Fiscal realities point to the rise of cities

[An abridged version of this blog appeared in the Wall Street Journal Think Tank blog on October 19, 2015]

Every so often, our country experiences a “change election,” a presidential contest that alters the course of national leadership for decades. The elections of Franklin Delano Roosevelt in 1932 and Ronald Reagan in 1980, for example, brought sweeping reforms that transformed the governance of the nation.

Could the 2016 presidential election join the ranks of these change elections? The possibility is real although the precipitating factors are unique. Unlike past historic elections, next year’s contest is not being driven by an economic shock or the convictions of a charismatic leader. Instead, market, demographic, political and fiscal forces are colliding to firmly establish cities as the vanguards of policy innovation and problem solving in our country.

Though this shift has been subtle, the American public has clearly indicated their belief that our current governing arrangement isn’t working. In Pew’s most recent survey on the topic, only 24 percent of Americans said they trusted the federal government always or most of the time. Less than 30 percent responded that they were satisfied with the state of the nation. And only a few weeks ago, 55 percent of Americans said it was more important for a presidential candidate to have “new ideas and a different approach” than “experience and a proven record.”

Taken together, these shifts in governance and public opinion suggest an opening for a candidate who calls for the devolution of certain powers away from the federal government and into the hands of cities.

After all, the rise of cities has been partly due to the decline of Washington, D.C. Years of partisan gridlock and policy drift in the nation’s capital have forced cities to address pressing national challenges—including climate change, wage stagnation, infrastructure disrepair and international migration—largely on their own. Cities, unlike Congress and most state legislatures, have no choice but to act when faced with obvious intolerable conditions.

The rise of cities will accelerate due to structural shifts in the federal budget. The Congressional Budget Office forecasts that by 2025 the federal government will spend $1.5 trillion more annually on mandatory programs like Medicare, Medicaid and Social Security due to the long-expected rise in the nation’s elderly population. Add in annual expenditures on national security and defense, and it is clear that the federal government will increasingly become, as some have put it, a “health insurance company with an army.” As a result, federal spending on non-defense activities like housing, infrastructure, education, economic development, environment and research and development is expected to fall to its lowest level as a share of GDP since the 1960s.

The fiscal writing, in essence, is on the wall. Harsh budgetary realities are triggering hard choices about which level of government takes primary responsibility for investing in the nation’s future, alone or in conjunction with private or civic actors.

Despite the mythology of an omnipotent federal government, the reality is that fiscal relationships between different levels of government (and the private and civic sector) are very complicated. Washington is the dominant investor in certain national activities—the safety net and basic scientific research, for example—but is only a junior partner in many others. Cities are increasingly becoming the lead investors on critical elements of the national agenda, like promoting early childhood education, modernizing infrastructure, commercializing research, and building quality places where people want to live and companies want to invest.

These economy-boosting locally driven investments are occurring across the country. Denver and Detroit have largely self-financed the design and construction of state-of-the-art transit systems. San Antonio and Salt Lake County are expanding early childhood education with local resources. New York and Boston are creating affordable housing for lower-income residents. And Chattanooga and Philadelphia are building innovation districts in the cores of their cities, fueled by investments from universities, medical campuses, venture capitalists, entrepreneurs, philanthropists and others.

Cities can do these things because they are not exclusively governments but also networks of public, private and civic institutions that have access to local and institutional capital. They can additionally deploy mechanisms like tax increment financing that capture the market value triggered by smart growth and development. And successful investments by one city inevitably lead to similar investments by others as innovative tactics are replicated, markets are routinized and resources align with the distinct priorities of different cities and local market demand.

How could presidential candidates align with this new order? They could focus on the core mission of the federal government and recommend that it do what cities cannot—invest in national functions like the safety net, defense, interstate infrastructure and basic research and development. On everything else, they could argue that the federal government remake itself as a flexible partner rather than a rigid decider, devolving more power and eradicating decades of one-size-fits-all prescriptions and layers of (often conflicting) rules and mandates.

So what will it take for 2016 to become a change election? Candidates on both sides of the aisle will need to get with the program. Strike a new governing compact with cities to fully unleash their talents and energies and drive our economy and society forward.