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NOVEMBER/DECEMBER 1995 ECONOMIC PERSPECTI A review from the Federal Reserve Bank of Chicago The g e o g ra p h y o f lean m a n u fa c tu rin g : R ecent e v id e n c e fro m th e U .S. a u to in d u s try In dex fo r 1 9 9 5 C an a lte rn a tiv e fo rm s o f g o vern a n c e help m e tro p o lita n areas? EDERAL RESERVE BANK OF CHICAGO Call for >e; s 1996 Conference on Bank Structure & Competition Contents The geography of lean manufacturing: Recent evidence from the U.S. auto industry.............................................................................................. 2 Thom as H. K lier This article presents new evidence on the emerging geographic structure of supplier plants in the U.S. auto industry. It appears that domestic and transplant suppliers respond somewhat differently to the forces of lean manufacturing. Index for 1 9 9 5 ..................................................................................................... 17 Call for papers..............................................................................................18 Can alternative forms of governance help metropolitan areas?.............................................................................20 Richard H. M a tto o n There is growing interest in creating regional governments to guide metropolitan-area growth more efficiently. This article reviews the evidence in favor of regional gover nance and discusses the experiences of three midwestern metropolitan areas that have used differing forms of it to help define their growth. hCONOMIC I^KiRS IYF]S President Michael H. Moskow Senior Vice President and Director of Research William C. Hunter R esearch D e p a rtm e n t Financial Studies Douglas Evanoff, Assistant Vice President Macroeconomic Policy Charles Evans, Assistant Vice President Kenneth Kuttner, Assistant Vice President Microeconomic Policy Daniel Sullivan, Assistant Vice President Regional Programs David R. Allardice, Senior Vice President Adm inistration Anne Weaver, Manager Editor Janice Weiss Production Rita Molloy, Kathryn Moran, Yvonne Peeples, Roger Thryselius, Nancy Wellman IMovember/December, 1995 Volum e XIX, Issue 6 ECONOMIC PERSPECTIVES is published by the Research Department of the Federal Reserve Bank of Chicago. The views expressed are the authors’ and do not necessarily reflect the views of the management of the Federal Reserve Bank. Single-copy subscriptions are available free of charge. Please send requests for single- and multiple-copy subscriptions, back issues, and address changes to the Public Information Center, Federal Reserve Bank of Chicago, P.O. Box 834, Chicago, Illinois 60690-0834, or telephone (312) 322-5111. Articles may be reprinted provided the source is credited and the Public Information Center is sent a copy of the published material. ISSN 0164-0682 The geography of lean manufacturing: Recent evidence from the U.S. auto industry T h o m as H. K lier Since lean manufacturing was pioneered by Toyota Motor Company in the 1950s, it has become the standard practice of many Japanese manufactur ing companies. During the last decade Ameri can manufacturers started to adopt it in order to compete effectively at home and abroad, and it is fast becoming the standard in manufacturing plants across the country. Lean manufacturing is characterized by an emphasis on product quality, an integrated approach to the various aspects of manufacturing, reliance on subcon tractors to produce a greater proportion of the value added, and an emphasis on speed in order processing, production, and delivery. One central feature of the system is the tiering of the supplier structure, which greatly reduces the number of companies the assembler deals with directly. Another feature is close relation ships and frequent interactions between assem blers and suppliers.1 It has been argued that efforts to reduce inventory stocks and arrange for “just-in-time” delivery function most effectively when the supplying and receiving plants are in reason ably close proximity.2 The concomitant in crease in the frequency of interaction and com munication between assembler and supplier companies is expected to strengthen that effect further.3 On the other hand, there is some evidence that spatial clustering is not a neces sary condition for the successful operation of lean manufacturing.4 The question to what extent the arrival of lean manufacturing has altered the geography of supplier networks 2 has not been definitively answered.5 The answer will have implications for regional development efforts. Proponents of the spa tial clustering hypothesis argue for a just-in time-based local and regional development strategy.6 Such an approach was apparent during Mercedes’ recent search for an assem bly plant site in North America. Alabama offered major tax breaks to the company, apparently on the assumption that the assem bly plant would attract a fair number of its supplier plants to locate nearby.7 This article attempts to shed new light on the spatial effects of lean manufacturing by examining the emerging geographical struc ture of lean manufacturing supplier networks in the auto industry, often highlighted for its bellwether role in the adoption of the new manufacturing system. First, I present an overview of previous studies. This is fol lowed by a detailed analysis of the U.S. sup plier networks of eight auto assemblers locat ed in the United States. While some of these networks have been the subject of previous research, this article goes beyond the existing literature by investigating both domestic and transplant suppliers and by identifying both the tier and the age of individual supplier plants.8 The evidence of emerging supplier location patterns is discussed both at the sam ple and assembly plant level. Conclusions follow in the final section. Thom as H. Klier is a senior econom ist at the Federal Reserve Bank o f Chicago. The author w o u ld like to thank Jason Brow n and Shinobu Suzuki fo r excellent research assistance. ECONOMIC PERSPECTIVES Review o f previous evidence As one of the most important and most visible manufacturing industries, the automo bile industry has been of interest to economic geographers for some time.9 Since the arrival of lean manufacturing by way of Japanese transplant assembly and parts facilities in North America, questions have been raised about its impact on the existing spatial struc ture of manufacturing. In Japan, auto assembly and parts production are heavily concentrated in the core industrial regions of Tokyo-Yokohama, the Nagoya region, and to a lesser ex tent, the Osaka area. Three factors are cited as an explanation for this concentration: “urbanindustrial agglomeration factors stemming from the dependence of the auto and other assembly-type industries on a wide range of parts, components, engineering processes and labor skills; ready access to the largest domes tic markets; and access to port facilities for interregional and export shipment.”10 Evidence from other industries and other countries indicates that the magnitude of the effect of lean manufacturing on location varies by industry and by country." For example, a recent analysis of 71 auto parts plants in nine countries suggests that the degree of dispersion of a country’s supply base is partly a function of the country’s size.12 Japan’s auto industry is characterized by the most geographically con centrated supply base, with 82 percent of the suppliers located within a four-hour journey by truck from the assembly plant. In contrast, the percentages for the U.S., U.K., and Germany are 35, 53, and 52, respectively. Sadler (1994) studied parts purchasing at several Japanese assembly plants in Europe and found that Japa nese transplants in Europe “placed far greater emphasis on working with an existing supplier base in Europe than on encouraging rapid trans nationalization of the Japanese components industry.” At the same time, they were imple menting the familiar mix of lean manufactur ing production and procurement practices.13 Did the arrival of lean manufacturing in North America lead to a similarly compact spatial structure? To understand the existing structure of the U.S. auto supplier industry, one must first distinguish between so-called captive and independent suppliers. Among the Big Three, the distribution of captive suppliers (that is, suppliers that are Big Three subsidiaries or divisions) varies by assembler. Even today, FEDERAL RESERVE BANK OF CHICAGO however, these suppliers generally remain locat ed in the upper Midwest.14 For example. Ford historically operated within a highly centralized model of production with clusters in Detroit and Dearborn; today the company’s parts operations are mostly clustered in southeastern Michigan and northern Ohio. General Motors, on the other hand, started out with multiple centers of operation in Michigan (Detroit, Flint, Lansing, and Pontiac), and soon afterward expanded its parts operations into other, predominantly midwestern states, mainly by acquiring independent supplier companies. Before World War II, the company’s captive suppliers were largely clus tered in the southern Great Lakes region. Since then, GM has pursued a policy of spatial divi sion of labor. Products requiring relatively skilled workers, such as engine and drivetrain components, have remained concentrated in the southern Great Lakes region. Lower-skill tasks, such as much of the manufacturing of electrical components, have been relocated to the south.15 As lean manufacturing has increased the degree of outsourcing, the more interesting question is how the location pattern of inde pendent supplier plants has been evolving. Historically, parts suppliers have been clus tered in southeastern Michigan and the adja cent southern Great Lakes states.16 A signifi cant change in the observed location of inde pendent suppliers occurred during the 1970s, when a noticeable number of supplier plants moved southward into Kentucky, Tennessee, Alabama, Georgia, Virginia, and North Caroli na.17 These relocations were related to location decisions of auto assembly plants. For exam ple, during the 1970s GM, in search of lowercost nonunionized labor, built or planned four teen plants in the south, primarily in rural areas of small towns.18 The latest development influencing the location decisions of suppliers has been the arrival of lean manufacturing in North Ameri ca, generally dated around 1980 when the first Japanese transplant assembly facilities opened. Early evidence indicates the emergence of a structure in which supplier plants locate closer to their assembly plant customers than under the previous system of mass production.19 A set of recent studies investigates the effect of lean manufacturing on the spatial structure of independent supplier plants in the United States. Rubenstein and Reid (1987) and Rubenstein (1988) analyzed data for the state 3 of Ohio. They could not identify a clear-cut effect of lean manufacturing on supplier plant location, yet they did find a change in the loca tional pattern after 1970. New firms were more likely to locate in the state’s rural coun ties and the central region, and less likely to locate in northeastern Ohio. Most of the existing analyses of the loca tion effect of lean manufacturing, however, concern Japanese-owned suppliers within the United States. This is not surprising, as these plants were generally set up to meet the de mands of lean manufacturing assemblers. In addition, most of them are new plants estab lished at so-called greenfield sites, which makes them a preferred object of study.20 Studies of these plants consistently find a con centration of Japanese suppliers in a region encompassing Michigan, Indiana, Ohio, Ken tucky, and Tennessee, commonly referred to as the I-75/I-65 auto corridor because it is defined by those two interstate highways. At the local level, suppliers are dispersed to avoid their drawing from the same labor market.21 From the perspective of the southern Great Lakes states, it seems that the arrival of lean manu facturing reversed the trend toward regional decentralization that started in the early 1970s. However, the sites chosen by transplants were not traditionally associated with motor vehicle assembly or parts production. Accordingly, a complex pattern of industrial growth and de cline emerged in the Midwest.22 The data “Mapping the spatial distribu tion of parts suppliers at one point in time, let alone changes, is a for midable task.”23 The Census of Manufactures can offer only incom plete information, because it distin guishes neither between original equipment manufacturers and pro ducers of replacement parts nor between different tiers of suppliers. In addition, because of the large variety of parts that make up an automobile, suppliers are classified in 18 of the 20 two-digit SIC cate gories. Finally, census data provide no information about linkages be tween suppliers and their customers. The data used in this study come from the ELM GUIDE data 4 base on the auto supplier industry, produced by a company in Michigan.24 The data available for analysis represent the year 1993 and cover 2,477 supplier plants located in the United States. As a first step I grouped the plants by tiers. Of the total, 1,383 plants were tier 1 suppliers, that is, they ship their products ex clusively to auto assembly plants and not to other suppliers or other customers; 373 were “mixed” plants, that is, they ship also to other supplier plants and/or nonautomotive assem blers; 721 plants had to be excluded from the analysis as they did not provide information on which customer(s) they shipped to.25 As the customer information in the ELM database is provided at the company rather than plant level, I focused on the set of auto assemblers that operate only one plant, or plants at only one location, in the U.S. in order to be able to establish linkages between assem bly and supplier plants; 511 (37 percent) of the 1,383 identifiable first-tier supplier plants ship to these 9 assembly plants (see table l).26 I then added several variables to the database. Information on start-up year of the supplier plants was obtained from various state manu facturing directories; information on Japanese ownership was obtained from a publication of the Japan Economic Institute.27 The start-up date for 41 plants in the sample could not be identified from state industrial directories. I sent these plants a questionnaire to obtain the missing information. Of the 20 returned ques tionnaires, 16 indicated plants that were still operational. Therefore, the number of observa- T A B LE 1 Assembly plants in study Location S ta rt-u p year Honda M arysville, OH 1982 Honda East Liberty, OH 1989 Nissan Sm yrna, TN 1983 NUMMI (GM-Toyota) Frem ont, CA 1984 AutoA lliance (Ford-Mazda) Flat Rock, Ml 1987 Diam ond-Star (M itsub.-C hrysler) N orm al, IL 1988 Toyota G eorgetow n, KY 1988 Subaru-lsuzu Lafayette, IN 1989 Saturn Spring Hill, TN 1990 Source: Ward's Communications (various years). ECONOMIC PERSPECTIVES TABLE 2 Top seven states for tier 1 supplier plants % of total plants (1,383) % of sample plants (486) M ichigan 25.6 M ichigan 20.4 Ohio 13.6 Ohio 15.8 Indiana 10.6 Illinois 6.8 Tennessee 5.9 Kentucky 8.2 Kentucky 4.0 Illinois 6.0 North Carolina 3.5 North Carolina 3.3 Top 3: 49.8% Top 5: 62.5% Indiana 10.7 Tennessee 10.3 Top 3: 46.9% Top 5: 65.4% Source: ELM International, Inc. (1993) and author's calculations. tions for the following analysis is 486. The resulting data allow for a comparison of more recent location decisions with older ones that were presumably not influenced by lean manu facturing. However, this is not equivalent to a time-series analysis since the sample only contains plants operating during 1993 and none that were shut down in earlier years. Where do plants locate? Th e spatial pattern o f the sample It is interesting to relate the geographic distribution of the sample to the population of tier 1 supplier plants. Table 2 shows that the sample plants were slightly more concentrated in five states and were located to the south of the population of identifiable tier 1 plants. Michigan, the most frequent location choice among the 486 plants in the sample, was less dominating in the sample than in the identifi able population of tier 1 supplier plants, while Ohio, Tennessee, and Kentucky each attracted a higher share of sample plants. This pattern is not surprising, as the assemblers for which linkages to supplier plants could be established were located to the south of the traditional assembly plant region. Nonetheless, on the whole the sample was geographically distribut ed quite similarly to the overall distribution of total identifiable tier 1 supplier plants. Since the sample plants were identified by start-up year and by affiliation with a Japanese company, it was possible to assess the location pattern by age of plant and plant ownership. Because transplant assemblers started operat ing in the U.S. as early as 1982,1 chose 1980 as the cutoff year to compare location patterns before and after the implementation of lean manufacturing techniques.28 Table 3 shows that about 42 percent or 203 of the 486 supplier plants were established before 1980; the vast majority of them (187) were domestic. The TA B LE 3 Location of sample plants Established prior to 1980 (203) Domestic (187) Transplant (16) Established 1980 or later (283) Domestic (118) M ichigan 26.7% 25.0% 25.4% Ohio 15.5 6.3 9.3 Transplant (165) 9.1% 21.8 Illinois 8.0 25.0 3.4 3.6 Indiana 7.0 6.3 13.6 13.3 Tennessee 5.9 6.3 12.7 13.9 Kentucky 4.3 0 4.2 16.4 California 0.5 6.3 2.5 4.2 Largest 3 50.2 56.3 51.7 52.1 Largest 5 63.1 68.9 65.2 74.5 Source: ELM International, Inc. (1993) and author's calculations. FEDERAL RESERVE BANK OF CHICAGO 5 FIGURE 1 Tier 1 supplier plants established prior to 1980 (203) location pattern of those 203 followed very closely the distribution shown in table 2 (see also figure 1). Too few transplant supplier plants were established prior to 1980 to show any discernible pattern. Figure 2 shows a remarkably different location pattern for tier 1 plants established since 1980. Most pro nounced is the development of the so-called auto corridor, a rather compact and densely 6 populated area stretching north-south along I75 and I-65.29 To what extent does this auto corridor represent locational choices of transplant and domestic supplier plants, respectively? Dividing the sample by age of plant re vealed two very interesting findings. First, compared with their older counterparts, post1980 domestic plants were located more to the ECONOMIC PERSPECTIVES southeast. Ohio and Illinois lost considerable share, while Indiana and Tennessee became more frequent location choices. However, the overall concentration in the top three and top five states hardly changed.30 These findings are displayed in figures 3 and 4. The most striking contrast, however, is between recently estab lished domestic and transplant suppliers (see figures 4 and 5). First, the number of transplant suppliers increased dramatically after 1980 (see table 4). Furthermore, 75 percent of the 165 transplant suppliers opened since 1980 located in only five states—Kentucky, Ohio, Tennessee, Indiana, and Michigan—a higher proportion than any other subset of the sample.31 The ag gregate picture in table 3 and figures 1 through 5 reveals the leading role played by the trans plants in establishing a different location pattern in the U.S. auto supplier industry. In addition, there is evidence, albeit to a smaller extent, for a changing location pattern among domestic sup pliers since 1980.32 Table 3 and figures 1 through 5 contain two additional interesting pieces of information. First, among the traditional auto states, Michi gan stands out for remaining the preferred loca tion of domestic supplier plants, even after 1980. One possible explanation is a stronger orientation of domestic suppliers to the Big Three as customers.33 In addition, the data sug gest that certain characteristics of a plant’s FEDERAL RESERVE BANK OF CHICAGO TABLE 4 Transplant auto supplier start-ups Number of facilities 1981 1 1982 5 1983 6 1984 5 1985 13 1986 25 1987 50 1988 67 1989 40 1990 17 1991 2 Source: McAlinden and Smith (1993). output seem to influence its location decision. For example, the production of sensors (such as airbag or temperature sensors), a lightweight electronic part, is widely dispersed, with a noticeable number of plants in California and adjacent states. On the other hand, the produc tion of seats—a part that involves various levels of subassembly including frames and upholstery, and is consistently quoted in the automotive press as one of the parts delivered to assembly lines by the hour—is concentrated within the automotive corridor, close to the 7 FIGURE 4 Domestic tier 1 supplier plants established 1980 or later (118) • 1 supplier plant ■ 2 supplier plants a 3 or more supplier plants assembler customers.34 The recently opened domestic plants in Michigan tend to be concen trated in the production of interior body system parts and components as well as body compo nents and trim (including parts such as instru ment panels, dashboards, and relatively heavy items such as hoods and doors). Comparing the product classifications of older and young er domestic plants in Michigan, one finds a 8 reduction in the start-up of plants producing engines and engine components since 1980, especially parts such as exhaust and intake manifolds and crankshafts. Second, several new plants located outside the I-75/I-65 corridor after 1980. Since the data set available for this study does not in clude information on production level and/or customer-specific shipments, it was not possi- ECONOMIC PERSPECTIVES FIGURE 6 ble to test whether those plants rely more heavily on nonautomotive business.35 Who is closer? An analysis o f fo u r supplier netw orks A closer look at the tier 1 supplier net works of specific assembly plants provides a more detailed picture of the changes in the location pattern of those suppliers during the FEDERAL RESERVE BANK OF CHICAGO 1980s. There is a striking difference between the pre-1980 and post-1980 location patterns similar to that observed among total sample plants. However, the analysis in this section will concentrate on suppliers that opened no earlier than the year during which their respec tive assembly plants started operating. This focus enables us to isolate the effect that lean manufacturing assembly had on the location of 9 blers than are domestic suppliers (see figures 9 through 12). How Average distance between supplier and assembler ever, even the latter locate in a (suppliers that opened after assemblers) noticeable network pattern in N e tw o rk D om estic T ransplant relation to the various assemblers A ssem bler average suppliers suppliers in the sample. By calculating the <----------------- --------- miles-------- ........................ ) distance between each supplier plant and the assembly plant for Honda 287 244* 399* each of the four networks, I for Nissan 317 360 287 mally tested for differences in the AutoA lliance 359 371 353 location decisions of domestic Toyota 325 466** 237** and transplant suppliers.37 Table ‘ Difference significant at the .10 level. 5 shows the average distances “ Difference significant at the .05 level. Sources: ELM International, Inc. (1993) and author's calculations. between the individual suppliers and their respective assemblers in the sample. A test of the similari suppliers.36 As one cannot directly compare ty of the location pattern showed a significant the pre- and post-1980 location patterns, this difference between the average distances of section presents statistical evidence on a relat domestic and transplant suppliers in two of the ed question: For the four transplant assembly four networks.38 Domestic suppliers that plants analyzed, do both domestic and trans opened after the start-up of their respective plant tier l suppliers make similar location assemblers were consistently located farther decisions? away than the transplant suppliers of compara First, the locations of these assemblers’ tier ble vintage.39 This is a surprising result, as it 1 suppliers produce very similar images (see indicates significant differences in the location figures 6 through 8). While the networks in effects of lean manufacturing on transplant and clude more post-1980 plants the longer the domestic suppliers. It is conceivable that more assembly plant has been in operation, they are of the customers of domestic suppliers than all focused on the I-75/I-65 auto corridor, transplant suppliers are located in the tradition whether the assembly plant is located in the al auto region, which would explain the larger center (like Honda in Ohio), at the northern end average distances to the three transplant assem (like AutoAlliance in Michigan), or the southern blers located in the auto corridor. As the loca end (like Nissan in Tennessee) of that region. tion of the Big Three assembly plants is not Second, a comparison of domestic and identified in the database, only indirect ways of transplant suppliers shows that transplants testing that explanation remain. When one are typically somewhat closer to their assem excludes AutoAlliance, the Mazda-Ford joint TABLE 5 T A B LE 6 Supplier plants by distance to assembly plant (suppliers that opened after assembler) Honda Distance in m iles Nissan D A u to A llia n ce D T 0-50 5.9 19.3 2.2 1.6 17.4 6.4 51-100 8.8 17.0 13.6 8.0 21.7 10.6 T D T Toyota D 5.5 0 T 6.9 20.7 101-200 29.4 27.3 4.5 38.7 17.4 10.6 11.1 37.9 201-400 26.5 21.6 40.9 33.9 4.3 29.8 66.7 20.7 401-800 20.6 10.2 36.4 12.9 26.1 36.2 5.5 10.3 8.8 4.5 2.2 4.8 13.0 6.4 11.1 3.4 >800 Note: D = domestic; T = transplant. Sources: ELM International, Inc. (1993) and author's calculations. 10 ECONOMIC PERSPECTIVES FIGURE 8 venture in Flat Rock, Michigan, and its suppli ers, the percentage of tier 1 suppliers shipping only to non-Big Three assembly plants is more than twice as large for transplants as for do mestic suppliers.40 However, when one focuses on the subset of suppliers not shipping to the Big Three, the average distances for both trans plant and domestic suppliers are lower than those listed in table 5.41 FEDERAL RESERVE BANK OF CHICAGO Table 6 presents more detailed information on the distribution of supplier plants around specific auto assembly plants. It suggests that the statistical differences in table 5 are driven by differences in the number of suppliers that locate very close to the assembler. A some what smaller share of domestic than transplant suppliers locate very close to the assembler (see table 6).42 A large share of both Honda’s 11 FIGURE 10 and Toyota’s transplant tier l suppliers are located within 100 miles (two hours’ driving time) of the assembly plant (36.3 percent and 27.6 percent respectively, compared with 14.7 percent and 5.5 percent of Honda’s and Toyo ta’s domestic supplier plants). In the case of AutoAlliance, about two-thirds of its domes tic tier l suppliers that opened plants after AutoAlliance started operating chose to locate 12 in southeastern Michigan and northern Illi nois, Indiana, and Ohio. Accordingly, table 6 shows that about 40 percent of its domestic supplier plants are located within 100 miles of the assembly plant. The statistical test pro duced no evidence of a significant difference between the average distances of AutoAlliance’s domestic versus transplant suppliers. ECONOMIC PERSPECTIVES FIGURE 12 Summary and conclusion Lean manufacturing has been implemented in the American manufacturing sector for some time now. While there is agreement that this has raised productivity at the assembly plant level, it has not been clear what effect it has had on the geographic distribution of the sup plier base. By refining a commercially avail able database, I was able to examine the sup plier networks of some recently opened auto assembly plants located in the United States, focusing in particular on the spatial relation ship between assemblers and their tier l suppli ers. While I could not test changes in the spa tial patterns of Big Three suppliers during the last decade, I have presented some new infor mation on a set of mostly transplant assembly plants and their suppliers. This information affords a better understanding of the evolving geography of lean manufacturing. Earlier findings about a movement of supplier plants toward the I-75/I-65 automotive corridor were confirmed. In addition, by dis tinguishing the age and ownership of the plants in the sample, this study found that since 1980 the majority of newly established tier l suppli er plants that ship to at least one of the assem blers in the sample chose to locate within the so-called automotive corridor. The data show FEDERAL RESERVE BANK OF CHICAGO the establishment of transplant supplier plants to be the main force in shaping a new geogra phy in the supplier industry. While domestic suppliers were found to have located in the I-75/I-65 corridor as well, their average dis tance to the assembly plants in the sample is significantly larger. In addition, the data indi cate that there are agglomeration effects in the automotive corridor and that the type of output produced also influences the location chosen. The implications of these findings for regional development policy are neither clearcut nor simple. While the evidence suggests the establishment of a new geography in the U.S. auto supplier industry, it is clear that that industry will not be nearly as geographically concentrated as it is in Japan.43 Thus a state’s ability to attract an assembly plant does not necessarily mean that a significant number of suppliers will set up shop nearby. In further research on this topic, I will extend the analysis to the supplier networks of Big Three assembly plants and will apply for mal location models to the data on hand. It would also be very interesting to obtain addi tional information for the sample plants, such as the location of the plant of the primary as sembly customer. 13 NOTES 'The importance of supplier networks is featured in a recent study on lean manufacturing in the auto industry (Andersen 1994) which suggests the management of the supply chain to be one of the key competitive factors. See also Bennet (1994) and Klier (1994). Rather than coordinating its entire supplier struc ture, an assembler prefers to deal directly with only a small number of supplier companies, referred to as tier 1 suppliers. ’Estall (1985), Kenney and Florida (1992). Mair (1992), and Dyer (1994). ’See Helper (1991) on the increased frequency of commu nication. 4See, for example, Glasmeier and McCluskey (1987), Reid (1995), and the references cited therein. ’See, for example, Mair (1992) and Erickson (1994). The issue is complicated by the fact that location patterns, once established, tend not to change over a short period of time, as they involve decisions with relatively long time horizons. See, for example, Ondrich and Wasylenko (1993) for a formal treatment of the location decision and Krugman (1991) for an explanation of the influence of history on the spatial pattern of economic activity. “For example, Mair (1993). ’Cooper and Ruffenach (1993). “Automobile assembly and component plants that are fully or partly owned by foreign companies are generally referred to as transplants. For the purposes of this study, the defining characteristic distinguishing transplant from domestic suppli ers is the ownership of the plant, not its customers. 9See Henrickson (1951), Boas (1961), and especially Rubenstein (1992) for a historical overview of the geography of the U.S. automobile industry. "’Sheard (1983). "See, for example, Angel (1994), Jones and North (1991), and Schampp (1991). "Andersen (1994). '’Sadler (1994) suggests that the resulting smaller increase in spatial proximity is due to the relatively fragmented market for cars, supporting a range of independent automotive companies, prior to the arrival of Japanese transplants. "McAlinden and Smith (1993); Miller (1988). '-’Rubenstein (1992). '"Rubenstein (1992); Henrickson (1951). "Glasmeier and McCluskey (1987). '““Four were built in Mississippi, three in Louisiana, two each in Alabama and Georgia, and one each in Oklahoma, Texas, and Virginia” (Rubenstein 1992, p. 238). According to Rubenstein (1992), the proliferation of different models since 1960 led to a fragmentation of the market for passenger cars and reduced the need for branch assembly plants, that is, plants producing identical models at centers of demand for regional distribution. That resulted in a fair amount of restructuring at the assembly plant and, consequently, at the supplier plant level. l9In his study on the North American auto industry, Miller (1988) finds that the introduction of new supply philosophies has shifted suppliers slightly closer to assemblers. 2l)See Glassmeier and McCluskey (1987), Mair et al. (1988), Rubenstein (1992), Woodward (1992), and Mair (1994). 2lSee Mair et al. (1988). 14 22Rubenstein (1992); Klier (1993). •"Rubenstein ( 1992). 24ELM (1993), the ELM GUIDE supplier database. This database includes, among other things, the addresses of the supplier plants, a listing of each plant’s customers, and a very detailed classification of products produced and materials used. 25It is difficult to accurately assess the coverage of this data base, since the size of the true population is unknown. How ever, anecdotal evidence on Honda (Mair 1994) and Nissan (Bennet 1994) indicates reasonably good coverage of the tier l supplier plants. Furthermore, the information obtained from the ELM database is qualitatively consistent with previously published accounts (see Mair et al. 1988, Kenney and Florida 1992. Rubenstein 1992, and Mair 1994). Therefore I do not expect the results to be biased. 2,’The nine assembly plants were all opened after 1980 and were mostly transplants. Ideally one would like to investigate the supplier networks of all U.S. assembly plants opened after 1980 and compare them to pre-lean manufacturing patterns. Howev er, geographic linkages between assemblers and suppliers at the plant level were available only for the eight assemblers listed in table l . In addition, I could find no comparable information on pre-1980 supplier networks. As Honda’s two Ohio assembly plants are only about 15 miles apart, I treated them as one site. Eight Big Three assembly plants have been opened since 1980: GM’s plants in Orion Township, MI; Bowling Green, KY; Fort Wayne, IN; Wentzville. MO; and Hamtramck, MI; and Chrysler’s plants in Detroit, MI (Mack Ave. and Jefferson Ave.), and in Sterling Heights, MI. Almost all of these are in the traditional assembly region of the lower Great Lakes states (see Boas 1961). Also excluded from the study were the 20 pre-1980 U.S. car assembly plants of the Big Three that were in operation during 1993. (See Ward's Automotive Yearbook, various years.) Because of the weak coverage of “mixed” plants, I exclud ed that segment from further analysis. "Japan Economic Institute (1992). ’“Glassmeier and McCluskey (1987) compared “recently built” facilities with the overall pattern of auto parts produc tion. However, in their study they do not indicate the time frame used to define these plants. Moreover, from the 17 observations they had in the “recently built” category, the authors can only speculate as to possible implications. 29See Mair et al. (1988). ’"As recently as 1988, Miller found no evidence of a notice able shift in parts-making activities (Miller 1988). "Ohio experienced both a very significant decrease in the percentage of domestic plant openings and a dramatic in crease in the percentage of transplant plant openings since 1980. This makes Ohio a very interesting case study (see Rubenstein and Reid 1987). ’’Given the nature of the sample, I could obtain no evidence on possible changes in the location patterns of the networks of Big Three assembly plants. In addition, the smaller effect of location changes among domestic tier 1 suppliers might well be related to the extent that transplant assembler plants resemble secondary customers of these supplier plants. However, information to support this claim is currently not available. See the following section for evidence of spatial patterns of domestic supplier plants at the network level. ’’Of the 118 domestic supplier plants opened since 1980, only 13.6 percent had no Big Three companies listed as customers. That compares to 36 percent of the 165 transplant supplier plants that opened during the same time period (see ELM ECONOMIC PERSPECTIVES 1993). However, the lack of information on the relative importance of a supplier plant’s customers prevents a more detailed look at that issue. uOf the 1,383 tier 1 plants identified in the database, 38 list sensors as one of their products. Only 39 percent of these plants are located in the five automotive corridor states, Michigan, Indiana, Ohio, Kentucky, and Tennessee. By comparison, 10 of the 13 seat plants are located in the auto motive corridor. "In terms of the type of parts produced, no particular group dominates the recently established non-auto-corridor plants. However, the parts tend to be relatively lightweight. Plants located in the Northeast tend to produce electronic and electrical parts. "As only nine suppliers to Saturn opened plants since 1990, the start-up year for the Tennessee assembly plant, its net work is not discussed in detail. In addition, no further analy sis is undertaken for the networks of NUMMI, Subaru-Isuzu, and Diamond-Star. The fact that neither could attract a noticeable number of supplier plants close to the assembly plant is probably an indication of agglomeration effects in the automotive corridor. "The distances were calculated by means of the mapping software MAPINFO at the county resolution. "In the case of Nissan, the difference is significant just above the .10 level. 'M Dyer (1994) reports that the average distance between Toyota’s assembly plants and its independent suppliers in Japan is only 87 miles. In contrast, he reports that the average distance between GM’s assembly plants and its independent suppliers in the U.S. is 427 miles. In a study done over 40 years ago, Henrickson (1951) lists sources of metal automobile parts to the Buick assembly plant complex in Flint. The average distance between independent supplier plants pre-1950 (58 plants) to the Buick plant can be calculated as 294 miles; information reported for the year 1950 (39 plants) results in an average distance of 309 miles. ■"'Saturn was not included in the definition of Big Three. The actual percentages are as follows: 45.5 percent of Honda’s transplant suppliers do not list Big Three customers, versus 14.7 percent of its domestic suppliers; Nissan, 27.4 percent versus 11.4 percent; AutoAlliance, 19.1 percent versus 13.0 percent; and Toyota, 48.3 percent versus 22.2 percent. JIThe number of observations in the “domestic” supplier category is too small for meaningful tests of statistical differ ence in the average distances within that subsample. 4:A closer look at the parts produced by supplier plants located within very close range of the assembly plant reveals an emphasis on interior body systems and components (such as dashboards, seats, door panels, and instrument panels) and body glass and components (such as windshields and rear and side windows). "'Andersen (1994) and Dyer (1994). REFERENCES Andersen Consulting, “Worldwide manufacturing competitiveness study—The second lean enterprise report,” 1994. Dyer, Jeffrey H., “Dedicated assets: Japan’s manufac turing edge,” H arvard B usiness Review, November/ December 1994, pp. 174-178. Angel, David P., “Tighter bonds? Customer-supplier linkages in semi-conductors,” Regional Studies , Vol. 28, No. 2, April 1994, pp. 187-200. ELM International, Inc., “The ELM GUIDE supplier database,” East Lansing, MI, database file, 1993. Rennet, James, “Detroit struggles to learn another lesson from Japan,” The New York Tim es , June 19, 1994, section F, p. 5. Boas, Charles W., “Locational patterns of American automobile assembly plants, 1895-1958.” Econom ic G eography, Vol. 31, 1961, pp. 2 18-230. Commerce Register Inc., M aine , in D irectory o f M anufacturers, 1993a. _________________ , M assachusetts, M anufacturers, 1993b. in Directory o f _________________ , New H am pshire, M anufacturers, 1993c. _________________ , Vermont, turers, 1993d. in D irectory o f in Directory o f M anufac Cooper, Helene, and Glenn Ruffenach, “Alabama’s winning of Mercedes plant will be costly, with major tax breaks,” Wall Street Journal, September 30, 1993, p. A2. Database Publishing Co., Arizona, in M anufacturers Register, 1994a. _________________ , California, Register, 1994b. FEDERAL RESERVE in M anufacturers RANK OF CHICAGO Erickson, Rodney A., “Technology, industrial re structuring, and regional development,” Growth and Change, Vol. 25, Summer 1994, pp. 353-379. Estall, R.C., “Stock control in manufacturing: The just-in-time system and its locational implications,” Area, Vol. 17, 1985, pp. 129-132. Glasmeier, Amy, and Richard McCluskey, “U.S. auto parts production: An analysis of the organization and location of a changing industry,” E conom ic G eog raphy, Vol. 63, No. 2, 1987, pp. 142-159. Harris Publishing Co., Harris Illinois Industrial 1994. Directory \ Helper, Susan, “How much has really changed be tween automakers and their suppliers?” Sloan M anage ment Review, Summer 1991, pp. 15-28. Henrickson, G. Rex, Trends in the Geographic D istri bution o f Suppliers o f Some Basically Im portant M ate rials Used at the Buick M otor Division, Flint, M ichi gan, Ann Arbor, MI: University of Michigan, Institute for Human Adjustment, 1951. Japan Economic Institute, J apan's Expanding U.S. M anufacturing Presence: 1990 Update, 1992. Jones, Philip N., and John North, “Japanese motor industry transplants: The West European dimen sion,” E conom ic G eography, Vol. 67, No. 2, 1991, pp. 105-123. 15 Kenney, Martin, and Richard Florida, “The Japa nese transplants—production organization and region al development,” Journal o f the American Planning A ssociation. Vol. 58, No. 1, 1992, pp. 21-38. Klier, Thomas, "How lean manufacturing changes the way we understand the manufacturing sector,” E co nomic P erspectives , Vol. 17, No. 3, May/June 1993, pp. 2-10. ______________ , “The impact of lean manufacturing on sourcing relationships,” Federal Reserve Bank of Chicago, Econom ic P erspectives , Vol. 18, No. 4, July/ August 1994, pp. 8-17. Krafcik, John F., “Triumph of the lean production system,” Sloan M anagem ent R eview , Fall 1988, pp. 41-52. Krugman, Paul, Geography and Trade , Gaston Eyskens Lecture Series, London: Leuven University Press, 1991. Mair, Andrew, “Just-in-time manufacturing and the spatial structure of the automobile industry: Lessons from Japan,” Tijdschrift voor Econ. en Soc. Geografie, Vol. 82, No. 2, 1992, pp. 82-92. _____________ , “New growth poles? Just-in-time manufacturing and local economic development strate gy,” Regional Studies , Vol. 27, No. 3, 1993, pp. 207-221. _________________ , H o n d a ’s Global Local Corpora tion, New York: St. Martin's Press, 1994. Mair, Andrew, Richard Florida, and Martin Ken ney, “The new geography of automobile production: Japanese transplants in North America,” Economic Geography, Vol. 20, October 1988, pp. 352-373. Manufacturers’ News Inc., Alabam a, in M anufactur 1994a. ers Register, _________________ , F lorida, R egister, 1994b. in M anufacturers _________________ , Indiana, R egister, 1994c. in M anufacturers _________________ , K entucky, R egister, 1994d. in M anufacturers _________________ , N ebraska, R egister, 1994e. in M anufacturers _________________ , N orth C arolina, ers R egister, 1994f. _________________ , O hio, R egister, 1994g. in M anufacturers _________________ , Oklahoma, Register, 1994h. _________________ , Texas, Register, 1994i. in M anufactur in M anufacturers in M anufacturers in M anufacturers _________________ , G eorgia, Register, 1995a. in M anufacturers 16 in M anufacturers _________________ , P ennsylvania, R egister, I995d. _________________ , W isconsin, R egister, I995e. in M anufacturers in M anufacturers McAlinden, Sean, and Brett Smith, “The changing structure of the U.S. automotive parts industry,” Ann Arbor, MI: University of Michigan Transportation Research Institute, report no. UMTRI 93-6, 1993. Miller, Roger, New Locational Factors in the A uto mobile Industry, Montreal, Canada: Universite du Quebec, 1988. Ondrich, Jan, and Michael Wasylenko, Foreign D irect Investm ent in the United States: Issues, M agni tudes, and Location Choice o f New M anufacturing Plants, Kalamazoo, MI: Upjohn Institute, 1993. Pick Publications, 1994 M ichigan M anufacturers 1994. Directory, Reid, Neil, “Just-in-time inventory control and the economic integration of Japanese-owned manufactur ing plants with the county, state and national econo mies of the United States,” R egional Studies, Vol. 29, No. 4, 1995, pp. 345-355. Rubenstein, James M., “Changing distribution of American motor-vehicle-parts suppliers,” G eographi cal Review, Vol. 18, No. 3, 1988, pp. 288-298. _________________ , The Changing U.S. A uto Indus try— Geographical Analysis, London: Routledge, 1992. Rubenstein, James M., and Neil Reid, “Ohio’s motor vehicle industry—industrial change and geographical implications,” Miami University, geographical research paper no. 1, 1987. Sadler, David, “The geographies of just-in-time: Japanese investment and the automotive components industry in Western Europe,” Econom ic Geography, Vol. 70, No. 1, 1994, pp. 41-59. Schampp, Eike, “Towards a spatial organization of the German car industry? The implications of new production concepts,” in Industrial Change and R e gional D evelopment: The Transform ation o f New Industrial Spaces, George Benko and Mick Dunford (eds.), London: Belhaven Press, 1991, chapter 8. Sheard, Paul, “Auto-production systems in Japan: Organisational and locational features,” Australian G eographical Studies, Vol. 21, April 1983, pp. 49-68. Smith Publishers & Printers, 1992 D irectory o f Tennessee M anufacturers, 1992. South Carolina Department of Commerce, 1994 1994. South Carolina Industrial Directory, _________________ , Virginia, Register, 1994j. _________________ , Iowa, Register, 1995 b. _________________ , M issouri, R egister, 1995c. Ward’s Communications, W ard’s A utom otive Year Detroit, MI, various years. book, in M anufacturers Woodward, Douglas P., “Locational determinants of Japanese manufacturing start-ups in the United States,” Southern Econom ic Journal, Vol. 58, No. 3, 1992, pp. 690-708. ECONOMIC PERSPECTIVES ECONOMIC PERSPECTIVES—INDEX FOR 1995 Issue A rtic le Pages B A N K IN G , C R E D IT, A N D F IN A N C E A current look at foreign banking in the U.S. and Seventh District Linda M. Aguilar Internal organization and economic performance: The case of large U.S. commercial banks William C. Hunter Jan/Feb 20-28 Sep/Oct 10-20 Mar/Apr 2-19 Mar/Apr 22-32 Jul/Aug 2-14 May/Jun 2-12 Jul/Aug 16-28 Jan/Feb 2-19 May/Jun 13-35 Sep/Oct 2-9 Nov/Dec 2-17 Nov/Dec 20-32 E C O N O M IC C O N D ITIO N S The temporary labor force Lewis M. Segal and Daniel G. Sullivan Does business development raise taxes? William H. Oakland and William A. Testa Big emerging markets and U.S. trade Linda M. Aguilar and Mike A. Singer M O N E Y A N D M O N E T A R Y P O LIC Y Temporal instability of the unemployment-inflation relationship Robert G. King, James H. Stock, and Mark W. Watson Sectoral wage growth and inflation Ellen R. Rissman R E G IO N A L E C O N O M IC S Midwest approaches to school reform Richard H. Mattoon and William A. Testa An analysis of the effect of Chicago school reform on student performance Thomas A. Downes and Jacquelyn L. Horowitz Chicago’s economic transformation: Past and future Graham Schindler, Philip Israilevich, and Geoffrey Hewings The geography of lean manufacturing: Recent evidence from the U.S. auto industry Thomas H. Klier Can alternative forms of governance help metropolitan areas? Richard H. Mattoon To order copies of any of these issues, or to receive a list of other publications, telephone 3 12-322-5111 or write to Public Information Center Federal Reserve Bank of Chicago P.O. Box 834 Chicago, IL 60690-0834 FEDERAL RESERVE BANK OF CHICAGO 17 Rethinking Bank Regulation: What Should Regulators Do? Conference on Bank Structure and Competition Federal Reserve Bank of Chicago M a y 1-3, 1996 The Federal Reserve Bank of Chicago invites research and policyDriented papers for submission to the 32nd annual Conference on Bank Structure and Competition to be held it the Westin Hotel in Chicago, Illinois, May 1-3, 1996. The major theme of the conference will be an in-depth evaluation of bank regulation. Historically, the American public has been concerned with banks’ becoming excessively large and wielding significant market power. As a result of this concern and occasional turbulence in financial markets, banks have been regu lated in nearly all aspects of their opera tions. Some consider them “quasi-public utilities.” In the last two decades bank regulation has been deemed excessive, would generate highly inefficient and inequitable distributions of resources? If the answer is yes, and regulation can be defended on economic grounds, then what is the optimal regulatory design? How can regulation address these failures, complementing or limit ing market forces as necessary? Can the goals of regulation be identified, and can regulations be tied to specific market failures? How effective are regulations in achieving their objectives? Are there unintended consequences? Do existing regulations minimize or actually exacer bate market concentration and externali ties? Addressing these issues requires evaluating specific regulations. If specific regulations are appropri ate, what then is the optimal regulatory Call for Papers and a number of banking laws have been implemented explicitly to deregulate the industry. Yet many argue that the term “deregulation” was actually a misnomer, and that as one of the more extensively regulated industries in the country, the industry continues to be excessively constrained. The conference will criti cally evaluate the rationale, intent, and consequences of bank regulation. Economists typically argue that reg ulation can be beneficial when market failure causes inefficient resource alloca tion. This may happen because of con centration of market power, asymmetric information, or market externalities — which may make the economy more vul nerable to systemic crises. The question then is determining whether the finan cial services sector requires regulation to suppress market forces. Are potential market failures so pronounced that, left to their own devices, the financial markets structure to achieve the stated goals? Should regulation be institution-, industry-, or function-based? Banks obviously compete in the broader financial services industry. Should a single regulator supervise this industry? If not, how much cooperation should there be among domestic regulators? Are there advantages to international coordination by regulators? What exactly should regulators be expected to do? Should supervisory powers be emphasized to direct industry behavior, or should market information be utilized to discipline bank behavior? How can regulators be held accountable for their supervisory decisions? Can regulators use market information to more effec tively regulate banks? Is regulator information superior to that of the marketplace? These questions encompass some of the most fundamental public policy issues facing the financial services industry today, including systemic risk, optimal merger activity, bank product powers, and regulatory reform. The 1996 conference will focus on these and related questions. We also welcome papers on other financial structure policy issues including • international financial regulation, • fair lending and community development, • structural change in the industry, • the unique role of commercial and investment banks in corporate financing, • the role of financial derivatives in intermediation, • the legal risk associated with financial derivatives, • payments system topics, and • other topics related to the structure and regulation of the financial services industry. If you would like to present a paper at the conference, please submit/our copies of the completed paper or an abstract with your name, address, and telephone number, and those of any coauthors, by December 20,1995. Address correspondence to Conference on Bank Structure and Competition Research Department Federal Reserve Bank of Chicago 230 South LaSalle Street Chicago, Illinois 60604-1413 For additional information, call Douglas Evanoff at 312/322-5814. Can alternative forms of governance help metropolitan areas? R ichard H. M a tto o n Economic development theo rists are increasingly promot ing the development of strong regional economies as the key to successfully attracting and maintaining economic activity when global competition and technological change are mak ing business location choices increasingly farflung.1 At the core of healthy regions are met ropolitan areas that offer the amenities and services that businesses demand. One school of thought suggests that while metropolitan areas are particularly critical to regional eco nomic success, current growth patterns are leading to urban sprawl and the inefficient delivery of public goods and services that will ultimately undermine the economic prospects of entire metropolitan regions. Yet deconcen tration of economic activity is entirely rational given the present rules of the economic devel opment game. Research has shown that any town will receive a tax benefit from securing commercial development even if that develop ment has negative spillover effects on the re gion.2 However, since there are no political and economic structures to promote the re gion’s interests over those of individual towns, the pattern of uncoordinated growth continues. The most frequently suggested solution to this problem is some form of centralized metropoli tan or regional government that can coordinate growth and help the entire region to share the benefits of economic growth. In addition to the potential benefits of coordinated regional growth, supporters of consolidated metropolitan governments usually suggest that economies of scale in the produc tion and distribution of public goods are avail able to larger government units.3 These effi ciencies lower the cost of government while providing the types of uniform governmental services that should appeal to businesses when making locating and operating decisions. The issue of metropolitan governance is of particular interest to the Midwest. Central cities in the region have been experiencing population declines. Recent economic and population growth in metropolitan areas has been achieved largely by the spread of activity into more distant suburbs, resulting in a pattern of uncoordinated land use. Such development is occurring in metropolitan areas across the nation, but it is more noticeable in the industri al cities of the Midwest, where central cities historically had high densities of both econom ic activity and population. While newer metro politan areas can be designed to accommodate the infrastructure that is needed to promote commerce, midwestern cities are often left with an aging infrastructure that was designed to support the commerce of the early 1900s, not that of the 1990s. Given this disadvantage, promoting a healthy and integrated region is arguably more critical to the Midwest than to other regions. The Midwest is an appropriate arena in which to examine the issue of metropolitan governance, for it is home to some of the most 20 ECONOMIC PERSPECTIVES Richard H. Mattoon is a senior regional economist at the Federal Reserve Bank of Chicago. The author wishes to thank William A. Testa for reviewing earlier drafts of this article. extreme examples of both consolidated and fragmented government in the nation. From the relatively tightly knit structure of Unigov in Indianapolis to the highly fragmented struc ture of overlapping governments in Chicago, the full range of government types is available. This article will address the question of whether there are advantages to changing some aspects of metropolitan governance. It will further assess some midwestern experiments in metropolitan government. Chicago metropolitan Chicago city 35 -23 Cleveland metropolitan Cleveland city 19 -45 Columbus metropolitan Columbus city 89 68 H o w have m e tro p o lita n areas in th e M id w e s t changed? Detroit metropolitan Detroit city Population movement in the early 1900s tended to be from rural areas to the central city. Today, population is still moving from rural areas to metropolitan areas, but at the same time, the population within metropolitan areas is spreading out of the central city into the surrounding suburbs and outskirts. Thus in many midwestern cities, while metropolitan population has grown, the population of the central urban areas has declined (see table 1). This is the most significant dynamic influenc ing midwestern metropolitan areas.4 The spread of population out of the center city is not a bad thing in itself. Some would argue that the high population density in the city helped create pollution, overcrowding, and a variety of problems associated with conges tion. Some support for lower population densi ty can be drawn from the fact that density in the fastest growing Sun Belt cities is signifi cantly lower than in “sister” midwestern cities. This fact is sometimes interpreted to indicate that lower density is better suited to promoting growth in the current economy (see figure 1). One urban analyst, David Rusk, has even sug gested that modern cities appear to have diffi culty growing economically once their popula tion density exceeds 5,000 people per square mile.5 This is at least partially due to Ameri cans’ apparent preference for living in lowerdensity communities. The economic conditions that once fa vored the development of high-density central cities have moderated for several reasons. First of all, many midwestern cities grew because they were close to a natural resource that gave them a comparative advantage over other loca tions. Often this was a river or other body of water on which commerce could be transport ed. This economic advantage created others Indianapolis metropolitan Indianapolis city 72 71 Milwaukee metropolitan Milwaukee city 41 -1 FEDERAL RESERVE BANK OF CHICAGO TABLE 1 Population growth, 1950-90 Percent change 35 -44 Sources: For Chicago, author's calculations. For other cities, Rusk (1993). that encouraged the clustering of the labor force in the city.6 Today economic activity is more often associated with concentrations of capital and human skills than with natural resource endowments. Since both capital and labor are significantly more footloose than natural resources, this has weakened the com parative advantage that cities derived from their natural resources. Accordingly, growth no longer needs to concentrate at a central place. Instead, it has become multimodal, with pockets of economic activity emerging throughout a metropolitan region, in proximity to each other but spread over a larger area. In the process the boundaries between urban, suburban, and rural areas have become blurred, and the entire metropolitan region has become more economically homogeneous. Not all aspects of this deconcentration are benign, and numerous analysts have questioned whether it represents a new pattern of rational economic growth or simply unregulated sprawl.7 While the forces leading metropolitan areas to spread out may reflect the natural demands of the economy, the response of local governments in dealing with the trend may be producing new problems. Anthony Downs argues that as development has moved out of the cities, individual towns have adopted poli cies that protect their interests but create a patchwork of regulations that ultimately harm region-wide development prospects.8 Initially 21 services is receiving growing attention, as efficient firms need Population density, 1990 efficient government to help (or thousands of people per square mile at least not hinder) their perfor mance in the world economy. A substantial body of re search since the 1920s has exam ined whether larger consolidated governments are more efficient in producing services than smaller, more fragmented units. Bish and Nourse (1975) summarize the assumptions in favor of a single consolidated government across three dimensions. First, a metro politan area is actually a single community linked by a shared economy but artificially divided by fragmented government juris dictions. Second, the metropoli tan-wide needs of citizens and businesses cannot be met by this fragmented governmental struc ture. Third, the elimination of fragmented jurisdictions will eliminate duplication and overlap Note: Cities were paired that had simitar census populations in 1990. Densities are for the city proper, not the metropolitan area. among governmental units in favor of a single metropolitan government that can more effi ciently provide public goods and services at towns often pursue new commercial develop ment at virtually any cost, using tax breaks and greater economies of scale.9 As the authors point out, evidence as to whether this last as land write-downs as incentives. Little attention sumption is true has been contradictory. is paid to the increased congestion and pollu In an attempt to identify the optimal size tion that may spill over into surrounding com munities, which may lack the infrastructure to of government, economists have tried to esti support these new burdens. Since the property mate the spillover effects and the scale econo mies that are produced when a central govern tax advantages of commercial development are limited to the town in which the development ment provides a uniform service across a metropolitan region.10 If positive spillovers occurs, adjacent communities are often forced and significant scale economies exist, central to accommodate the development without any ized provision of services may be warranted. greater fiscal resources. Once residents decide In general, this appears to be the case most that additional growth is not desired, towns often with government services that are wellmay move to the next stage of this process, suited to technical solutions. For example, instituting growth-management policies to water, sewage disposal, and electric services force development elsewhere or to regulate appear to be most efficiently provided by a closely the type of development that can occur. centralized metropolitan-wide government. A second issue: O p tim a l Supporters of such government also argue that g o v e rn m e n t size mass transit, transit planning, and even land Even if the potential harmful effects of use planning also appear to benefit from cen urban sprawl were not a consideration, metro tral provision. Services that tend to be poorly politan governance may be warranted on the provided by centralized governments are grounds of optimal government size. The many social services such as education and efficiency with which government provides its 22 FIGURE 1 ECONOMIC PERSPECTIVES welfare. Moreover, localities may prefer to decide for themselves what levels of these services to provide.11 Economists in general have been careful not to overstate the potential benefits of having governmental services provided by single, metropolitan-wide governments. Much of the criticism of such government rests on the work of Tiebout (1956), who suggested that consum ers are best served when they are free to move and can choose communities that provide their desired level of public services. The resulting competition among communities not only allows individual towns to provide their own unique set of services, but also should in prin ciple control the size of government. This view is supported by Eberts and Gronberg (1988), who found a statistically significant relationship between the number of general-purpose governments at the metropoli tan and county level and their size as measured by the share of personal income devoted to local governmental expenditures. The more general-purpose governments there are, the smaller the share of personal income required to support local government. While this find ing supports the idea that decentralized govern ment promotes fiscal competition and holds down the cost of government, it does not indi cate whether such governments can provide better-quality services than more centralized governments. Not surprisingly, this uncertain ty has led to the policy prescription that a hy brid approach to providing governmental ser vices works best. Rather than uniformly sup porting either a centralized or a fragmented government structure, this prescription argues that one should consider the nature of the ser vice and assign its provision to the appropriate level of government. Can c e n tra liz e d m e tro p o lita n g o vern an ce help w ith spraw l? Whether a more centralized model of governance could alter the current pattern of metropolitan deconcentration really depends on which forces are causing the population to spread out.12 If deconcentration is occurring because more efficient production and lower transportation costs are available outside the central city, then policies to reverse deconcen tration may simply promote inefficiency. If, however, it is due to negative externalities associated with the city such as social prob lems, then deconcentration may indicate an inefficient distribution of available resources. T A B LE 2 Correlations: Central city with metropolitan area and suburbs Metropolitan area All suburban counties3 Counties with no central cities Counties with central cities Population growth 1960-70 1970-80 1980-90 0.609 0.729 0.709 -0.188 0.261 0.273 -0.041 0.233 0.239 -0.322 0.317 0.401 Real per capita income growth 1960-70 1970-80 1980-90 0.815 0.872 0.835 0.456 0.552 0.605 0.398 0.479 0.603 0.503 0.686 0.599 Average real house value growth6 1970-80 1980-90 0.906 0.939 0.525 0.849 0.480 0.820 0.706 0.877 281 656 391 265 Number of observations includes all parts of the county except the central city. bCity and suburban average house value correlations have fewer observations; reading across, the numbers of observations for the 1970s are 224, 569, 359, and 210; for the 1980s they are 279, 651, 388, and 263. Source: Voith (1993). FEDERAL RESERVE BANK OF CHICAGO 23 In this latter case, deconcentration may not reflect some optimal reconfiguration of regional resources, but rather, a type of sorting process in which people and firms relocate to areas that serve their individual needs but do not necessar ily promote the interests of the region. Anec dotal evidence about the growing pains associat ed with suburban growth suggests that decon centration is at least partially being driven more by “flight from blight” than from some optimal reconfiguring of resources to maximize efficien cy in the regional economy.13 However, a frequent criticism of efforts to introduce metropolitan governance is that they are thinly disguised attempts to force develop ment back into the central city. Those analysts who believe metropolitan deconcentration will improve regional economic efficiency suggest that central cities may be an anachronism, and that the increasing preference of firms for suburban locations can result in healthy sub urbs able to function without a healthy central city. In the Midwest, Detroit is often presented as an example of such a scenario. On the sur face, it appears that the suburbs surrounding Detroit have continued to flourish despite the sharp decline of the central city. Those sub urbs may have absorbed the industries that have left the city, in which case economic activity has not left the area but simply has redistributed itself. Since commercial develop ment usually benefits the community in which it is located,14 it is not clear that suburban com munities would embrace a new form of gover nance that was expected to channel commercial development back into the urban area. If they did so, they would surrender the tax benefits they would receive if they captured the devel opment themselves. However, evidence sug gests that healthy suburbs need healthy cities in order to grow.15 Furthermore, anecdotal evi dence suggests that many of the healthiest metropolitan areas rely more heavily on vari ous forms of regional governance. Establishing a structure to promote regional problem-solving and consensus-building has become more important as cities and their sub urbs appear to have become more interdepen dent in important ways. A variety of research has found links between the health of central cities and the development prospects of the suburbs.16 Gains in city and suburban popula tions, per capita income, and housing values are 24 positively correlated, and these relationships have strengthened every decade since 1960 (see table 2).17 Such positive relationships suggest that population, income, and housing values in the suburbs are related to (or at the very least not independent of) the vitality of the central city. However, one must interpret such correla tions carefully. Rather than reflecting greater interdependence between city and suburbs, they may simply indicate that as economic activity has moved to the suburbs, suburban economies have begun to resemble city economies and now react to external forces in the same manner as their city counterparts. While much of this research is still quite new, it has yielded two interesting findings. First, the age of the city matters when it comes to growth prospects. Second, the period over which deconcentration is examined matters when it comes to measuring whether suburbs can flourish without a healthy central city. Norton (1979) found that U.S. cities that devel oped before 1920 have faced significantly dif ferent economic prospects than cities developed after 1920. The pre-1920 or “old” cities are characterized as being largely landlocked, con structed before automobile transportation was the dominant form of transportation, and having high population densities. The younger, post1920 cities have lower population densities, tend to have fewer spatial restrictions, and have grown through active annexation of surrounding areas. Norton examined the trends in popula tion, density, age of housing stock, and the ratio of household incomes of city dwellers versus suburbanites from 1950 to 1975 in order to assess how the age of a city influenced growth. The “old” cities in the sample, which had large percentages of housing stock built before 1939, shrank during this era; the young cities grew. Norton’s sample included four midwestem cities—Chicago and Detroit labeled old, India napolis labeled young, and Milwaukee some where in-between and labeled anomalous. If the variables Norton examined are updated to 1990 for these cities, the pattern remains much the same except in Milwaukee, which now appears to behave more like the old cities than the new (see table 3). Initial decline in the central city may not seem to set off any alarm bells, but over time, it will affect the suburbs as well. Scholars of metropolitan development have suggested that ECONOMIC PERSPECTIVES TABLE 3 Differences between “old” and “young” midwestern cities A .1975 OLD Chicago Detroit ANOMALOUS Milwaukee YOUNG Indianapolis Ratio of household income, city/ SMSA ring Population change. 1950-75 Population density Pre-1939 housing (p e rc e n t) (000s p e r sq. m ile ) (p e rc e n t) -14 -28 15.1 11.0 67 62 73 82 4 7.6 55 73 67 1.9 40 107 Ratio of per capita income, city/ suburb, 1989 B .1990 Population change. 1970-90 Population density Pre-1939 housing (p e rc e n t) (000s p e r sq. m ile ) (p e rc e n t) 8.9 4.2 45 36 66 53 OLD Chicago Detroit -12.7 -21.4 ANOMALOUS Milwaukee -4.5 6 38 62 YOUNG Indianapolis -1.6 2 19 90 Sources: For 1975 data, Norton (1979). For 1990 data, author's calculations. tions. Initially these may only be farther-outly it passes through six stages, as illustrated in table 4.18 According to Rothblatt, the majority ing suburbs, but as diseconomies spread of U.S. cities are operating at stage 5, “absolute throughout the metropolitan area, economic activity will begin to leave the area altogether. decentralization.”19 In this stage, the central Such a scenario makes clear that the prob city’s population is shrinking, the metropolitan lems and growth prospects of metropolitan area’s population is growing, and the perceived characteristics of the metropolitan area (such as areas have become more interdependent. It also makes clear the importance of establishing tax burden, infrastructure, or congestion) are seen as worsening. If the process moves to the regional mechanisms to promote regional con sensus-building and problem-solving. next stage, the decline of these characteristics will accelerate. Rothblatt points out that the consequences of this evolution are particularly worri T A B LE 4 some in an increasingly global Metropolitan development and population change economy, in which firms have M etropolitan more choice in location and can Stage Ring Core area leave declining areas. As urban markets expand and become more _ 1. Centralization + + competitive, firms must be efficient 2. Absolute centralization ++ + ++ in order to survive. This in turn 3. Relative centralization + ++ + requires well-managed and sup 4. Relative decentralization + + portive metropolitan areas. If de 5. Absolute decentralization + concentration leads to metropolitan 6. Decentralization diseconomies such as traffic con Souce: R o thb latt (1993). gestion and higher housing prices, firms will begin to seek other loca FEDERAL RESERVE RANK OF CHICAGO 25 Is there a better way? Developing a better structure for govern ing metropolitan growth has long been of inter est to planners and academics. Voters and politicians, however, have viewed such propos als with suspicion, envisioning an additional layer of government that would only duplicate existing governmental functions without pro viding any clear benefits. In addition, local governments are unlikely to want to cede pow ers to a new level of government. Nevertheless, some notable examples of metropolitan governance allow us to assess its potential benefits. In the Midwest, these in clude the Metropolitan Council of Minneapolis/St. Paul, Unigov in Indianapolis, and the Allegheny Regional Asset District in Pitts burgh. None of these has been as ambitious or as successful in many ways as large-scale ef forts such as Toronto’s.20 In most cases, met ropolitan governments have been established to fill planning gaps between other existing levels of government. These governments are not designed to function in any comprehensive fashion. As such, they provide limited exam ples of the potential for metropolitan gover nance rather than serving as ready-made mod els to be implemented elsewhere. Minneapolis-St. Paul Metropolitan governance has a longer history in the Twin Cities than in virtually any other U.S. city. As early as 1957, the Metro politan Planning Commission (MPC) was established to coordinate issues of regional growth.21 However, this was a voluntary coun cil of governments that proved largely ineffec tive in managing growth. While the MPC was well equipped to study the nature of growth problems and to suggest potential solutions, it could not enforce any of its suggestions. Once this became apparent, the MPC was supplanted by the Metropolitan Council of the Twin Cities in 1967. The council has been credited with notable successes, but significant obstacles still prevent it from operating as a fully developed regional policymaker. The Metropolitan Council covers seven counties in the metropolitan area containing roughly 272 governments: 7 county, 138 city, 50 township, 49 school district, 6 metropoli tan, and 22 special purpose districts. Proba bly none of these governments has a signifi 26 cant interest in reducing its own authority. Accordingly, the role of the council from the beginning was to fill the gaps, handling issues that other governments were unwilling or unable to manage. Its charge was to coordi nate planning, particularly in the area of phys ical infrastructure. The council’s structure has several unique aspects. First, although its interactions are with local and county governments, it was created by the state legislature, to which it reports. This suggests that the council’s pri mary audience may be state rather than local government, although over time, local consid erations appear to have become more influen tial in the council’s deliberations. Second, all 17 council members are appointed by the governor, with some input from legislators from the metropolitan area’s districts. Being appointed may help protect council members from feeling particularly beholden to parochi al interests, since they are not forced to re spond to a local constituency. On the other hand, it reduces the leverage of the council members, since they lack broad-based public support and are rarely well known within the metropolitan area. Third, by design the coun cil has very little operating authority. While it oversees and approves the budgets of some smaller regional operating authorities, its main charge is to review and plan for longrange expenditures in the region. The council has proven to be reasonably effective in carry ing out this charge in the area of physical infrastructure. Critics have suggested that the council has been less effective in social poli cy; its efforts in health care and education have so far been largely unsuccessful. Two widely acknowledged partial success es for the council were its 1973 Metropolitan Development Guide and its successful tax-base sharing program. The former was an ambitious state-mandated plan to rationalize growth within the region in order to prevent urban sprawl. Its major goal was to stop development from leap frogging into rural locations, directing it instead to the central city and the already heavily devel oped first-ring suburbs with existing infrastruc ture. In addition to this primary goal, the plan had subsidiary goals of preserving the natural environment, expanding people’s social choices, lowering the concentration of minorities in the central city, and diversifying the sources of ECONOMIC PERSPECTIVES regional economic growth. Two other objec tives were to increase the equitability of financ ing for public services and increase citizen in volvement in regional governance. Assessments of the council’s efforts to channel development have been mixed. Clearly, the Twin Cities shifted some development into the central city during the mid-1970s and 1980s. Commercial construction in the city remained strong, and the economic prominence of Minneapolis-St. Paul was enhanced. The central city did lose population during this period, particu larly in comparison to the outer-ring suburbs. But there is some evidence that growth was channeled into the first-ring suburbs, which suggests that the council’s efforts were at least partly successful. Population density in the close-in suburbs rose, perhaps because in-fill development appeared more attractive. While population growth accelerated in the outlying suburbs, commercial development did not leap frog in the usual pattern. Enforcing this con tainment were limitations on sewer and water extensions onto working farmland. The plan’s success was limited in another way as well. While development within the designated planning area was influenced, uncon trolled development continued in the fringe area just outside the five districts under the council’s jurisdiction. Since the plan did not allow the districts to annex the surrounding areas, growth on the fringe went largely unchecked. A second major effort of the council that has met with some success is mandated taxbase sharing. In 1974, Minnesota’s Fiscal Disparities Act was passed with the goal of reducing the disparities in the tax base between towns caused by the concentration of commer cial activity. Proponents of the act argued that towns that attracted commercial activity re ceived significant tax benefits, while neighbor ing areas had to deal with the spillover effects without receiving any tax benefit. Using 1971 as the base year, the law stipulated that 40 percent of the net gain in new commercial and industrial development would be dedicated to a tax-base-sharing pool that would channel mon ey to communities unable to attract commercial development. Allocations would be based on a formula that took into account population growth and the fiscal capacity of each town. With this plan, the ratio between the highest and lowest commercial and industrial tax base FEDERAL RESERVE BANK OF CHICAGO per capita in 1991 was 4 to 1; without the plan, it would have been 22 to 1.22 The primary beneficiaries of this plan have been fast-grow ing residential areas lacking commercial devel opment. Ironically, because of the concentra tion of commercial construction downtown, the central city has ended up a net contributor. Many analysts have rated the Metropolitan Council as at least a partial success. It has had a significant influence in planning infrastructure, ranging from development of the metropolitan airport to the siting of the Metrodome sports complex and the giant retail center, the Mall of America. However, because the council lacks enforcement power, its influence is largely limited to its powers of persuasion. Part of its success is attributed to the belief that the Twin Cities region appears to be more accepting of the notion that without a strong and vital central city, the region will be unable to compete for jobs and new industries. The region’s alleged acceptance of this notion in turn appears due to two factors. First, it is the only significant met ropolitan area within a 400-mile radius. This relative isolation means that no other place in the region is likely to be a significant draw for new economic activity. Second, intraregional options for economic growth are few. Growth in the region’s agricultural industries appears limited, and the region’s traditional mining activity has faded. Accordingly, the health of Minnesota’s economy has become more heavily dependent on the success of the metropolitan Minneapolis-St. Paul area. Perhaps another reason for the greater acceptance of metropolitan governance is cul tural. The northern European population that was initially drawn to this area embraced coop erative ventures, with farming, dairy, electrifi cation, and even housing co-ops relatively common. Some analysts have suggested that this has carried over into a greater acceptance of government structures drawing on broad networks of resources. A final reason for the success of the Twin Cities’ regional gover nance may be the area’s cultural homogeneity. Some evidence suggests that the more racially different the populations of the central city and the surrounding suburbs, the less likely the region is to embrace metropolitan governance, particularly when it perceives such governance as primarily a measure to help the central city at the suburbs’ expense. As the Twin Cities’ 27 minority population stands at only 12 percent, this is the most homogeneous metropolitan area of the thirty largest in the country.23 These factors may have combined to make acceptance of metropolitan governance more likely in the Twin Cities region. However, even in this more friendly environment, such a structure is seen largely as filling gaps between other layers of government. Without enforce ment powers and without the ability to annex new areas as the region grows, the future of the Metropolitan Council is still unclear. It has yet to demonstrate that it can successfully address social infrastructure problems. As with most governments, once its role is defined, it may have difficulty reinventing itself. Indianapolis and Unigov Another Midwest experiment in regional governance is Unigov in Indianapolis. In the late 1960s, Indianapolis Mayor Richard Lugar established the Governmental Reorganization Task Force to investigate the potential for creating a unified county-city governance structure for Indianapolis and the surrounding municipalities in Marion County. The origi nal goal was not a single body responsible for all governmental functions in the area, but only a unified legislative body—the CityCounty Council, with the mayor of Indianapo lis as its Chair.24 Initial support for Unigov was not over whelming. Many city constituents, particularly black residents, saw it as an attempt to dilute their political influence. Although minorities were a growing segment of the city’s popula tion, Unigov would add 113,000 mostly white suburban residents to the electorate that would then total 406,000 voters. These numbers would swing the city-county elections to the Republicans. Proponents of Unigov recognized that support for the new consolidated structure might not run deep and chose not to seek a voter referendum to approve it. Instead, Unigov was ultimately approved only by the Indiana legisla ture. Unigov’s proponents brought a voluntary lawsuit against themselves in order to ratify the legitimacy of the new structure and forestall potential court challenges.25 Marion County still contains 50 separate local governments and 100 taxing units. But the Unigov legislation created Indiana’s only consolidated city, with geographic boundaries that roughly equate to those of Marion County. 28 The boundaries of Indianapolis expanded from 82 to 402 square miles, its population from 480,000 to 740,000. The legislative body responsible for governing the area is the 29member City-County Council elected to fouryear terms, 25 from single districts, 4 at large. The mayor is the executive of the consolidated city and is elected city-wide. The consolidated city has six administra tive departments below the mayor’s office: Administration, Metropolitan Development, Parks and Recreation, Public Safety, Public Works and Transportation, and Public Health. Housed in the executive branch, these depart ments provide county-wide services that had previously been performed by 16 independent special-purpose corporations. Six independent municipal corporations remain outside the consolidated city’s direct control. These cor porations tend to be single-function govern ments (the Health and Hospital Corporation, the Airport Authority, the Public Transit Au thority, and the Public Library), but they also include the more broadly chartered Capital Improvement Board and the City-County Building Authority. Even though these remain independent corporations, the City-County Council has been given the power to review their budgets and appoint governing members to their boards. Other notable government units not con tained in Unigov include the Marion County government, which still exists in a diminished form, and the county court system. In addition, when Unigov was created, four municipalities received “excluded cities” status and retained their own government structures. Another 17 municipalities received the ambiguous designa tion of “included towns,” which meant that while they maintained their own local govern ment, they could vote in the county-city elec tions because they paid taxes and received certain consolidated city services. Finally, independent school districts were left out of the Unigov structure. The disadvantage of this structure is that it makes for a patchwork in terms of the geographic area and way in which services are provided.26 Despite this somewhat awkward frame work, Unigov has provided revenue benefits to the consolidated city and has permitted revenue diversification that probably would not have occurred otherwise. Some of this diversifica ECONOMIC PERSPECTIVES tion has been forced on the consolidated city by actions of the state and federal government, but the enlarged scope of the city has enabled greater flexibility in dealing with changes in revenue structure. For example, in 1973 the state legislature passed a property-tax reform measure designed to limit the growth in the property-tax rate. Towns were compensated through a state property-tax replacement fund, whose revenues were derived from an increase in the sales tax. Since this measure put a limit on future growth in the property tax, the search for alternative revenues became increasingly important. Similarly, the decline in federal support, particularly block grants, made local revenue-raising more important. Unigov helped expand the fiscal base of the city and allowed the passage of new revenue-raising options that have not made the central city prohibitively more expensive (from a tax per spective) than adjacent communities. A county option income tax was adopted in 1983; a 10 percent county excise tax on automobiles and a wheel tax on trucks were also adopted. Fees and charges on sewers, solid waste collection, building permits, and other services have also been adopted, but since these are county-wide, they do not unduly distort the city’s tax base relative to other communities. Similarly, Indianapolis has pursued the usual array of tax incentives to attract and retain businesses in the area, but because it can draw on the larger tax base of the consolidated city, the cost of the incentives to the individual town is reduced. In turn, the benefits of added economic development can be shared county wide. The city-county government has also used its powers of eminent domain to rational ize economic development by assembling appropriate parcels of land for development. While these measures have helped with both economic growth and revenue-raising, they have not eliminated disparities in property tax rates between counties. In 1992 there were 60 applicable property tax levies and 63 de fined taxing jurisdictions within Marion Coun ty. Nominal property tax rates ranged from $7.92 to $13.09 per $100 assessed valuation. This variation is because certain services are still supported only by the local tax base, not that of the consolidated city. In the community with the highest tax rate (Center Township in downtown Indianapolis), public assistance FEDERAL RESERVE BANK OF CHICAGO needs run high and are supported exclusively by property taxes imposed on Center Township properties. Finally, one fiscal advantage that Unigov has provided is the ability to borrow money. The expansion of the city’s boundaries to in clude the surrounding suburbs has made it easier to finance large-scale capital projects, since the expanded tax base can support them. It has also arguably lowered debt costs, since the increased flexibility provided by the larger and more diverse tax base has led bond rating agencies to give Indianapolis consistently high debt ratings.27 Allegheny Regional A sse t D is tric t One of the most recent attempts at region al government is the Pittsburgh-area Allegh eny Regional Asset District.28 Established in 1994, this governmental body was designed by the County Commissioners to address five policy objectives: improving and stabilizing funding for regional assets, correcting funding inequities for Pittsburgh, relieving overreli ance on selected taxes (particularly property taxes), reducing fiscal disparities between rich and poor communities, and enhancing region al cooperation. The district has no direct taxing authority but receives 50 percent of the proceeds from the 1 percent county-wide local option sales tax. It uses these funds to sup port so-called regional crown jewels—ameni ties located in Allegheny County that benefit all residents. In 1995, 30 percent of the district’s funds went to parks and 32 percent to libraries. Oth er recipients were sports venues, cultural enti ties, and special facilities such as zoos. Many of these regional assets are in the city of Pitts burgh and have a recent history of financial distress. City resources for funding them have become strained as the central city’s growth has lagged that of the suburbs. This left Pitts burgh in an awkward position. While it was still the heart of the region’s economy, it was having to fund amenities that no longer prima rily benefited city residents. For example, the city zoo was funded primarily by the city be fore the district was created, although 75 per cent to 85 percent of the visitors to the zoo lived outside the city limits. The creation of the district has saved the city approximately $16 million in annual expenditures on this and other crown jewels. 29 The county government and 128 municipal governments spend the remaining 50 percent of the sales tax proceeds on the other policy ob jectives endorsed by the County Commission ers. Allegheny County uses its 25 percent of the total sales tax revenues to reduce property taxes by 25 percent and to eliminate the coun ty-wide personal property tax. The remaining funds are distributed to municipalities on a formula basis that recognizes municipal need. The local governments are required to use twothirds of the revenue to reduce local taxes. Specifically, Pittsburgh is required to use all of its sales tax revenues to eliminate the city’s portion of the personal property tax and to cut the city’s admissions tax for sports and enter tainment events from 10 percent to 5 percent. The district is run by a seven-member citizen board. Board members may not be public employees, elected officials, or relatives of elected officials. Four members of the board are appointed by the County Commis sioners and two by the mayor of Pittsburgh; the seventh member is chosen by the other six from a list of nominees provided by regional agencies within the area. The governor is also allowed to appoint an eighth non-voting mem ber. Board members decide which regional assets are eligible for funding. Although a few assets are specifically excluded (schools, health care facilities, and parks of less than 200 acres), virtually anything else can qualify. Funding is provided only if six of the seven board members approve. It is too soon to assess the success of the Allegheny County effort, but as a new experi ment in regional government, this method of supporting regional assets will receive a great deal of attention in the future. The concept of identifying and supporting assets that benefit the entire region and enhance its image as a good place to live and work is intuitively appealing. Thanks to a regional funding structure, the area’s crown jewels can be maintained even if they are located in places whose tax base can no longer provide the support they require. Finally, the regional governance structure may foster a more coor dinated strategy for promoting the benefits of 30 the region, rather than those of individual towns. By supporting regional assets, this structure may lessen the friction between urban and suburban interests. Conclusion: Why is m etropolitan governance im portant now? The purpose of creating a more cohesive metropolitan region is worth restating. Effi cient firms cannot function for very long in inefficiently configured metropolitan regions. With efficiency and productivity consider ations guiding the development of many firms, local barriers that prevent firms from improv ing their situation will certainly hurt the devel opment prospects of most regions. Metropoli tan governance, or at the very least a mecha nism for recognizing regional goals for devel opment, can help rationalize growth and help prevent the many problems that occur when each town charts a development course that provides only for its own interests. Much of what metropolitan governance can do is related to better land use planning. Infrastructure and development plans can be coordinated to ensure that balanced develop ment can occur and that commercial develop ment is balanced with needed regional ameni ties such as parks and open spaces. Ultimately, the purpose of metropolitan governance is to promote a highly efficient metropolitan region that is properly configured to support growth in a more rational form. The characteristics of this metropolitan region would most likely include a governmental structure that promotes regional planning and problem-solving, highor mixed-density bounded-growth communi ties surrounded by open space, and greenbelt areas related to mass transit facilities that move people to and from jobs and shopping centers. Finally, new jobs would be concentrated in defined employment clusters where employ ment growth could best be accommodated. While the above characteristics are per haps the ideal, simply recognizing the linkages within metropolitan regions would benefit midwestern cities as they attempt to reinvent themselves for the economy of the next centu ry. Clearly the current pattern of economic growth does not appear sustainable. ECONOMIC PERSPECTIVES NOTES 'See Mattoon (1993). l7Voith (1993), p. 2. 2Oakland and Testa (1995). l8Rothblatt (1993). 3For a discussion of issues concerning optimal govern ment size, see Zax (1988). For a different perspective, see Eberts and Gronberg (1990). l9Ibid. 4Szatan and Testa (1994) chronicle this dynamic. 5Rusk (1993), p. 14. “ Metro Toronto was created in 1953 to fuse the city of Toronto and 12 of its suburbs into a metropolitan govern ment. It has been widely hailed as a model of efficiency in land use and infrastructure development. For an evalu ation of Metro Toronto, see Frisken (1993). 7See, for example, Downs (1994) or Rusk (1993). “The following description of Minneapolis-St. Paul’s experience with metropolitan governance is based on Martin (1993). "Downs (1994). 22Smith (1994). l’Bish and Nourse (1975), p. 200. “ Martin (1993), p. 207. "’Oates (1977), p. 6. 24Blomquest (1994a). "Bish and Nourse (1975), p. 201. “ Blomquest (1994c). ,2Voith (1993), p. 3. “ Blomquest (1994b). “For a discussion of “flight from blight,” see Voith (1992). “ Kirk (1994). IJOakland and Testa (1995). “Turner (1995). hHansen (1974). “Savitch et at. (1993); Voith (1993). l6Voith (1992 and 1993), Van Der Veer (1994), and Savitch et al. (1993). REFERENCES Bish, Robert L., and Hugh O. Nourse, Urban Economics and Policy Analysis, New York: McGraw-Hill, 1975. Blomquest, William, ‘Creation of Unigov,” in The Encyclopedia of Indianapolis, D. Bodenhamer and R. Barrows (eds.), 1994a, pp. 1350-1352. / ‘Structure of Unigov,” in The Encyclopedia of Indianapolis, D. Bodenhamer and R. Barrows (eds.), 1994b, pp. 1353-1355. , “Unigov and political participation,” in The Encyclopedia of Indianapo lis, D. Bodenhamer and R. Barrows (eds.), 1994c, pp. 1355-1358. Bloomington and Indianapolis, IN: Indiana University Press, 1994. Downs, Anthony, New Visions for Metropoli tan America, Washington, DC: The Brookings Institution and Cambridge, MA: Lincoln Insti tute of Land Policy, 1994. Eberts, Randall W., and Timothy J. Gron berg, “Can competition among local govern ments constrain government spending?” Eco nomic Review, Federal Reserve Bank of Cleve land, First Quarter 1988, pp. 2-9. , “Structure, conduct and performance in the local public sector,” Na tional Tax Journal, Vol. 43, No. 2, 1990, pp. 165-173. Bodenhamer, David J., and Robert G. Barrows, eds., The Encyclopedia of Indianapolis, FEDERAL RESERVE BANK OF CHICAGO 31 Frisken, Frances, “Planning and servicing the greater Toronto area: The interplay of provin cial and municipal interests,” in Metropolitan Governance: American/Canadian Intergovern mental Perspectives, D. Rothblatt and A. Sanc ton (eds.), 1993, pp. 153-204. Hansen, Niles M., “Regional policy in the United States,” in Public Policy and Regional Economic Development, Niles M. Hansen (ed.), Cambridge, MA: Ballinger Press, 1974, pp. 271-304. Kirk, Robert, “Unigov and public finance,” in The Encyclopedia of Indianapolis, D. Bodenhamer and R. Barrows (eds.), 1994, pp. 1358-1360. Martin, Judith, “In fits and starts: The Twin Cities metropolitan framework,” in Metropoli tan Governence: American/Canadian Intergov ernmental Perspectives, D. Rothblatt and A. Sancton (eds.), 1993, pp. 205-244. Mattoon, Richard H., “Economic develop ment policy in the 1990s—Are state economic development agencies ready?” Economic Per spectives, Federal Reserve Bank of Chicago, Vol. 17, No. 3, May/June 1993, pp. 11-23. Norton, R.D., City Life-Cycles and American Urban Policy, New York: Academic Press, 1979. Oakland, William H., and William A. Testa, “Does business development raise taxes?” Economic Perspectives, Federal Reserve Bank of Chicago, Vol. 19, No. 2, March/April 1995, pp. 22-32. Oates, Wallace E., “An economist’s perspec tive on fiscal federalism,” in The Political Economy of Fiscal Federalism, Wallace E. Oates (ed.), Lexington, MA: Lexington Books, 1977, pp. 3-20. Rothblatt, Donald N., “Summary and conclu sions,” in Metropolitan Governance: Ameri can/Canadian Intergovernmental Perspectives, D. Rothblatt and A. Sancton (eds.), 1993. Rothblatt, Donald N., and Andrew Sancton, eds., Metropolitan Governance: American/Cana dian Intergovernmental Perspectives, Berkeley, CA: Institute of Government Studies Press, 1993. 32 Rusk, David, Cities Without Suburbs, Wash ington, DC: Woodrow Wilson Center Press, 1993. Savitch, H.V., David Collins, Daniel Sand ers, and John P. Markham, “The ties that bind: Central cities, suburbs and the new met ropolitan region,” Economic Development Quarterly, Vol. 7, No. 4, November 1993, pp. 341-357. Smith, David A., “Comprehensive tax base sharing,” Commentary, Center for Urban Eco nomic Development, Washington, DC, Sum mer 1994, pp. 17-22. Szatan, Jerry W., and William A. Testa, “Metropolitan areas spread out,” Chicago Fed Letter, Federal Reserve Bank of Chicago, No. 83, July 1994. Tiebout, C., “A pure theory of local expendi tures,” Journal of Political Economy, Vol. 64, No. 5, October 1956, pp. 416^424. Turner, James W., “The Allegheny Regional Asset District: Communities thinking and act ing like a region,” Government Finance Re view, June 1995, pp. 19-22. Van Der Veer, Jeroen, “Metropolitan gov ernment and city-suburban cleavages: Differ ences between old and young metropolitan areas,” Urban Studies, Vol. 31, No.7, 1994, pp. 1057-1079. Voith, Richard P., “City and suburban growth: Substitutes or complements?” Business Review, Federal Reserve Bank of Philadelphia, September/October 1992, pp. 21-33. _______________,“Does city income growth increase suburban income growth, house value appreciation, and population growth?” Federal Reserve Bank of Philadelphia, working paper no. 93-27, November 1993. Zax, Jeffrey S., “The effects of jurisdiction types and numbers on local public finance,” in Fiscal Federalism: Quantitative Studies, Har vey Rosen (ed.), Chicago: University of Chica go Press, 1988, pp. 79-103. ECONOMIC PERSPECTIVES ECONOMIC PERSPECTIVES P ublic Inform ation C enter Federal Reserve Bank of Chicago P.O. Box 834 Chicago, Illinois 60690-0834 BULK RATE U.S. POSTAGE P A ID CHICAGO, ILLINOIS PERMIT NO. 1942 D o n o t fo rw a rd A d d ress c o rre c tio n re q u es ted R eturn p o stag e g u a ra n te e d M a ilin g lab el c o rre c tio n s or d e le tio n s Correct or mark Delete from mailing list on the label and fax it to 312-322-2341, or send to: Mail Services Federal Reserve Bank of Chicago P.O. Box 834 Chicago, Illinois 60690-0834 FEDERAL RESERVE BANK OF CHICNGO
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