Battling the rhetoric that broke Michigan’s competitive advantage:
A response to Ross Emmett

Igor Vojnovic

This past November, Andy Henion published an article—“MSU researcher says high taxes can spur growth”—introducing research from my GeoJournal article on the weaknesses of neo-liberalism, and my forthcoming bookchapter “Urban Settlement in Michigan: Suburbanization and the Future” in a book edited by Randy Schaetzl, Joe Darden, and Danita Brandt called Michigan: A Geography and Geology. The two pieces challenge the long-standing right-wing and Republican belief that low taxes, and hence weak urban services and physical infrastructure, are the necessary policy directions for promoting economic growth.

Ross Emmett, Director of The Michigan Center for Innovation & Prosperity at James Madison College, MSU, recently wrote a response to the GeoJournal article. My own response below was triggered by Ross Emmett's confusion of how high taxes and high expenditures on urban infrastructures can be drivers of local development and economic performance.

1. In the GeoJournal article, top world headquarters and first level subsidiaries are used as a proxy for economic performance. Ross Emmett objected to the use of this indicator for measuring economic performance and competitiveness. Emmett argues:

   “What does the presence of the head-quarters of large corporations have to do with economic growth in a region? And perhaps even more importantly, how is economic growth related to the decision of such corporations to set up new office locations?”

   There are two patterns that are evident with the deregulation of markets. One is the global decentralization of industries and the second is the concentration of higher order management functions, specialized services, and high-technology manufacturing.

   It is not only that top headquarters are over-represented in high performance cities—New York is regularly found to maintain the highest concentration of headquarters in the world, and Los Angeles and San Francisco are among the top—but these cities also maintain an over-representation of national employment, and particularly employment in skilled manufacturing and producer services, which are critical drivers of today’s economy.

   In 2000, based on U.S. Census, New York City and Los Angeles maintained 4% of the U.S. population and yet maintained over 6% of employment in the U.S.. These two cities also maintain close to 8% of national employment in producer services. Producer services consist of various business services that are the support system for national and international companies, and they include banks, brokers, insurance, legal services, accounting, and computer analysis, data, and processing, and engineering services.

   In addition to being over-represented nationally in the concentration of corporate headquarters and employment, these urban regions, according to the U.S. Census Bureau, also maintain among the highest median household and per capita incomes in the country.

   Specialized services, high-technology manufacturing, and design-intensive consumer products are today’s economic drivers. By 2001, according to the OECD, about 4 out of every 5 jobs in the U.S. was in service, including in insurance, banking, accounting, research, engineering, and legal services. The U.S. Census Bureau shows similar patterns of market development.

   In addition, according to the OECD and UNDP, more than half of total GDP in the core world economies is now knowledge-based, including industries such as computers, software, pharmaceuticals, education, and media. In fact, over the past two decades, high-tech manufacturing has been the fastest-growing area of world trade. High-tech industries have almost doubled their share of manufacturing output, to about 25%, and knowledge-intensive services are growing even faster, accounting for 8 out of every 10 new jobs.

   Thus, corporate headquarters and first level subsidiaries were selected as proxies for economic performance in the GeoJournal article since knowledge based firms, high-tech manufacturing, and specialized services—due to a series of economic variables (agglomeration effects), social variables (lifestyle preferences of the skilled), and cultural variables (access to amenities)—concentrate around corporate headquarters. Hence the over-representation of employment, and particularly of producer services, in cities that maintain high corporate headquarter concentrations, as evident with New York City, Los Angeles, and San Francisco. This is the employment that, as discussed above, is critical in today’s specialized services and high-tech manufacturing industries. Similar concentration patterns are evident in other cities nationally (San Francisco and Boston) and internationally (London, Paris, and Tokyo).

    

2. A second criticism by Ross Emmett of my GeoJournal article is that location and relocation decisions cannot be viewed as important drivers of economic growth. Emmett maintains that:

   “Few companies make significant location or relocation decisions each year (about 6%, if our research can be believed). No location or region could depend upon such relocations as the foundation for economic growth!”

   Let me reflect momentarily on the importance of “significant location and relocation decisions”. In the 1950s, Santa Clara County’s claim to fame was being the “Prune Capital of the World”, and by the mid-1970s it had become Silicon Valley, one of the world’s most innovative high-technology manufacturing regions. In contrast, during the 1950s, Detroit was among the world leaders in traditional manufacturing, and we know the current status of the city.

   Internationally, significant impacts in regional development stemming from relocation decisions are evident with the rise of Tokyo since the 1950s, and more recently the emergence of Seoul, Singapore, and Shanghai as critical investment points for capital.

   Particularly in the face of deregulation and the opening of global markets to international competition, investment relocations have made some urban centers into key economic drivers of the specialized services and high-tech economy, while breaking the competitive advantage of other regions, urban regions that did not respond effectively to global economic restructuring.

   According to the U.S. Census Bureau, between 1977 and 1985, New York City lost 22.0% of its jobs in manufacturing, and between 1993 and 1996 the city lost another 12.9% of manufacturing employment. Many U.S. cities, particularly in the traditional manufacturing belt, have experienced comparable impacts associated with market deregulation and the global decentralization of industrial plants, including our own Michigan cities.

   While New York city was experiencing significant economic and urban decline from the 1970s and into the 1990s—one just needs to think of Times Square during the 1980s—it responded to the job loss by actively investing in its urban infrastructure and redirecting development into its urban core, which facilitated the growth of its specialized services, high-technology manufacturing, and design-intensive consumer products.

   Between 1977 and 1985, services in New York City (such as legal services, computer related services, banking, accounting, advertisement, insurance carriers, agents, and brokers, administrative services, and engineering services) increased by 42.0%, and then by another 4.2% between 1993 and 1996.

   Hence, relocation decisions over the last three decades have fundamentally transformed New York City from a manufacturing-based economy to a specialized services and high-tech economy. This transformation from traditional manufacturing to high-tech industries and specialized services was evident in a number of cities nationally and internationally, including Boston, Chicago, London, and Paris.

   Thus in contrast to Ross Emmett’s claim, the world has actually been shaped and reshaped by extensive investment location and relocation decisions since the 1960s, as Michigan itself has experienced. This has been driven by both the global decentralization of industries and the concentration of upper tier specialized services and high-order production functions (as evident in Silicon Valley, Route 128, and the Cambridge High Technology Corridor).

   Looking at the impacts on Michigan manufacturing alone over the last few decades, are we really to believe that location and relocation decisions are insignificant? The fact is that these decisions have fundamentally transformed the Michigan economy, yet Detroit and other Michigan cities did not respond effectively to the necessary national and global restructuring, largely by not making required investments to promote the development of other industries.

   The state of Michigan continues to engage in the debates over whether it even should begin to make necessary infrastructure investment (education, transportation, telecommunications) to seriously compete in the new economy. In the meantime, urban regions around the nation and the world take a first-mover advantage, an early edge in developing their products and niches, especially important in the most technologically advanced industries and services.

    

3. In his response to the MSU News and the GeoJournal article, Emmett indicates that he is confused about the connection of high taxes, urban infrastructure provision, and economic development, noting that the:

   “The leap of logic here confuses me. High taxes and social investment spur growth because urban areas that attract the head-quarters of large corporations and their major subsidiaries have high taxes and significant social investment?”

   As extensively discussed in the MSU News and in the GeoJournal article, high taxes enable a rich and robust urban infrastructure provision, such as education, transportation, telecommunications, water and sewage networks, and police and fire protection. This is infrastructure that is necessary to accommodate high concentrations of residents and businesses. These high-taxing, infrastructure-rich cities, however, also maintain robust social services.

   In the GeoJournal article I use the example of the impacts on New York City of just removing the subway network on residential and business concentrations. I note that “without this transit system, congestion would make the movement of people and goods unmanageable and existing residential densities and business concentrations impossible to support.”ⁱ It is the rich urban infrastructure that enables business and residential concentrations.

   Emmett goes on to argue that:

   “They [companies] tend to be driven by pragmatic issues: proximity to the relevant portion of their supply/value chain; access to human/intellectual capital; etc. Large centers get their share of these companies because of these issues, despite their disadvantageous tax environments! In short, Vojnovic has put the proverbial cart before the horse.”

   The supply/value chain and access to human capital are important to companies, and hence their agglomeration. But to achieve these agglomerations, and to have access to a skilled work force, you need rich urban infrastructure to support the necessary residential, business, and amenity concentrations.

   If we can briefly recall the NYC World Trade Center. You do not build the approximately 90 million square feet of office space to consider after the construction of the buildings how you will bring in the 150,000 to 250,000 people moving through this complex daily, including the various deliveries of office supplies and goods sold in that single block. As any planner, engineer, or architect will tell you, the consideration of how you move people, equivalent to half the population of the Lansing region, through one block while also confronting high employment and residential densities all around that block, are infrastructure requirements that need to be resolved before construction.

   To provide two more well-known examples. It is not that Silicon Valley magically grew out of the rich soils of Santa Clara County, the “Prune Capital of the World”, and then came Stanford and Berkeley, along with Federal grants for high-technology manufacturing. It is not that the biotechnology and telecommunications firms of the Research Triangle Park miraculously appeared in North Carolina, to be followed by the emergence of North Carolina State University, UNC Chapel Hill, and Duke University. Physical infrastructure capacity comes first, and it can then drive even higher infrastructure capacities and business concentrations.

   This is where experience in physical planning, infrastructure outlay, and development become critical in how you build cities and effective business environments. This is also where analysts limited to just theory need some basic lessons in physical planning and development—and afterwards, real life, on-site construction and development experience—before telling others the positioning of the “horse” and cart” in development processes.

   Cities require appropriate infrastructure capacities before investments are made. Academics are well aware of this relationship. For major conferences, where you might have 8,000 or more conference participants attending, many cities are excluded from consideration as a location simply because they do not have the hotel/conference center capacity to support the meeting.

   Thus, it is not that these companies concentrate in these urban centers “despite the disadvantageous tax environments” and high infrastructure expenditures, as claimed by Emmett. No rational company, and particularly high-order specialized service firms with rich information on location options, would pay such high taxes or real estate prices unless the infrastructure requirements and the scale of business concentrations supported agglomeration effects that were bringing in high enough returns from these locational decisions.

   Rich and robust urban infrastructures enable companies to concentrate at extreme scales and to take advantage of agglomeration economies and general improvements in economic performance. This is an infrastructure investment pattern that is not only evident with New York City, Los Angeles, and San Francisco, but in all major urban economies that are concentration points for investment, business services, corporate headquarters, and social/cultural amenities.

   A comparison of residential and employment urban concentrations, persons per hectare, is provided below for reference.

   	Central city density (Central Business District) Persons per hectare		City density Persons per hectare
   Cities	Population	Employment	Population	Employment
   Detroit Los Angeles Washington DC Chicago Boston San Francisco New York City Toronto London Paris Singapore Seoul Tokyo	16.5 28.2 27.3 30.3 71.2 111.1 226.6 51.1 63.0 179.7 82.8 203.7 63.2	256.9 506.1 688.5 921.0 297.7 744.3 989.1 927.0 423.7 369.6 386.2 579.5 546.8	28.6 28.7 38.1 47.3 43.1 59.8 91.5 60.0 78.1 96.7 124.2 298.8 132.1	10.9 15.6 45.1 23.8 34.1 48.3 52.4 44.3 63.8 56.1 132.9 209.7 108.3

   A more detailed discussion of employment concentrations, agglomeration effects, and other economic advantages of high-density residential and job concentrations are provided in my forthcoming book chapter “Urban Settlement in Michigan: Suburbanization and the Future” in the book by Schaetzl, Darden, and Brandt called Michigan: A Geography and Geology.

   Notice that currently the City of Detroit would not have the infrastructure capacity (transit, roads, water and sewage, and telecommunication networks), nor the building capacity, to maintain the population and employment densities of businesses in Chicago, Boston, or San Francisco. This is where infrastructure investment becomes critical in enabling economic development and growth.

   Targeted taxes, and being more successful in bringing in funding from Congress for urban infrastructures to develop Michigan’s high-tech and specialized services industries, are necessary if we are going to become more economically competitive in this economy. Many cities have recognized the importance of urban infrastructure, and many cities nationally and internationally have been, in fact, over-investing in urban infrastructure for years. A well-known example is the over-investment in telecommunications infrastructure (data and video networks, wireless and radio systems, cable networks, and satellite systems) as cities market themselves and try to capture high-order business services.

   Education and R&D facilities are also a well-known example of critical urban infrastructure investment. Just across the border, in Canada, the Greater Toronto Area (GTA) has the third largest concentration of private Information and Communication Technologies (ICT) facilities among major North American metropolitan centers, behind San Francisco and New York. This is exemplary since Toronto is a third-tier city in a North American context. It does not generally compete against first and second tier cities such as New York City, Los Angeles, or Chicago in the scale of capital investment.

   Educational institutions in Toronto are considered a key player in this industrial agglomeration, both in training the workforce and in providing research and development. The ICT industries in Toronto are supported by 159 ICT postsecondary related programs in the city. There are also many major ICT programs that are in relative proximity, but not part of this count, including at University of Waterloo, McMaster University, and Queen’s University.

   Given that Michigan’s competitive advantage in automobile manufacturing has eroded, in part, because of the relatively lower investment in R&D compared to major Japanese manufacturers, one can imagine the impact to the industry if 159 well-funded post-secondary programs related to automobile manufacturing were concentrated in the Detroit region. In direct contrast, however, Michigan’s investment in education continues to suffer. Michigan’s appropriations to higher education declined by 8.1% between 2002 and 2007.

   For a more detailed discussion see the forthcoming chapter “Urban Settlement in Michigan: Suburbanization and the Future” in the edited book Michigan: A Geography and Geology. See also Matt Miller’s Lansing State Journal article “State higher ed funding lags, while others invest” (September 24, 2007).

    

4. Another important dimension of the discourse in the state of Michigan is the regional tax burden. Ross Emmett notes,

   “So should we adopt high taxes with correspondingly high levels of social investment to rebuild prosperity in Michigan? We already have relatively high taxes, so that is a moot point!”

   The GeoJournal article shows that the outcome of the last two decades of tax reforms in Michigan and Detroit has resulted in lower income groups being relatively over-burdened with taxes, while upper-income groups pay lower taxes than the average, in the comparison of major U.S. cities.

   The article illustrates that based on US Census data, in comparing nine major US cities, a family of four in Detroit earning an annual income of $25,000 will face total local and state taxes that are above the major city average (paying over $500 more than a similar family in New York City and about $400 more than a similar family in Boston). In contrast, at the other end of the income bracket, a family of four in Detroit earning an annual income of $150,000 will face total local and state taxes that are below the major city average (paying about $5000 less than a similar family in New York City and about $2000 less than a similar family in Boston).

   We generally hear that the state pays relatively high taxes, and given our regional economic difficulties, there is no money for more taxes and public service expenditures, such as education, transportation, and police protection. The fact is that there are many population groups in the state that do very well, and continue to do well while the condition of others is quickly deteriorating. While the Detroit Metro area consists of some of the poorest census tracts in the country, it also maintains some of the wealthiest census tracts.

   The GeoJournal article illustrates that compared to major U.S. cities, there is considerable room to restructure the tax burden in Detroit and the state, to reduce the burden on lower income groups to at least the national average, while increasing the tax burden on upper income groups, to again, at least the national average among comparable cities.

   In discussing tax burdens in Michigan, Emmett and other ‘minimal tax advocates’ need to become much more specific in indicating who exactly is over-taxed and who is under-taxed in the state.

   I also wish that their passion dedicated to protecting the wealthy from potentially being taxed equitably was equal to their passion to ensure that lower-income groups in the state are not over-burdened with taxes. But you hear nothing of the tax burden on our lower-income groups. You hear nothing of the need to change the existing tax structure to ensure that lower-income groups in the state are treated at least at levels equal to national standards among comparable cities.

   If any tax is introduced, it should target the wealthy, which is effectively accomplished through an income tax, to ensure that those benefitting economically in the state are contributing to at least levels equivalent to the national average in terms of tax burdens. It is the only equitable proposition. I promote this recognizing that I too would have to contribute more if such a policy was pursued, but it is the only fair option.

   It should be recognized, however, that residents of the high taxing cities get returns from the higher taxes and robust infrastructure investment. This is evident with greater employment opportunities, higher incomes, as well as greater access to robust urban infrastructures, such as education, public transit, cultural and entertainment amenities, and yes, even social services for the more disadvantaged in the state.

    

5. Ross Emmett considers that the GeoJournal article presents a “confused understanding” of neoliberal policy, including in its assessment of the relationship between taxes and urban infrastructures, and yes, social services as well.

   I contend that Michigan has been too eager to buy into the minimal government advocacy from analysts that have never been involved in any aspect of city-building, including infrastructure provision and financing, design and development of tax structures, residential and commercial building standards, the construction of roads and transit, and the provision of parks, public spaces, and cultural amenities.

   In fact, from the comments of the minimal government advocates, it is clear that they know very little about cities. It is only under conditions of poor theory in simplified hypothetical economies that one comes to the conclusion that weak urban infrastructure enables economic development.

   Analysts that have had on-site development experience recognize the importance of urban infrastructure in driving economic growth, and that investment decisions do drive infrastructure costs exponentially. For instance, the extreme cost distinctions between one mile of bus line, streetcar line, and subway line. But they also recognize what these infrastructure expenditures, and the new urban capacity, means for residential and employment concentrations.

   The fact remains that:

   - as one stands on the Shinjuku Station platform in Tokyo looking at the 14 subway lines running parallel to each other, and knowing that there is yet another extensive rapid train network above ground;

   -as one comprehends the university concentrations across the US, the amount of research funding that they bring in from NSF, NIH, and various other public and private agencies, and the knowledge-based industries that they drive

   (Nationally this is evident evident with Silicon Valley around Stanford and Berkeley universities for computers, semi-conductors, computer software, and biotechnology; the LA metropolitan area for a variety of R&D, including automotive design, and UCLA and USC’s linkages to Hollywood music and film; New Jersey and especially around Princeton university for drugs and chemicals; the Research Triangle Park in North Carolina for biotechnology and telecommunications; and the Boston region, centered particularly on MIT and Harvard, but other universities as well, for computers and a variety of other R&D);

   - as one stands in front of the British Museum and reflects on all the other free public museums and galleries in London, as well as all the other ‘urban infrastructures of play’ that attract residents, businesses, and tourists;

   - as one looks at the option of airlines and city connections among the New York area airports;

   one realizes the extreme scale of rich urban infrastructures (at levels and standards of robustness never previously evident in history), and also the accompanying scale of business, employment, and residential concentrations that these networks support within these cities.

   If at this point you hear a voice in the back of your head telling you that “low taxes and low expenditures on urban infrastructure enable economic development and growth”, you recognize how useless and how far from reality the minimal government advocacy really is.

   The GeoJournal article just shows that census data on taxes in major U.S. cities supports this recognition. Simply, high-taxing, high public expenditure cities maintain robust urban infrastructures and high concentrations of employment and residents.

    

6. One request that I do have of Ross Emmett and other minimal government advocates: “Please show me this illusive, low-taxing, low-services, and weak urban infrastructure region that is the model of economic competition and performance?”

   I know that I can direct you to a few urban centers that show us the exact opposite. Let us begin with New York City, London, Tokyo, Zurich, Madrid, Paris, Seoul, Chicago, Hong Kong, Milan, Shanghai, Osaka, Brussels, Sydney, Los Angeles, San Francisco, Taipei, Amsterdam, Beijing, Toronto, Melbourne….

   How relevant is this discussion to Michigan? It indicates that we can either try and compete with cities that have already responded to the changes taking place with the deregulation of markets and globalization—by investing in our urban infrastructures and increasing the economic, social, and cultural capacity of our cities—or we can decide that our urban regions will not even try and compete in this new economy. If this is the case, let us continue arguing about how much further we could cut spending on education, police, and transit, and simply resign to becoming an increasingly irrelevant global region.

    

---