Save Us From City Saviours
By PATRICK LUCIANI
The Globe and Mail
Over the past few years, there’s been a persistent effort by big-city mayors, civic boosters, urban planners, and smart-growth and anti-suburban advocates to convince Canadians that cities create economic wealth. According to the Speech from the Throne, Ottawa is listening: It’s prepared to forgo $7-billion in GST payments over the next 10 years with more support to come for infrastructure spending, all under the guise of making our cities more competitive.
But cities want more than tax concessions; they want greater leeway to impose their own taxes. They argue that by keeping more of their taxes, the whole country wins. In other words, if Toronto wins, so does Brandon, Manitoba. Consider it a trickle-outward theory.
Do cities create wealth, or are they where most of Canada’s wealth is generated? The distinction isn’t simply a matter of economic hairsplitting.
The kind of economic policy we should design for our cities depends on which side of the debate you favour. Those who support the theory that cities create wealth make their case on the following: Industrial clusters are important to cities. Think of high-tech in Silicon Valley, automotives in southern Ontario, financial services in Toronto, aerospace in Montreal, even cereal production in Battle Creek, Mich. Policy makers like clusters because they bring innovation and high salaries.
But trying to encourage or create clusters is costly and usually futile. The German government paid a fortune trying to turn Frankfurt into an international financial powerhouse, with the hopes of overtaking London. It had all the ingredients: lots of international interest, the new European Central Bank, loads of investment and a new European currency. In the end, high German taxes did them in; financial institutions continued to move to London.
There’s a lesson here for fans of government support for the growing North American entertainment cluster in Toronto. Shifts in the exchange rate (let alone another SARS crisis) would swamp any good policy intentions.
Next is the argument that globalization is forcing countries to compete on a regional, rather than national, basis. In the process, a sophisticated network of high-level financiers, lawyers, accountants and advertising professionals are grouped in so-called global cities. We hear how Barcelona competes with Milan or New York.
To survive and prosper in this world, the argument goes, Canada should see its major city regions as competitors on a global scale. It may not be as important for New York, Los Angeles, or Chicago, but it is crucial for the Greater Toronto Area, which has roughly 20 per cent of Canada’s GDP.
How often do we have to be reminded that businesses compete, not nations, not regions, but businesses? The GTA has become a so-called global city-region, with strong north-south ties in North America, because individual companies made decisions to locate there, not because of government planning.
A third factor is the role played by innovation and human capital. Cities that put out the welcome mat for skilled workers will be the winners of tomorrow. This is what Richard Florida argues in his book The Rise of the Creative Class. He claims talent goes to communities that are tolerant (gay index), multicultural (mosaic index) and creative (creativity index). Throw money at the arts and they will come. Florida’s idea has seduced too many big-city mayors in Canada.
Sounds plausible, if not a little gimmicky, except evidence doesn’t back up the theory. Las Vegas, not exactly a Mecca of creativity, unless you consider gambling an art, is one of the fastest growing cities in North America. In the 1990s, the fastest growing cities had three things in common: a warm climate, skills and urban sprawl. One could just as easily construct an index for crime, pollution and high housing costs, and find that most talent locates where these conditions exits.
The last decade has seen a mini-industry of scholarly books trying to explain wealth creation and why some countries are richer than others: David S. Landes (The Wealth and Poverty of Nations), Robert Barro (The Determinants of Economic Growth), and William Baumol (The Free-Market Innovation Machine). The authors, aside from being highly acclaimed scholars, have another thing in common: None of them mentions cities as creating wealth. Remember that Canada’s productivity jumped substantially after 1996, a time when Canada’s major cities were fiscally stressed.
What they do mention are mundane policies such as controlling the size of government, free trade, low taxes, freedom to innovate and protection of property rights. The knowledge of the ages comes down to some very simple principles.
Entrepreneurs and businesses create wealth by risking capital on new markets and ideas, not by governments enticing firms and talent with trendy ideas of global cities, clusters or creativity indexes.
By all means give cities and municipalities a break by giving them more of their tax dollars. In turn, if they really want to help their cities grow, they should give their citizens a break by reducing their taxes. What we don’t need is a third level of government with unbridled ability to assault the taxpayer.
Patrick Luciani is senior fellow on urban affairs at the Atlantic Institute for Market Studies in Halifax