Creating a Better Model to Solve Urban Ills
Edward J. Dodson
Focus Magazine, 4 January, 1984]
According to various members of our government, the policies of the
present administration have provided the catalyst and prescription for
long-term economic recovery. The upward trend of certain "leading
economic indicators" seems to substantiate such claims. What
bothers me, however, is the structural nature of high unemployment
Government statistics conveniently measure unemployment only on the
basis of how many individuals register for unemployment benefits.
Absent is the actual number of people who are no longer eligible for
unemployment benefits and have given up their search for work.
Continued plant closings, permanent layoffs and wage concessions paint
a different picture of realty for the worker.
Also looming over our economic future is the potentially catastrophic
problem of defaults on institutionally-held debt by many financially
desperate nations (accompanied and exacerbated by serious political
upheaval). Further, we must also recognize that despite administration
pronouncements to the contrary, inflation continues as a primary
problem for the United States and the world economy in general.
This brief tour of our economic circumstances leads back to the very
personal and tragic aspects of unemployment. The political economists
continue to debate the causes of mass unemployment: however, simple
observation reveals that once under way the process of recession has
the capacity to feed upon its own downward momentum. Unemployment
becomes more severe under conditions of reduced consumer demand and
this triggers a secondary reduction in the demand for inventories and
new plant or equipment, which leads to more unemployment, further
reducing consumer spending, and so on.
As the cycle deepens there is normally a significant deflationary
effect on prices, since, the relationship between those who control
the supply of goods and services and the demand level is reversed. In
a severe recession there is very little "demand pull;"
therefore, suppliers. committed to production are forced to compete
via the price mechanism for a reduced number of buyers.
Faced with a growing level of structural (i.e., essentially
permanent) unemployment here in the United States, the immediate
concern is whether any combination of economic policies thus far
practiced can produce growth and stability. For reasons too involved
for this writing, I am convinced that the conventional approaches ("conservative"
or "liberal") have contributed to the problems rather than
Thus, for somewhat different reasons I am in agreement with M.I.T.'s
Lester Thurow that we have fallen to a plateau in economic growth. As
a result, we are faced with a
zero sum environment in which the world's net supply of
physical wealth (i.e., real rather than monetary forms of capital) has
virtually ceased to expand.
What we are experiencing is that through the process of deterioration
nature is recapturing more of the existing capital stock than is being
replaced by production. As a result, economic policy pursued by
government, accepting zero sum conditions, is directed not toward
unilateral growth but toward achieving comparative advantage over
other political economies (whether at the urban, regional, national or
Examine the players
To understand the nature and consequences of zero sum strategies, we
must first examine the players and their respective strengths and
weaknesses. Although they fall into four categories, one is
hard-pressed to identify a given player by one category only, as will
At the core of economic production are the players who control what
nature has to offer (i.e., the land and natural resources). By virtue
of ownership rights held against locations or resources, these players
attempt to dictate the terms under which the economic factor "land"
is brought to the game. For the landowning player -- who might be an
individual, corporation or government -- the greater the control over
the supply of essential land (e.g., a unique location near a major
transportation hub or land blessed by plentiful fossil fuels or
minerals) the greater the impact on the end distribution of rewards.
Custom has identified players in the second group: 4'labor."
This group receives a monetary wage for its efforts. Economists,
however, generally adhere to an expanded definition of labor as not
being a class of individuals but as a "factor of production"
(i.e., human exertion both mental and physical) expended with the
production of physical wealth as a goal.
Under our complex system of indirect production and specialization,
wages are returned to labor in the form of money which represents a
contribution to the value of wealth actually produced. The actions of
labor in the zero sum game reflect a recognition of imposed wage
limitations, and labor attempts to obtain higher rewards not from
greater production but by more aggressive bargaining through unions,
which attempt to control the supply of labor in much the same manner
as is land by those players controlling its supply.
Unfortunately for labor, large numbers make difficult such control;
and, as the game approaches zero sum and goes beyond, previous gains
in wages and other benefits are lost and employment itself becomes
threatened. Part of the reason is that our first category of players
(land owners) is far more capable of limiting supply and thereby
sustaining price levels. Additionally, our third player has the
responsibility of determining who plays (i.e., is employed) and who is
left out of the game.
This third player is the business entity (anything from the single
proprietor/entrepreneur to the publicly-held multinational
corporation). How well the individual business entity fares in the
game depends upon many factors. some recognizable and others
well-concealed. High quality products and services, even expert
management, will take our third player only so far. Success and
longevity are directly tied to maximizing the cost/benefit
negotiations with other players in the game.
Therefore, the effective zero sum strategy is, on the one hand, to
acquire as much control over your land factor need~ as possible, while
rewarding labor on the basis of profitability rather than production.
Having accomplished this strategy, the business entity still has the
problem of dealing with tile last, and often the most powerful, player
For better or worse, government has always maintained the role of
removing impartiality from the market. The other three sets of players
are to greater or lesser extents controlled or protected by government
intervention. During the game each player attempts to introduce
countervailing measures in an effort to neutralize advantages granted
by government to opposing players. The result is a burgeoning
government bureaucracy besieged by pleas for advantage from a
multitude of special interests.
The rules of the game may change overnight and without consideration
as to long-term effects, as evidenced by the impact of O.P.E.C. in the
game as a multi-government sanctioned monopoly having both political
and economic purposes. A decade of world wide turmoil followed as the
other players scrambled to introduce countervailing measures and
protect their respective pieces of the economic pie.
As one becomes more convinced that the world economy has, because of
existing structural conditions, reached zero sum, then the issue of
comparative advantage becomes crucial as a strategy for short-run gain
-- not only in the inter-national markets but between regions,
metropolitan areas and even between the urban center and its suburban
What is needed, then, to compete successfully is a strategic plan
based on policies necessary to achieve comparative advantage. While
this scenario indicates a greater conflict rather than cooperation
between recognized geographic units, such a program is vital for the
urban center because of intense social problems associated with rising
unemployment and loss of business activity. Moreover, as financial
support from the Federal government is with drawn the urban center
faces tremendous revenue-raising problems for which it has
historically' been ill-equipped to handle.
The urban center today experiences the bitter pain of comparative
disadvantage in the contest with wealthier suburbs. Suburban
populations support business and government by a significantly higher
level of per capita income and require far less in the way of locally
financed social welfare programs. Additionally, since educational and
job skill levels of urban dwellers are often rated by employers as
inferior to those of suburban-educated workers, many employment
opportunities located in the urban center are taken by suburban
residents. While the city receives some benefit from the presence of
these workers (tax revenue on wages, consumer spending, etc.), the
bulk of their earnings -- that spent on housing, food and clothing
--is returned to the suburban community in which they reside.
Thus, although the urban population represents a vast pool of
untapped labor which, if gainfully employed, would support thousands
of large and small business entities, the same population unemployed
acts as a tremendous drag on the urban economy. Government then
further complicates the picture by using its taxing powers in an
attempt to redistribute purchasing power from those who are producing
to those who are not.
One can argue over the social and political need for such government
intervention on the grounds of "economic equality" or "humanitarianism."
Certainly, those disenfranchised from society because of structural
flaws not of their own making must be protected. However, what is only
now gaining recognition is that the consequences on the productive
players of redistribution through heavy taxation eventually worsens
the problem of comparative disadvantage.
This is because deteriorating urban markets and escalating taxes
force many businesses either to close down for good or to move to a
location outside the reach of the revenue-hungry urban center. Taken
with them are both jobs and more of the tax base, and as the process
accelerates the city inches closer toward fiscal, economic and social
disorder. The issue is not
if but when this will occur.
Reduce tax levels
The clear zero sum strategy for the urban center is to greatly reduce
tax levels to a point where they have a comparative advantage over
suburban competitor communities. Doing so will improve the condition
of existing but marginally-profitable business entities and return to
wage earners a larger amount of earnings with which to obtain goods
Presented with new technologies and pushed by rising production
costs, business has adopted a survival strategy of replacing labor
with machinery. Marty workers have lost their jobs due to the
introduction of automation, but because we have reached zero sum they
are unable to find other employment. Again, government policies such
as accelerated depreciation and investment tax credits make investment
in physical capital significantly more advantageous than employing
more people. (In response, union leaders negotiate to protect workers
from job loss due to automation, and businesses simply do not replace
those who retire or otherwise leave.)
And yet, as the number of unemployed increases, consumer spending
drops and many firms end up closing despite efforts to "modernize."
One strategy available to both business and labor has only been
sporadically introduced and generally in watered-down fashion --
employee participation in ownership.
Through the efforts of California attorney Louis Kelso, Congress
several years ago passed legislation supporting the tax-advantaged
employee stock ownership plan ("ESOP"). This represents at
least one way for business and labor to end the "us versus them"
type of relationship so destructive to achieving comparative
advantage. I am convinced that only by a gradual movement toward at
least partial employee ownership of large businesses will investment
decisions begin to reflect concern for both employment security and
The short-term profit maximization concerns of private
investors/speculators differ from those of employee stockholders who
through reinvestment of pension fund monies and an ESOP, gain a voice
in the management of the company and contribute to its monetary
capital. Under conditions of employee participation, automation and
modernization become positive and motivating factors rather than
threats to employment. This is even more important where zero sum
conditions dictate there will be more losers than winners.
Returning to the issue of tax policy, a legitimate question arises as
to what would happen to government's ability to raise revenue if
wholesale tax reductions were adopted. The relationship between
significant tax reductions on wages, business income or physical
capital and the beneficial impact is rather straightforward. What
cannot occur, however, is an overnight response, since business
investment decisions are made well in advance of implementation.
Consequently, the level of government services will stay high and so
the need for revenue. Remembering that the implementation of changes
in tax policy must be undertaken on a gradual basis to permit
individuals and businesses sufficient time to react, the solution to
the potential revenue gap dilemma rests with that factor of production
and its controlling players not directly affected by the above
What the city retains as its primary tax base is that which would be
there even if all of its citizens and businesses decided to pick up
and leave the location of the city itself and the value of it its
As an economic factor, land is the one thing permanently fixed in
location. It cannot be picked up and moved. Because of this
characteristic, a gradual shift in the tax base from moveable factors
(people and physical capital) to land values produces a set of
business considerations that enhance the urban center's position
vis a vis its suburban competitor communities:
The above strategies and proposed changes in tax policies
address the issue of unemployment from a market rather than
government-centered approach. From the above discussion, I hope tile
reader will recognize that government -- by setting down the rules --
has a strong say in who wins or loses.
- Owners of centrally-located and normally valuable sites would
be able to realize substantial benefit by putting their land to
intensive use. In anticipation to a gradual shift in the tax on
real estate from one imposed on both land and buildings to land
only, the property owner has sufficient time to consider the most
advantageous development options in order to minimize the impact
of the change.
- An unused or underutilized sites are brought into development,
new employment opportunities would be created. An expanding
employment base reduces the pressure on government to raise
revenue for unemployment and welfare-related services and
simultaneously broadens the tax base supported by wages,
permitting a drop in the rate of taxation.
- Economic theory indicates that taxes on land values become
capitalized into lower land prices, since the increased cost of
carrying undeveloped land of high market value brings more land
onto the market, creating more of a "buyers market" for
- The cost of tax collection drops significantly since a tax
based primarily on assessment of land values is rather simple to
implement using modern appraisal methods and computer equipment.
Moreover, there exists in every urban center large quantities of
unused land or sites cleared of improvements prior to development.
The sales data for these sites would be inputed into the
computer's data base and, based on location, zoning and other
qualities, each parcel appropriately assessed. Such a computerized
system (once full exemption of improvements is implemented)
largely eliminates the inequitable nature of the present form of
property tax and amalgamation of other taxes, plagued as they have
always been by subjectivity, noncompliance and frequent fraud.
- Properly assessed land is also more likely to attract
development based on its best economic use (as dictated by demand
and in accordance with such community-imposed restrictions as
zoning and availability of municipal services).
- Finally, investment and rebuilding in neighborhoods outside
the central business district becomes economically feasible
because the lower profit potential is reflected in proportionately
lower taxes levied on less valuable land. Renovation and
rehabilitation of older structures also would benefit unilateral
rather than piecemeal as is now the case under
government-sponsored tax abatements.
While city government's responsibility is to improve the urban
center's position of comparative advantage, the strategies proposed
are designed to free the productive forces inherent in our economic
system. Conventional wisdom has up to this point prescribed the
opposite -- restrictive tariffs, import quotas, wage and price
controls and other types of heavy-handed government interference.
Those methods brought the world economy to its zero sum position. An
expansion of comparative advantage strategies beyond the urban center
to the metropolitan, regional, national and international markets
might put us back on a growth path and end the zero sum game for good.