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Economic Brief

July 2017, EB17-07

Responding to Urban Decline
By Santiago Pinto and Tim Sablik

In recent decades, a number of once-prominent U.S. cities have experienced
economic hardship and significant population loss. Policymakers in those
cities want to jump-start growth and improve prospects for the people who
live there. But where should they begin? This Economic Brief surveys economic studies on a variety of urban policy interventions and provides lessons
for policymakers.
Over the past two centuries, the population of
the United States has become increasingly concentrated in cities. In the 1800s, only 6 percent of
people lived in urban areas. Today, nearly twothirds of Americans live in cities.1 Not only is the
U.S. population concentrated in cities, the nation’s economic activity is as well. Large cities accounted for roughly 85 percent of the country’s
gross domestic product (GDP) in 2010.2 Concentrating economic activity in this way produces a
number of benefits. Places with higher population density exhibit faster growth in productivity
and per capita GDP. Cities are also wellsprings of
innovation, accounting for a disproportionate
share of new patents.3
These benefits make it all the more puzzling that
a number of prominent U.S. cities have experienced large population declines in recent decades. St. Louis, Detroit, Cleveland, and Pittsburgh,
for example, each lost half or more of their populations between 1950 and 2010. Others, such as
Baltimore, Chicago, and Minneapolis, suffered
smaller, though still substantial, population losses
during the same period.

EB17-07 - Federal Reserve Bank of Richmond

If these changes merely reflected shifts in population from one city to a more desirable or more
productive city, there wouldn’t necessarily be
any cause for concern. However, evidence suggests that urban population outflows have hurt
some lower-income people who have been left
behind. Declining city centers frequently exhibit
high and persistent poverty rates. For instance, in
Detroit and Cleveland, 40.3 percent and 36.2 percent of the population, respectively, were below
the poverty line in 2015. Meanwhile, the average
incomes of the surrounding suburbs have risen.4
In fact, the metropolitan statistical areas (MSAs)
surrounding many declining cities have grown in
population since 1950. For example, the Detroit
and Baltimore MSAs each added more than 1
million people between 1950 and 2010.5 As city
centers decline, those people and firms who can
leave do, and those who cannot (frequently lowincome, low-skilled households) are stuck with
dimming economic prospects.
Urban policymakers in declining cities justifiably seek to revitalize their cities and help the
people who live there. To do so effectively, it is

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important to understand what factors lead cities to
decline and to examine a variety of urban renewal

with either a sudden shock or a steady decline have a
natural inclination to revitalize their cities. But should
they intervene? And if so, how?

The Lifecycle of Cities
Some cities may decline due to the natural aging of
infrastructure. When a city is new, buildings near the
center are the most desirable and tend to be occupied by a mix of firms and wealthier households. But
as those buildings age and deteriorate, those households move to newer developments surrounding
the city, leaving behind lower-income households.
This process can repeat multiple times, pushing the
city border outward as higher-income households
retreat to the newest ring of development. Eventually, deteriorated buildings in the city center are
redeveloped, once again attracting higher-income
households back to the city and starting the cycle
anew. This cycle can be seen in cities such as Chicago
and Philadelphia.7

Types of Policy Responses
Different wages and housing costs within cities do
not necessarily demand a policy response to correct.
Some households may voluntarily decide to reside
at distant locations despite higher commuting costs
because housing prices are lower. Wages and housing prices can also differ between cities for a variety
of reasons, such as availability of amenities. These
differences don’t necessarily justify policy intervention either. However, should policymakers choose to
act, economic theory suggests that interventions can
have wide-ranging effects in the context of cities.10

Because buildings are durable goods, it can take a
long time for a city to move through its lifecycle.
When a city’s population is growing, it is profitable to
construct new housing because demand and prices
for housing are rising, and the city expands rapidly.
But when the population declines, existing housing
stock doesn’t simply disappear. It can take decades
before it is profitable to refurbish or replace a building. The surplus of housing depresses house prices
below the cost of construction, and the city stops
growing.8 Moreover, falling rents may draw lowerskilled and lower-income households into the city,
intensifying urban sorting by income.
In addition to natural aging, cities experience shocks
that alter their composition of firms or people. These
shocks can be positive or negative. Cities such as San
Francisco, Washington, D.C., New York, and Cleveland, for example, appear to have experienced fairly
rapid changes in firm composition. Greater automation at major employers might lead to population
losses as local firms demand less labor. This can result
in a city with a thriving downtown but a surrounding residential area that is too large for its current
population, as seen in Detroit and other manufacturing cities in the Rust Belt.9 Urban policymakers faced

Cities are built on the powerful economic forces
generated by firms and people coming together
in one place. Higher concentrations of people and
firms have positive effects on almost everyone living
in a city. Higher population density means greater
learning and sharing of knowledge, more productive
firms and workers, and more efficient supply lines
and labor matching. Economists call these forces
agglomeration economies. Of course, cities do not
grow indefinitely because higher concentrations of
people and firms are also associated with negative
effects, such as traffic congestion and pollution, that
may eventually outweigh the benefits.
Investments in a declining city may well “jump-start”
positive agglomeration forces in ways that could
have benefits that outweigh their costs. In theory,
even an announcement that a neighborhood will be
revitalized could by itself trigger a variety of positive
effects before the government spends any money.11
Once policymakers decide to intervene, there are
two main types of approaches to consider. One
option is to focus on helping households by giving
them the tools to improve their situation. This could
involve removing barriers that prevent households
from relocating to thriving parts of the city, providing housing vouchers to help them move, or improving and expanding transportation networks to
reduce commuting costs. An alternative approach is

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to focus on revitalizing the city itself. This includes reconstructing residential or commercial buildings that
have declined or offering incentives to employers to
move to the city and hire local people. Economists
have labeled these different approaches “peoplebased” and “place-based” policies, respectively.

ployment and wages from Empowerment Zones.14 On
the other hand, there is also evidence of significantly
negative spillover effects on areas geographically near
or economically similar to the Empowerment Zones,
suggesting that at least some of the “gains” may simply be shifted economic activity.15

Revitalizing Places
Place-based interventions are the most common
and widely studied types of urban policies. A good
example is the Enterprise Zone (EZ). EZs attempt
to revitalize areas by attracting new businesses
through tax credits or providing grants for development projects. EZs have been implemented at both
the state and federal level. Connecticut established
the first state-based EZ in 1982, and forty states had
some type of EZ by 2008. At the federal level, Empowerment Zones (which are similar to EZs on the
state level) were used from 1993 to the mid-to-late

Other place-based urban policies focus on improving
residential buildings and infrastructure. Examples of
federal urban renewal programs include the Housing
Act of 1949, which provided loans to cities to acquire
and redevelop decaying neighborhoods, and the
Model Cities Program of the 1960s, which focused
more on renewal of neighborhoods rather than
wholesale reconstruction. Evidence on the impact of
these projects is also inconclusive. Studies don’t suggest they had a meaningful impact on population
growth or per capita income, but that may be due to
their relatively limited funding.16 Urban renewal projects do seem to generate higher land values—even
in nearby neighborhoods not directly targeted, as
found in one study of the Neighborhoods-in-Bloom
program in Richmond, Virginia.17 One of the main
findings of that study is that after accounting for all
the external effects generated by this kind of program, the overall benefits may more than compensate for the costs of implementation.

Investment in EZs has been substantial, but measuring their impact has been challenging. One problem
is that targeted areas often don’t align neatly with
census tracts, zip codes, or other standard geographical boundaries used for collecting data. Another challenge is controlling for other factors that influence
local economic conditions and finding appropriate
control cases for comparison. A third difficulty is that
any benefits attributed to the EZ may come at a cost
to other regions. For example, persuading a business
to relocate from one city to another city benefits
the latter at the expense of the former. On the other
hand, promoting development in one part of the city
may spur private investment that benefits nearby,
nontargeted areas. Any empirical study looking to
measure the benefits of these programs must account for these positive and negative spillover effects.
Given these challenges, it is not surprising that studies
have found mixed effects from state and federal EZ
programs. At the state level, an examination of California’s EZ program found no evidence of a significant
impact on employment, while an analysis of Texas’s
EZs found a positive effect, particularly in lower-paying industries.13 At the federal level, some studies have
found positive, statistically significant effects on em-

But to the extent that urban renewal programs
generate higher land values, many of the benefits
may accrue to landowners rather than low-income
households if those households are mostly renters.
For example, one study of the federal Empowerment
Zone program found that it had no effect on poverty
and employment for residents but a large effect on
property prices.18 Successful urban renewal projects also may end up displacing those households
if neighborhoods become more desirable because
of new construction.19 An influx of higher-income
households may bid up rents and price out the lowincome households the renewal projects were intended to help.
Investing in People
Place-based policies are not the only way to improve
the welfare of households living in declining cities.
To the extent that those households are constrained

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from leaving and seeking better opportunities, policymakers may be able to help.
In the mid-1990s, the U.S. Department of Housing
and Urban Development took this approach with the
Moving to Opportunity (MTO) program. The program
was implemented in five cities—Baltimore, Boston,
Chicago, Los Angeles, and New York—and it provided housing vouchers to families living in high-poverty
neighborhoods to help them move to low-poverty
neighborhoods. While participation in the program
was voluntary, the eligible applicants who received
vouchers were chosen randomly, making it a good
case study of this policy approach. Some households
(the treatment group) received housing vouchers
that could only be used in census tracts with poverty
rates below 10 percent; others received vouchers
with no geographical restrictions (Section 8 vouchers); and the control group received no vouchers and
continued receiving public assistance.
Some research has found that for adults, the program seems to have had no lasting effect on earnings or economic self-sufficiency.20 Moreover, of the
households offered a voucher to move to lowerpoverty neighborhoods, less than half accepted,
and some that did move later moved back.21 For
children, the evidence was mixed. Those who were
younger than thirteen when they moved to a lowerpoverty area seemed to benefit. Compared with
children in the control group, they had incomes that
were about $3,500 (31 percent) higher on average
in their mid-twenties, were more likely to attend college, and were less likely to become single parents.
On the other hand, children who were older than
thirteen when they moved suffered worse long-term
outcomes, possibly because they already had established social networks in their old neighborhoods
and disrupting those networks caused more harm
than good.22
More recent research examines the outcomes of
similar housing voucher programs and finds more
favorable evidence of this type of policy. From a
research standpoint, the fact that participation in the
MTO experiment and the use of the housing vouchers was voluntary introduces potential self-selection

bias into the results of the experiment. Some children who could have benefited from the relocation
to a low-poverty neighborhood did not participate
in the program because their parents were not motivated to move. To overcome this problem, one study
focuses on the outcomes of a specific program that
involved the mandatory relocation of households
to other neighborhoods because the public housing where they lived was set to be demolished. This
study concludes that the relocation of households
had large and positive effects on children (they
were more likely to be employed and earned higher
wages as adults), and these effects were substantially
larger than those found in the MTO experiment. This
suggests that the children who did not participate
in the MTO experiment were very likely those who
could have benefited most.23
Rather than attempting to move residents to more
prosperous areas, another people-based approach
is to improve residents’ human capital. Certainly, investing in education and human capital has benefits
on the individual level. But having a more educated,
more productive urban population has positive spillover effects on the city as a whole, too. In fact, these
spillover effects seem to play a key role in defining
modern successful cities. In the early post-World War
II era, city growth was tied to high concentrations
of physical capital, like the car factories of Detroit or
the steel mills of Pittsburgh. But since 1980, human
capital has become a more reliable indicator of a
thriving city. Average wages in cities with highly educated populations, such as Boston or San Francisco,
are much higher for both college graduates and high
school graduates than in cities with low levels of college education.24
There may be other spillover benefits as well. Individuals with more education are significantly less
likely to commit crimes. Thus, increasing high school
graduation rates (for men in particular) seems to
provide substantial social savings to cities in the
form of less crime.25 Raising human capital levels
and the number of high-skilled jobs in a city also has
a multiplier effect. One study found that for each
new job in an innovative field added to a city, five
additional jobs were created. This includes high-

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skilled jobs (such as lawyers, teachers, or nurses)
and lower-skilled jobs (such as waiters, baristas, or
taxi drivers).26
Cities with higher levels of human capital also tend
to attract more individuals with high levels of human capital, creating clusters of innovation, such as
Silicon Valley near San Jose or the Research Triangle
in Raleigh, Durham, and Chapel Hill, North Carolina. What is less certain is whether policymakers in
declining cities can create new innovation clusters
by investing in universities or other research institutions. Empirical evidence does suggest that such
investments could have lasting benefits for a city, but
many of these studies examine the effects of wellestablished universities on a region. It is more difficult to say for certain what leads individuals and firms
to cluster around certain institutions and not others,
and it is unclear whether attempting to create such
clusters out of whole cloth would succeed.
Taking a Balanced Approach
The economics literature provides a number of
important lessons for urban policymakers. First,
agglomeration economies are powerful forces that
have led to the dramatic urbanization of the world’s
population over the past two centuries. These forces
have fed into each other to generate remarkable
economic growth. These feedback effects mean that
even small changes to a city can have a large impact
over the long run. Urban policies are often thought
of in terms of large-scale projects: building a new
sports complex or business center, redeveloping
whole neighborhoods, or adding new public transportation infrastructure. But small-scale projects
could be just as effective at promoting city growth.
Another takeaway is that cities are far from identical.
The forces that gave rise to the movie industry in Los
Angeles or the auto industry in Detroit may not be
replicable elsewhere. Moreover, policies that generated a positive response in one city have no guarantee of doing the same in another. As the studies
highlighted in this Economic Brief illustrate, policies
implemented in the complex social environment of
cities may trigger all sorts of unanticipated responses. This doesn’t mean that policymakers can draw no

lessons from experiments in other cities, but the key
lesson is to proceed with caution.
Finally, place-based and people-based approaches
should not be viewed as mutually exclusive. There
may be practical limitations to how far city leaders
can take any one approach. Emptying out a declining
neighborhood may seem like the efficient choice in
an economic model, for example, but it may not be
a realistic solution. Rather, policymakers should consider a mix of responses that would be most appropriate for their respective cities. Two main questions
should guide their choices. First, are there policies
that can potentially improve the well-being of nearly
all residents? Second, to what extent do more targeted policies help their intended recipients?
Santiago Pinto is a senior policy economist and Tim
Sablik is an economics writer in the Research Department at the Federal Reserve Bank of Richmond. The
Bank published a more comprehensive version of
this article as the featured essay in the Bank’s 2016
Annual Report.

 arryl T. Cohen, “Population Trends in Incorporated Places:
2000 to 2013,” United States Census Bureau Report P25–1142,


J ames Manyika, Jaana Remes, Richard Dobbs, Javier Orellana,
and Fabian Schaer, “Urban America: U.S. Cities in the Global
Economy,” McKinsey Global Institute, April 2012.


E nrico Moretti, The New Geography of Jobs, New York: Mariner
Books, 2013, p. 84; and Adam B. Jaffe, Manuel Trajtenberg, and
Rebecca Henderson, “Geographic Localization of Knowledge
Spillovers as Evidenced by Patent Citations,” Quarterly Journal
of Economics, August 1993, vol. 108, no. 3, pp. 577–598 (article
available with subscription).


 ore recently in the 2000s, following the nationwide trend,
poverty has been rising in the suburbs as well. However, poverty is still highly concentrated in inner cities.


T he Census Bureau began tracking “standard metropolitan
areas” with the 1950 census. These were later renamed MSAs,
and the boundaries have changed over the decades following
the fluctuations of cities. Data are from the 1950 census and
2010 census.


T his article is based on an essay that appeared in the Federal
Reserve Bank of Richmond’s 2016 Annual Report.


S tuart S. Rosenthal and Stephen L. Ross, “Change and Persistence in the Economic Status of Neighborhoods and Cities,”

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Handbook of Regional and Urban Economics, 2015, vol. 5,
pp. 1047–1120 (article available with subscription).


E dward L. Glaeser and Joseph Gyourko, “Urban Decline and
Durable Housing,” Journal of Political Economy, April 2005,
vol. 113, no. 2, pp. 345–375 (article available with subscription).

 atrick Kline and Enrico Moretti, “Local Economic DevelopP
ment, Agglomeration Economies, and the Big Push: 100 Years
of Evidence from the Tennessee Valley Authority,” Quarterly
Journal of Economics, November 2013, vol. 129, no. 1,
pp. 275–331 (article available with subscription).


 atrick Kline and Enrico Moretti, “People, Places, and Public
Policy: Some Simple Welfare Economics of Local Economic
Development Programs,” Annual Review of Economics, August
2014, vol. 6, pp. 629–662 (article available with subscription).


T he Empowerment Zone designation generally expired in
2009, though it was subject to a series of case-by-case


 avid Neumark and Jed Kolko, “Do Enterprise Zones Create
Jobs? Evidence from California’s Enterprise Zone Program,”
Journal of Urban Economics, July 2010, vol. 68, no. 1, pp. 1–19
(article available with subscription); and Matthew Freedman,
“Targeted Business Incentives and Local Labor Markets,”
Journal of Human Resources, Spring 2013, vol. 48, no. 2, pp.
311–344 (article available with subscription).



E steban Rossi-Hansberg, Pierre-Daniel Sarte, and Raymond
Owens III, “Housing Externalities,” Journal of Political Economy,
June 2010, vol. 118, no. 3, pp. 485–535 (article available with


 ndrew Hanson, “Local Employment, Poverty, and Property
Value Effects of Geographically-Targeted Tax Incentives: An
Instrumental Variables Approach,” Regional Science and Urban
Economics, November 2009, vol. 39, no. 6, pp. 721–731 (article
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S everal studies show that EZ programs could have generated demographic changes in affected neighborhoods. See
David Neumark and Helen Simpson, “Place-Based Policies,”
Handbook of Regional and Urban Economics, 2015, vol. 5,
pp. 1197–1287 (article available with subscription).


J effrey R. Kling, Jeffrey B. Liebman, and Lawrence F. Katz, “Experimental Analysis of Neighborhood Effects,” Econometrica,
January 2007, vol. 75, no. 1, pp. 83–119 (article available with


S usan Clampet-Lundquist and Douglas S. Massey, “Neighborhood Effects on Economic Self-Sufficiency: A Reconsideration
of the Moving to Opportunities Experiment,” American Journal
of Sociology, July 2008, vol. 114, no. 1, pp. 107–143 (article
available with subscription).


 aj Chetty, Nathaniel Hendren, and Lawrence F. Katz, “The
Effects of Exposure to Better Neighborhoods on Children: New
Evidence from the Moving to Opportunity Experiment,” American Economic Review, April 2016, vol. 106, no. 4, pp. 855–902.


E rik Chyn, “Moved to Opportunity: The Long-Run Effect of
Public Housing Demolition on Labor Market Outcomes of
Children,” Working paper, October 2016.


E nrico Moretti, “Human Capital Externalities in Cities,” Handbook of Regional and Urban Economics, 2004, vol. 4, pp. 2243–
2291 (article available with subscription); and Enrico Moretti,
“Local Labor Markets,” Handbook of Labor Economics, 2011,
vol. 4b, pp. 1237–1313 (article available with subscription).


L ance Lochner and Enrico Moretti, “The Effect of Education
on Crime: Evidence from Prison Inmates, Arrests, and SelfReports,” American Economic Review, March 2004, vol. 94,
no. 1, pp. 155–189 (article available with subscription).


Moretti (2013)

 aymond Owens III, Esteban Rossi-Hansberg, and Pierre-Daniel
Sarte, “Rethinking Detroit,” National Bureau of Economic Research Working Paper No. 23146, February 2017 (article available with subscription).




 atias Busso, Jesse Gregory, and Patrick Kline, “Assessing the
Incidence and Efficiency of a Prominent Place Based Policy,”
American Economic Review, April 2013, vol. 103, no. 2, pp.
897–947 (article available with subscription); and John C.
Ham, Charles Swenson, Ayşe Imrohoroğlu, and Heonjae Song,
“Government Programs Can Improve Local Labor Markets:
Evidence from State Enterprise Zones, Federal Empowerment
Zones and Federal Enterprise Community,” Journal of Public
Economics, August 2011, vol. 95, no. 7-8, pp. 779–797 (article
available with subscription).
 ndrew Hanson and Shawn Rohlin, “Do Spatially Targeted ReA
development Programs Spillover?” Regional Science and Urban
Economics, January 2013, vol. 43, no. 1, pp. 86–100 (article
available with subscription).
E dward L. Glaeser and Joshua D. Gottlieb, “The Economics of
Place-Making Policies,” National Bureau of Economic Research
Working Paper No. 14373, October 2008 (article available with

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