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Is Economic Freedom Associated with Urban Development?
By Adam Millsap of Mercatus.
"Since
the mid-20th century, many cities have experienced a dramatic decrease
in their populations, to the detriment of their local economies. Efforts
to generate urban development in America’s declining cities take a
variety of forms, but nearly all of them focus on building or renovating
infrastructure. New parks, new roads, new trains or streetcars, new
downtowns, new office parks, and new sports stadiums are some of the
most commonly proposed remedies for urban decline.
Adam A. Millsap offers an alternative to this approach by focusing on
policy- and government-related impediments to urban development. Using a
sample of 381 metropolitan statistical areas (MSAs) and an MSA-level
economic freedom index, Millsap examines the relationship between
government policy and growth across MSAs. Local rules and economic
policies can facilitate or inhibit urban economic development, and
policymakers need a better understanding of this relationship.
Methodology
The MSA economic freedom index ranks MSAs using three criteria:
- Size of the government. How much does the government
consume, transfer, provide in subsidies, and pay in social security
payments, as a percentage of personal income?
- Takings and discriminatory taxation. How much does the government collect in taxes as a percentage of personal income?
- Labor market freedom. How high is the minimum wage as a
percentage of per capita personal income, what percentage of workers are
employed by the government, and what proportion of workers belong to a
union?
Controlling for a variety of other factors that are also known
to impact urban development, such as industry composition, education,
demographics, and climate, allows us to isolate the effect of MSA
economic freedom on per capita income growth and population growth.
Key Findings
The plight of America’s declining cities is well known, but policies
capable of halting or reversing such decline remain elusive. The
traditional remedies of intergovernmental grants and subsidies,
subsidized private investment, and tax incentives and abatements have
been largely ineffective.
This paper provides a new framework for analyzing city competition,
clarifying the different dimensions along which cities can compete with
one another for residents and businesses.
MSAs with greater tax freedom (i.e., lower taxes) experienced more population growth from 2002 to 2011 and from 2002 to 2015.
MSAs with greater overall economic freedom experienced more per
capita income growth in the short run (2002–2005) and longer run
(2002–2011). Government size was the primary factor driving this
relationship.
MSAs with greater labor market freedom had higher per capita incomes."
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