Remarks by Governor Edward M. Gramlich
At the Federal Reserve Bank of Cleveland Conference "Livable Communities: Linking Community Development and Smart Growth," Cincinnati, Ohio
November 7, 2002
Thank you for inviting me to speak at your conference on smart growth. The concept of growth is often misunderstood, and I hope this conference helps to dispel some of the confusion.
In the realm of macroeconomics, there is confusion about the relationship between the growth of aggregate demand and the growth of aggregate supply. In the short run, supply grows at a trend rate while demand fluctuates with disturbances in the behavior of consumers, investors, and government. But in the long run, the growth of demand will settle down to match the growth of supply, and this supply growth, set by national saving rates, population growth, and productivity change, becomes all-important.
When we turn to local community development, the subject of this conference, there is further confusion. Local politicians often speak of community development as a noncontroversial objective, on a par with motherhood and apple pie. But what if community development entails urban sprawl, congestion, and pollution? Is that type of growth really a good thing? Politicians also favor job growth. But what if this purported job growth involves simply a shuffling of jobs between communities, stimulated by a tax break here and a tax break there? This shuffling would not stimulate overall employment, and is likely to result in adverse changes in the tax structure. In either case, community development involves much more than simple growth.
The organizers of this conference have recognized these problems and have embraced the concept of smart growth. But what exactly do we mean by smart growth?
The fundamental principle of smart growth is that development should be of a holistic nature. That is, rather than just paying attention to job or output growth, communities should focus on improvements in the ultimate quality of life of individuals. Communities should worry about whether the growth actually benefits their residents or whether it merely makes their communities larger. They should worry about congestion and pollution. They should worry about a proper balance of benefits between high- and low-income individuals. In the language of economics, smart growth requires that all external benefits and costs be factored into development decisions. New industries should be enticed into the community only if the net gains exceed the value of any tax inducements.
Timing considerations also factor into smart-growth decisions. Both the inducements for businesses and calculated costs and benefits must be long term, not short term. It does little good for a community to attract a new business if that firm later pulls up stakes, leaving unused water and sewer facilities and empty school classrooms. The whole notion of smart growth presupposes a concern with the long run, and communities should be fully aware of these long-term issues.
Finally, in the best of all worlds, the smart-growth process would be democratic, focusing on gains and losses for the whole community, as viewed by the whole community. In a representative democracy there are limits to the degree to which all citizens can have a voice in all decisions of the city council. But, at the same time, we want to avoid industrial development that benefits the few and not the many. And a sensible way of measuring the net benefits of a development project is to let people vote on it.
This rapid suburban growth has had many benefits, such as creating new economic opportunities in less-developed areas, increasing housing choice, and expanding services in new communities. But there have also been costs, for cities and suburbs alike. As the suburbs have extended farther and farther out from the cities, commuting times have increased, natural areas have decreased, and both urban and suburban areas have become more isolated from each other. Suburban growth has left both unused infrastructure investment and growing income disparities in central cities. For example, in 1999, the poverty rate in the nation's central cities was more than twice that in suburban areas--three times in the case of Cincinnati. Inner-city jobless rates were 1.5 times higher than in the suburbs--and two times higher in Cincinnati. These data illustrate how outmigration creates budgetary pressures on urban governments that have to provide public and social services to a dependent population in the face of diminishing sources of revenues to fund those programs.
This dilemma suggests another smart-growth objective--fostering economically diverse neighborhoods by creating a mix of housing that includes affordable units as well as moderately- and higher-priced homes. Communities that are economically integrated are more sustainable because they offer a more reliable base to support government funding and private investment. These communities should look for ways to provide homeownership and home-rental opportunities for people at all economic levels. One example of such a venture is the Poplar Project in Boulder, Colorado, which uses public-private financing partnerships to fund affordable housing adjacent to an upscale residential neighborhood. The development plan incorporates common areas and pedestrian paths to foster a sense of community among the residents. And by using infill development to achieve economic integration, Poplar Project developers ensure that lower-income households are not isolated and are able to take advantage of existing infrastructure.
Infrastructure investment is an important consideration in smart growth. Although suburban growth has increased options for consumers, it has also required significant investment in new infrastructure, such as roads and water and sewer lines. At the same time, existing central city systems have been allowed to stagnate or decline. Smart-growth proponents question the long-term economic benefit of creating new systems before finding ways to leverage existing infrastructure, which could result in two underutilized systems. A study by the Research Institute for Housing America presents compelling data on the considerable long-term savings that can be achieved by targeting growth closer to metropolitan and inner-ring neighborhoods. Based on dollar values for 2000, this study posits that the application of smart-growth strategies over a twenty-five-year period could save as much as $250 billion, mainly in the form of infrastructure investment. This includes more than $35 billion in road costs, nearly $9 billion in water and sewer systems investment, and almost $145 billion in housing-related expenses. Further, this study estimates that over the course of twenty-five years controlled-growth strategies could save $15.5 billion in land costs and spare more than 2.5 million acres of agricultural and environmentally fragile land.
These statistics do not suggest that all new suburban development is undesirable, only that a mix might often be preferable. And we must recognize that some growth is inevitable, given that the Census's middle-series population projections estimate an increase of 62.5 million people over the next twenty-five years. Obviously, new jobs and new living spaces will be required to accommodate these new people. But these statistics show the importance of using infrastructure investment efficiently, finding new uses for older areas, and limiting sprawl.
The Smart-Growth Planning Process
A community should first consider what issues are most pressing, be they reducing crime, improving schools, increasing housing, or recruiting businesses. It must then identify its resources, and how to maximize their value. In addition to physical assets, community resources include proximity to services, transportation, and cultural or natural attractions, as well as other features that enhance residents' quality of life. With its priorities and resources identified, a community can then assess its current development policies and create new development strategies consistent with its growth objectives. The process will not be easy--indeed it may be idealistic to suppose that communities or regions can arrive at consensus strategies. But the planning process itself is valuable, because it requires the various segments of the community to sit down and talk about vital issues.
The nearby city of Pittsburgh offers an example of the benefits of a dedication to smart growth. Given its industrial history of steel manufacturing, Pittsburgh has many contaminated brownfields that it would like to redevelop. Washington Landing, a forty-two acre island near downtown Pittsburgh, was once the site of many of these brownfields. It is now home to high-end housing, offices, retail stores, light industry, and a public park. Although funding the cleanup of the land and providing liability protection to private developers involved a high degree of public-private cooperation, this project succeeded because it addressed the local community's priorities of redeveloping brownfields, revitalizing the downtown area, and using existing infrastructure. Collaboration was critical to the success of this process, and private investment was vital to economic sustainability. Public-private partnerships can be an effective mechanism for developing mutually beneficial strategies that address both the needs of the community and the needs of the business sector. This is why smart-growth advocates strongly encourage the use of partnerships to leverage funding and mitigate risk for all investors.
Resources for Implementing Smart Growth
The sponsors of today's conference serve as important local and national partners in promoting efforts to encourage strategic economic growth. Both Local Initiatives Support Corporation and the National Neighborhood Coalition offer the benefits of being oriented toward grass-roots community organizations and having access to national networks and resources for community development. Locally, organizations such as Citizens for Civic Renewal and Smart Growth Coalition for Greater Cincinnati and Northern Kentucky serve as important catalysts, providing community leadership to support government and private investment in local and regional development. Additional smart-growth initiatives have been undertaken by the OKI (Ohio, Kentucky, Indiana) Council of Governments Land Use Commission.
The Federal Reserve can also help. The Fed's Community Affairs Offices (CAO), both in Washington and at the Reserve Banks, facilitate partnerships that in turn create community-based strategies for fostering economic growth and development. The CAO can convene meetings such as this to promote information exchanges; and they can offer technical assistance and insight into the efforts of other communities throughout the country. As an impartial information intermediary, the CAO can be an important link in your communities' smart growth initiatives.
I hope that you have a fruitful conference and that you will return home with ideas and insights to help you achieve smart-growth strategies for your own communities.