Academic journal article The Cato Journal

Why Some Cities Are Growing and Others Shrinking

Academic journal article The Cato Journal

Why Some Cities Are Growing and Others Shrinking

Article excerpt

Over the last three decades, large cities like Pittsburgh, Detroit, Cleveland, Buffalo, and Toledo have seen their populations shrink, while areas like Houston, Atlanta, Dallas, Tampa, and Phoenix have seen their populations grow rapidly. Examining the policy differences between high-growth and low-growth areas can provide evidence that may help declining cities reverse their fortunes.

In 1980, Austin, Texas, and Syracuse, New York, were roughly the same size. The Austin metro area had a population of about 590,000, and the Syracuse metro area had about 643,000 residents. By 2007, Austin's population had increased by more than 1 million while Syracuse's population had been stagnant. That same disparity exists when one examines the growth of employment and real personal income. Another disparity between the two areas is the tax burden. State and local taxes accounted for nearly 13 percent of personal income in Syracuse but only about 9 percent in Austin. Although there are numerous factors that can influence the growth of individual economies, one finds a consistent relationship between low taxes and high economic growth in metropolitan areas, in states, and in nations.

This article details that relationship between taxes and growth for the 100 largest U.S. metropolitan areas. In the 10 highest-tax metro areas, the state and local tax burden accounted for about 12.4 percent of personal income. In those same areas, population grew by 21.3 percent from 1980 to 2007, employment grew by 40.1 percent, and real personal income grew by 75.5 percent. In contrast, taxes were only 8.3 percent of personal income in the 10 lowest-tax areas. The economic growth in those areas was much faster. Population grew by 64.4 percent, employment by 107.6 percent, and real personal income by 157.3 percent.

The contrasting experiences of Austin and Syracuse occurred in countless other areas as well. This article provides 14 additional examples of pairs of metro areas that had similar tax and growth patterns. (1) The experiences of all 15 pairs of metropolitan areas provide valuable lessons for distressed areas everywhere. Keeping tax burdens low appears to be an important ingredient in the recipe for economic prosperity. If high-tax, low-growth metro areas like Detroit, Milwaukee, Buffalo, and Syracuse want to be more like high-growth areas such as Dallas, Tampa, San Antonio, and Austin, they should lower their onerous burden of taxation and bring spending reader control.

Taxes, Economic Growth, and Prosperity

In 1776, Adam Smith wrote An Inquiry into the Nature and Causes of the Wealth of Nations. Economists have been busily examining the issue ever since. It is one of the most widely studied topics in the field of economics. One of the most common findings relates to how economic activity is organized. For example, capitalist countries (those in which economic activity occurs on the basis of voluntary exchange within private markets) tend to grow faster than socialist countries (those in which economic activity is organized by government). The existence of private property rights in capitalist countries helps create stronger incentives for individuals to be productive. As a result, factors of production (including labor and capital) tend to flow out of socialist countries and into capitalist countries. The economic collapse of the Soviet Union and other bastions of socialism provide ample evidence of that.

Starting in the 1980s, Nobel economist Milton Friedman played an important role, along with many other economists and public policy experts, in the development of an index of economic freedom that would allow researchers to be able to measure the degree to which a country had a free market economy. Those efforts culminated in the Fraser Institute's publication in 1996 of the first edition of Economic Freedom of the World. There have been 14 more editions published since then in what is now an annual series. …

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