 1970. O ther places have formally adopted tax-base sharing (Minneapolis-St. Paul) or have codi fied metropolitan-wide land use plans and restrictions (Toronto and Portland, Oregon). However, such arrangem ents are the exception rather than the rule; local communi ty interests are often reluctant to cede land use authority to a central government. —-Jerry W. Szatan and William A. Testa Tee Glenn H. Miller, Jr., “Demographic influences on household growth and hous ing activity,” Economic Review, Federal Re serve Bank of Kansas City, SeptemberOctober 1988, pp. 34-48. 2See Elmer W. Johnson, Avoiding the collision of cities and cars, Washington, DC: American Academy of Arts and Sciences, 1993. T h e impact of favorable tax treatm ent on costs of housing (and its effect on de mand) has been demonstrated to vary with the rate of inflation. For a review, see Frank DeLeeuw and Larry Ozalle, “The impact of federal income tax on invest ment in housing,” Survey of Current Busi ness, December 1979, pp. 50-61. T or an empirical study of the effect of deferred capital gains in O hio’s seven major cities, see Thomas Bier et al., The sion a variety of corrective policy re sponses. For instance, the federal tax code could be shifted gradually toward neutrality with respect to housing. A more even-handed approach to vehi cle travel and infrastructure might be adopted. So too, those public services that must contain some subsidy to the poor, such as education, should proba bly be funded by state or federal gov ernm ents (perhaps even through cash IRS homeseller capital gain provision: Contribu vouchers as in the current Milwaukee tor to urban decline, Cleveland: Ohio Hous experim ent) in order to neutralize the ing Research Network, 1994. incentives of individuals to isolate 5David Rusk, “Bend or die,” State Govern themselves in remote suburbs. In ment News, February 1994, pp. 6-10. those instances when costs or benefits spill over community boundaries, some problems may be solved by coop erative agreements among the many Karl A. Scheld, Senior Vice President and affected localities. In fact, such agree Director of Research; David R. Allardice, Vice President and Assistant Director of Research; ments have been reached in some Janice Weiss, Editor. instances, often facilitated by state government, regional planning associ Chicago Fed Letter is published monthly by the Research Department of the Federal Reserve ations, or voluntary associations of Bank of Chicago. The views expressed are local governments. However, it is not the authors’ and are not necessarily those of yet clear whether voluntary negotia the Federal Reserve Bank of Chicago or the tion among communities is altogether Federal Reserve System. Articles may be reprinted if the source is credited and the successful, given the difficulties and Research Department is provided with copies costs of bargaining. of the reprints. As another approach to solving the Chicago Fed Letter is available without charge from the Public Information Center, Federal problem of governm ent fragmenta Reserve Bank of Chicago, P.O. Box 834, tion, some local governments have Chicago, Illinois, 60690, (312) 322-5111. gone so far as to consolidate formally. ISSN 0895-0164 The city and county governments of Midwest m anufacturing activity continued to expand m oderately in recent months, but somewhat m ore slowly than the robust pace earlier in the year. The purchasing m anagers’ survey in Chicago showed a modest pullback in industrial output growth in the area during May, while the Detroit survey depicted a somewhat sharper loss of m om entum . Light vehicle assemblies have declined during the second quarter on a season ally adjusted basis, and preliminary schedules show no sign of a substantial rebound during the third quarter. These schedules are subject to revision, however, and if growth in retail sales by auto dealers reasserts itself in coming m onths, assembly schedules will most likely be revised upward. Sources: The Midwest Manufacturing Index (MMI) is a composite index of 15 industries, based on monthly hours worked and kilowatt hours. IP represents the Federal Reserve Board industrial production index for the U.S. manu facturing sector. Autos and light trucks are measured in annualized physical units, using seasonal adjustments developed by the Board. The purchasing managers’ survey data for the Midwest are weighted averages of the produc tion components from the Chicago, Detroit, and Milwaukee Purchasing Managers’ Associa tion surveys, with assistance from Bishop Associ ates and Comerica. ins-^g teig) f£80"06909 sTounu ‘oSt^uo P£8 xo9 Od J31U33 uopEiujojuj aqqnj OOVOIH3 3 0 XNV9 TUIdSM TVH3Q3 J iO T Prq p q j O x)P 3iq3
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