H‘- , Denver, Colo. 8021 I 2715 - 17th 5’. Bound by DENVER BOOKBINDING (20., ABSTRACT THE ECONOMICS OF SOCIAL CLASS AND METROPOLITAN LOCAL GOVERNMENT By Ann Roell Markusen Theoretical work in local public finance has often focused on the desirability of a multiplicity of independent local governments in a metrOpolitan area because competition among them for residents may lead toward efficient allocation of resources in the local public sector. The argument rests on a particular interpretation of the residential location incentives of households and the public sector production incentives of local government. This thesis attempts to illuminate the weakness of the above analysis and to construct a superior theory of household and local government behavior and performance. USing utility analysis to examine the household's incentives for choosing among city and suburbs, the model specified two dis- tinct sources of attraction. One is the particular public-private output mix that is available to the household given its income. The other is a certain level of redistribution, not only of one's own and one's neighbors' income, but also of cost characteristics under- lying local public service supply functions. The local public sector links every household with the income and cost characteristics of Ann Roell Markusen other residents, and insulates it from those of non-residents. Thus individualized utilitydmaximization breaks down, since the income and cost characteristics of the entire community enter as arguments in its demand function. The distributional impact of the local public sector on a par- ticular household can be viewed as a constrained change in income, or, alternatively, as a change in relative prices of private vs. publicly-produced output facing the household. The presence of this impact precludes the conclusion that residential location reflects a revealed preference for a particular package of local public serv- ices. The choice of community may be a response to a more favorable distributional position and may even be made at the cost of violating a preference maximizing position at the given income level. Attempting to aggregate individual responses to local public sector location incentives, the model indicates that any differences in income or cost characteristics among citizens with similar pref- erences will cause disagreement among them over the appropriate tax and service levels. Such disagreements will ordinarily be solved by the protagonists migrating to other communities pOpulated by more like-endowed neighbors. The result of this pattern is the creation of stratified and internally homogeneous communities. Perfect strat- ification will occur if all consumers have similar preferences (or, in the case where they might differ, such differences are overridden by distributional considerations) and if the local public sector is Ann Roell Markusen the only factor in locational choice. Local governments in this model are not simply producers of local public services, but are economic agents whose interests are identical to those of their constituents. To the extent that suburban pOpulations are homogeneous, the local government will act as if it is maximizing the representative utility function. In addi- tion to determining tax and expenditure levels in the short run, in the long run the government can influence the income and cost char- acteristics of its residents and the incidence of both taxes and benefits. This process is termed market construction, and suggests that the output level and concommitant tax price in the local public sector is largely a result of the manipulation of demand and supply conditions within the community. This behavior of local governments furthers the tendency toward stratification and homogeneity within suburbs. The dynamics of the model suggest that the trends toward fragmentation and outward sprawl in metropolitan areas will not abate in the future, that stratification will become more pronounced and the dreams of metropolitandwide government never realized. Given the difficulties of specifying an acceptable quantitative measure of local public output and the problems besetting the esti- mation of demand and supply functions, the empirical tests of the theory are indirect. The first set employs data for 47 municipal governments in the Detroit SMSA to test for correlation between high income and low public service cost characteristics and for homogen- eity within suburban communities. Both the correlation and equality Ann Roell Markusen of variance analysis employed support the hypothesis of stratifica- tion and homogeneity. A second hypothesis concerning resistance to annexation and consolidation is supported by historical evidence tracing the development of fragmented metropolitan government and the legal tradition protecting it. A final hypothesis predicting continued fragmentation and stratification is supported by trend analysis for both the United States as a whole and the Detroit area. THE ECONOMICS OF SOCIAL CLASS AND METROPOLITAN LOCAL GOVERNMENT BY Ann Roell Markusen A DISSERTATION Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Economics 1974 (9 Copyright by ANN ROELL MARKUSEN 1974 FOR MARINUM MARKUSEN AND THE WOMEN'S MOVEMENT, THE SOIL FROM WHICH THIS SPRANG ii ACKNOWLEDGEMENTS I wish to thank all those who have helped, both materially and morally, to complete this work. In particular, my thanks to Professor Milton Taylor, the thesis chairman, Doddie Taylor, and the committee members, Professors Leanna Stiefel, Byron Brown and Charles P. Larrowe. To Nicholas Schrock, for reading and comments. To Judy Bowman, for the typing and graphics. To my parents, Jeanne and David Markusen, for too many gifts to note. To Marinus Markusen and the Sidney Markusen's, for providing the warmth through a cold Minnesota winter to enable me to put this down. iii CHAPTER I CHAPTER II CHAPTER III TABLE OF CONTENTS INTRODUCTION AND OVERVIEW REVIEW OF THE LITERATURE . A. B. C. Traditional Views in Public Finance .... The Tiebout Hypothesis Migration and Efficiency in the Public Sector Economic Theories of Politics .......... The Exploitation Hypothesis ............ Demand, Supply and Location Factors in Local Government Output ............. Empirical Fabrications A Nod to Political Scientists .......... A Wrap-up LOCAL GOVERNMENT OUTPUT AND CITIZEN LOCATION DECISIONS A. The Assumptions ...... Distribution Functions ............. Revenue and Expenditure Function ... 1. Utility Functions 2. Production Function 3. 4. Budget Constraints 5. Maximization The Short Run: Individual Maximization Within the Given Community ............. l. 2. Efficiency but not Redistribution .. Redistribution but not Efficiency .. Alternative Assumptions The Forms of the Utility Function .. Content of the Utility Function .... Interdependence of Utility Functions ........ Variation in Preference Functions Between Households iv 17 21 29 34 42 49 51 53 53 53 55 57 59 62 62 64 72 74 76 76 80 81 83 CHAPTER IV CHAPTER V CHAPTER VI TABLE OF CONTENTS (Continued) 5. The Form of the Production Function ........................... 6. Revenue and Expenditure Functions .......................... E. A Class Analysis of Suburban Location 0 O O I O O O O C O I O O O O O O O O O O O O O O O O O O O O F I conCIIISion I O O O O O O O O O O O O O O O O O O O O O O O O O I O 0 SOME ILLUSTRATIVE EXAMPLES OF INDIVIDUAL CHOICE AND RESPONSE ......OCCOOCCOCOOOOOOOOO A. Basic Model ............................ B. Derivations ............................ C. Example 1 .............................. D. Example 2 .............................. E. Extensions of the Graphical Approach ............................... F. Conclusion ............................. LOCAL GOVERNMENT AS A MARKET DESIGNER ...... A. The Assumptions ........................ . Representativeness ................. . Homogeneity ........................ . Minimum Size ....................... . Legal Protection ................... waH B. Local Government Maximization in the Metropolitan Area ...................... 1. The Short le .....OOIOOOOOOOOOOOOIO 2. me Long le ......OIOOOOOOOOOOOOOO. C. Local Government Policy: Elements of Market Construction ................. D. A Word about Non-residential Location ............................... E. A Marxist Counterpart .................. THE DYNAMICS OF MARKET CONSTRUCTION INAMTROPOLITANAREA ......OOCCOOOOOOOOOOO A. Fragmentation and Stratification along Income and Hardship Lines ........ 85 86 89 92 93 93 94 94 99 105 108 108 108 109 110 111 111 115 117 118 126 127 130 130 TABLE OF CONTENTS (Continued) B. Centrifugal Movement ................... 132 C. Further Resistance to Metropolitanization .................... 134 D. Resistance to Economic and Racial Integration ..................... 134 E. Institutional Rigidity I O O O O O O C O C O O O O O O O 135 CHAPTER VII EMPIRICAL EVIDENCE OF MARKET CONSTRUCTION: HOMOGENEITY AND STRATIFICATION ............. 138 CHAPTER VIII EMPIRICAL EVIDENCE OF MARKET CONSTRUCTION: USE OF ANNEXATION, CONSOLIDATION AND INCORPORATION WITHIN THE METROPOLITAN AREA ....................................... 167 CHAPTER IX EVIDENCE ON FUTURE TRENDS FOR MTROPOLITAN AREAS ......OOOOOOOOOOOOO0.0... 179 CHAPTER X SUMMARY AND CONCLUSIONS .................... 191 BIBLIOGRAPI‘IY O.....00............OOOOOOOOOOO 196 MPENDIX 0.0.000...I.......OOOOOOOOOOOOOOOOO 203 CHAPTER IV CHAPTER VII CHAPTER IX LIST OF TABLES Table 1. Taxes, Consumption and Apparent Income: Example]. 00000000000000.00000000 Table 2. Real and Apparent Income .......... Table 3. Tax, Consumption and Apparent Income, Examplez 000...00000000.000000000 Table 1. Socio-Economic Characteristics Of DetrOit-Area Localities 000000000000... Table 1. Percent of SMSA Population in Cities and suburbs 0.000000000000000 ...... Table 2. Median Income for Selected DetrOit Area Cities, 1950—1970 00000000000 Table 3. Racial Composition of U. S. Central Cities and Suburbs ........ ....... Table 4. Percentage Population Black, 1950 and 1970 0000000000000000000000000000 Table 5. Dependency (Z Population over 65) Ratios, 1950 and 1970 00.000.00.000... Table 6. Education Status, 1960 and 1970 000000000000000000000.000000000000000 Table 7. Changes in Median Value of Owner Occupied Housing, 1960 and 1970 .... Table 8. Housing Quality in Selected Cities, 1960 t01970 0.0000000000000000... vii 95 98 100 150 180 182 183 185 186 187 188 189 CHAPTER IV CHAPTER VII LIST OF FIGURES Figure 1. Consumption and Income, Example]. 000000000000.000000000000000000000 97 Figure 2. Income and Consumption, Examplez 00000000000000000000000.00000000.0 101 Figure 10 COSt Functions oooooooooooooooooooooo 138 Figure 2. Demand, Supply Functions ........... 139 viii CHAPTER I INTRODUCTION AND OVERVIEW This thesis attempts to construct a new theory of local public finance. Surprisingly little has been written on economic behavior and performance of peOple and governments in the local public sector. What has been written is concerned chiefly with efficient resource allocation in the public sector. This thesis explores the rather neglected area of income, cost and wealth distribution. Chapter II reviews the literature that is related to the four theory chapters following. The most important work, in terms of its acknowledged professional stature, is Tiebout's hypothesis1 that the existence of a multiplicity of local units of government in a metro- politan area facilitates efficient resource allocation in the local public sector because it allows public service customers to express their preferences by voting with their feet. Other economists have speculated on the effects of community migration, externalities and political power on resource allocation in the public sector. The em? pirical work that has been done bears little resemblance to hypothesis testing and casts little light on theoretical postulates such as Tiebout's. 1Charles M. Tiebout, "A Pure Theory of Local Expenditures," Journal g£_Political Economy, LXIV (October, 1956), pp. 416-424. In Chapter III, a theory is developed to explain the incentives which motivate an individual household to locate in a particular suburb or city within a metrOpolitan area. Using a utility- maximization model with an income constraint, we can Specify two distinct incentives. One is allocative; the consumer-voter wants a public service package that has an appropriate mix given his or her preferences. The other is distributive; the public sector by its very nature has a distributional impact, a result of both the way that it distributes services it produces and the way that it levies for those services. The local public sector links every citizen with the income and cost characteristics of other residents, so that the individualized utility-maximization model breaks down. The house- hold is no longer choosing among a set of alternatives gizgg_its in- come; now the income and cost characteristics of the entire community enter as arguments in its demand function. Not only do these two incentives co-exist, but it is quite likely that they are both effective in every location decision. It is therefore impossible to accept Tiebout's suggestion that residential choice reflects a revealed preference for a certain package of local public services, since a move may be more a response to a preferred distributional position and may even be made at the cost of violating a preference-maximizing position. Attempting to aggregate individual responses to public sector incentives, we find that any differences in income or cost character- istics among citizens with similar preferences will cause disagreement among them over the appropriate tax and service levels. Such disagree- ments will ordinarily be solved by the protagonists migrating to other communities with more like-endowed neighbors. The result of this pat- tern is the creation of stratified and internally homogeneous communi- ties. Perfect stratification will occur if all consumers have similar preferences (or, in the case where they might differ, such differences are overridden by distributional considerations) and if the local public sector is the only factor in locational choice. Chapter IV develOps two hypothetical examples of community choice and public sector incentives. The graphs accompanying the chapter illustrate that the impact of the public sector on individual Options is to offer a set of positions which are actually constrained income Options; for every tax rate a citizen chooses, a different quantity of total resources of the community will be devoted towards satis- fying its needs. A poor family in a community with a public sector which redistributes from rich to poor will enjoy the output of more resources the larger the public sector becomes. This is an increase in income in kind. The graphs also indicate that the same phenomenon can be viewed as a change in relative prices; the distributive nature of the local public sector effectively changes the relative price that households pay for public vs. private services. In a community which redistributes from rich to poor, wealthier families face a higher relative price for public services, while their poorer neigh- bors face a lower relative price. Chapter V develops the market construction theory. It suggests ’ . f1 that local governments are probably very representative of their constituents, and that we can view them, therefore, as responding to the same incentives that motivate their residents. Local government is more than simply a producer of services for an anonymous market. It has an interest in protecting the preferred position of its customers; it is a utility-maximizer rather than a profit-maximizer. Since the distributive nature of the local public sector is of great interest to the residents, the local government is concerned not only with an apprOpriate service mix, but also with the distributive arrangements which affect each resident's wellébeing. The local government has an unambiguous incentive to manipulate cost and demand characteristics of the local public service market to achieve the lowest cost, highest quality output possible. The local government can use exclusionary tools to influence the complexion of the popula- tion residing within its boundaries, it can construct tax and distribution rules for its output in a way that will discourage undesirables from moving in, and it can protect its insular position by joining forces with other local interests to bar metropolitaniza- tion attempts. This behavior of local governments will foster the tendency toward stratification and homogeneity within suburbs. Chapter VI speculates on the future of metropolitan areas given the public sector incentives and behavior outlined previously. It suggests that the trend toward fragmented local government and stratification will not abate in the future. The distributional stakes in an insulated local public sector markets are so great that it is likely that suburbanites will forego public sector efficiencies that could be gained by metropolitanizing services rather than sur- render their independent markets. Chapter VII attempts to test some of these hypotheses. It looks in detail at the Detroit metropolitan area, tests for stratification and homogeneity, and concludes that there is ample evidence of large disparities among suburbs and of the tendency toward homogeneity. It investigates the history of annexation and consolidation in the United States and concludes that neither appears to be a promising tool for reshaping the American metropolis, except perhaps in the South and Southwest. It looks at the trends since World War II both nationdwide and around Detroit and concludes that there is evidence that fragmentation and stratification will continue to be a problem of major metropolitan areas. a‘u CHAPTER II REVIEW OF THE LITERATURE A. Traditional Views 12_Public Finance Public finance theorists have traditionally stated that there is no simple and uniquely optimal solution to the problem of resource allocation in the public sector. No automatic, market-type mechanism exists to register consumer preferences and translate them into publicly-produced output. An analogy with the private market mechan- ism cannot be made, for the necessary conditions do not exist in the public sector. First, the public sector produces some goods that are characterized by complex externality problems, such that the con- sumer is encouraged not to express her true preferences, but hopes that the good will be provided by another group or subset of citizens, with the benefits accruing to her free of charge. Second, even in cases where externalities do not exist, the voting mechanism is a poor substitute for dollar power in the market place. Finally, even if voters did correctly register their preferences at all times at the polls just as if they were buying local services on the private market, government is still a monOpoly and cannot be expected to per- form in the same efficient way that a firm under competitive pressure does. Hence, "no decentralized pricing system can serve to determine optimally these levels of collective consumption."1 1Paul Samuelson, "The Pure Theory of Public Expenditures," $513; Economics and Statistics, XXXVI (November, 1954), pp. 387- In lieu of an impersonal market mechanism, then, public output is generally thought to be determined through a social decision- making process. One view of this process is that government allo- cates resources by providing the level of output preferred by the median voter, presumably minimizing the costs of this output. The government's role in this process is either organistic or individual- istic; either the government is portrayed as the Social Person itself, acting to maximize a community welfare function, or it operates as a well-oiled, personless machine which registers individual preferences, produces the output and charges each recipient on a median benefit basis.2 A more sophisticated analysis of this decision-making process has appeared in the work of Downs, Buchanan and Tullock, discussed in section D below. They examine the process of aggregating individual preferences through the political mechanism and its implication for allocation in the public sector. An alternative view of this process is the Leninist thesis that government acts on behalf of the small group constituting the owning class and caters only to the well-being of this group. This approach is also discussed below. Despite the general acknowledgement of the inadequacy of neo- classical theory for dealing with the public sector, such a theory still has its advocates. Richard Musgrave derives the Paretian condi- tions for optimal resource allocation in the public sector when the 2James Buchanan, "The Pure Theory of Government Finance: A Suggested Approach," Journal g£_Politica1 Economy, LVII (December, 1949), pp. 496-505. optimal distribution of income has been predetermined.3 He tries to avoid the conclusions of Samuelson by imposing a Wicksellian separa- tion between the distributive and allocative functions of the public sector. (In the Samuelson work quoted above, distribution is deter- mined simultaneously with resource allocation.) Criticism Of his derived Paretian conditions include Gordon Sparks' observations that changes in relative prices within the market-clearing process will hurt someone, if preferences differ, and that the Pareto criterion, with its multiplicity of Optimal positions, does not allow the determ- ination of a uniquely Optimal allocation without specification of the social welfare function.4 B. The Tiebout Hypothesis In an article published in 1956, Charles Tiebout challenges the prevailing pessimism for market solutions with respect to the local public sector.5 He claims that competition among fragmented local governments in a metropolitan area allows consumers to reveal their preferences by "voting with their feet," and forces governments to cater to these preferences. Tiebout begins his analysis by stating, 3Richard Musgrave, The Theory 2: Public Finance (New York: 4Gordon Sparks, "Professor Musgrave's Theory of Public Expendi- tures," Canadian Journal 2f Economic and Political Science, XXX (November, 1964), pp. 591-594. SCharles M. Tiebout, "A Pure Theory of Local Expenditures," .J22£§§1“2£_Political Economy, LXIV (OctOber, 1956), pp. 416-424. In terms Of a satisfactory theory Of public finance, it would be desirable (l) to force the voter to re- veal his preferences; (2) to be able to satisfy them in the same sense that a private goods market does; and (3) to tax him accordingly. The question arises whether there is any set of social institutions by which this goal can be approximated. He proceeds to construct a model of local government which he sees as satisfying these requirements. The Tiebout model assumes that public service consumers choose their maximizing tax-service package by moving to the most attractive community: The consumer-voter may be viewed as picking that community which best satisfies his preference pattern for public goods ... At the local level various governments have their revenue and expendi- ture patterns more or less set. Given these revenue and expenditure patterns, the consumer moves to that community whose local government best satisfies his set of preferences. The greater the number of communities and the greater the variance among them, the closer the consumer will come to fully realizing his preference position.7 Tiebout further assumes that public service producers try to Optimize community size. For each pattern of public services, there is an Optimum size determined by the number of residents for whom this particular service package can be produced at the lowest average cost. Communities falling short of their Optimal size will try to attract residents, while communities who have reached Optimal size will discourage additional residents. 61bid., pp. 417-418. 71bid., p. 418. 10 Thus migration by central city residents to suburbia is seen as a reaction to over-optimal size (and thus resource misallocation) in the city, while the use of zoning laws, implicit agreements among realtors and the like are viewed merely as devices for keeping an optimally-sized population stable.8 These behavioral assumptions for public service consumers and producers, along with the typical assump- tions of the market model such as perfect mobility, perfect knowledge, and the existence of many competing communities, form the basis of the Tiebout model. In addition, Tiebout assumes that employment opportunities do not limit the residential location decision within a metropolitan area, and that external economies are non-existent. From these postulates, Tiebout concludes that residential mobility results in an equilibrium pattern where each locality has a revenue and expenditure pattern that reflects the desires of its residents. Tiebout then proceeds to deduce the implications of this model for resource allocation in the local public sector. He visualizes the local government as taking the aggregated demand of its citizens to the market place and bidding for resources. In the limit, as shown in a less realistic model to be developed later, this total demand will approximate the demand that represents the true preferences of the consumer-voters--that is, the demand they would reveal, if they were forced, somehow, to state their true preferences. In this model there is no attempt on the part of local governments to "adapt to" the preferences of consumer-voters. Instead, those local governments 81bid., p. 420. 11 that attract the optimum number of residents may be viewed as being "adopted by the economic system.- Tiebout goes on to develop an even stricter model which demonstrates this theoretical optimal allocation. Tiebout deals briefly with his unrealistic assumptions. Partic- ularly with respect to the existence of external economies and dis- economies, he admits that metropolitandwide government is the logical reSponse. However, he notes that "in real life the diseconomies are minimized insofar as communities reflecting the same socio-economic preferences are contiguous."10 With regard to the perfect mobility and perfect knowledge assumptions, Tiebout Offers the empirical evidence that studies of residential location decisions reveal substantial citizen awareness of differing revenue and expenditure patterns. In addition, he interprets the resistance to metropolitanization proposals as the fears of local citizens that their own distinctive tax-service packages will be lost in the amalgamated metropolitan government. Out of his analysis, Tiebout draws some policy recommendations for the future of urban areas. He opposes metropolitanizing services, except in the case where everyone is made better off or at least no one worse off, that is, when "more of any service is forthcoming at the same total cost and without reduction of any other service." Since it is unlikely that this will be true, then there are no 91bid., p. 420. 10Ibid., p. 423. 12 acceptable arguments for metropolitanization "on purely economic grounds."11 He espouses policies which will increase residential mobility and enhance the knowledge of the consumer-voter, since these will allow the system Of local governments to more closely approximate the market-type solution he sees as optimal. Tiebout sums up his analysis by claiming that he has demonstrated the conceptual solution to the problem of optimal allocation of resources in the public sector: If the consumer-voters are fully mobile, the ap- propriate local governments, whose revenue- expenditure patterns are set, are adopted by the consumer-voters. While the solution may not be perfect because of institutional rigidities, this does not invalidate its importance. The solution, like a general equilibrium solution for a private spatial economy, is the best that can be obtained given preferences and resource endowments.12 While he admits that his model falls short of the perfection of the theoretical private competitive model, he notes that: Those who compare the reality described by the model with the reality of the competitive model-- given the degree of monopoly, friction and so forth-—may find that local government represents a sector where the allocation of public goods (and reflection of the preferences of the population) need not take a back seat to the private sector. Tiebout has had few critics. On the contrary, his hypothesis has been welcomed by a profession stymied by the massive problems Of economic analysis of the public sector. He had salvaged at least llIbid., p. 423. 13Ib1d., p. 425. 13 a part of the public arena for theoretical inclusion in the realm of automatic, market solutions to the problem of output determination and efficient resource allocation. His article often graces the head of every reading list on state and local public finance, and has become known as the monopolistic competition model of local government. In general, economists have been willing to concur with him that a multiplicity of local governments is an improvement over a single, metropolitandwide government in the same way that monopolistic compe- tition is an improvement over monOpoly in the private sector. The major weakness in this model lies in its behavioral pro- positions. TO reiterate, Tiebout envisions the consumer-voter as choosing a community's tax-expenditure package because it best fits her own preference pattern. In general, when we speak Of consumer maximization in economics, we refer to her behavior giv§n_her income and wealth status. Tiebout carries this maximization principle over into the public sector without considering that choice of community might also involve income-enhancement through the public sector mechanism. In addition, the local government, in the Tiebout model, acts as an average-cost minimizer. This behavior supposedly compels it toward the "Optimal size" community, an analogy to the firm reach- ing the minimum point on its average cost curve by building the 14See, for instance, James Buchanan and Gordon Tullock, The Calculus 9£_Consent (Ann Arbor: University of Michigan Press, 1962), p. 114; John Due, Government Finance: Economics g£_the Public Sector, 4th ed. (Homewood, Illinois: Irwin, 1968), p. 316; or werner Hirsch, Urban Economic Analysis (New York: McGraw-Hill, 1973), p. 131. 14 Optimal size plant. Here, too, Tiebout ignores the possibility that a local government might be playing a redistributive role with re- spect to both income and costs. The only other Tiebout work related to this theory appeared in 1961.15 While the main concern of the latter is to develop a theory of fiscal federalism, the earlier conclusions of Tiebout are reiter- ated. The model constructed here assumes that all incomes are equal and that taxation proceeds purely on a benefit basis, the purpose being to demonstrate criteria by which society can arrange the struc- ture of government to achieve optimal resource allocation in the public sector. However, Tiebout considers briefly the effect of dropping his equal incomes assumption. He recognizes that tax colonies may appear and that wealthier families may get better services in the local public sector as well as the private: As a result of unequal incomes, the resulting pattern of public goods will be less optimal, in a sense, than in the case where incomes are equal. However, two modifications appear which somewhat offset agg distortions introduced by unequal incomes. There is no attempt by Tiebout to define the meaning of "less Optimal, in a sense." The two "modifications" turn out to be demand- ing public service changes as a condition for entering a community, 15Charles Tiebout, "An Economic Theory of Fiscal Decentraliza- tion," in Public Finances: Needs, Sources and Utilization, ed. by National Bureau of Economic Research (Princeton: Princeton University Press, 1961), pp. 79-96. 16Ibid., p. 93. 15 and changing the pattern Of public services after you enter the community. These hardly seem like legitimate modifiers even on the grounds of Tiebout's own theory. Nevertheless, despite the ultimate conclusion, once again, that multiple local government and mobility improve the changes of attaining Optimal resource allocation, we must here credit Tiebout with an awareness, if muddled, of the distribution problem that is lacking in his earlier work. In an article unrelated to the above theory, Tiebout has con- sidered public sector distributional motives for community choice.17 He and David Houston attempt to set up a set of voting rules which will allow a local community to improve income distribution within their community beyond the level established by policy at higher governmental levels. This set of rules amounts to disenfranchising the potential beneficiaries of further redistribution, so that they cannot impose a burden on the "haves." Tiebout and Houston state, One might suggest that, to the extent that these rules have not been operative, "tax colonies" have appeared. Within the metrOpolitan region there is some freedom of choice for community of residence ... Any community which redistributes income "too far" may lose its higher-income residents. Higher- income people may regroup into a suburban tax comunity . 8 Unfortunately, Tiebout speculates on this possibility without making any effort to relate it to his previous work on allocative incentives 17Charles Tiebout and David Houston, "Metropolitan Finance Re- considered: Budget Functions and Multi-level Governments," Review 2f Economics and Statistics, XLIV (November, 1962), pp. 412-417. 18Ibid., p. 417. 16 for migration. The student of Tiebout is left to ponder without guidance the relative significance of two distinctly different public sector location stimulants. One exception to the general acceptance of the Tiebout hy- pothesis is Harvey Brazer's article, "Some Fiscal Implications of Metropolitanism."19 Having summarized Tiebout's hypothesis, Brazer states: And as an exercise in abstraction, it may be a solution, as useful, perhaps, as many of the econ- omist's abstractions. Unfortunately, however, Tiebout's model cannot be said to be even a rough first approximation of the real world. The most pressing fiscal problems of metropolitanism arise precisely because of the very factors he denies in his assumptions.20 He then proceeds to enumerate the ways in which real world circum- stances conflict with Tiebout's assumptions. He also notes the in- creasing differentiation of suburb and city along income and racial lines, creating unequal fiscal endowment. However, he does not suggest the reasons for this increasing differentiation, nor does he construct an alternative model to Tiebout's. The only explicit test of the Tiebout hypothesis to date has been undertaken by Wallace Oates.21 He postulates that we ought to 19Harvey Brazer, "Some Fiscal Implications of Metropolitanism," in City and Suburb: The Economics gf_Metropolitan Growth, ed. by Benjamin Chinitz (Englewood Cliffs, N.J.: Prentice-Hall, Inc., 1964), pp. 127-150. 2°Ib1d., pp. 132-133. 21Wallace Oates, "The Effects of Property Taxes and Local Public Spending on Property Values: An Empirical Study of Tax Capitalization and the Tiebout Hypothesis," Journal g§_Political Economy, LXXVII (November, 1969), pp. 957-971. 17 observe the capitalization of public service benefits in pr0perty values: If this is true (the Tiebout hypothesis), the outputs of public services (as well as taxes) should influence the attraction of a community to potential residents and should thereby affect local property values.22 He proceeds to run a regression relating property values for different communities with their effective tax rate, an index of public sector output, accessibility to the central city, and housing quality, and finds that high tax rates do depress property values, but that if higher taxes go for increased public sector output, this offsets the impact on property values. The only comment we will register here is that this observation Of capitalized value can be applied to alternative theories, such as the one to be developed in this thesis. C. Migration and Efficiency i§_the Public Sector The major debate that parallels and succeeds the Tiebout work focuses on the contention that free migration of individuals will achieve the Optimal allocation of resources in the public sector. This debate originated within a general discussion of the justification for fiscal transfers among units of government, mainly states. James Buchanan argued as early as 195023 that redistribution 22Ibid., p. 958. 23James M. Buchanan, "Federalism and Fiscal Equity," American Economic Review, XL (September, 1950), pp. 583-599. 18 of fiscal resources among units in a particular tier of government (e.g., states) was necessary to achieve a Pareto-optimal use of those resources. About the same time, A. D. Scott concluded the opposite,24 that fiscal transfers would hinder the achievement of a Pareto-Optimal resource allocation. An exchange followed, until it became clear that both arguments were valid within the conceptual framework chosen. After Samuelson's redefinition of efficiency in the public sector,26 Richard Musgrave suggested that as long as governments produced efficiently, and employed benefit taxation, there would be no efficiency basis for intergovernmental transfers.27 Buchanan responded28 that he might have overestimated the importance of efficiency considerations in calling for redistribution, but that it still appeared to him that people would migrate in response to fiscal differentials (benefits compared to taxes) even when all states 24Anthony D. Scott, "A Note on Grants in Federal Countries," Economica, XVIII (November, 1950), pp. 416-422. 25See James Buchanan and Richard E. Wagner, "An Efficiency Basis for Federal Fiscal Equalization," in The Analysis 2: Public Out ut, ed. by Julius Margolis (New York: National Bureau of Economic Research, 1970), pp. 140-141, for a discussion of this debate. 26 Samuelson, "A Pure Theory." 27Richard Musgrave, "Approaches to a Fiscal Theory of Political Federalism," in Public Finances, ed. by National Bureau of Economic Research, pp. 97-122. 28 James M. Buchanan, "Comment," Ibid., pp. 122-129. 19 produced efficiently. Musgrave agreed, but said that he did not feel that just because income differentials exist, they should be considered distorting influences. They should be viewed simply as locational factors, site features of ... the economic map which determines resources allocation. Efficiency is not served by erasing this feature of the map. Indeed, a central policy aimed at nullifying resulting differentials (such as remain with universal benefit taxation) in state finance will interfere with efficiency in the regional structure of public finances.29 This problem continued to concern Buchanan, who recently published two papers dealing with it. The first appeared in 1970, written jointly with Richard Wagner.30 While conceding the point which Musgrave had made about the unimportance of transfers on ef- ficiency grounds when states produce in a cost-efficient manner and employ benefit taxation, Buchanan and wagner pointed out that states use traditional tax methods, not benefit taxation, and therefore do not conform to this theoretical ideal. They proceed to construct several simple models in which they demonstrate the migrational impact on efficient resource allocation given different assumptions. In an economy with one pure public good and perfectly mobile produc— tive resources, the efficient position is for every person to migrate to the wealthiest state. In an economy in which resources are not perfectly mobile (e.g., land and space cannot be taken with you), there 29Musgrave, "Reply," Ibid., pp. 132-133. 30Buchanan and Wagner, "Efficiency Basis," pp. 139-158. 20 will be a tendency for less than optimal migration from the poorer area to the rich, in which case we might prescribe a transfer from the poor to the richer area. In the most realistic of these simple models, however, the government produces a less-than-pure public good, so that the benefits to any resident decline (after a point) with immi- gration of others. This negative benefits effect will likely offset the positive tax effect, and the wealthier area will tend to be over- crowded. Each immigrant will consider only the tax price to himself and the average benefit he will receive, not the diminution of the benefits to others which he imposes with his presence. Thus immigra- tion will proceed past the Optimal point, because the migrant weighs average benefits to himself rather than the marginal benefit impact on the entire population. Buchanan and Wagner point out that the excessive migration generated by private choice can be mitigated by the granting of property rights to residents of subordinate units of government; practially this would amount to allowing such polit- ical communities the right of excluding immigrants. Individuals then wishing go migrate would be forced to purchase these rights.~1 However, they feel that such an arrangement would violate the spirit of freedom of movement implicit in Western Civilization. In its stead, they suggest the use of a system of fiscal transfers to promote efficient resource allocation by preventing too much migra- tion from poor areas to richer ones. 311bid., p. 153. 21 We pause here to note that in reality, an immigration policy and tool kit does exist for the local government. Although the policy is not formulated in terms of property rights, it is implicit in the formal and informal rules governing entry into the community. As such, it is a sort of black market in property rights; those who can afford it may move into a community which provides bountiful public services at a relatively low price. In other words, fiscal privileges go to the highest bidder. Another weakness in this approach is its concern with the ef- ficiency implication of migration to the exclusion of the distribu- tional ones. Given some initial social welfare function, the analysis works out the implications for efficiency within a process that redistributes income. However, it is probable that the social welfare function itself may be changed by the process, obscuring the results. In addition, it seems that the analysis misses its oppor- tunity to examine the distributional effects of migration in theme selves. D. Economic Theories g£_Politics Several ambitious attempts have been made to integrate govern- ment behavior into economic theory. Among these is Anthony Down's book, An_Economic Theory 2_f__Democracy.32 Rejecting traditional approaches to government's role as an economic agent, which either 32Anthony Downs, An_Economic Theory g£_Democracy (New York: Harper & Brothers, 1957). 22 consider policy~makers as altruistically pursuing the common good or government as a machine which automatically works to maximize a social welfare function, Downs hypothesizes that politicians maximize votes, just as consumers maximize utility and firms maximize profits. Since votes are distributed on an egalitarian basis, government policies (which are designed to win a majority of votes) will favor low and middle income groups (assuming larger numbers in these groups) and involve some redistribution from rich to poor.33 The lower in- come bias and redistribution will be tempered to the extent that cost of information and uncertainty hamper the voting mechanism. However, in general a "better" allocation of resources could be achieved if high income groups, under certain rules, could buy off votes of lower income groups, a trade which both parties would be willing to engage in. Since democratic constitutions forbid vote selling, a Pareto Optimum, in the traditional welfare sense, cannot be achieved in a democratic society.34 Since we can expect that uncertainty and information cost will be minimal at the local level, the Downs theory suggests that local government policies would tend to be redistributive and favorable to the lower end of the income distribution. However, this conclusion 33This argument ignores the plausible points made by contemp- orary radical thought that wealth controls the media which molds the preferences of the masses. It also ignores milder criticisms such as in Due, Public Finance, pp. 25—26, that information is more accessible to higher income groups and thus these groups will have a disproportionate influence on public policy. 34Ibid., pp. 202-203. 23 is invalid in a context where both citizens and local governments have alternative means for achieving their goals, namely, migration and the Opportunity to design their own communities. The existence of multiple local governments in a metropolitan area thus changes the possibilities for achieving efficient consumption (defined as the fulfillment of consumer's maximization goals given income con- straints), implies different conclusions about the redistributive effect of public policy and widens the scope of activity for local public policy-makers. These issues are fundamental to this thesis. As other work of importance on this tOpic is the Buchanan and Tullock book, The Calculus of Consent.35 They design a theory of individual maximization as it affects political decisiondmaking, dealing mainly with constitutional issues. Their stringent assump- tions suggest that according to the self-interest postulate, no redistribution would take place in the public sphere. However, they point out that citizens may Opt for redistributive rules in govern- ment as insurance for a future time in which they might potentially be recipients.36 Since government policy clearly i§_redistributive, Buchanan and Tullock continue, each issue therefore has two sets of costs and 35James M. Buchanan and Gordon Tullock, The Calculus 2f Con- sent (Ann Arbor: University of Michigan Press, 1962). 36Actually the converse Of this may be the better description of reality. Milton Taylor suggests that households may oppose re— distribution because they believe that they may be richer in the future and thus lose out. 24 benefits for the citizens-one set redistributive and the other allo- cative. One interesting conclusion is drawn from this: The impact of these expected redistributional ex- ternalities on the individual calculus could scarcely be overemphasized, for it seems to be this expectation which causes the individual to refrain from assigning to the collective sector many activities which he would tend to collec- tivize if such externalities were absent ... If such projects are to be financed, or if the indi- vidual expects them to be financed out of general tax revenues, the redistributional externalities expected may well be sufficiently large to offset the allocational externalities that may be continued by failure to undertake coordinated development. Unfortunately, with this brief nod to the entanglement of these two issues, the subject of distribution is dropped. Elsewhere Buchanan and Tullock acclaim the virtues of government decentraliza- tion and locational choice, echoing Tiebout's analogy between com- peting political units and competitive market forces.38 An attempt to test the basic theses of Downs, Tullock, and Buchanan was made by James Barr and Otto Davis.39 However, in the process of distilling the theory to get testable propositions, they lose most of its essence. In their haste to find a manageable utility function for individual voter-consumers to maximize, they assume that each maximizes over private market goods and local public 37Ibid., p. 198. 38Ibid., p. 114. 39James L. Barr and Otto A. Davis, "An Elementary Political and Economic Theory of the Expenditures of Local Governments," Southern Economic Journal, XXXIII (October, 1966), pp. 149-165. 25 expenditure: The imperfect procedure adopted here simply is to presume that any utility function has as its argu- ments private goods and the (by assumption only one) expenditure of the local government. While it may be true that voters are concerned only with that portion of governmental expenditures which provide those goods and services which they consider them- selves to be consuming, it appears apprOpriate to abstract from problems related to the manner in which governmental goods and services are distributed (and also produced).40 This "abstraction? combined with a very simplistic assumption about the renter awareness of prOperty tax burden, results in Optimiz- ing solutions for individual such that "if the ith voter-consumer is not a property owner, then he will view the municipal expenditure as a 'free good' and will desire that value of x to be selected which equates his marginal utility of the expenditure to zero."41 Con- versely, the voter-consumer who is a property owner will select a level of public expenditure which equates the ratio of her marginal utility for public expenditure to her property taxes with the ratio of her maginal utility for private goods to their prices. The authors hypothesize that the successful politican must approximate the ddsires of owners of median prOperty values in a community (all residents have identical utility functions), and that an inverse relationship should be expected between the expenditure per capita of a community and its corresponding median property 4oIbid., p. 151. 411pm, p. 152. 26 ratios,42 a high proportion of home ownership having a depressing influence on expenditure. The hypotheses are further emasculated by substitution of surrogates for the proposed variables, resulting in vague testable hypotheses which could represent any of a number of theories. Attention is paid to this piece of work here simply because it is the only known attempt to test the political theories of the Downs-Buchanan type. Its flaws are obvious. A discussion of economic theories of politics would not be complete without a reference to Lenin's work, State and Revolution.43 Lenin's theory, drawing strongly on Marx and Engels, is that govern- ment is not a contract of reconciliation between individuals with different interests, but the manifestation of irreconcilable class conflicts, where the state develops as the tool of the oppressing class. Even in democratic countries, power inevitably is wielded by those who have wealth, since wealth has the means of permeating the government machinery and using it for its own ends. As Marx said, universal suffrage simply means the Opportunity for the Op- pressed classes to go to the polls once every few years and vote for a member of the ruling class to represent and repress them in the 42A community's median property ratio is simply the ratio of median property value of homeowners to total property value in the community. 43Vladimir I. Lenin, State and Revolution, in The Essential Works gf_Marxism, ed. by Arthur Mendel (New York: Bantam, 1961), pp. 103-198. Originally published in 1917. 27 legislative body. In Lenin's eloquent words, Democracy for the rich-that is the democracy of capitalist society. If we look more closely into the machinery of capitalist democracy, we shall see everyWhere,... restriction after restriction upon democracy. These restrictions, exceptions, exclusions, obstacles for the poor, seem slight especially in the eyes of one who has never known want himself and has never been in close contact with the oppressed classes in their mass life ... But in their sum total these restrictions exclude and squeeze out the poor from politics, from active participation in democracy.44 If Lenin were here today, touring the new suburban phenomenon, which did not exist in his day, he would continue his condemnation along these lines. Lenin would see suburbia as the consolidation of bourgeois power in the public and social sectors. By isolating them- selves from the larger and more representative urban society, the wealthier groups escape the possible consequences of a coalition of an angry urban working class, Blacks, the unemployed and the elderly poor who might vote for large public benefit programs at their ex- pense and make inroads on the class structure. Such an escape is easiest at the local level, but also more critical, because democracy works best here; at higher levels, while such coalitions are pos- sible, political distance and aggregation blunt their attack. Suburban enclaves also prevent participation by lower income groups and classes (e.g., Blacks) in quality public service programs like education. By insulating their tax funds within suburban borders, 28 wealthier groups can insure that their children will receive the superior educations and thus preserve the class structure. Further- more, the social fabric Of the suburbs, with its emphasis on con- spicuous consumption, accumulation of durable goods, respect for private property, business clubs, college educations, and good jobs, provides a perfect acculturating atmosphere for children. Suburbia is thus both a community and a local government dedi- cated to preserving bourgeois class structure. Furthermore, its development, in Leninist terms, was inevitable since the egalitarian- ism of the public sector threatened to diminish class distinctions and the power of the wealthy. It is useful to note that the Marxist view disagrees outright with Tiebout and Buchanan's view of the nature of the utility functions. The latter believe that people do have unique and varied preferences, so that even when everyone has the same income, indi- viduals desire different allocations of resources. Their strong endorsement of political democracy and fragmented local government as efficiency generators rests primarily on this assumption. The Marxist analysis, on the other hand, suggests that preferences are not unique, but are conditioned by class, so that members of each productive group can be expected to have similar preference patterns. For instance, as a family moves "up" in capitalist society, it moves to a house and neighborhood that advertizes its economic position, not to one which it innately prefers. Indeed, this behavior is probably essential to maintaining its job and economic position. 29 Under such circumstances, the division of the population into separate local governmental units can reflect only the differentials in income and wealth, and the desire to preserve them.45 This thesis will try to reconcile the Marxist view with our conventional tools for analysis. One of the questions it seeks to answer is whether or not we can expect that wealth and wealth- preserving behavior will inevitably undermine the pursuit of egali— tarian goals in our society. E. The Exploitation Hypothesis WOrk on an explicit hypothesis Of suburban exploitation of the central city has been done by William Neenan.46 His first formula- tion of this concept appeared in 1970, in a study in which he attempted to measure the benefit flows between Detroit and six of its suburbs. Neenan points out that there has been a surprising reticence among public finance experts to admit that suburbs exploit the 5Despite the reliance of conventional economics on diversity for significance, the assumption of identical utility functions is actually quite common, especially in Operationalizing theory. 6For references to previous work along these lines see William Neenan, Political Economy_of Urban Areas (Chicago: Markham, 1972), pp. 57-60; Dick Netzer, "Federal, State and Local Finance in a Metropolitan Context," in Issues in Urban Economics, ed. by Harvey Perloff and Lowdon Wingo (Baltimore: Johns HOpkins Press for Resources for the Future, Inc., 1968), p. 438; or Wilbur Thompson, A Preface to Urban Economics (Baltimore: Johns Hopkins Press for Resources for the Future, Inc., 1965), p. 290. While the term "suburban exploitation thesis" was coined previous to Neenan, he is the first to elaborate upon it and advance it to the stature of a theory. 47WilliamNeenan, "Suburban Central City Exploitation Thesis: One City's Tale," National Tax Journal, XXIII (June, 1970), pp. 117-139. 30 central city. He quotes Margolis: The argument that central cities are exploited by the noncentral cities is not well established. If anything, central cities may be relatively better Off. This argument is based on the observation that while a central city's facilities have a high use rate during the day, supporting suburban commuters, the intensity of land use in the central city that para- llels this activity provides an enriched fiscal base in the form Of higher property values. Neenan sets out to measure what he terms the "citizen's surplus," the difference between perceived benefits and perceived tax liability. He constructs a benefit profile for residents of six Detroit suburbs, including the "free" services they receive from Detroit (museums, the zoo, etc.), the avoidance of welfare-related services, and the uneven benefits impact of indirect public subsidies like tax exemp- tions. Weighing this against taxes and intrametrOpolitan transfers, he finds that a suburban family receives between $7.00 and $50.00 a year in uncompensated benefits from Detroit. He then suggests compensation with revenue-sharing and a non-residential income tax. In 1972, Neenan published his Political Economy gf_Urban Areas.49 48Julius Margolis, "MetrOpolitan Finance Problems: Territories, Functions and Growth," in Public Finances, Needs, Sources and Utiliza- tion, ed. by James Buchanan (Princeton: Princeton University Press, 1961), pp. 229-270. 49William B. Neenan, Political Economy 2£_Urban Areas (Chicago: Markham, 1972). 31 The book is an expansion of the exploitation hypothesis, designed to propose concrete corrections in the fiscal structure. Neenan builds a model of individual consumer maximization in order to develop the concept of fiscal residuum, which is the con- sumer's perceived benefits over her perceived tax. The model implic- itly includes recognition that her tax will depend on costs and the incomes of other consumers of public services, but these determinants are not expressed in a way which permits analysis of each influence independently, nor of the potential conflicts between the two and the resulting behavior of citizens and governments. In addition, Neenan explicitly disregards the influence that socio-economic characteristics of a community may have on the supply functions for basic services.50 Neenan develops a measure of benefits, which is essentially a cost-Of-service (expenditure) measure modified by a willingness- to-pay multiplier. With this measure, tax data and his estimates of intrametrOpolitan revenue and benefit flows, he designs a revenue sharing system to compensate for the exploitation. He can be credited with being a pioneer in this effort; very few revenue sharing proposals, including the recent national one, have tried to use real needs and imbalances as the allocative criteria for shared funds. Of greater interest to this thesis is the chapter in Neenan's SOIbido, pp. 87-920 32 book where he deals with equity and efficiency considerations. In order to term one situation exploitative, he says, we have to have some non-exploitative benchmark. His basic contention is that it is impossible to talk about efficiency in the public sector without first establishing a normative guide. ... an explicit equity judgment is required before central city-suburban public sector interactions can be analyzed in terms of efficiency. Although the relation between (1) income distributional pat- terns and (2) relative price structures and the optimal supply and mix of metropolitan public services are admittedly theoretically pertinent, they will be disregarded in this chapter. However, a judgment will be made regarding the "correct" legal structure. Neenan's normative benchmark is that the welfare distribution should be the same across the metrOpolitan area as in the absence of any public service sector, and public services introduced only if a majority of metropolitan residents then vote for the new tax and expenditure program. He demonstrates that if individuals are free to migrate to maximize their own fiscal residuum, there will be a decrease in the total fiscal residuum across the metropolitan area, a situation which represents inefficiency. Thus, even without ex- ternalities, the existence of differing fiscal resources can impede the achievement of efficiency over the whole area. Therefore, a transfer should be made from the richer to the poorer jurisdiction to prevent an inefficient solution.52 52Note the resemblance of this outcome to the Buchanan and Wagner case examined above. 33 The normative criterion is very important here. Without it, if one takes an already fragmented metropolitan area in which numer- ous units are providing public services, it is impossible to judge the equity of the situation, for the formation of those units and their impact on distribution has been ignored. One of Neenan's observations justifying his use of the benchmark is: It is contended here that the mere fact of resi- dence in a rich community rather than a poor com- munity establishes no property right in the public sector benefits that accrue to high income communi- ties. The fact of such residency constitutes merely a windfall gain judged in reference to an initially "neutral" welfare distribution in a metro- politan area. This point of view is applauded and espoused by the writer of this thesis. Neenan realizes that his concept of fiscal residuum is ex- tremely hard to measure. The introduction of such real world factors as legal and extra-legal barriers to migration, the immobility of resources, general equilibrium inter- actions with the private sector and capitalization Of fiscal phenomenon make the question of quanti- fying the fiscal residua for metropolitan areas extremely problematic.5 Since his interest is in the quantification, he has had to take some rather crude steps in the analysis to proceed from consumer maximization to his concept of fiscal residuum to its measurement and the derivation of compensation principles. The theoretical 54Ibid., p. 183. 34 model for deriving and comparing fiscal residua requires that income levels are equal, utility functions identical, tax structure the same, distribution and cost functions the same and that no external- ities exist. With these assumptions, the fiscal residua can be measured as the difference between the perceived benefits (above) and the per capita tax base, modified by a tax-exporting factor. Thus based on both per capita prOperty values and an index of tax-exporting, and overlooking the pos- sibility of differential congestion costs, and supply conditions, it appears that Detroit residents may receive a somewhat smaller fiscal residua than do their equals in other metropolitan areas.55 Neenan's work is laudable in precisely this tremendous effort to generate a useful criterion and measure for the exploitation which is obviously going on. This thesis hOpes to go beyond Neenan's work by developing a more inclusive theoretical model, by examining in particular the behavior of citizen groups and local government decision-makers, and by concentrating more on an historical frame- work for analysis. F. Demand, Supply and Location Factors iE_Local Government Output Several people have dealt with local economic issues in a way which includes recognition of differential cost factors, supply factors, and demand elements among local governments. These few studies are pioneers in rejecting the theory that local governments simply respond to exogenous cost and income conditions when 551b1d., p. 189. 35 determining output levels. Jerome Rothenberg has approached the problem of local govern- ment in the metrOpolitan area from within the framework of location theory.56 He has tried to build a model to explain the pattern of residential and commercial location in an urban area which includes the influences of the local government sector. His model examines the location decisions that a household and business will make and the responses to those decisions by city and suburban policy-makers. This model assumes that all residents of the area have the same preference function, which varies with income. Each family chooses to locate in one of two communities--the city or the suburb. There are five differential costs (or advantages) which distinguish the suburb from the city: 1. Privacy - more Space per family, at a higher cost of accessibility. 2. Welfare Redistribution - the evasion of welfare-related services which the family achieves by moving to the suburb. 3. Public Service Consensus - the suburb is assumed to be richer (median income higher) than the city and more homo- geneous (less disparity in incomes). Therefore a family with an income higher than the median in the city will gain by moving to the suburb where its demand for public services will be similar to its neighbors and its share of the tax burden will be lighter. 4. Externality Induced Tax Burden - the suburban evasion of taxes for public services which the city supplies but which can be enjoyed by commuting suburbanites. 56Jerome Rothenberg, "Strategic Interaction and Resource Al- location in MetrOpolitan Intergovernmental Relations," American Economic Review, Papers and Proceedings, LIX (May, 1969), pp. 494- 503. 36 5. Minimum Lot Size - a potential disadvantage to moving to the suburbs. However, it is a cost only to those who would have preferred a smaller lot size; for these house- holds it represents a purchase (and maintenance) cost constraint. Each family weighs these advantages and disadvantages and decides whether it will gain, given its budget, by moving to the suburb. Rothenberg notes that on balance, these five location factors benefit higher income groups: The impact of this is that the suburbs will tend to attract chiefly the highest income classes (having assumed away demographic differences among house- holds). The suburbs will tend to be a high income, highly homogeneous community relative to the city. It is clear that minimum lot zoning is a device that enhances the strength of the other suburban advantages.5 Rothenberg also points out that the highest income groups will be the first to migrate to the suburb, since the benefits for them are greatest. The sequential pattern of metropolitan migration will be from the richest on down. The larger the suburb gets, the less the advantage to the next migrant. Each successive entrant decreases the average level of privacy, the strength of the public service consensus, and the degree of insulation from income redistribution; at some point, the minimum lot size constraint will become operative. The utility gain for each successive migrant diminishes. When the advantage to the next migrant equals zero, then the equilibrium size of the suburb is determined. Having formulated the individual decision-making function, 57Ibid., p. 499 37 Rothenberg turns to the responses by city and suburban governments. He assumes that the city has two policy instruments: the ability to recover externality costs from suburbanites (the form of this recovery is not specified) and a property tax rate. The suburb has a property tax rate instrument and zoning powers. Both governments are assumed to maximize the total value of land within their juris- dictions. With this model, Rothenberg derives values for the policy instruments for both city and suburb, the maximum land value for the area and optimal size for each. Since each set of prescribed policies depends on the choices of the other government, Rothenberg points out that the results need reaction function analysis to see if the behavior of the two converges to some equilibrium point. The strength of Rothenberg's model lies in its inclusion of the income and welfare cost redistribution which does occur in the dy- namics of fragmented local government. The model does not contend that a more efficient allocation of resources is achieved through competing local governments, but simply that certain groups derive "benefits" from its existence. "Benefit" includes redistributive gains as well as a better family income allocation pattern. Rothenberg's model would be better if it included an analysis of the dual role of local government (determining an apprOpriate level of public services and capturing distributional gains) and the possible policy conflicts arising from it. Could the incentive to use land use policies, zoning and building codes for insulation from area-wide redistributive forces constrain the ability of the local 38 public sector to act as a firm marketing a product mix and facil— itating consumer choice? In addition, his characterization Of local government behavior is weak (maximizing land value). The restric- tion of the model to only two governments--one central city, one suburban-leads to an equilibrium solution which may not in actuality characterize the competition among numerous suburbs and the central city. Finally, Rothenberg's work lacks historical suggestion as to how the situation arose in the first place. This thesis will ex- amine the possibility that fragmented local governments appeared and have been maintained partly because of the escape from redistribution which they provide for groups of differing income and sociological characteristics. One of Rothenberg's students, Bryan Ellickson, has worked on the problem of redistributional benefits in location decisions.58 He notes that most public finance work has resulted in the advo- cacy of either larger local units of government, or further frag- mentation, while in reality we observe rigid and unchanging juris- dictional boundaries. He feels that the lack of realism in such proposals stems from the failure to include motives for residential location in this analysis. Ellickson includes in his model a conception of the dual role of local government: 58Bryan Ellickson, "Jurisdictional Fragmentation and Residential Choice," American Economic Review, Papers and Proceedings, LXI (May, 39 ... we must investigate the impact of local govern- mental structure not only on allocative efficiency but on the extent of redistribution from rich to poor as well.59 He views the relationship between government and its citizens as simultaneous; the nature of government policy both attracts resi- dents to the community and is affected by their votes once they are there. Ellickson then suggests the elements of a general equilibrium model for a metropolitan area, but stops before formulating the equations for it, as it is too formidable, and merely assumes that communities will stratify by wealth. He does make an important observation, however: The stability of perfect stratification hinges crucially on the nature of household preferences and the method by which local public services are financed. Collusion, through exclusionary zoning, further enhances the strat- ification tendency. Ellickson then cites several recent studies as evidence for stratification and homogeneity. Regretably, he does not attempt to test for the existence of these phenomena himself. This thesis, in addition to alluding to similar existing evidence, will try to employ both statistical and historical evidence in its support. Of all the diverse sources quoted in this Review, Ellickson 591b1d., p. 334. 601bid., p. 339. 40 comes closest to posing the problem which this thesis addresses. While the present work approaches the problem in a different manner, it owes a debt to Ellickson for pointing out that distributional motives are indeed operative in community choice and that such motives may lead to stratification and homogeneity. This thesis will examine in greater detail the relationship between allocational and distributional motives for an individual household in choosing a community and will construct a theory of governmental behavior from the implications of the former. Byron Brown's work on educational finance includes some novel approaches which this thesis will build upon. Brown's objective is to assess the suitability of "achievement level" as a measure of educational output, to survey the variation in school district be- havior across the state of Michigan.61 and to judge the effective- ness of school aid formulas for achieving equality of educational opportunity.62 Brown's model assumes that the school district maximizes its social welfare function, choosing between education and private goods. He employs two constraints in the maximization: the tradi- tional budget constraint (school district resources), and the 1Byron Brown, "Achievement, Costs, and the Demand for Public Education," Western Economic Journal, X (June, 1972), pp. 198- 219. 62Byron Brown, "State Aid and Equality of Opportunity in Education," Review gf_Socia1 Economy, XXIX (September, 1971), pp. 218-226. 41 production function for education. In other words, he recognizes that school districts are producers as well as consumers of educa- tional output, and that they make decisions about the inputs into production within their maximizing behavior. Furthermore, the production function he develOps includes two sets of inputs: paid- for inputs, such as teachers, class size, etc., and unpaid-for inputs, or the socio-economic characteristics of the students them- selves. Students are thus the "raw material" of the educational process, with their class, social and family backgrounds. The output of a year of education will vary greatly between two unequally equipped school districts with the same set of "paid-for" inputs. Using this model and the reduced forms derived from it, Brown estimates demand and cost functions for education from cross- sectional data for Michigan. He finds that his assumed output mea- sure, cognitive achievement level, does not fare well in the analy- sis, suggesting that the real output of education may be something entirely different, such as cultural and psychological adjustment and class indoctrination. Furthermore, he finds (as others have previously) that expenditures on the paid-for inputs are not sig- nificantly related to the output variables, but instead that the socioeconomic inputs have much greater explanatory power for pre- dicting the behavior of the school district. The Brown model is a short-run model in the sense that it as- sumes the socio-economic characteristics, which are integral to his analysis, as exogenous, and surveys the implications of his model 42 cross-sectionally. This thesis hOpes to examine the impact of Brown's strategic variables on individual behavior in choosing a community and in "protecting" it through the politics of local government. Hopefully, some understanding of this will throw light on a historical pattern which has led to the present disparities which Brown notes in his work. G. Empirical Fabrications With the exception of those few empirical studies mentioned above in relation to specific theories, most empirical work done on local government output has been of an ad hoc variety, purporting to explain the variation in state and local expenditure patterns. These studies are mentioned here as a contrast to the work reviewed above, and because they have received such widespread attention in the literature. The expenditure differential studies originated with a detail in a book by Soloman Fabricant published in 1952.63 Fabricant, as an exercise in support of a verbal argument about the influences on the local budget, regressed interstate variation in operating ex- penditure per capita on three explanatory variables: per capita income, pOpulation density, and percantage of state pOpulation in urban areas. His results were good in the statistical sense; his variables explained 72 per cent of the variation. Of this exercise, 63Soloman Fabricant, Trend gf_Governmental Activipy ip_the United States Since 1900 (New York: National Bureau of Economic Research, 1952). 43 Fabricant notes, "The readers will discover that the following analysis is rather more technical (and tentative) than that in pre- ceding chapters. It may be skipped without losing the main thread of the discussion."64 Nevertheless, there followed a plethora of studies which tried to improve upon this exercise. Improvements included adding more explanatory variables and changing the functional form. It is the writer's Opinion that the pOpularity of such studies lay not in their usefulness or correspondence to reality, but in their coin- cidence with an era enamored with the use of statistical technique in economics, and the need to publish something, of whatever qual— ity. A brief description of these studies follows, with concluding remarks on the general weaknesses of this approach. Glenn Fisher was the first to re-run Fabricant's regression. He used the same model for the analysis of 1957 interstate variation in per capita expenditure with similar results. Additions to the right-hand side of the equation were made by Seymour Sacks and Robert Harriss in explaining interstate variation for 1960.66 They added both state and federal aid as independent 64Ibid., p. 112. 65Glenn Fisher, "Determinants of State and Local Government Expenditures: A Preliminary Analysis," National Tax Journal, XIV (December, 1961), pp. 340-355. 66Seymour Sacks and Robert Harriss, "The Determinants of State and Local Government Expenditures and Intergovernmental Flows of Funds," National Tax Journal, XVII (March, 1964), pp. 75-85. 44 variables and found that this increased the explanatory power of the regression. Glenn Fisher again attempted to explain interstate variation in state and local expenditure levels for 1960 data, this time postu- lating a diverse collection of variables under three main categories: economic, demographic and socio-political. Out of these he hand- picked those which gave him the best results, eliminating the "over- lapping" variables in his kitchen sink.67 Ernest Kurnow, objecting to the linear form of previous regres- axlle2b2X3b3 He claimed to get better results than his predecessors. ...). sions, substituted a joint regression model (Y = In 1967, Ira Sharkansky decided that what was missing in the regression equation was an additional independent variable, last year's expenditure. By including this "independent" variable in the equation, he "explained" over 90 per cent of all variation in ex- penditure differentials for the present period.69 While the above studies all deal with interstate variation in aggregated state and local expenditure, similar studies have been 67Glenn Fisher, "Interstate Variation in State and Local Government Expenditures," National Tax Journal, XVII (March, 1964), pp. 57-74. . 8Ernest Kurnow, "Determinants of State and Local Expenditure Re-examined," National Tax Journal, XVI (September, 1963), pp. 252-255. 69Ira Sharkansky, "Some MOre Thoughts About the Determinants of Government Expenditures," National Tax Journal, XX (June, 1967), 45 used to explain differences in levels of public expenditures among cities and local governments. The 1951 pioneer study by Brazer of expenditure levels across 462 cities is perhaps the most well known;70 he found that population density, median family income and intergovernmental revenue were the variables most closely cor- related with expenditure levels. In l957, the Scott and Feder study of 192 California cities found that property value per capita, retail sales per capita, pOp- ulation growth and median number of persons per dwelling unit ex— plained a large part of inter-city variation.71 Woo Sik Kee attempted to add certain socio-economic ahracter- istics to an analysis of differentials in fiscal effort between local governments and found that, in addition to income per capita and the level of state grants, the difference was explained by the ratio of employment to resident pOpulation, a commuter proxy. Recently, a study of local expenditure levels in Ontario by Ronald Bodkin and David Conklin found that expenditure differen- tials were explained chiefly by population, per capita property assessment, population density, and per capita provincial and 70Harvey Brazer, City Expenditure i2_the united States (New York: National Bureau of Economic Research, 1959). 71Stanley Scott and Edward Feder, Factors Associated with Variations iE_Municipal Expenditure Levels (Berkeley: Bureau of Public Administration, University of California, 1957). 72W'oo Sik Kee, "City-Suburban Differentials in Local Govern- ment Fiscal Effort," National Tax Journal, XXI (June, 1968), 46 dominion aid.73 A number of common criticisms can be levied against these studies. Most serious, in the view of this writer, is the failure to construct a meaningful economic theory about the differences be- tween expenditure levels of local units of government. The "results" of the multiple regression analysis are therefore not tests of any hypotheses but merely answers to technical, ad hoc exercises. Werner Hirsch points out that in order to mean something, such studies should hypothesize the relationship between expenditure and the supply and demand for local public services. The two most important "determinants" of local expenditure as found in these studies, local fiscal capacity and federal-state aid, do not fit well into either cost or demand theory.74 Secondly, the general methodology of these studies is appalling by the most primitive of econometric standards. Among the more serious errors is the claim that "explanation" is increased by re— gressing a variable on what is essentially a component of itself.75 The use of state and federal contributions to local expenditure as an independent variable "explaining" local expenditure levels is of 73Ronald Bodkin and David Conklin, "Scale and Other Determinants of Municipal Expenditures in Ontario: A Quantitative Analysis," International Economic Review, XIV (October, 1971), pp. 465—481. 74Werner Hirsch, "The Supply of Urban Public Services," in Issues in_Urban Economics, ed. by Perloff and Wingo, pp. 477-525. 75Elliott Morss, "Some Thoughts on the Determinants of State and Local Expenditures," National Tax Journal, XIX (March, 1966), Pp 0 95-103 0 47 this genre. Another highly suspect maneuver is the addition of last year's expenditure as an explanatory variable for this year's expenditure. There is also criticism of the use of explanatory variables which are closely related without considering the multi— collinearity problems associated. Fabricant's original use of pOpu- lation density and percent population in urban areas as independent variables is an example.76 Third, most of these studies have been confined by data unavail- ability to examining the differentials between states or between larger cities within states, and not urban-suburban differentials. Therefore, the results may have little importance for highlighting intra-metrOpolitan differences. Fourth, all of the studies use state and/or local expenditure as a measure of output, despite apologies about its unfitfulness. This is inadequate and misleading. It results in predictions such as that made by Jesse Burkhead77 that since expenditure and tax levels in the Cleveland metropolitan area are becoming more uniform across local units, there may be less resistance to metropolitanization in the future. This will be true only if expenditure levels accur- ately reflect the real satisfaction that residents gain, and it is 76See Harvey Brazer, "State and Local Public Expenditures and 'Needs'," in Financing_State and Local Governments, Federal Reserve Bank of Boston, 1970, for a longer discourse on the econometric weaknesses of these studies. 77Jesse Burkhead, "Uniformity in Governmental Expenditure and Resources in a Metropolitan Area: Cuyahoga County," NatiOnaI Tax Journal, XIV (December, 1961), pp. 337-348. 48 highly unlikely that this will be so. Unfortunately, these studies, in the absence of any extensive empirical test of Tiebout and alternative theories, have served as an implicit and subtle body of evidence for the Tiebout hypothesis. As Fabricant found, income differentials are the major factor in "explaining" expenditure differentials, and no subsequent study has unearthed a more significant influence. This can be viewed as in- direct support for the Tiebout hypothesis; nomopolistic competition provides alternative public service packages that tend to attract and sift out the various income groups in the population. However, the same observation can be used to support a more comprehensive theory such as that suggested by Rothenberg and Ellickson, and that developed in this thesis. An exception to the lack of theorizing accompanying expenditure studies is work done by James Henderson.78 Henderson postulates that local decisions about tax and expenditure levels are made by maxi- mizing some perceived community welfare function. The community gains satisfaction from.both public and private goods, the latter represented by expenditure level; the utility gained from public expenditure is in turn a function of the level of per capita income, population size and revenue forthcoming from higher levels of govern- ment (voila! the familiar variables). Henderson constructs a logex 78James Henderson, "Local Government Expenditures: A Social Welfare Analysis," Review 2£_Economics and Statistics, L (May, 1968). pp. 156-163. 49 utility function, which is additive between public and private goods, and proceeds to run a two-stage least squares multiple regression on the reduced forms. The results, needless to say, are edifying. In addition to his omission of any analysis on the construction, politically or economically, of this community welfare function, Henderson does not really do much more than his predecessors who merely ran ad hoc regressions on expenditures. He makes no effort to defend his particular choice of a community utility function, a matter which is of utmost importance, since entirely different results can be obtained with alternative forms. One cannot help but suspect that his "model-construction" is merely a form of empty one-upmanship. H. .é Nod £2_Political Scientists Political scientists, too, have had their debates over the suitability of fragmented local government in the metropolitan area. Robert Warren notes: Students of government, planners and civic leaders have produced numerous studies, articles and books during the last 40 years which have found that de- centralized systems of government are not respon- sive to, or capable of meeting the needs of, metro- politan pOpulations ... A common point of agreement in the literature has been that the decentralization or Balkanization of governmental decision-making authority within the same pOpulation center is the primary cause of the metropolitan problem ... Its performance is characterized by the uneven alloca- tion of fiscal resources, differing levels of service, economically inefficient scales of organ- ization, benefit-cost discrepancies, unresolved regional problems, and the lack of a mechanism to 50 allow controlled and rational growth and to de- termine and implement regional policies.79 warren himself suggests the political scientist's counterpart to Tiebout's argument, that the market mechanism is theoretically a beautiful device for providing for the efficient allocation of re- sources and the satisfaction of diverse preferences, and that it can and is being applied at the local level of government. Decentralized government is viable, he claims, and contrary to the decades of dire predictions, has not lead to breakdown and failure in the public sector. Not only is it viable, but it has been seriously underesti- mated and actually may be far superior to metropolitandwide schemes. The Opposite vieWpoint is espoused by Robert Wood, one of the members of the New York MetrOpolitan Region Study.80 He claims that fragmented local government has prevented the achievement of public service goals both on equity and efficiency grounds. Furthermore, the corrective he proposes--metropolitan government--he fears is not achievable in a setting where each political unit operates in its self-interest and has something to lose. Having made a strong case for metropolitandwide government, he reluctantly concludes that the chances of attaining it (a revolution, in his words) are slim, since it would require certain groups sacrificing their own self-interest 79Robert warren, "A Municipal Services Market Model of Metro- politan Organization," Journal gf_the American Institute 2£_Planners, XXX (August, 1964), p. 195. 80Robert C. Wood, 1400 Governments (Cambridge: Harvard Uni- versity Press, 1961). 51 for gains to the whole pOpulation. "We simply record that we know of no other time when a revolution took place when the existing system was solidly established and its citizens, as they understood the goals of their domestic society, content."81 I . _A_ Wrap-up In closing this chapter, it is helpful to summarize the limita- tions of what has gone before; this listing will sketch out, like a silhoette, the departure point for this thesis. The problem is the determination of the economic role of a local government in an urban area. It/is a firm-like agency which produces public services ef- ficiently under the compulsion of consumer covereignty Operating through market choice? Or is its function more complex, even contra- dictory, to this view? In general, this review of the literature indicates that in most economic work the analysis has not employed realistic behavioral postulates about individual household behavior in response to public sector location incentives. This has led to incorrect conclusions about the function of fragmented governments. When realistic (meaning inclusive of distributional considerations) behavior has been allowed, it usually has been treated as an unpleasant problem, and in any case has not led to a comprehensive theory of the trans— lation of such behavior and incentives into local government policy. The economic performance of local government also has not 81Ibid., p. 199. 52 adequately been described by the existing theories. Its effective- ness on three traditional economic counts—-allocative efficiency, distribution and stability--has not been established. In addition, the theories advanced to date have never been adequately tested. The empirical work done on local public sector finance, purporting to explain differences among units, actually casts no light on these theories; they cannot be considered hypothesis testing, but rather resemble ad hoc searches for "explanation." This thesis attempts to improve on the behavioral postulates and their implications, and to arrive at a better prediction of performance, which it will test, however crudely. With a thanks to the thought-provokers reviewed in this chapter, we will proceed with our model. CHAPTER III LOCAL GOVERNMENT OUTPUT AND CITIZEN LOCATION DECISIONS In this chapter we shall develop a simple model to use in examining the individual citizen or family's response to the local public sector in their choice of, and satisfaction with, a community in which to reside. The analysis here is conventional. The use of contemporary consumer theory will enable us to point out the errors in the conclusion, drawn from the same theory, that a multiplicity of local governments necessarily facilitates the fulfillment of individual preferences with respect to a public/private product mix and thereby works in favor of efficient resource allocation. A. The Assumptions The following assumptions are made for any local community of n decision-making units, or households: 1. Utility Functions Each household derives utility (pleasure) from the consump- tion of two goods, one publicly produced within the community and the other privately produced and purchased on the private market. Equation 1. Ui = u(Pi,Gi), for all i where Ui: utility of household i Pi: consumption of publicly-produced good, P, by household 1 53 54 Gi: consumption of private good, G, by household 1 a, The function is non-additive with respect to G and P; that is, the satisfaction obtained from the consumption of one good depends on the level of consumption of the other. This is more realistic than assuming additive utility functions. The latter, such as Ui - Pi + Ci, argues that you are indifferent between one orange and forty-nine apples, or twenty-five of each. Clearly, most of us prefer the balanced fruit diet to the unbalanced. Thus we represent the function as Ui = f(Pi,Gi), such as PiGi, P12612, etc. Other forms will be considered below. b, The utility function is identical for all households. This is a strong statement, for obviously the question of preferences is central to this thesis. However, we do not need this assumption to validate the argument, but for ex- positional purposes we will employ it for its simplicity. Later on, we will see what happens if we assume that indi- viduals do indeed have "unique" preference functions. For now, we crudely postulate that each person desires about the same proportion of public and private goods. This limits us only to saying that all poor people have about the same priorities between crime prevention and food, and that all wealthier groups have about the same priorities; how- ever, the poor may have very different priorities than the 55 rich within the bounds of this assumption. 2, Each household's utility is independent of its neigh- bor's; that is, Ui i f(Uj). This is merely the formal ex- pression of the Selfish Man Assumption, devoid of altruism or "keeping up with the Jones," institutionalized in the competitive economy. In general, people do not ostensibly derive satisfaction from the educational gains of others in the community nor from better protection of other neighbor- hoods; they are concerned only with their own. Alternative assumptions will be considered below. d, Both Gi and Pi are "goods," that is, they are positive wants. The consumer's pleasure increases with more of either. 2. Production Function The production of Gi takes place outside of the community, since the community is negligibly small with respect to the market producing the goods it consumes. The production of Pi, however, takes place within the community. The local government is the collective decision-making unit, functionally analogous to the firm. Its approval of a yearly budget constitutes the determination of the level of public output as its corresponding tax price. It produces the output, P, for the whole community, from one purchased input, R, and two "free" inputs, H and T: Equation 2: P = f(R,H,T) where R: quantity of purchased input 56 H: community handicap index T: community rip-off factor a, R is conveniently visualized as labor, since payroll comprises the bulk of local budgets. Capital outlays and other inputs can be included by simply expanding the ex- pression for multiple inputs. Over the output range con- sidered, we assume that output will increase with addi- tional purchased inputs, 3P/3R > 0. b, The handicap factor is an index of unpurchased inputs into production. The level of public safety, for instance, is influenced not only by the size of the police force and the shine of their badges, but also by the incidence of narcotics in the area, the incidence of broken families, the local unemployment rate, the presence of repeaters, and the shape of the city's physical plant. Some of these inputs can be associated with individuals who reside in the area; some simply abide in the structure and function of the com- munity itself. While they do not appear as paid-for items in the local budget, they are strong molders of output. The handicap factor is simply a sub-grouping of inputs of this type and can be constructed by a realistic multiplicative association of such factors, scaled with 1.0 as the "aver— age" handicap of the array of communities. Since such in- puts are negative, we espect that 8P/3H is less than zero. 57 g, The rip-off factor, T, is a measure of the "free" inputs which a community can enjoy at the expense of another com? munity. This is merely a colorful expression for the poly- syllabic externalities so familiar in public finance. How- ever, the use of the term "rip-off" implies that such extern- alities as are found in urban areas are not simply acts of God that residents are innocently saddled with, but are consciously created and cultivated. The rip-off factor is a function of the ease of access to the public service of another unit and the success in avoiding assessment for its use. Each Detroit suburb, by way of example, enjoys the free input of facilities such as the Detroit Zoo and Belle Isle in the provision of local recreation services for its residents. Ripped-off services enhance public output: dP/dT greater than zero. g, A discussion of the apprOpriate form for the production function parallels that for the utility function. we want a multiplicative function, for realism. Any of the conven- tional forms, of a Cobb-Douglas or CES type, are acceptable for our purposes. 3. Distribution Functions The community may distribute the publicly-produced output in a number of ways: Equation 3. Pi = g(Pi,Yi,n,hi) for all i where Yi: income of household 1 58 n: number of households in the community hi: handicap index of individual households 2, If P is a true public good, non-exclusive in nature, than Pi = P. This is delightfully simple, but unfortunately, most local services (with the single forceful exception of pollution control) are not of this nature. 2, Most local public services are functions of n, meaning that the output must increase when population increases to provide the same quality and quantity of service to each household. Take parks, for instance; while each family has access to a community park, the growth of the community will tend to congest the park. More acreage must be provided to assure the same enjoyment level for each resident. There- fore we expect dP/dn < 0. .2. It is possible to distribute services on the basis of income, wealth, or some income-related characteristic. Street-cleaning and boulevard upkeep, for instance, benefit a family according to their frontage. Public golf courses and municipal snowmobile trails are offered only to those who make a concommitant private expenditure. (These are services which we usually advise to be paid on a fee basis instead of out of general tax revenue; it does not always happen that way though.) It is also possible to distribute services inversely with respect to income; public health 59 facilities such as a general hospital benefit lower income groups in a community. We do not have conclusive evidence of the prevailing relationship between income and receipt of local public services in this partial context. g, Some services are distributed on the basis of the handi- cap characteristics Of individuals or areas in the community. Remedial reading programs are an example. (As a rule, the correlation between handicap characteristics and income will be large and negative.) While generally public services at the local level are distributed in favor of handicapped groups, there are cases in which the Opposite is true. Differential treatment Of areas within a city with reSpect to structural and maintenance services in effect redistri- butes in favor of those with few handicaps. The prevailing relationship is here also indeterminante. 4. Budget Constraints Each household spends its income in the form of local taxes and on G1. Equation 4. Yi = t(Yi)B + Gipg where t: local tax rate, t :_0 pg: market price of G B: parameter expressing nature of tax structure; 0 §_B For convenience, we treat saving as if it were a part of the basket of G1 purchased, in order to focus on the allocation of income between the local public sector and all other uses. 60 The tax form here has been generalized to enable us to con- sider both the tax structure and the tax rate. While the bulk Of local taxes are property taxes, we can, by using incidence data, represent the property tax as a form of income tax. The 1958 Michigan Tax Study concluded that persons with incomes under $2000 in Michigan paid an average 5.05% in property taxes, while persons with incomes over $10,000 paid an average 1.01% in property taxes.1 These figures can be used to express the tax structure and rate in a single expression. Incidence can be expressed in the following way: 12.: siziii Y1 Y1 = t(Yi) (8-1) where ti: total local tax paid by household In order to determine the burden of the tax across income levels, we take the derivative of incidence, Ti/Yi, with respect to income to see if the incidence increases or decreases as in- come rises. If the former, then the tax structure is progressive, since a higher proportion of income goes to local taxes as in- come rises. If the latter, it is regressive. d Yi _ dt(Yi)(B-l) in ‘ in = <8-1):(Y1>(B‘2) Now as long as t > 0, this expression will be positive if B> l, 1Richard Musgrave and Darwin Darcoff, "Who Pays Michigan Taxes?" Michigan Tax Study, Staff Papers, State of Michigan, House of Repre- sentatives. Lansing, Mich.: Michigan State Legislature, 1958, p. 138; figures for residential property tax incidence. 61 in which case the tax structure is progressive. If B < l, the expression is negative, indicating that incidence declines as income rises. If B = l, incidence is constant over the entire income range. Thus, in our formulation, 8 represents the tax structure; (Yi)B the tax base. If B = 0, the tax is a flat fee on each household, regardless of income. If B < 1, the tax structure is regressive. If 8 = l, the tax is flat rate, or proportional. If B > 1, the tax is progressive. In the incidence study cited above, the tax structure as expressed in terms of B can be in— ferred to be something like 1/6 or .167. A change in incidence, over time, represents a change in the tax structure; it becomes more or less regressive (or progressive) and can be reflected by a change in B. t represents the tax rate. Generally, the property tax rate must apply to every plot within a community equally, by law. A millage issue is a choice between 30 mills or 40 mills, with the victorious rate applying across the board. This uniformity provision is almost universal in the U. 8., although in a few cases different categories of prOperty receive differential treatment. Even in cases where different rates are in fact used, i.e., a local income tax, we can convert these differences into changes in base. We do so here, in order to facilitate an examination of long run and short run responses to taxes by individuals. 62 In the short run we will assume that the tax structure is fixed; all citizens can vote on a tax increase issue, but the incidence it will have is predetermined. In the long run, citizens can in- fluence the structure, and thus the incidence, of taxes. 5. Revenue and Expenditure Function The community has no source of funds to finance its public services except local taxation. Equation 5. t£(Yi)B = Rpr where pr: market price of "paid-for" public input It is assumed that pr is exogenous. In general this is true, since wages and salaries are competitive over many industries and throughout a metropolitan area. However, it is possible that one might have to pay a policeman more to work in the inner city than in Pristine Province. Below we shall consider the effect Of other sources of revenue. B. Maximization The above model enables us to see the interactions between public sector institutions and decisions, and individual preferences. We can avoid the problems of aggregating the individual utility functions into a community utility function. We can merely investigate the con- ditions under which a household will be satisfied with the public service package it receives. If it is not, we will be able to use this model to identify the elements which it will want to change, whether via the local exercise of political power or by migrating to another local community. 63 Each household will attempt to maximize its utility subject to its budget constraint. The common Lagrangian technique is used here to examine this process. The range of possibilities for each household will depend on the time period we choose to examine. In the short run, we will assume that each family is stuck in one community, with all its structural and institutional characteristics given. The exogenous variables in the short run are thus (Yi, ZYi,* T, H, hi,* 8, n, pg, pr). The en- dogenous variables are (Gi, Pi, P, R, and t). In other words, the community is semi-permanently saddled with its income and handicap levels, its tax structure and its size. Within these limitations, each family will choose a desirable tax rate and desirable levels of private and public consumption. In the long run, we will assume that individuals and therefore communities can attempt to manipulate many Of their structural fea- tures, in particular: ZYi, n, B, H, T, and hi. The utility of the members of the community can be increased by carefully molding these market determinants. Collusive action can affect the magnitudes of these variables beyond each individual's power over his own income and preference patterns. This long run behavior will be examined *Under the usual community conditions the size of the population is so large that no one individual's income will have an impact on the total level of income. If a household's income goes up $1000 it may have a large impact on its own behavior but it is negligible in a community Of 20,000 with an average income of $10,000, where it repre- sents .00002 of the total. The same argument holds for treating hi independently of H. 64 in Chapter V. C. The Short Run: Individual Maximization Within the Given Community To facilitate the exposition, the model is here restated suc- cinctly along with the behavioral expectations associated with each equation: 1. Ui = u(pi,Gi) for all i; §%%-> 0, %%%-> 0. 2. P =f(R,H,T) 3.3% >O,—:-I-I;- <0,-§-¥->0. 3. Pi = g(P,Yi,n,hi) for all 1; %%1-> o, 2E1-< o; 3%%, §§%- not determined a priori 4. Y1 = t(Yi)B + Gipg for all i, B > 0. 5. tZ(Yi)B = R(pr) In the short run: Exogenous: Yi, ZYi, B, H, hi, T, n, pr, pg. Endogenous: Gi, Pi, P, R, t. Given this model, the following Objective function can be formed with the Lagrangian multiplier, 1: 6. Ui' = u(Pi,Gi) + l{tYi + Gi(pg) - Yi} Substituting for Pi the production and distribution functions, and for t the community taxation function, this becomes: 7. Yi' = u' [g{f(R,H,T), Yi, hi, n}, Gi] + YiB ZYi A{R(pr) + Gi(pg) - Yi} B This is an acceptable function, for it contains only two endogenous 65 variables, R and Gi, which are in fact the two "choices" that the household has. R is chosen implicitly with the tax-vote decision of each household, since under the short-run conditions, each tax rate (30 mills, 50 mills, etc.) is associated with a unique R, P, and Pi. Taking the partial derivatives of Ui' with reSpect to R, Gi and A: 8..§%%_.= u'g{g[f(R,H,T), Yi, hi, n], G1} + A The first major observation from this exercise is that each household has a unique tax and public expenditure package that satis- fies its maximization conditions. For each household, we have a set of five equations (ll-15) for five endogenous variables: Gi, R, P, Pi and t. The system is identified for the individual household; there is one unique solution. However, equations 12, 13, and 15 determine the values of three variables, R. P, and t, which are systemrwide. The value of each must be the same across any community of n units. Aggregating over n households, we find that we add five equations into the system for each household, but gain only two endogenous variables each time: G1 and Pi. The result is an over-identified system in which there will be 5n equations but only 2n + 3 endogenous variables. For a two-household community, for instance, we have the following set of equations: lla. G1 = Gi(n,H,T,Yi,ZYi,hi,pr,pg) 11b. Gj = Gj(n,H,T,Yj,ZYi,hj,pr,pg) 12a. R = R(n,H,T,Yi,2Yi,hi,pr,pg) 12b. R = R(n,H,T,Yj,ZYi,hj,pr.P8) 13a. P a P(n,H,T,Yi,ZYi,hi,pr,pg) 13b. P = P(n,H,T,Yj,2Yi,hj,pr,pg) 143- P1 = Pi(n,H,T,Yi,ZYi,hi,pr,pg) 67 14b. P3 = Pj(n.H.T.Yj. Yi.hj.pr.pg) 158. t = t(n9H9T9Yia Yi,hi,pr,pg) 15b. t = t(n:H9T9Yja Yiahjyprapg) For these ten equations, we have only seven endogenous variables: R,P,t,Gi,Pi,Gj, and Pj. Another way Of approaching this result is to convert R, P, and di di di t above into R , P , and t , denoting the desired magnitudes of each of these variables for household 1. This restores the number of endogenous variables to 5n. However, we then have to add a set of equations to the model which will contrain the actual magnitudes of R: P: and t: 16. Rd1 = RdJ for all 1, j; 17. Pdi = PdJ for all 1, j; 18. td1 = tdj for all i, j; Since there can be only one actual R, P and t. In this formulation, our number of equations would again exceed the number of endogenous variables [by 2(u-1)]. Over-identification simply means that we have too much informa- tion for the determination of a unique value for each variable. We could leave out 5n - (2n+3) = (3n-3) equations in the first formula- tion [or 2(n-l) in the second] and still be able to find solutions for our unknowns. As the model stands, we have too many potential values of R, P, and t. In practical terms, this means merely that each household makes a calculation of the desirable level of R, P, and t for itself, but 68 only one such value can prevail. If, then, the system of equations (i.e., each household's calculations) does indeed produce different values for these variables, a conflict is inevitable. This conflict either manifests itself as an incentive to migrate gg£_of the commun- ity or to attempt to win through the internal political process. The only case in which this system will be identified, i.e., in which a unique solution is Obtained for all variables which satisfies everyone, is when Yi = Yj and hi = hj.3 This reduces the number of equations to 2n + 3, since each household's equations for R, P, and t will be identical. In the above two-household illustration, this special situation reduces 12a and 12b, 13a and 13b, and 15a and 15b to the following: 12c. R = R(n,H,T,Yi,ZYi,hi,pr,pg) where Yi = Yj, hi = hj 13c. P = P(n,H,T,Yi,ZYi,hi,pr,pg) where Yi = Yj, hi = hj 15c. t = t(n,H,T,Yi,XYi,hi,pr,pg) where Y1 = Yj, hi = hj Now we have seven equations for seven endogenous variables. We would expect that a community Of households in which this special case holds would be stable (no one cares to migrate) and peaceful (no controversies would develop in local politics). The maximization under income constraint which we have built into this model is a condition necessary for the arrival at a Pareto- Optimal point for society. Satisfaction of the maximization condi- tions for all would ensure that the marginal rate of substitution 3The reader should keep in mind that this outcome is dependent on the assumption Of identical utility functions. 69 between public and private consumption for all consumers is equal, the Pareto-Optimal condition for the demand side of the market. The failure to satisfy the maximizing conditions is a signal that the Pareto-Optimal condition does 22£_hold and that some individuals would be better off with a different public-private mix. Another way to view this lack of Optimality is to Observe that our efficiency criterion has been violated; a different allocation of society's scarce resources between public and private output would increase someone's well-being (without, presumably, affecting another's ad- versely) and therefore constitute a more efficient economic mechanism. Since we can expect that households will register their dissatis faction by migration or political dissent, we can interpret the lack of either as a sign of fulfillment of the demand conditions for a Pareto-Optimum. In this particular formulation, we see that all the maximizing conditions are satisfied only in a homogeneous community (Yi = Yj, hi = hj). Therefore to the extent that our assumptions hold, we can conclude that efficiency considerations tend tO motivate households to seek homogeneous communities. This is consistent with the Tiebout thesis of efficiency motivation governing location decisions with respect to the public sector. The second major Observation is that each household faces re- distributive forces, as well, in choice of community. The reduced forms indicate that even if all units have the same level Of income, any one household's utility is also a function of the £2521_income (2Y1) Of the community, the hardship (H) and rip-Off (T) factors, so 70 that it will be tempted to move to a higher income and less handi- capped community gygn_if_its maximization conditions are satisfied in the present community. This potential to enhance income and escape costs through com- munity selection also encourages the creation of homogeneous commun- ities. Although every household will desire to live in as wealthy and costless a community as possible, theoretically an equilibrium will develOp in which communities will be stratified along such lines. The wealthiest groups will tend to congregate together, since eaCh member will lose less than if it chooses to cohabitate with poorer, more handicapped groups. The latter will aSpire to cohabit a commun- ity with the "betters" but will settle for their own kind if they cannot gain entry and for barriers to intrusion by still "lower"- groups. Institutional mechanisms adopted and employed to actualize these aspirations are the subject of Chapter V. As soon as we admit that distributional motives exist in the context of community choice, we lose the option Of describing a move from one community to another as Pareto—Optimal. A Pareto-optimal move is one which makes everyone at least as well Off as previously. If migration in fact makes some (those left behind) worse Off, then we cannot claim that the postdmigration situation is preferable to the previous one. While we can still say that moves are partly prompted by preference maximization motives, we cannot claim that efficiency is achieved. The two states, before and after migration, are Pareto non-comparable; the distribution has been changed. 71 Tiebout, it may be recalled, used the efficiency stimulus to migra- tion to postulate that fragmented local governments provide a more Optimal allocation of resources in the public sector than a single monolithic government. In light of our analysis, we must object that the two states are non-comparable, since income and cost distribution differs between them. Certainly a change from the latter to the former is 22£_preferable. With these two major observations, we have demonstrated theo- retically that both efficiency and redistributive motives arising from the nature of the local public sector are present in migration decisions among city-suburban communities. As we shall see below, relaxation of specific assumptions does not invalidate this result. Since both are present, it is impossible to state unambiguously that either one or the other is primarily responsible for creating and maintaining the fragmented pattern of local governments, and whether either one is controlling today in household location decisions. A second conclusion that we have suggested is that both these incentives lead toward homogeneous communities.4 This result is dependent on the assumption of identical utility functions. If we admit different preference functions among households with equal income and handicap characteristics, then the efficiency incentive 4This inference is important because it allows us to construct a testable hypothesis, whereas the previous point, while self- evident, does not. 72 will not lead unambiguously to homogeneous communities.5 The income redistribution effects within a given community will still encourage the household to search for class and socio-economic equals and superiors on maximization principles, but the effect of conflicting preferences may encourage a household to identify potentially with households of different (income, wealth, age, etc.) endowments than its own. In Chapter V’we develop a behavioral model for local govern- ment which analyzes the response to potential conflicts between pre- ference and distributionally-motivated moves. To further establish the inextricable presence of these two motivations, suppose that we enquire into the possibility that only one Of them is actually present in household location decisions. What are the conditions under which either of the two is non-existent? It is possible to construct alternative restricted forms of the model which can ascribe migration (and the tendency toward homogeneity) to only one of these motivations. l. Efficiency but not Redistribution a, If the variables, ZYi, H, and T are identical for every existing and potential community, then there would be no motivation to move for distribution's sake. Obviously, this is not a believable case, since most communities do differ greatly in income-per-capita and cost structures. Indeed, we have proved above that as long as individual incomes 5See Section D-4, p. 73 vary, there exists a motive for the creation of fragmented income-cost homogeneous communities. Only under complete income and cost egalitarianism (Yi = Yj, Hi = hj) would this case exist.6 b, If distribution of public output is directly proportional to the payments made to the local government by households 8 (that is, if Pi = P_ilil§), and if H and T are identical 2 (Yi) for all communities, then there would be no motivation to move for distribution's sake. It would not matter which community an individual lived in since his portion of public output would not depend on his neighbor's income but only on his own.7 His taxes, in this case, are really a sum which varies directly with how much he gets. This case is not observed in the present Operation of local government; distribution of public output is not very strongly related to the contributions made by individual households. And even if it were theoretically imagined, there is no guaran- tee that households would not try to change this distribu- tion rule within their respective communities. 6This is interesting, because it suggests that a truly egali- tarian society could effectively use local community alternatives to achieve efficiency (if differences in preferences really do exist) without having to sorry about distributional implications. 7In other words, the public sector acts just as if it were a private market. 74 2. Redistribution but not Efficiency A simple case. By restricting the model to a very simple one, we can show that it is possible for efficiency conditions to be satisfied in a non-homogeneous community, but that re- distributive motives will tend to create homogeneous communities anyway. Let us suppose that the utility function for each indi- vidual looks like this: 19. U1 = PiGi Each household has a utility function which produces indifference curves in the shape of a rectangular hyperbole. 20. P = RT/H Production function is the input times the handicap and rip-off factors. 21. Pi = P/n Output is distributed on the basis of population. The reduced forms will then be: 22. Gi = Yi/2pg 23. R = Yi(1-B)Z(Yi)B/2pr 24. P = Yi(1-B)Z(Yi)B(T)/2pr(H) Yi(1-B)Z(Yi)B(T)/2pr(H)n 25. Pi = 26. t = Y1(1'B'/2 With one additional restriction, that = l, we obtain the result that all members of the community, regardless of income level, will be satisfied with the same tax rate, since the formulas for P, R and t will be identical for all individuals (all Yi's drop out): 23a. R = (Yi)1/2pr 24a. P = (Yi)1(T)/2pr(H) 75 26a. t = 1/2 However, even though the efficiency conditions are fulfilled for each, households will still gain by moving into a different community where Yi, H or T is more favorable. It is possible to extend the results in this case to a number of other special (and similar) cases. However, no matter how far it is extended, we cannot escape two serious limitations. The first is that by limiting the utility function to a certain class of functions, we lose the substitution character- istics for each good, either completely [as above, Gi # f(pr)] or partially. This is seriously limiting. While we can make a good case for the importance of the interdependent element in the function (the PiGi or PiB 8 Ci , etc.), we have to avoid func- tions such as Ui = P1 + PiGi + Gi or else suffer the ambiguity that we suffer in the general case. Our ignorance of the nature of utility functions becomes a crippling factor in this situa- tion. Secondly, we frankly do not Observe that local taxes are of a flat rate form (proportional: B = 1). When they are not, then individuals do have an efficiency motive for migrating. However, it is also clear that if the individuals in a community can change the tax structure, even if their maximization conditions are satisfied with the present tax rate, they may elect in favor of a regressive tax in order to preserve their redistributive 76 gains.8°O Therefore, the redistributive motive may initiate and re-enforce institutions which may as a side effect give rise to efficiency motives for behavior. Thus our expedition into the theoretical possibilities for pure attribution of migration to one or the other of these public sector motives is disappointing. The restricted forms which would give such results are too unrealistic. For the moment, then, we must live with them both. D. Alternative Assumptions This section considers alternative assumptions that could be used in constructing a model of this type. It attempts to cover all serious challenges to the realism of assumptions employed earlier. 1. The Forms of the Utility Function8 In the model constructed in the previous section we chose a non-additive utility function; for the Special case under Section C, we used a further restricted form. Here we briefly look at alternative forms and their results. .é: Additive forms. Additive utility functions look like this: Ui = f(Pi) + f(Gi). This means simply that a con- sumer gets pleasure from these two independently-that his enjoyment of park facilities is totally independent of 8'OSee Chapter V, Rule 2. 8The debate considered here is analogous to that concerning production function forms and thus will not be repeated for the latter. 77 whether or not he has a bicycle, baseball bat or thermos jug. In general, while such forms are the simplest avail- able, we do not use them because they are unrealistic. Quite obviously I would rather have one bicycle and one park nearby, rather than two of one and none of the other. Three subsets of such functions exist. The first (e.g., Ui = P12 + G12) includes all such functions that would give us difference curves concave to the origin on a conven- tional indifference map. we reject these as "irrational."9 The second subset consists of all functions Ui = (a + bPi + cGi), linear functions which give us a linear indifference curve. This is generally considered unacceptable because it is the limiting case. Unless the relative price ratio exactly coincides with the slope of such an indifference curve, each consumer will choose to consume all of either one good or the other; if it does coincide, then the solu- tion is indeterminant. In our model, however, the use of this type of function would emphasize the results; for even if the budget line did coincide with the indifference curve, each household will choose to consume only one type of output (public or private) if its income differs from its neighbor's. If its income is less than the average, then it 9See Milton Friedman, Price Theory: A Provision Text, lst ed. Rev., Chicago: Aldine Publishing Company,-l967. 78 will vote for a total tax/public service package with no private consumption, and vice-versa. The third set of additive functions contains those that give us convex-to-the-origin indifference curves: U1 = (a + bPia + cGiB) where 0 < a < 1, 0 < a < 1 1/2 + G11/2 Thus a function like Ui = Pi will give us a solution for R and t that looks like the following:10 R XYi/{pr[(pr/pg)(Yi/ZYi)n + 1]} t 1/[n(pr/pg)(Yi/£Yi) + 1) + 1] One weakness in this formulation is its implication that R is an inferior good when the tax structure is proportional. On principle, it is better to avoid use of additive functions because they ignore the interdependence between consumption goods. 2, Non-additive forms. 1) Conventional forms. Most production functions which we use in economics belong to the CES class of functions, which demonstrate both homogeneity of degree one and constant elasticity of substitution. The use of these functions has been popular because they are quite manageable; while they may not explain the total reality of the relationship between produc- tion inputs, they at least serve well as a crude 10Using the simplified equations in Section C-2, setting 8, H, T = l. 79 approximation. The situation with utility functions is analogous, except that we will lose the substitutability in some cases, as noted above. In addition to the CES forms (which include a Cobb-Douglas form), we can add all multiplicative functions of any degree homogeneity, and get satisfactory and manageable results. These are the forms used in the foregoing analysis. ‘11) Quadratic forms. We can also inquire into the results of using quadratic forms of the utility func- tions, which combine the additive and multiplicative characteristics of the functions considered above.11 A function such as Ui = Pi + PiGi + Gi gives us a desired tax rate of t = i/2(l + pg/Yi - npr/ZYi). More complex quadratic functions yield more compli- cated reduced forms, e.g., Ui = PiGi + 1/10(Ri)2 + l - prn/ZYi . It 2 ‘ (l/5)n(pr/pg)(Yi/2Yi) becomes almost impossible to determine what the im- l/lOGi gives us t = pact of a change in Yi, prices, size, etc., will be as the form lengthens. It is essentially only a mathematician's exercise anyway, since this is an empirical question which can be solved only by 1Here, again, we have to avoid many functions, e.g., P12 + PiGi + Giz, which describe concave preference functions. 80 revealed preference methods, or more circumspectly, by the estimation of demand functions. For our part we will not do worse than most by restricting ourselves to the simplest of realistic functions and seeing how their implications bear up in the real world. 2. Content of the Utility Function We could include, in this analysis, variables such as space, commuting cost and time, which do vary with choice of community. However, we are simply attempting here to examine the partial influence of public policy choice on metropolitan location de- cisions. The complexity of the location problem is so great that no one has yet produced a satisfactory general equilibrium theory of location (not to mention the need for dynamic analysis in this area). Regretting the limitations of partial analysis, we have proceeded nevertheless in hOpes of casting some light on the public sector impact on such decisions. The exclusion of land value determination from the model, on the other hand, is a serious problem. It is quite probable that land values are not independent of public policy decisions and choice, esPecially the instruments of community design, such as zoning, etc., discussed in Chapter V. However, the latter is more a question of the distribution of benefits, i.e., the trans- fer of public policy surplus into land rent, rather than a counterbalance to the forces at work in the model. 81 3. Interdependence of Utility Functions Interdependencies in household preference functions pro- duce different results in our model. Two prototypes will be considered here briefly. .5. Keeping up with the Jones.’ This proposition has strong intuitive appeal, either from the social-climbing vantage point or in its Big Fish in a Little Pond variant. Either form can be expressed in the following way: PiGi) PjGj Ui = u( The public sector response of this position, under the simplest form of the model, depends on the relationship between Pi and Pj. If Pi = P/n, then Pi must equal Pj in actuality, and public sector choice is indeterminate alto- gether; 3Ui/3R = 0. The relationship between Pi and the individual income and hardship position, if such exists, will determine either a positive or negative response to increased public output and taxes. It is intuitively. clear that this preference structure will tend to reinforce the tendency toward homogeneity which we have derived under independent utility assumptions. All so motivated will wish to live in a community populated with people who will reflect well on them, and aggregating over the total potential pOpulation, this search will tend to group people into homogeneous strata. 82 b, The Altruist. Another interesting case is the urban liberal, whose utility function encompasses his neighbor's access to and enjoyment of certain publicly produced goods: Ui = u(Pi,Gi,Pj) an/an > 0 According to our short run model, this sentiment would lead the liberal to vote for higher taxes, since he will margin- ally value P, and therefore R, more highly. Using Ui = (PiGin), a simple calculation along the lines of equations 22-26 yields: 23b. R = (2/3)Y1(1'B)2(Y1)B/pr instead of the original 23. R = (l/2)Yi(1-B)Z(Yi)B/pr Thus under any realistic tax system (flat rate or regres- sive), this behavior actually hurts the very group which the liberal wishes to aide, since it forces the former to allocate too much of their own paltry income to the public sector. (This is assuming, of course, that the lower in- come groups do not return the liberal's altruism.) In the long run, households of this persuasion will find that in order to achieve their goals, they must dis- mantle the entire set of institutions which has been care- fully groomed to protect the inequality (see Chapter V). This is nearly impossible for any one household to achieve. MOst individual responses (e.g., the suburbanite who moves back into the city) carry heavy penalties. It is more 83 likely that such households will continue to live in subur— bia but assuage guilty consciences by supporting metropoli- tanization or redistributive revenue-sharing. 4. Variation in Preference Functions Between Households Finally, in this consideration of alternative assumptions about preference structures, we come to the most interesting and most challenging: Ui = ui(Pi,Gi) That is, that households have different preference functions among themselves. This is the fundamental assumption on which the Tiebout hypothesis is constructed. Let's consider a simple example. Suppose that two house- holds have a different valuation of public vs. private consumption: Ui = PiGi Uj = PiGi2 The Optimizing combination for each, in our model, yields tax and public output goals: di Yi(1 B>2Yi di Yi3Y1A .YJ ZYiB 1 20 Y1 i i If the left hand side of this expression exceeds the right, then a1- locative considerations overrule redistributive considerations for the household. In our example, a painstaking calculation reveals that this is the case for our friend X; she will prefer to stay in the poorer area where she can obtain a better product mix. The in- stitution of a regressive tax has turned what once was an attractive community into an unattractive one. In her own community, despite a regressive tax, she does not bear an inordinate share of the tax burden because all incomes are equal. The above formula points out that this decision depends on the tax structure (8), the disparity between incomes of winning and losing tax voters (Yi,Yj) and the disparity between overall levels of in- come (iYi ,iYiB). A change in any one of these factors could change the decision in favor of migration for X. It is clear that there is a range of values for which X would chose to live in B with a misal- located income, rather than in poorer A with a properly allocated income. We should note that this dilemma is very real for X, the lower income household, while it is almost non-existent for Z. Since X orders her options in the following way (XBX, XBZ or XAX, XAZ) it is likely that she will be stuck choosing between the middle two. It 104 is unlikely that XBX will occur; that would mean that X's tax pref- erence would dominate in a community where everyone shares B's in- come and aims. It is likely that if she lives in B, she will have to live with position XBZ or else join a community like A of like-minded, like-endowed incomes. For Z, however, whose ordering goes ZBZ, ZBX, or ZAZ, ZAX, both middle positions are unlikely while the two un- equivocal ones are not. Most Z's, as we know, end up in ZBZ positions. The dilemma just illustrated points out the major contention of this thesis, that is, that the choice by a household or individual to reside in a particular community cannot be taken as his revealed preference for a certain public/private mix in a simple utility- maximizing model. He maximizes utility, certainly, but his choice involves alternative income status's as well as different product mixes. Our conventional theory claims that we achieve an efficient allocation of resources when all persons are maximizing their giygg incomes by contracting on the free market for goods. But here we see that some individuals may forego maximization positions in order to enhance their income position. Viewed another way, this is equivalent to saying that the marginal content of the argument has been destroyed. As economists we are accustomed to the convenient simplicity of viewing market choice as a means for marginal improvement. Ordinarily, because our consuming unit corresponds one-to-one with his resources (income), we can demonstrate unambiguously that on the margin, a particular 105 consumption mix is more desirable than another solely with reference to his desires. However, now that the consumer's income position (or, alternatively, the relative price structure) is not independent of his choice, we have lost the comparability of various consumption points for the purpose of determining the more "efficient" mix. E. Extensions 2§_the Graphical Approach The graphical analysis employed above can be extended to portray the impact of any of the variables in our model. We could chart different utility functions, different production functions for public output, distribution functions which favored or penalized different sets of individuals, revenue functions that include compensatory components from higher levels of government, and so on. However, we would not gain any conceptual understanding from such exercises, for the basic dilemma still remains. Even if varying utility functions prevented agreement on tax levels within a community, we could not interpret the emigration from that community as a reSponse to purely "allocative" motivation. Such graphical extensions would point out, however, that income is not the only non-allocative factor inducing people to move. It is rational for a household to choose another community if all that differs is the cost structure, that is, if all else is equal, T is higher and/or H lower than for the present location. Differences in cost structure can be translated into a different relative price ratio for public/private output, or into a gain in command over 106 resources (apparent income) as discussed above. Similarly, a dispar- ity in public output distribution methods or in tax structure can be viewed as incentives to migrate in the same vein. F. Conclusion These examples and the accompanying graphs have been devised to help in a visualization of the problem considered in this thesis. They point out that choice of a tax level and community actually en- tail the calculation of a new set of trade-offs. The urbanite chooses not merely between combinations of public-private output at her given income level and a fixed market price level, but between combinations of output at different (but constrained in kind) income levels, or looked at the other way, at different relative price ratios. This real choice can be expressed by the construction of a new budget constraint which is unique (within any one community) and can be used analytically in the same way as the conventional budget constraint. However, the components of that new budget constraint force us to the conclusion that an individual's maximizing position is dependent on his neighbor's income, sociological status, the shape of the com- munity's physical plant, etc., factors which we do not conventionally insert into the givens of our theory of micro-economic behavior. Nor can we conclude that a person's migration from one community to another is simply in response to a more amiable mix between public/ private output. 107 Having analyzed the demand side of the local public service market, we shall turn (in our next chapter) to the supply side of this market and examine the producer's response to the double-faceted goals of its current and potential residents. CHAPTER V LOCAL GOVERNMENT AS A MARKET DESIGNER We have explored the public sector incentives which attract metropolitan people to various residential locations. When they are not moving, however, these same people attempt to achieve their goals with respect to local services and their tax tag through local government. In this chapter, we will explore the link between the individual consumer's motivation and local government decisions. We will develop a model that postulates metropolitan local govern- ment behavior and policy. A. The Assumptions The following assumptions are made for any municipal government, other than that of the central city, in a metrOpolitan area. 1. Representativeness The municipal government is assumed to be as representa- tive as a very pure theory of democracy would suggest. That is, its actions are approved by at least a majority of its constit- uents at all times. While we generally observe that the egal— itarian principles of democracy are undermined by the unequal distribution of wealth and income, and therefore power, on most levels of government, we can make a good case for a high degree of democratic responsiveness at the local level in a metro- politan area. 108 109 Several reasons can be cited in support of this assumption. First, the relatively small size of the suburban constituency, averaging less than 50,000,1 facilities operation along the lines of traditional grassroots democracy. Personal contacts with local officials are common and no political expertise is required to run for office. Secondly, local elections are fre- quent, and money tends to be a less important factor in victory. Finally, most suburban areas have fairly good local papers which are published weekly and devote a great deal of space to the reportage and discussion of local affairs. Therefore, our assumption seems reasonable in light of these accessibility and information factors. 2. Homogeneity We make the explicit assumption that suburban municipali- ties, by virtue of the process described in the preceeding chapters, have highly homogeneous populations. We can further defend this assumption by pointing out that despite the fertile atmOSphere for political debate, suburban politics are almost uniformly dull. Political scientists have remarked at length on the political consensus which is characteristic of 1In the sample of 47 Detroit area municipalities used in Chapter VII, comprising 82% of the SMSA population, the median size population is 30,850, although 55% of the population live in Detroit and nine other suburban cities with populations above 70,000. Data from 1970 census. llO suburbia.2 This assumption does not hold in exceptional communities which are undergoing a transitional stage due to their position in the aging process or which are subject to special location features or pressures (e.g., the University community). But heterogeneity in such communities is treated here as either transitory or of negligible importance in describing the general political functioning of the suburb. In cases where policies implied by the model are the subject of contention among hetero- geneous groups within a community, we will note these differ- ences. The other exception here is the central city itself, which cannot be characterized by homogeneity and political consensus. Bit city politics are a subject for a more sophisticated theory of public expenditures and decision-making. However, since our point is that the metropolitan problem is mainly one of the development and maintenance of surrounding independent munici- palities, we are not losing explanatory power by excepting the central city. 3. Minimum Size We assume that there is a lower limit to the size of a viable independent municipality. The production conditions for 2See, for example, Robert Wood, Suburbia: Its Pegple and Their Politics (Boston: Houghton Mifflin Company, 1958), especially Chapter 5, "The Politics of suburbia." 111 local public services are such that they can satisfactorily be met only by a unit larger than this minimum.3 The minimum, imposed by production requirements, can be expressed as n > no, or R > R0, or a similar scale-related variable. (R is the single-factor input used in the model; n is population.) This lower limit on the size of a municipal unit contrains the process outlined above from resulting in as many service units as there are people in the metropolitan area. A crude esti- mate of the minimum feasible size for a modern suburb is between 10,000 and 15,000. 4. Legal Protection We assume that a legal apparatus exists which facilitates the establishment of independent municipalities on the fringe of metropolitan areas. A permissive framework makes it easy for outlying areas to stave off absorption into larger areas by defensive incorporation. B. Local Government Maximization in_the MetrOpolitan Area The local government's role in producing public output is func- tionally analogous to the firm in the private economy. It must hire the factors necessary for production, determine an output level for a stated price and produce that output. However, in explaining 3See James Buchanan, "An Economic Theory of Clubs," Economica, XXXII, February, 1965, for an exposition of optimal group size given the cost of distribution characteristics of the service which the group provides and its membership consumes. 112 local government behavior and policy, a complete analogy with the behavior and performance of firms in a competitive market is inadequate. The neoclassical theory of the firm examines its responses to a given resource allocation via the factor price vector and to a given state Of demand for its output. Under competitive conditions, the profit drive compels the individual firm to perform efficiently both in choosing type and level of output and in employing minimum cost techniques. Aggregating over all firms, the profit drive ensures the most desirable employment of scarce resources. In this micro model, we do not expect to Observe the firm engaged in any activity other than vigilant cost minimization and a continual search for new and cheaper resources and techniques. The firm has no inter- est in whg_purchases its product, apart from their ability to say. Furthermore, there is no limit on the expansion of its output except prohibitive or rising costs, or insufficient demand; in general firms are always seeking to expand their markets without screening their potential customers (and rejecting some) on the basis of how much money they make, how educated they may be, how white or black they are. The firm's behavior is divorced from the interestsof its consumers and is indifferent to the impact of its decisions on the individual well-being of any one or group of them. Recognition is granted only to the dollar power that the customer can muster in the marketplace. The local government, on the other hand, finds its goals 113 indistinguishable from those for whom it is producing. Thus it com- bines the roles of producer and consumer. It both embodies the demand for public services and carries out the production of them. In this merging of two roles, usually considered separately in eco- nomic theory, the profit-making motivation disappears as the incen- tive of disinterested management, and the utility—maximizing motiva- tion replaces it as an enforcer of cost-efficient production.4 But utility-maximization implies a wider range of behavior than what we observe in the prescribed role of the firm. We have demonstrated above in Chapters III and IV that the public sector well-being of a group of citizens does not merely en- tail the efficient production of public services for them, giygg their resources, but includes income enhancement. The local govern- ment, then, since it reflects the maximization goals of its constit- uents, can be expected to behave in a way that will achieve both these ends. Unlike the private firm, indifferent to its customer's income position, the local government can theoretically be expected to pursue policies which will enhance its "customer's" wealth or income. Expansion of its market will not be undertaken unless it enhances the well-being of its present customers. Free from the 4In "Property Rights and Economics Theory," Journal 2f_Economics Literature, X, December, 1972, Erik G. Furnbotn and Svetozar Pejovich summarize the salient features of a diverse set of theoretical studies, all of which employ some form of utility maximization as the behav- ioral postulate in place of the traditional profit maximization (for firms) or social welfare maximization (for the public sector). 114 need to search for new markets, the local government can turn its attention to controlling cost and demand factors in its public serv~ ice market. This is the process which we shall term "market construc- tion." In contrast, the conventional firm in economic theory enters "the market," an arena in which supply meets demand, where produced goods, consisting of assembled resources, are traded for other goods, or the money surrogate. It may tru, as in the case of oligopoly, to influence demand (e.g., advertising) or costs (e.g., vertical inte- gration), but its market is by nature independent of the firm itself. The economic behavior of the local government is quite differ- ent. Its output is local public services, like public safety, parks and recreation, and sanitation. The demand for these services is expressed by the taxes the resident consumer is willing to pay for a certain set of them, given quantity and quality. The cost struc- ture is determined partly by general technological considerations (the expense of an equipped policy cruiser) and local conditions (the extent of the drug traffic, poverty, etc.). Since the goal of the agent (here the local government identifying with its constit- uents) is to enjoy the best service package at the least possible price, it is obvious that given a chance to influence the cost or demand structure in this local public service market, it will do so. This behavior on part of the producing agent is facilitated by the fact that the market for the public output of local govern- ment is spatially circumscribed. The local government cannot 115 "profit" by selling its output to a higher bidder who lives in another community. It can only "gain" by carefully sifting the com- ponents of its own market, to try to achieve the best possible cost and resource position. Therefore it attempts to mold its own demand, and to limit its cost per unit of output: it constructs the market for its product. Having assumed that local government mirrors the concerns of its residents, and after suggesting the general outlines of the market construction process, we can express short run and long run local government behavior explicitly. The explicit specification of local government policy aims involves merely transferring the con- cerns of the individual consumer, as determined in Chapter III, to the motivational reservoir for public policy. 1. The Short Run In the short run, that convenient time period which we use to distinguish between optimizing behavior giygn_supply and de- mand conditions, and optimizing behavior with respect to struc- tural change, the local government is expected to formulate the annual municipal budget and assign an appropriate tax price. From Equations 12c, 13c and 15c, we have the unique solutions "price" in a for public service factor input, output and tax homogeneous community: 12c. R = R(n,H,T,Yi,ZYi,hi,pr,pg) where Yi = Yj, hi = hj for all i, j 116 13c. P = P(n,H,T,Yi,ZYi,hi,pr,pg) where Yi = Yj, hi = hj for all i, j 15c. t = t(n,H,T,Yi,XYi,hi,pr,pg) where Yi = Yj, hi = hj for all i, j The solution here is straightforward. This optimum tax- service package is settled upon either through local leadership in the budgetary process, or at the polls by a voter-determined tax rate corresponding to a particular service package. We can infer that the local government, in its combination of consumer and producer roles in this process, stretches each tax dollar as far as possible, so that in a very limited and theoretical sense (to be qualified further) it can be said that the local government is an efficient economic agent in allocat- ing scarce resources from the supply side. However, this admis- sion does not rest, as Tiebout's argument does, on the competi- tion among local governments as the necessary incentive, but on the unity of producer and consumer aims at the local level. In assuming that the government's action allocates the resources available to it as efficiently as possible, we are simply para- phrasing the cornerstone assumption of economics, that man is rational. Furthermore, this efficiency generating behavior is acknowledged only with respect to the individual unit, in iso- lation from the competitive struggle, as if we were considering it with blinders on. When we take those blinders off, as we will see below, the behavior and performance of local government 117 differs dramatically from the simple Tiebout model of congenial competition imposing allocative efficiency. 2. The Long Run In Chapter III we demonstrated how the individual unit would desire certain structural changes in the public sector which would enhance her public service position and her general well—being. These structural changes will be carried out by the local government, buttressed by citizen and local business support. All of them are aimed at changing the demand and supply conditions that the local government, and therefore its taxpayers, faces. What kind of rules, structural parameters and institutions will a local community adOpt in order to foster and protect distribution from public sector erosion? We have already seen that the tax rate a person pays and the public services she receives in return are influenced by the following relationships. Pi = Pi(n,H,T,Yi,ZYi,hi,pr,pg; tax structure, distribution structure) t = t(n,H,T,Yi,ZYi,hi,pr,pg; tax structure, distribution structure) Each household will lobby in its community for the aggrandize- ment of its own portion of Pi via these variables. The house- hold becomes part of a group which is literally constructing its own market for local public services. In all but a very few instances, the prescribed action for the policymakers is 118 unambiguous; every resident will generally want the same rules enacted, regardless of their other differences. We will note the exceptional cases. C. Local Government Policy: Elements 2f_Market Construction Market construction, a long run phenomena, consists of a set of general principles which circumscribe the growth of the community, mold its membership and promote its public sector philosophy (to redistribute or not to redistribute). The following policy rules for local government can be deduced from the individual maximization schemes. Rule 1. Develop as high an average income level as possible. We have noted above that unless public output is an inferior good (which we have rejected in general), an increase in per capita income in the community will increase the amount of public output that each resident gets. Even if public output is considered inferior by the very wealthy (a hypothesis which probably holds for individual out- put categories but not the aggregate of local services), an increase in per capita income will still amplify the community's resources and subsidize the public sector. Attracting richer rather than poorer inhabitants at the very least protects residents against re— distributive drains through the local public sector. Local governments have at their disposal certain tools of market design: building codes, zoning regulations and public relations. Building codes can be designed to ensure that residents are of a 119 certain income/wealth level. Some states allow minimum cost require- ments in the building code. In states where this is illegal, the same effect can be achieved by controlling minimum floor space, basements, car garages, etc. By determining in this way the price range of the home and by setting tax rates, the local government dictates the disposal of a substantial portion of the prOSpective resident's income. (A conservative estimate would be an average of about 30%, by the time we add up mortgage or rent payments, school and local taxes). Zoning regulation can also be used in the same manner. The employment of large lot requirements as a way of build- ing exclusive communities is notorious. In addition, the combination of local government public rela- tions efforts and informal practices of realtors and home-sellers round out a team of policies which make suburbia almost airtight, racially as well as economically. A glance at the racial statistics of the 1970 census for local government divisions5 suffices to demon- strate the effectiveness of the deployment of these defensive weapons. Rule 2. Manipulate the tax £932. A regressive tax form en- sures that if low income households do move into the community, they will at least pay as many dollars (or greater than proportional) as the wealthier households, thus damping the innate redistributive nature of the public sector. In turn, the regressive tax discour- ages low-income households from entering the community, since they 5See Chapter VII for Detroit figures. 120 will likely not be able to satisfy their utility-maximization condi- tions. A simple example can be drawn from our ideal case in Chapter III: a family willing to pay a proportional amount of their lower income in school taxes will be unwilling to pay a greater than pro- portional amount. Since the tax base/expenditure studies6 indicate a tendency to compensate low tax base with hither tax rather, it may be that this willingness to pay more will hamper the effectiveness of regressive taxes as an exclusionary tool. Nevertheless, the more re- gressive the tax structure, the harder it is on low-income households, and the more apt it is to discourage migration effectively. One might object here that the property tax, the principal component of this regressive tax system, is highly unpopular. How- ever, one can counter that its unpOpularity may be chiefly due to its assessment in one lump sum (therefore its high visibility), its poor administration and its hardship on older people, not to its regressiveness. Once voters start looking at alternative forms of taxation, it is possible that they will decide that the property tax is not all that bad after all. Rule 3. Exclude as many handicaps as possible. Since handi- caps are adverse inputs into the production process (they raise costs), rules should be adopted to keep them out. A, To the extent that handicaps are attributable to individual households, exclusionary practices should be employed. For 6Metzer, Dick, "Federal, State and Local Finance," p. 442. 121 instance, the latest crime studies show that the crime rate is closely related to poverty, drugs, broken families, and obsolete infrastructure. It is higher among blacks. Therefore, a commun- ity can adOpt zoning rules that eliminate any potential resi- dent except families of a certain size, a certain income level, a certain race, and as far as possible, a certain social re- spectability. Unofficial racism re-enforces this attempt by excluding blacks. Here again, zoning devices (single-family zoning, etc.) can be quite effective, and fortunately, since there is a high correlation between income/wealth and handicap characteristics (negative), the use of these tools is unam- biguous. B, To the extent that handicaps are part Of the physical plant (e.g., the old narrow streets and firetraps of the 19th century), the best way to exclude them is to build a community anew on the cornfields or mountains or orange groves at the periphery. Thus the new community naturally has the edge with respect to handicap inputs. Rule 4. Practice urban removal. (The inverse of rule 3.) This rule simply counsels the removal of those handicaps with which a city may have the misfortune to be saddled. This is usually the typical form.in which central cities and inner ring suburbs practice market design (e.g., Detroit, Hantramck and Dearborn's efforts to remove ghettos and their residents). Attacking ghetto housing by demolition has the pleasant result of removing both obsolete high—cost physical 122 plant and poor, unhealthy, crime-inclined blacks. Rule 5. Rip off as much as possible from other areas. In the first instance, this is done by maintaining political independence and screaming loudly for home rule every time the legislature re- considers it or threatens to impinge upon it. Beyond that, it is possible to construct an entire theory of "rip off maximization" which would include concessions of minimal compromise (e.g., a frac- tional non-resident income tax rate) and efforts to minimize the cost of access (e.g., freeways). Rule 6. Manipulate the distribution of services within the com- munity to the advantage of certain groups. If the suburb is non- homogeneous, the undesirable elements can be encouraged to leave (it's only the richer that want the poorer to leave, not vice-versa) by ensuring that they cannot participate fully in local services unless they have some status-related entree. Streetcleaning and public parks can be differentially allocated, public funds can be used to construct golf courses and snowmobile trails without adequate fee compensation. Rule 7. Lobby for preferential treatment at higher levels of government. Since state and federal governments often threaten to take over some local functions or to subsidize them in a redistri- butive way, it behooves each better-than-average community to work hard to assuage the redistributive effects of such policies. So far, coalitions of suburban/rural forces have prevented large-scale relief for the cities, where the problems of local government are 123 most acute but so concentrated that their political pull higher up is ineffective. The history of revenue-sharing proposals at both state and federal levels is a testimony to the ability of suburbs to protect their differential position.7 These rules are the essence of a policy of willful market de- sign. Of them, all except rules 2 and 6 are politically unanimous; every member of the community, regardless of income, wealth, status, age, will welcome them. A working class slip-in in a higher income community will welcome rules which effectively exclude any more of his kind. However, the same taxpayer will object to attempts by the higher income groups to manipulate tax and distribution structures at his expense. He will likely lose on those issues, however, for the higher income group can also take advantage of its mobility if it does not prevail, whereas the worker is probably still better off in this community than in one with his peers. To the extent that a community achieves homogeneity, there is no conflict here, for a regressive tax structure is actually only flat rate if everyone has about the same income (and similarly for distribution structures). Differentials on these two accounts are useful in a preventive sense mainly, and, as noted, to lighten the redistributive burden in communities where "undesirables" have managed to remain. I should also note that individuals or families subject to the assault of urban removal will, of course, object, but chances are they will be 7See Chapter III, Section D-6, for a discussion of federal revenue-sharing provisions. 124 a tiny minority against a unified consensus. Note that rules 2 and 6, too, are apt to introduce into our ideal model precisely those circumstances under which households with disparate incomes will not be able to agree on a mutually satis- factory tax rate and output level. Therefore, while it might appear that some people migrate because they cannot attain the satisfactory public and private good mix in a particular community, the frustra- tion of their goals may have arisen from policies adOpted to aid or harm them on a distributional level. What if we allow for disparate utility functions? It appears that if a household with a rather low income desires to spend a large proportion of it on local public services at the expense of private consumption, then there should be no objection by high in- come groups to its presence in the community (a la Tiebout). How- ever, the community can adOpt only one set of rules governing immi- gration, and cannot make an exception for a person who they suspect might have different priorities. (It cannot insure, for instance, that this household will sell to a similarly inclined household in the future.) The rules adopted, therefore, generally do not allow this exceptional family to purchase a house within their means in the higher income community. The maximizing conditions for this household are thus thwarted by the distributional rules governing its possibilities. Now, again a clarification of the argument is needed. If we admit different utility functions (and the idea of an ambitious 125 working class family eating beans in exchange for a good education is not strange), then we would expect either to see them happily settled in a community of unequals or unhappily stuck in a community of their peers. The first prOposition remains to be tested, al- though we have postulated that market construction rules prevent it. The second, as we have noted, does not pertain--at least we have little political indication of disgruntlement (again, outside the central city) within the local community. However, another suggestion can be made here. That is, that while it is true that some members of an economic or social class may have different public service aims from their peers, they are prevented from achieving them by the demands for conformity to the group consensus as well as by barriers to emigration. Thus the ambitious working-class family would be considered "uppity" or pre- tentious by their skeptical neighbors if they were to prOpose or sup- port a large tax increase for education. WOod, in Suburbia, makes a strong case for the power of this conforming behavior in the suburbs. (This is a paraphrase of the Marxist analysis of class interests and institutionalized tastes.) If we accept this possi- bility, then we are back to uniform utility functions within a class, with an occasional allowance for a few truly unhappy families who cannot get the public services they want, but do not raise a politi- cal ruckus because their impact would be negligible. 126 D- ‘A Word about Non-residential Location To this point, we have not considered the relationship of busi- ness and commercial location to local politics in this analysis. This was for two reasons: (1) the burgeoning of suburbs in the metropolitan area is primarily (and initially) a residential phenome- non, with the exception of a few older communities in the inner ring, and (2) government policy is responsible to voters, not to business- men, a legal pressure which works fairly well in every metropolitan local government except the central city, for reasons we stated above. However, it is not difficult to fit business into this analysis. Non-residential land use is carefully controlled by every suburban community, with the exception of pseudo-rural suburbs at the outer edge, which may have a significant amount of land in agricultural use (but which will fall under the communities' design sooner or later). Since the local government is politically immune from the influence of outside businessmen (unless a local offical is bribable or can profit personally from a venture), it can dispassionately view the advantages and disadvantages which alternative uses of land will bring to the public sector of the community. We can imagine a sort of cost-benefit calculation going on in the zoning board's heads; will the change in the tax base from this new use compensate for its public service cost impact? If on balance the result is favorable, the new use will be granted. Of course, the zoning board, as the mirror of community 127 interests, does not only take into account the dollars and cents imr pact on the public budget, but the impact of the new land use on the individual well-being of its members as well, on their private con- sumption. Thus a community might turn down a rezoning request for a manufacturing plant on the grounds that it would pollute the come munal air, or accept it because of the jobs it would generate with- in the community. There are, of course, some interesting speculations about special situations like Ford Motor Company's presence in Dearborn. But these are interesting sideshows in the generally dull suburban political circus. We can close our analysis of local government policy by say- ing that non-residential land use is viewed in the same way as resi- dential land use: as a tool for maximizing residents' utility and designing the most favorable public service market. E. .A Marxist Counterpart In Chapter III, we talked briefly about class determination of residential choice as derived from the Marxist analysis. In a straightforward and simple manner, class analysis portrays the dif— ferentiated suburban landscape as the outcome of class preservation and reproduction. This view leads directly to an analysis of local government as a tool for attaining class interests. Here, as before, the Marxist analysis is more powerful than the utility arguments underlying the government analysis in this chapter, mainly since it obviates the need for the representativeness arguments in the latter. 128 Since suburbs are class-bound phenomena, it is logical that the local government that represents a class will conduct its affairs in ways that will enhance the position of that class. The government will use all means at its disposal to protect the private property of its constituents, to provide services which will enhance suburban functions such as the class assimilation of children, to insulate its residents from potential social costs that could be imposed in a larger local public sector and to facilitate the exploitation of various central city services without compensation. In carrying out these aims, suburban governments will employ strict immigration barriers, in the form of minimum regulations on private expenditures such as land and housing costs, and tax rates and structure. These barriers will ensure the class-bound nature of suburbs. However, the dynamics of class segregation, where each subclass continually tries to outdo the others and households con- tinually try to associate with the highest subclass within their reach, will lead to excessive suburb-building and outward sprawl. Thus the problems of the central city are simply the outcome of a social and economic structure which does not engender community, but encourages class divisions within the community that spawn the subur- ban structure. Suburbs are both enclaves of escapism from the social problems of capitalism and predators on the community services which the central city provides. 129 In the next chapter, we shall extend the analysis of this and the previous chapters by projecting the impact of the behavior and policy hypothesized on the future of the metrOpolitan area. CHAPTER VI THE DYNAMICS OF MARKET CONSTRUCTION IN A METROPOLITAN AREA We have inferred the behavior of each local government from the behavioral motives of each household. Now we can go one step further and infer the pattern of growth of local governments across a metrOpolitan area and the results of this growth. A. Fragmentation and Stratification along Income and Hardship Lines First of all, we expect that distribution motives, re-enforced by efficiency motives, will result in a fragmented multiplicity of local governments. At most, there will be N/no (where N is the total metropolitan population, no is the minimum feasible size for a local government) of these units. The promise of distributional gains will encourage the development and maintenance of independent units rather than consolidated growth within the existing political entity. While the desirability and maintenance of fragmentation is also postulated by a Tiebout-type analysis, our model suggests that the degree of community proliferation is a result of strong distribu- tional forces which may overrule the efficiency gains forthcoming from a partial or complete political consolidation for providing public services. The distributional forces unequivocally favor frag- mentation while efficiency gains argue for fragmentation only if preferences differ significantly and production economies are not an 130 131 impediment. Since the list of ills proferred by critics of frag- mentation is headed by externality problems like pollution and lack of rational planning, and internal diseconomies such as inadequate scale and duplication of effort, we might conclude that such inef- ficiencies associated with a multiplicity of local governments are a part of the price willingly paid for distributional gains accruing to the suburbanite. The fragmented units, in addition to being numerous, and per- sistent, will be clearly differentiated along socio-economic lines. In the abstract extreme, if income were the only socio—economic feature of households and public sector factors the sole determinant of locational choice, then we would expect suburbs to represent a heirarchy of income enclaves. That is, if each household in the population is ranked by its income position, then we would find Suburb 1 with households ranked 1 through 20,000, Suburb 2 with house- holds ranked 20,000 through 40,000, and so on. Allowing for other socio-economic features of households, this stark pattern will be modulated by an overlay of other factors, particularly race and age of pOpulation. Higher-income blacks may not be acceptable residents in a high-income suburb; households with a high prOportion of young and old dependents may not be acceptable either. Allowing other influences outside the public sector to explain a person's presence in a particular community, such as distance to place of work, we will likely observe some households whose needs or advantages on a private score override public service incentives to seek the commun-. ity of likes. 132 The tendency toward homogeneity is an inevitable consequence of the distributional game. Whatever rules are adopted by a local unit, it will generally find that in the long run, its average rela- tive income cannot be much above the level existing at any one time or above the level required of a potential immigrant, whichever is lower. This is true of cost factors too. Higher income and lower cost households will naturally locate in community which Of- fers them better distributive conditions, while those who will 10- cate in a particular community are those at or below its "standards" (who cannot get into a better-favored community). Since a communitys rules eliminate those potential immigrants who are below its "stand- ards," then it is apt to attract only newcomers who are exactly like the households presently residing in the community. Each household, then, will move into the least redistributive (i.e., most exclusive) community that will allow it in, and that community is bound to con— tain peOple with similar socio-economic characteristics. It should also be obvious that the higher the relative income level, and the lower the cost level, the better the distributive spoils to be at- tained through the compartmentalization of the public sector. B. Centrifugal Movement The model suggests that there will be a tendency for the popu- lation to disperse outwards into these independent municipalities at a faster rate than would be expected on the basis of population growth alone. Peripheral growth will not simply occur in accord with changes in congestion and distance costs. There is also an added 133 incentive to move out in the distributive nature of the local public sector. The newest communities are the most favored in the dynamics of market design. First of all, they have much greater leverage over their own structural features, since they will have the great- est amount of land unzoned and unoccupied. Older, more built-up areas do not have this kind of power over their contemporary struc- ture. The preference that some urban residents might have for family/neighborhood tradition and comfortable old homes is usually overwhelmed by the gradual deterioration of an entire sector of the city and by the crime and change in racial composition of neighbor- hoods accompanying age, so that the cost of remaining in your tradi- tional family home (costs both in terms of wealth and maintenance) becomes intolerable. In addition, newer communities do not have to live with "mis- takes" from the past. They can design their communities to take advantage of the advances in public service technology. Cities de- signed in a pre-auto age, when public safety was produced on the beat, are highly handicapped in an age when law enforcement is best carried out with the Chevy V-8 cruiser. Central cities are truly the American dung heap in this process. They are the residuals, left with the lower income strata and the highest costs, the elements which have been excluded from the new community-building on the periphery. It is quite possible that this bias towards outward progression 134 brought about by potential individual distributive gains, may result in inefficiency over the metropolitan area as a whole (e.g., empty central cities). Much as a system of tariffs impedes efficient allo- cation, the construction Of insulated markets for public services might also prevent the best resource allocation. While it is not within the scope of this thesis to specify the impact of fragmenta- tion and proliferation of municipalities on efficiency in the local public sector, we do suggest that distributional gains may be traded off against efficiency and that localized versus area-wide public service provision is at the very least Pareto non-comparable. C. Further Resistance £2_Metropolitanization The model predicts further resistance to metrOpolitanization. Metropolitan government, with monolithic tax, distribution and ex- penditure functions, can indeed be viewed as a return to the original egalitarian concept of the public service sector. But the enthusiasm for this idea comes generally from the central city (i.e., those who had it redistributed away_from themselves). Since we can expect that some suburban residents paid a premium for real eState or com- mitted themselves to sacrifices in the private sector (e.g., a longer commuting trip) in order to gain the proferred distributional gains they will fight hard to retain them. D. Resistance £2_Economic and Racial Integration There are no incentives to lighten the immigration restrictions in the future. Even if a community wishes to be broadminded, it 135 faces disastrous competition from its neighboring communities, which will tend to attract all the wealthier dissenters away, starting a reverse redistribution which will affect the whole community. A little charity, then, will result in a much greater loss. E. Institutional Rigidity Finally, we observe that the institutional constructs of this process are vast. Such institutions include the elaborate zoning and building codes which mold land use in a community; these legal tools are sanctioned by state law and tradition, and have a long history of support in the courts. A more subtle companion to these legal constructs is the entire body of private property law, which upholds the sanctity of private property and limits the right of any public body to undertake policies which will affect the value or use of privately-held land. Present attempts to fashion meaningful land use legislation in the public interest are greatly encumbered by the philosophical and legal protection of private property rights. The political survival of local municipalities in the urban area is guaranteed by another set of tenets, engrained in the Ameri- can consciousness and state constitutions--Home Rule. The unequivo- cal right to self-determination protects distributional enclaves. Periodic attempts to limit home rule have been unsuccessful, and there is little hope that this record will change in the future. Suburban interests, whose numbers are growing, have successfully blocked such attacks in state legislatures with the help of rural VOtES . 136 The existence and use of these institutions has made the frag- mented metropolitan area one large institution in itself. Entire communities are designed to capture public sector distributional gains. To a large extent, the sprawl and pace of metropolitan come munity building represent a capitalization of these gains. Because of the permanency of land use decisions, we will have to live with the present deformed pattern of urban development for a long time to come. Ultimately, in order to change the "inequality" in the public sector, it may be necessary to dismantle the structure, and its supporting institutions, entirely. These prospects are decidedly gloomy. They suggest that the metrOpolitan problem is not simply an accident, which can be cor- rected now that we see our folly. On the contrary, even though most urbanites might agree that the entire structure is seriously de- formed, their own respective interests may find them staunchly op- posed to the organizational reform.which is needed for the viability of the area as a whole. It may be that new cities, more rationally planned, will grow up elsewhere, and that older cities will become deserted, modern ruins of a self-interested, competitive economy. Although the energy crisis of late presents a tightening throttle on growth, we should nevertheless experience future rapid growth of medium-sized cities in the West, and no growth or decline of most large urban areas in the Northeast quadrant of the country. Itmay be too late to help cities like Detroit. 137 In the next chapters we will test the hypotheses advanced in Chapter III through VI. We will try to gauge the extent of the problem, as outlined in this thesis, to canvass urban varieties in different areas of the country, and to investigate the prognosis of the future as presented in this chapter. CHAPTER VII EMPIRICAL EVIDENCE OF MARKET CONSTRUCTION: HOMOGENEITY AND STRATIFICATION Having completed the exposition of the market construction hy- pothesis, we want to test the implications of such a theory. To do so directly, we would want to specify supply and demand relationships for local public output within each community in the metropolitan area. The following diagrams show the typical relationships we would expect for a local public service such as public safety: Figure 1. Cost Functions. AC l N Community 1: high income, white 2 suburb $40 MC Community 2: low income, aging, l increasingly black central city Per capita cost of low crime rate N c: I Z l I I I 30 20 10 0 *Index of Crimes per Thousand * Output of public safety increases to the right along the horizontal axis. Each set of curves represents the market which the community in question has constructed for itself. On the supply side, the urban 138 139 Figure 2. Demand, Supply Functions. S $40r 2 Community 1: high H 0 income, white Sufi S suburb .. a: 1 g s'3 Community 2: low .: o 5 20- income, aging, '2 3 5 D increasingly o-gig‘ 2 1 black central 3'8 city I L I I 30 20 10 0 *Index of Crimes per Thousand * Output of public safety increases to the right along the horizontal axis. core community (e.g., Detroit) faces much higher cost functions than its suburban neighbor. The concentration of the poor, of racial minorities and of deteriorating physical plant mean that safety is achievable only at a much higher cost. The suburban community, on the other hand, by keeping out the lower end of the income distribu- tion and the socially oppressed, faces a drastically reduced cost for a low crime rate. On the demand side, one can postulate that personal and property safety is a normal good, and that therefore the demand is apt to be higher where incomes are higher. Unfortunately, it is impossible to specify these relationships empirically. Since we do not know the nature of underlying utility and production functions, we can onIy estimate the demand and supply functions. When we try to do this, we confront the identifi- cation problem; it is impossible to estimate the structure of demand 140 unless we have a situation in which supply conditions change and demand conditions remain constant, allowing us to sketch out the shape of the demand curve.1 The converse is true for estimation of supply curves. We simply do not have enough information to carry out this effort successfully. In addition to the problem of statistical demand and supply curves, we are further handicapped in the public sector by the lack of an adequate measure Of output. Economists have traditionally used expenditure as a measure of local output. The dangers of using such a measure are obvious. Figure 2 indicates that if expenditure were used as a measure of put for the stereotypical communities shown, the viewer would conclude that the two communities enjoyed nearly equal benefits from the public sector. Expenditure can be used for a proxy of output only if production and cost functions are identical across the communities studied and if the composition of output is identical. Such assumptions are not acceptable, because they obscure the important differences in supply conditions which do exist and therefore the real differences in output that residents of metropolitan communities enjoy. As indicated in Chapter IV, revealed preference methods are of no use here either, for choice of community represents not only personal evaluation of an output mix and level, but also choice of a set of cost and distributional characteristics that affect his 1See Friedman, Price Theory, pp. 31—36, for a detailed explana- tion of this problem. 141 well-being. Thus conventional methods of testing microtheory pro- positions are not useful for our purposes. We are forced to resort to indirect tests of the theory. The first such indirect test of the theory develOped in this thesis, and of its claimed superiority over the Tiebout analysis, tests for the existence of stratification and homogeneity. The first hypothesis can be formulated as follows: Hypothesis 1: MetrOpolitan sub-communities are strati- fied and internally homogeneous with respect to income and public service cost conditions. To further support our theory, we will look in the next chapter at the historical development of fragmented local government, includ- ing the status of annexation and consolidation tools today. The second hypothesis is thus: Hypothesis II: The creation and maintenance of inde- pendent local governments within the metropolitan area has been pursued successfully by suburban metropolitan citizens and their political representatives. Finally, we shall look at trends over time in differentials among local units. Our hypothesis in this final chapter is: Hypothesis III: The socio—economic differentials among central cities and suburbs are not diminishing. 142 The presence or absence of homogeneity will cast some light on the competing theories. The Tiebout model predicts that communities will be populated with like—minded people who have the same prefer- ences for a public-private consumption mix, regardless of income. Thus we may expect that people whose preferences differ from the average of their own general socio—economic group (e.g., wealthy groups unconcerned with education and poor groups yg£y_concerned with it) would be found side-by-side in communities with non-peers, con- suming unique combinations of public and private services. The prediction of the theory developed in this thesis is that people with similar income, wealth, and socio-economic backgrounds will be found together in communities, regardless of preferences. Taking into account both efficiency and distributional motivations for moving, we postulate that either all persons have identical utility functions, in which case both motives encourage homogeneity, or in the case of differing preferences, distributional considera- tions override, and distributionally-provoked institutions prevent, heterogeneity. Hypothesis 1: Metropolitan sub-communities are stratified and internally homogeneous with respect to income and public service cost conditions. The hypothesis will be disproved if we find substantial heterogeneity within communities outside the central city, except in cases where recent change indicates that a community is in transition. 143 It is interesting to note that the phrasing of this hypothesis does not explicitly contradict Tiebout. However, on closer look, the resulting homogeneity means either of two things for the Tiebout approach: (1) either all preferences are the same, across any one income group, in which case efficiency motivation boils down to in- come differences, or (2) preferences differ, but are overridden by the distributional aspects. In either case, the substance of the Tiebout argument is lost, for in the former there are no unique pref- erences to cater to, and in the latter they aren't catered to regard- less of their presence. Several detailed studies have been done on differences between suburbs and cities. Unfortunately, such studies generally lump all suburbs together and contrast them with the central city. This seriously restricts our use of such studies to provide evidence for a wide range of differentiated communities across an array of metro- politan communities. Nevertheless, we shall mention them briefly. The Advisory Commission on Intergovernmental Relations has twice examined disparities between central cities and suburbs on a nationwide basis. The first attempt was in 1965.2 In this study, the ACIR concludes The picture revealed in this report is disquieting. POpulation disparities between central cities and 2Advisory Commission on Intergovernmental Relations, Metropoli- tan Social and Economic Disparities: Implications for Intergovern- mental Relations in_Central Cities and Suburbs (washington: Government Printing Office, 1965). 144 suburbs and among suburban jurisdictions themselves are significant. Governmental structure in our metropolitan areas is growing more complex. The re- sultant need for services and the ability to provide those services are drifting apart. However, on the basis of their comparison of aggregated suburbs and central cities: Very few generalizations about central city-suburban population differences are applicable to most metro- politan areas. The extent and direction of disparities for most characteristics vary enormously especially with respect to the nonwhite population.& The second ACIR study was done in 1967.5 It concludes: After assessing relative levels of various social and economic indicators in central cities and suburbs, it is clear that the Nation's central cities are becom- ing inhabited to an increasing extent by "high cost" citizens. The central city has a concentration of the nonwhite, the elderly, and the low income population Often living in unsound housing, without an adequate education for today's world and without hope for the future.6 This second study also points out that the disparities are the great- est in the large Northeast and Midwestern metropolitan areas. Southern and Western SMSA's are a mixed group, since some have been able to prevent the proliferation of suburbs. Robert Wood, in his study Suburbia, came to much the same 3Ibid., p. 123. 4Ibid., p. 23. 5Advisory Commission on Intergovernmental Relations, Fiscal Balance in_the American Federal System, Vol. 2, Metropolitan Fiscal Disparities (Washington, D. C.: Government Printing Office, 1967). 6Ibid., p. 55. 145 conclusion. Data from the 1950 census "Speaks to the success of the suburban population in differentiating itself in certain ways from the mother-city in its own metrOpolitan area."7 Wood's study of the available evidence confirms the thesis of a systematic differentia— tion among suburbs. He took 106 suburban municipalities in six major metropolitan areas and tabulated variation among them on a number of indicators such as employment, income and sex ratio. While it is impossible to examine the stratification of individual suburbs on all accounts because of Wood's aggregation procedure, it is evident, as he concludes, that these limited excursions into quantitative comparisons make it clear that the overall suburban disposition to gather together a disprOportionate share of middle class, better-educated Americans is, within itself, fragmented and divided. The broad tendencies toward homogeneity in occupation, education, orientation to family life, and age are intensified in particular suburbs, and their differences from other American com- munities are even further exaggerated. The only intensive analysis of a single metrOpolitan area is the Williams, Herman, Liebman and Dye study of Philadelphia. They also conclude that differentiation is characteristic of the metro- politan area: Municipalities in the more urbanized portion of the metropolitan area (suburbs) are more specialized and differentiated from one another than the semi-urban municipalities (towns and townships). suburbia, far from being a uniform social landscape, is really dis- tinguished by its highly varigated character ... 7Wood, Suburbia, p. 111. 81bido’ pp. 117-1200 146 The pattern of variation is one of extreme complex- ity. Few of the variables that contribute to the pattern of differentiation vary from community to community in a consistent fashion. MOst community characteristics appear to be independent of one another. Although social rank, wealth and some of the prOperty characteristics are correlated, the intermunicipal variation among them is far from congruent. The variables compared in the Philadelphia metropolitan area study were age, education, occupation, social rank, race, religion, wealth, property composition, and size of total population. A final reference on existing literature is necessary. There have been some attempts by geographers to develOp a classification scheme for local units of government. The most recent and compre- hensive of these is Richard Forstall's work.lo Forstall designs an elaborate classification scheme which distinguishes local communities on the basis of size, socio-economic status, stage in the family cycle, nondwhite population and presence of manufacturing activity. While the system is constructed purely for statistical description, it is possible that data gathered for such a classification could serve as the basis for widespread empirical work on disparities among local units in the future. DeSpite these efforts, there is no existing study which focuses 9Oliver Williams, Harold Herman, Charles Liebman and Thomas Dye, Suburban Differences and Metropolitan Policies (Philadelphia: Uni- versity of Pennsylvania Press, 1965), p. 72. 10Richard L. Forstall, "A New Social and Economic Grouping of Cities," in The Municipal Year Book, 1970 (washington, D. C.: Inter- national City Management Association, 1970), pp. 102-159. 147 on the community differentials which are specified in our model. A test of our theory involves examining the socio-economic character- istics which directly affect the local fiscal sphere. The Williams, at 21, study, while it does not disclose its correlation results, implies that correlation among socio-economic variables is low; this may be a result of the inclusion of such variables as size of pOpu- lation and religion, which we would not expect to be strongly corre- 1ated from our model. Our model does suggest that correlation among cost and income factors affecting the local public sector should be strong, especially on the lower and upper end of the distribution. We need a test area to ascertain this. In addition, we want to examine the degree of stratification and of internal homogeneity across a set of metropolitan communities. This thesis uses the Detroit metropolitan area, familiar to the author, as its test area. we shall examine here the cross-sectional disparities among Detroit and its suburbs for the 1970 census. At the end of this chapter we shall look briefly at the trend of these disparities over time. A map of the study area follows. The Detroit SMSA consists of Wayne, Oakland and Macomb counties. The municipalities chosen in- clude all incorporated cities in this area with populations of over 10,000 in 1970 and those not incorporated which are classified by the 1970 census as urbanized places. This gives us a sample of 47 municipalities, which account for 82 per cent of the total SMSA population. These areas cover a continuous area radiating out from 1 149 the city of Detroit, with the sole peculiar exclusion of Redford Township (not classified as urbanized by the census), and ignoring several areas which have remained unincorporated or are too small to count: Grosse Pointe Shores Village, Grosse Pointe City, and Lathrop Village. The sample also includes outlying population centers such as Plymouth, Farmington, Troy and Mount Clemens, and the "other central city," Pontiac. Table 1 contains the data for this set of municipalities. These figures represent the demand and cost factors which influence the structure of the local public service market. we want to investi- gate this data set for evidence on the following propositions: area communities are highly stratified with respect to income and cost factors; correlation among cost and income factors is high; within each community a high degree of homogeneity exists. The table itself provides the best evidence for examining the stratification hypothesis. Without testing for equality of the means, it is evident that a large number of communities have a median sig- nificantly different from the areawide median in each of the cate- gories. Several of the distributions are highly skewed; income is skewed on the upper end, poverty on the lower end, inadequate plumb- ing on the lower end. The growth figures are highly erratic. The percent black population is clearly a bi-modal distribution with Detroit and a few of its inner ring suburbs accounting for nearly all the area's blacks. 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(Continued) Footnotes. a Table includes all incorporated localities in the SMSA with a pOpulation of more than 10,000, and unincorporated areas classified by the 1970 Census as urbanized areas. The table is arranged by median household income status in descending order. Population figures from 1970. b U. S. Bureau of the Census, Census 2f_Population and Housing: 1970, General Social and Economic Characteristics, Final Report PC(l)-C24, Mighigan, Tables 89 and 107. C Ibid. These figures differ from the previous column due to the inclusion of unrelated individuals in the latter set. d Ibid., Tables 90, 107. e Ibid., Tables 84, 103; and U. S. Bureau of the Census, Census 2; Population and Housing: 1970, Census Tracts, Final Report PHC(l)-58, Detroit, Michigan SMSA, Table P-2. f Regretably, the 1970 Census does not have published figures for deteriorating and dilapidated housing, as it has in past census reports (although this information can be constructed from informa- tion on tapes). These percentages have been calculated from numbers in Table H-l of Census, Census Tracts - Detroit, quoted above, and from U. 8. Bureau of the Census, Census g£_Housin , 1970, Vol. 1, Housing Characteristics for State, Cities and Counties, Part 24, Michigan, Tables 8, l8 and 23. 3 Calculated from Census, Census Tracts - Detroit, Table P—l. hState of Michigan, Michigan Manual, 1969-70, pp. 354-375. Date of Incorporation column figures used except in the case of Inkster, which became a home rule village in 1926, but was not formally in- corporated as a city until 1964. It was felt that the former date gives a better indication of its independent existence. 1 U. S. Bureau of the Census, Census 9f Population and Housing: 1970, Final Population Counts, Advance Report PC(Vi)-24, Michigan, Table 2. Figures for Sterling Heights, Westland and Taylor were calculated from census tract data for 1960 and 1970; it was not pos- sible to do the same for Drayton Plains and Dearborn Heights because tract data does not correspond directly for the two census periods. 155 TABLE 1. (Continued) j U. 3. Bureau of the Census, Census 2; Population and Housing: 1970, General Population Characteristics, Advance Report PC(Vl-24), Michigan, Table l. A percentage of 0.0 does not mean that there are gg_blacks in the city, but that their numbers are so small that they are insignificant (i.e., less than 00.05 percent). kMichigan State Tax Commission, 1970 City Tax Levy, Internal Paper, 1970. 156 communities into subgroups with similar characteristics. The follow- ing groups are useful for Group 1 Subgroup Subgroup Subgroup Group 2 Subgroup Subgroup Subgroup Subgroup Subgroup Group 3 Subgroup Subgroup subgroup this purpose: A 0 Detroit, Highland Park, Hamtramck, Pontiac River Rouge, Ecorse, Mount Clemens, Inkster wyandotte, Ferndale, Hazel Park, Melvindale Lincoln Park, Dearborn, Center Line, Berkeley, East Detroit Plymouth, Clawson, Garden City, Royal Oak wyane, Roseville, Taylor Madison Heights, Westland, Drayton Plaines, Harper Woods, Southgate, Dearborn Heights, Riverview St. Clair Shores, Warren, Fraser, Sterling Heights Livonia, Troy, Southfield, Beverley Hills, Trenton, Allen Park, Oak Park Farmington, Birmingham Grosse Pointe Woods, Grosse Pointe Farms, Grosse Pointe Park This ranking is a descending order of "betterness"; the communities at the top of the table are those ridden with high cost factors and low income levels. Those at the bottom.have ample resources and few public service cost burdens. Group 1 includes the twelve communities which are clearly low income, high cost areas. They have the lowest income groups, the highest incidence of poverty, the worst housing stock, and a large 157 percentage of the aged. All of them are older areas which incor- porated before World War II, and have been experiencing slow or nega- tive growth in recent years. Despite the industrial base in many of them, they generally have very high municipal millage rates. Three subgroups can be distinguished within this group. The first is a collective that properly speaking represents the central city. Both Highland Park and Hamtramck are totally surrounded by Detroit and Pontiac is an old central city in its own right. These communities represent the very bottom of the socio-economic ladder. A second subset includes four suburbs that are heavily black and share the low status profile of the former. Three of these, River Rouge, Inkster and Ecorse, are typical black inner ring suburbs; Mount Clemens is an outlying small town that has become a poor, and increasingly black, suburb. A third subset consists of four inner ring suburbs which have successfully prevented invasion by blacks. These are "poor white" communities, sharing in all other respects the disabilities of the former. The second group contains 23 middle income, middle status come munities. These communities are distributed around the mean for each of the characteristics in question. The most obvious common characteristic is the almost total exclusion of blacks from their pOpulations. The five cities classified under subgroup A are older, pre-World War II suburbs which can be broadly termed "working class suburbs." 158 These are inner ring suburbs which are alldwhite, lower middle income areas, with an average education level and very slow of negative growth rates; they fall in the lower half of the poverty distribu- tion and have a relatively high percentage of older people. subgroup B consists of older, outlying areas which have striven successfully to achieve middle-class status. Each of these areas has had enough vacant land to expand significantly in recent years. They have average income and educational levels, a relatively young popu- lation, and a low city tax rate. subgroup C consists of new working class suburbs, post World War II incorporation which are stuggling to maintain a middle-class aura. While they are all white, these cities have a relatively poorly-educated population, and a relatively high incidence of poverty, even though they have a generally young population and a fast rate of growth. Subgroup D includes a large group of typical post World War II middle-class suburbs. Each of these has an average level of income and educational attainment, a small incidence of poverty, few if any blacks, a new and undeteriorated housing stock, a relatively young population, a rapid growth rate, and moderate local city taxes. ' communities Subgroup E contains the middle-class "superstars,' which have been very successful at building middle-class constituen- cies in very recent years. Each of them experienced very rapid rates of growth in the 1960's, at least 69%. Each has a median in- come considerably above average, a low incidence of poverty, an above 159 average educational level, less than 1% of housing without complete plumbing, a very youthful population and relatively low millage for city purposes. The final group contains the twelve communities which qualify for upper middle class status. Each has a median family income above $14,000. Educational levels are very high. This group, how- ever, shows surprising variety, e8pecially in the age category. The differences become clearer with the subgroupings. Subgroup A contains new suburbs which have achieved exclusive status by guarding entry closely. These communities have all incor- porated since 1945; they have grown rapidly in recent years, exper- iencing little poverty, and have relatively young populations. These communities have low millage rates, despite the expansion in recent years. Subgroup B consists of two old peripheral farming communities which have been absorbed into the metropolis in recent years. They have become elite communities in their own right, with large lot zon- ing of former farmlands and upper middle class subdivisions moving in. The older roots of the communities explain the relatively high percentage of older people living there. Subgroup C consists of the Grosse Pointe complex, a very exclu- sive string of communities lining the Detroit River north of Detroit. These communities date back to the early part of this century, even though they were not incorporated until after WOrld War II. They were the first exclusive bedroom suburbs, places where families 160 making money in autos or related industries moved to display their wealth and enjoy their newfound fortunes. Today they experience little or no growth and have a high percentage of older peOple; at the same time, they have many of the wealthiest, most educated metrOpolitanites in their communities. This overview suggests that stratification is indeed great with- in the metropolitan area. Although one could contend that Tiebout's choice might still Operate within the small subgroupings we have constructed, the data does indicate that choices are narrowly circum- scribed and that distributional factors are much more important in characterizing the supply and demand conditions of local public service sectors than the small within-group variation. A second prOposition that we want to examine is the correlation among the cost and income factors analyzed above. Our theory sug- gests that at the extreme, the privileged, exclusive suburb will have the best of everything, while the central city and its nearby inner ring suburbs will have the worst of everything. Public sector incentives will encourage market construction and result in "winner" communities in which incomes are high, poverty is non-existent, dependency is low, housing stock is good, municipal tax rate is low, and so on. Since most of the data tabulated in Table 1 cannot be assumed to have a particular distribution, it is necessary to use non- parametric tests. The best of these for testing the relationship between two sets of variables is the Spearman rank correlation 161 coefficient. This statistic, when compared with the most powerful parametric correlation (the R used in much of econometric and statis- tical work), is about 91% as efficient. That is, if the data did have a bivariate normal distribution and we used rank correlation techniques instead of direct correlation, we would be able to reject the null hypothesis that no correlation existed .91 times as often as with the latter.11 The Spearman rank correlation coefficient can be used for any two of the community socio-economic characteristics in Table 1. It has been calculated for each pair. However, in order to get a sta- tistic which reflects the relationship across the entire matrix of characteristics, it is necessary to use another statistic, the Kendall coefficient of concordance, W.12 This statistic measures the amount of agreement across any set of m rankings. Its value is close to that of the mean Spearman coefficient, to which it is linearly re- lated. Since the mean Spearman coefficient is difficult to calculate directly, we use the coefficient of concordance instead, test its significance and then calculate the mean Spearman coefficient of rank correlation from the former. Table A-2 in the Appendix shows the rank correlation coefficients and corresponding t statistics for the set of nine community 11Sidney Siegel, Nonparametric Statistics for the Behavioral Sciences (New York: McGraw-Hill Company, Inc., 1956), p. 213. 12Maurice Kendall, Rank Correlation Methods (London: Charles Griffin and Company, Ltd., 1948), Chapter 6. 162 characteristics.13 A coefficient of 1.0 indicates complete correla- tion; a coefficient of 0.0 would indicate no correlation. The criti- cal value for t with 40 degrees of freedom (we actually have 45 but the table does not cover this size sample) is 2.704 at the .01 level of significance. Of the thirty-six rank correlations, only four show insufficient relationship to reject the null hypothesis that there is no correlation between the two sets of ranking in question. All of these include the dependency ranking as one of the pair; evidently our age indicator of dependency (peOple over age 65) is not a good socio-economic indicator of cost burden. All other pairings have a rank correlation coefficient of .4 or higher, indicating a strong degree of relationship. The coefficient of concordance was calculated for all nine ranks and certain subsets.14 In all cases, the coefficient and its relative, the mean Spearman coefficient of rank correlation, were large (over .6) and significant at the .01 level for the chi-square test. Al- though the dependency ratio is not well correlated with variables such as income, poverty, education, housing condition and tax rate, it is highly correlated with date of incorporation and growth rate. Apparently, some older suburbs with a large percentage of older peOple and a slow or zero growth rate have still managed to maintain 13The data on race is not included here because of its bimodal distribution; it is impossible to develOp meaningful ranks for it. Ranks assigned appear in Table A—1 of the Appendix. 14See Table A-3, Appendix. 163 a high status complexion in their communities; the Grosse Pointes are obvious examples and may be in themselves largely responsible for the disagreement in the data. These tests support us in the contention that the array of com- munities in the metropolitan area tends to be characterized by cor- relative rankings over a whole set of socio-economic characteristics, and that in general, low income communities are also high cost communities. The correlations also indicate that high municipal tax rates are strongly correlated with low income and the presence of high cost factors. This evidence supports the market construction hypothesis. The final proposition which we wish to examine is that homo- geneity is characteristic within individual communities. The only socio-economic characteristic for which variation is tabulated in the Census is family income.15 The data itself presents serious problems. The mean family income for the entire SMSA is $13,532. The income figures are presented in interval form; unfortunately these intervals are unequal. There are ten intervals of $1000 up to $10,000; the succeeding intervals go from $10,000 to $11,999; $12,000 to $14,000; $15,000 to $24,900; $25,000 to $49,000; and over $50,000. There are only three intervals above the mean interval and eleven below it. Therefore the data is very crudely organized 15Data from Census, 1970, Census Tracts - Detroit, Michigan, Table P-4. Data are listed in the Appendix, Table A-4. 164 for the upper end of the income distribution. However, since these data are all that exist, it is useful to test for equality of variance between individual communities and the general SMSA. If homogeneity exists, we would expect the variation within each community around its own mean to be significantly less than the variation of all SMSA incomes around the areadwide mean. Rejecting a null hypothesis that the variances are equal will not prove homogeneity, but will indicate a strong tendency toward homogeneity. In this test we used the twenty-seven largest communities in the sample, since the data for these communities were already come piled by the Census. The results of the test were mixed.16 The F statistic was significant for twenty-two of the communities. However, the remaining five, all with means above the areawide mean, and in- cluding the four with the highest mean income in the sample, had variances larger than the areawide variance. In addition to the crude grouping problem mentioned above, there is another source of this problem. Since the variance measured in this test is absolute variance, the variance of grouping on the upward and of the distri- bution will naturally be larger than that of the entire distribution about their respective means. Despite this bias, eight communities whose means fall above the SMSA mean still had variances significantly less than the areawide variance. 16Statistics for this and the following exercise are listed in The Appendix, Table A-5. 165 In order to correct the bias introduced by skewness in the distribution, the relative variance was calculated for each city. This statistic divides the absolute variation of incomes from mean income by the mean income itself, yielding a measure of relative variance which is not affected by its position in the income distri- bution. The results cannot be tested for significance, but the large size of the sample makes it likely that these statistics are close to their true values. The results are listed in Table A-5, the Appendix. The coef- ficient of relative variation is smaller than that for the whole SMSA in all but three communities. The exceptions are Detroit, Hamtramck, and Highland Park, the three "cOutral cities" of the SMSA. It is not surprising that these three areas, once the original heterogeneous community, should still contain diverse income groups. Detroit, of course, has large neighborhoods which are upper middle class. The results of this exercise support our hypothesis that outside of the central city there is a strong tendency toward homogeneity. The coefficients indicate another interesting observation. The relative variation is smallest for communities in the middle of the income distribution. This suggests that it may be the middle-income communities that demonstrate the strongest interest in suburb- building and in excluding the unwanteds. However, this could also result from the simple fact that there is a larger number of middle income households and thus greater ease in homogenizing such communities. 166 The evidence on income homogeneity shows only that there is a strong tendency toward less income diversity within local communi- ties than within the areas as a whole. It does not prove that units are homogeneous; in fact, the data indicate that every community does have residents in every income class (temporary yearly income fluctuations may explain many of these observations). However, this thesis does not contend that homogeneity is complete, even given all socio-economic characteristics. Our contention is that public sector incentives encourage homogeneity, and the existence of this tendency in the income data supports the theory. CHAPTER VIII EMPIRICAL EVIDENCE OF MARKET CONSTRUCTION: USE OF ANNEXATION, CONSOLIDATION AND INCORPORATION WITHIN THE METROPOLITAN AREA We have hypothesized that distributional motivation will prompt all but the poorest governments and voters to Oppose metrOpolitan unification because it would destroy their carefully constructed and insultaed markets for public services. We will provide evidence for this hypothesis by surveying the existing information on annexation and consolidation: the legal limitations imposed historically, the success and failure record of annexation and consolidation proposals in the U. S., and the limited evidence on factors influencing voter and government positions on annexation issues. American local governments have always been creatures of the States. The structure and functions of local government are estab- lished in state constitutions, and can be molded and changed by the state legislature within certain limits. However, municipal govern- ments in most states are generally protected by a constitutional guarantee Of home rule, a sort of "local Bill of Rights" in the State Constitution. An integral element of home rule is the right of self-determination, which protects any local government with home rule status from involuntary seizure or annexation by a neighboring community. 167 168 The laws governing annexation and consolidation evince a famil- iar economic principle. It is almost as if economists had donated their fundamental welfare principle to the drafters of legislation concerning municipal boundaries. The welfare criterion so familiar to economists, Pareto optimality, is enshrined in constitutional and legal requirements for such changes. The guiding principle can be stated like this: no adjustment of boundaries or change in the constituency of municipal government, either by annexation or con- solidation, shall take place unless all the concerned municipal governments (or a majority of their respective voters) approve (i.e., gain from) the change. On the other hand, there is no law that prevents suburban escape from central city responsibility; in fact, incorporation law is quite liberal. Thus the Pareto-optimal criterion is applied in a somewhat lOp-sided manner. It is the consensus of most political scientists that this bias in boundary law emasculates annexation and consolidation as tools for solving metropolitanwide problems. It is the contention of this thesis that the law and practice governing the formation and pro- tection of a multiplicity of local units in a metropolitan area is a result, in part, of the public service sector incentives which encourage households and their governments to construct their own insulated market for public services. The following inquiry into annexation and consolidation will provide evidence for this hypothesis. 169 Hypothesis II: The creation and maintenance of independent local governments within the metro- politan area has been successfully pursued by suburban metropolitan citizens and their political representatives. 1. The Historical Use of Annexation and Consolidation. Annexa- tion and consolidation were the conventional means of city growth in the 19th century. Annexation, a term referring to the addition of unincorporated territory to an existing municipal unit, and consoli- dation, a term referring to the merging of two or more existing local governments, paralleled population growth of Eastern American cities. Such expansion was often characterized by very large territorial acquisitions of relatively unurbanized land. Wood quotes the following figures as indicative of the success of annexation before 1918. Until 1918, America's largest cities managed to annex sizable territory without substantial difficulty. The ten largest at least doubled their areas and some in- creased from three- to tenfold. In 1891, New York come pleted the greatest single extension of territory, adding over 250 square miles to the city; Boston doubled its size in 1914; Baltimore added 60 square miles in 1918, and St. Louis gained 43 square miles in 1876. For cities Of more than 100,000 residents, 605 square miles were annexed between 1890 and 1900, 413 in 1900-1920, and 628 and 521 square miles respec- tively in the next two decades. Similarly, consolidations in the 19th century were responsible for the creation of four of the largest U. S. cities: New Orleans (1813), 1Wood, Suburbia, p. 77. 170 Boston (1821), Philadelphia (1854) and New York (1898). Annexation and consolidation were relatively easy in the 19th century for two reasons. One was that the outlying areas depended on the central city for certain critical services, like water supply. The other was that there was no major reasons to fear merging with the city since the public service sector was at the time very small. However, as soon as these simple relationships began to change, urban expansion under one municipal government was no longer a matter-of-course. The end of annexation as a popular tool for ex- pansion arrived early in Boston. In 1873, Brookline voted to remain separate. The state legislature created special state-managed agencies which took over the water, sewer and park building, freeing suburban communities from service dependence on Boston. By the 1800's, with but one exception, no suburban town ever again seriously considered annexation ... It was already apparent in the 1880's that to join Boston was to assume all the burdens and conflicts of a modern industrial metropolis. To remain apart was to escape, at least for a time, some of these problems.2 By the turn of the century, many local governments were choosing to remain independent of the central city. As early as 1910, social critics like H. G. wells were attacking the proliferation of inde- pendent suburbs, and by 1930, a large number of experts agreed that fragmentation was indeed a problem and should be curtailed.3 The 2Same B. warner, Jr., Streetcar Suburbs: The Process 2f_Growth 12 Boston, 1870-1900 (Cambridge, Massachusetts: Harvard University Press and the M.I.T. Press, 1962), p. 64. 3Wood, suburbia, pp. 74-75. 171 suburb was, in the view of Lewis Mumford, "a pharisaic way of passing by on the other side, leaving the civic organism itself in the gutter."4 In the decades of the 1920's and 1930's, there was considerable interest in consolidation, at least on the part of urban crusaders. Consolidations were proposed for Alameda County (1921), St. Louis (1926), and Pittsburgh (1929); all were defeated at the polls. Con- solidation movements were strong, but never came to a vote, in Boston, Cleveland, Portland, Seattle and St. Paul; interest was ex- pressed among groups in Detroit, Buffalo, Milwaukee, Cincinnati, Jersey City, Kansas City (Missouri), Rochester and Wilmington.5 The argument for consolidation during this era was based on a critique of fragmentation as an accidental historical development, as a structure injurious to the good of the whole population, hurting its development and encouraging corruption. Consolidation would be pos- sible if only politicians weren't so self-interested and citizens so ignorant.6 The naivete of this critique, demonstrated by sus- tained 20th century resistance to consolidation, lies to a large extent in its failure to consider the incentives for fragmentation 4Lewis Mumford, The Culture 2; Cities (New York: Harcourt, Brace, 1938), p. 216. 5Robert Warren, Government ig_Metrgpolitan Regions: 'A_Reapprai- sal gf_Fractionated Political Organization (Davis, California: University of California, Institute of Government Affairs, 1966), p. 9. 6Chester Maxey,'The Political Integration of Metropolitan Com- munities," in National Civic Review, Vol. XI, August, 1922, pp. 229-253. 172 presented in this thesis. Despite the advocacy of metrOpolitanization by many articulate spokesmen, both annexation and consolidation declined between 1900 and the end of World War II. This was not merely an accidental occurrence: In order for Opposition to the one government concept to be effective, it was necessary to get state legis- latures to make municipal annexation and consolidation difficult to use successfully. In many states this was accomplished, with a coalition of suburban and rural legislators usually the decisive force.7 During this era, stringent controls on annexation and consolidation were introduced, usually by making any such expansion subject to the initiation and/or approval of the voters of the annexed unit. 2. Post World War II Activity. There was some resurgence in annexation activity in the years after the 2nd World War. However, it is generally agreed that this phenomenon was not very widespread and did not offer the solution to the metropolitan problem. Wood says of this period: Annexations did not keep pace with metropolitan growth, and just at the time when the metrOpolitan problem became critical, annexation petered out. Despite a few sizable territorial additions to Detroit and Los Angeles, and a spurt of small acquisitions after the Second WOrld War, political opposition to the absorption of outlying towns increased. Completely surrounded by the territory of the central city, enclaves in Los Angeles, Boston, 7John C. Bollens and Henry J. Schmandt, The Metropolis: Its People, Politics and Economic Life (New York: Harper and Row, 1965), p. 406. 173 Cincinnati, Cleveland, Detroit and Pittsburgh clung to their separate identities and they were joined by towns and villages on the fringe. The ACIR has analyzed the record of annexation in the '50's. They find that annexation has been the exception rather than the rule, and that in most cases where it has been used, it has involved a negligible amount of land: During the 1950-60 decade, only 22 of these (130 most populous) cities annexed as much as 30 square miles to their respective areas, and in only 12 of these instances was the territory added to the city during the decade as much as 60 square miles. Furthermore, 44 of the 130 largest cities experienced no change in area during the entire decade, while 36 others eac added only from 1 to 10 square miles of territory. State-wise, their data indicates that the larger annexations took place almost exclusively in the South and west.10 The record on consolidation in recent years is also poor. City- county consolidations succeeded in Baton Rouge in 1947, and in Nashville in 1962. In the latter part of the '60's, Dade County in Florida; Richmond, Virginia and Jacksonville, Florida have all succeeded in unifying a larger area. The failure list is much longer: Newport News, Albuquerque, Knoxville, Durham, Macon, Columbus (Ohio), Memphis, St. Louis, Chattanooga. All the successes, 8Wood, Suburbia, p. 78. 9Advisory Commission on Intergovernmental Relationa,Governmenta1 Structure, Organization and Planning ip_Metropolitan Areas (washing- ton, D. C.: U. S. Government Printing Office, 1961), p. 16. loIbid., p. 23. 174 and in fact most of the attempts, have been south of the Mason-Dixon line. It is possible that southern cities fear a black take-over of the central city where all the white commercial interests are and that whites thus prevent such black accession to power by consolida- tion. This is rumored to be the case with Richmond and Jacksonville. In the larger cities of the country where consolidation has been urged because of the massive problems of fragmented local government, there have been literally no attempts or achievements by the forces for consolidation. Generally the legal and political requirements governing consolidation are so stringent that crusaders abandon this route before they start. The legal arrangements governing annexation and consolidation developed from the philosophy of self-determination and were cemented into state laws by the 1930's. Annexation laws vary across states; methods include legislative determination, municipal determination, judicial determination or quasi-legislative determination, in addi- tion to the most commonly used, popular determination.11 In 1961, the ACIR published a comprehensive study of metrOpoli- tan government.12 Their first two recommendations are strong attacks on home rule and its ability to "hamper the orderly and equitable extension of municipal boundaries." The report calls for "assertion 11Frank S. Sengstock, Annexation: .A Solution to the Metropoli- tan Area Problem (Ann Arbor: University of MichigaE’Law School, 1960), Pp o 9.41. 12ACIR, Government Structure, quoted above. 175 ' and "author- of legislative authority regarding metropolitan areas,‘ ization of municipal annexation of unincorporated areas without the consent of areas annexed.13 Unfortunately, these recommendations do not suggest an easy means of dealing with metropolitan areas where all the land surrounding the central city is already built up and incorporated. The ACIR recommends a number of legislative innova- tions to facilitate cooperation and voluntary consolidation, but does not attack home rule in this context. In 1966, the National League of Cities published their report, Adjusting Municipal Boundaries.l4 Their conclusions are similar to the ACIR's; they recommend greater freedom for cities to annex unin- corporated areas, but offer no real solution for simplifying the come plexity of metropolitan area government without consent of all con- stituencies involved. 3. Studies of Voter Reaction. Despite the strength and fre- quency of such recommendations, little use of annexation or consoli- dation has been made in this recent era of renewed interest in the city. There are few studies of citizen reaction to such proposals. The only general survey of attitudes is the 1962 ACIR study of eighteen reorganization prOposals. Only seven of the proposals 13Ibid., pp. 18—21. 14Department of Urban Studies, National League of Cities, Adjusting Municipal Boundaries: Law and Practice (washington, D.C.: National League of Cities, 1966). 15Advisory COmmission on Intergovernmental Relations, Factors Affectigg_VOter Reactions £2_Governmental Reorganization ig_Metro- politan Areas (Washington, D.C.: Government Printing Office, 1962). 176 which they studied were drastic reorganization plans involving the consolidation of two independent governments. The rest were partial consolidations or special district creations. In every instance, proposals lost in the suburbs if they did not win in the central city. In twelve cases, the proposal won or lost in both locations; in six, the proposal won in the central city and was rejected in the suburbs. Surprisingly, the ACIR concluded that suburban homeowners were not a significant interest group in de- feating consolidation proposals. However, it is possible that the aggregation of the data over all suburbs in all study areas on all the diverse proposals wipes out the impact of this group; it may also be that this group relies upon local public Officials to represent them and thus plays no visible leadership role. Several studies have been made of individual attempts at con- solidation. In addition to specific critiques of the campaigns in question, these generally conclude that Opposition.i§_characteristic of middle class suburban groups who are well provided for by their own local governments. This brief overview of the nature and history of annexation and consolidation yields some insight into the theory develOped in this 16Examples are David Booth, Metropolitics: The Nashville Con- solidation (East Lansing: Michigan State University, 1963); Henry Schmandt, Paul Steinbicker and George Wendel, Metropolitan Reform 3p SE, Louis: ALCase Study (New York: Holt, Rinehart and Winston, 1961); and Annie Hartsfield, Group Involvement ig_Municipal Consoli- dation: The Defeat gfua Unification Proposal iE_South Brevard County, Florida, unpublished doctoral dissertation, University of Colorado, 1968. 177 thesis. We can accept the hypothesis that suburban independent municipalities have successfully attained independence and defended it from the onslaught of urban reformers. This acceptance must be qualified, however. It appears that this pattern is unequivocally true of all the large cities of the Northeast and Midwest, and of some of the older ones in the West (e.g., Los Angeles). However, some of the older Southern cities have successfully consolidated a number of independent governmental units, and many of the younger middle-sized cities in the Southwest have employed annexation success- fully to prevent the development of a surrounding ring of independent communities. If the former phenomenon may arise from rather Spurious reasons (fear of black takeover), the latter is a small light on the horizon. Perhaps Southwestern cities have learned from the experience of older Eastern cities and will be able to prevent encirclement in the initial stages. Despite the forecast for the Southwest, most political scientists and urban observers do not believe that annexation and consolidation is a realistic solution for most cities in the U. S. Adrian concludes: What of the Future? Despite evidence of pessimism by suburbanites concerning the future viability of their independent municipalities, prospects for the future would appear to imply conservatism in the mak- ing of readjustments. The projection of current trends a decade or two into the future indicates that both the size and number of metropolitan areas will increase. These areas will not usually be governed by areawide governments, except for a few adoptions of city-county consolidation plans, and for the ex- panded function of the traditional county, whose 178 boundaries will in only rare cases be changed to fit the urbanizing pattern. The political resistance to changing the home-rule foundations of the laws governing local units prejudices the ability of planners to recommend and achieve unified, rational metropolitan government: Popular determination as a method of annexation exists in some form or other in the majority of states. Apparently, the political philosophy of the nation is committed to it. Reforms in annex- ation laws are predestined to failure unless cog- nizance is taken of this fact; no prOposed unqual- ified repudiation of it will succeed in the majority of states. Such observations bear out the contention of this thesis, that individual public sector incentives encourage citizens to protect their self-constructed local public service markets by insulating their independent governments from the larger public sector of the entire metropolitan area. l7Charles Adrian, "Public Attitudes and MetrOpolitan Decision- Making," in Issues iE_State and Local Government, ed. by Russell Maddox, Jr. (Princeton: D. Van Nostrand and Company, Inc., 1965), p. 319. 18Sengstock, Annexation: ‘A_Solution, p. 19. CHAPTER IX EVIDENCE ON FUTURE TRENDS FOR METROPOLITAN AREAS In support of the implications of the market construction model drawn in Chapter VI for the future of the metropolitan area, we will offer here some meager evidence of the trends characteristic of the city-suburban dichotomy. In addition to the 1968 Hodge-Hauser study of population trends and future projections for American metropolitan areas, we will examine the pattern of the recent past in the Detroit area directly from census data. We hope to determine whether the trends suggest that stratifi- cation, homogeneity, and fragmentation of local governments in a metrOpolitan area is lessening or worsening. We can formulate the null hypothesis in the following way: Hypothesis III: The differentials among central cities and their suburbs are diminishing over time. 1. Population Growth in Cities and Suburbs. The Hodge-Hauser projections indicate that 79% of national population growth over the period from 1960 to 1985 will be absorbed by the suburbs of SMSA's.1 The percent population concentrated in metropolitan areas will con- tinue to grow and suburban areas will grow much faster than their 1Patricia Hodge and Philip Hauser, The Challenge 2£_America's Metropolitan Population Outlook, 1960 52 1985 (New York: Praeger, 1968), p. 51. 179 180 central cities: TABLE 1. Percent of SMSA Population in Cities and Suburbs2 Central Cities suburbs Year (Per Cent) (Per Cent) 1950 59 41 1960 51 49 1985 37 63 Given this pattern, it is inevitably that the American suburb will represent the dominant form of community life in America for the fore- seeable future. The same pattern can be expected in the Detroit area, where the central city pOpulation fell by 10 per cent from 1960 to 1970, while its suburbs grew by 28 per cent.3 2. Fragmentation. Political fragmentation is likely to con- tinue to accompany the outward expansion of pOpulation in the metro- politan area. As we have seen in the preceding section, incorpora- tion laws are permissive and annexation or consolidation very diffi- cult. In the Detroit area, suburbs incorporated since World War II account for 26.9 of present SMSA population. From 1950 to 1960, fifteen cities were incorporated around Detroit, all of which have 2Ibid., developed from data on pp. 13-15. 3U. S. Bureau of the Census, Census 2: Population and Housing: 1970, General Demographic Trends for Metropolitan Areas, 1960-1970, Final Report PHC(2)-24, Michigan, p. 6. 181 populations in excess of 25,000 and together account for 18.2% of the total current population. From 1960 to 1970, five more large cities were incorporated, accounting for 7.6% of present SMSA popula- tion. In addition to the burgeoning of these larger units, some thirteen other cities with pOpulations under 10,000 have incorporated in the Detroit SMSA since 1950. Thus in the last twenty years alone, thirty-three new independent municipalities have been created around Detroit.4 The recent decades, then, have been characterized by extensive fragmentation. It may be that the slowing of population growth will damp this trend in the future. However, the vast scale of recent suburb-construction suggests that regardless of the pace of new community-building in the future, the central city is already irre- vocably ringed by a multiplicity of independent municipalities. 3. Trends in Income Composition. The Hodge and Hauser study does not include income projections. The following table has been constructed for a sample of Detroit area units on the high and low ends of the income distribution to show the differentials among them for median income for the three most recent census periods. These figures reveal that relative differentials among municipalities have stayed fairly stable; the wealthiest communities have 4Figures from 1950, 1960 and 1970 Census; Incorporation dates from Michigan Manual, pp. 354-375. The thirteen smaller incorpora- tions in the Detroit SMSA were Keego Harbor, Memphis, Northville, Novi, Wixom, Orchard Lake, Richmond, Rochester, Walled Lake, Wood- haven, Gibralter and Flat Rock. 182 TABLE 2. Median Income for Selected Detroit Area Cities, 1950-1970 Median Income Census Year City 19503 1960b 1970 Mount Clemens 3,180 6,229 11,210 Inkster 3,227 6,664 11,290 Highland Park 3,375 5,696 8,716 Hamtramck 3,412 5,345 9,395 Detroit 3,465 6,069 10,045 Allen Park 4,634 8,492 14,153 Birmingham. 5,373 10,723 17,292 Grosse Pointe Woods 6,054 11,160 18,981 consistently had a median income about double that of the poorest. The trend seems to be slightly worsening; Beverley Hills median fam- ily income of $22,909 is 2.6 times that of Highland Park today. While relative differentials may not have changed much over the postwar period, absolute differentials have. In 1950 the average Grosse Pointe family had $1,679 more to spend than their Highland Park 8U. S. Bureau of the Census,‘U_. S. Census of Population: 1950, General Characteristics, Michig___(P-BZZ), Table 10. Figures here include unrelated individuals who were not treated separately in this census year. Therefore the comparison with the two later years, where family income is used, is valid only for showing differentials within the group, not absolute changes over time. bU. S. Bureau of the Census, U. S. Census of Population: 1960, General Social and Economic Characteristics, Michigan (PC91- -24C), Table 33. 183 neighbor; in 1970 they had $10,265 more. There is no evidence to suggest that stratification by income will lessen; we may expect this trend to continue. 4. Trends in Racial Composition. The following figures are the Hodge and Hauser projections for black and white proportions in the central cities and suburbs in 1960 and 1985: TABLE 3. Racial Composition of U. S. Central Cities and Suburbs5 Percent of Total SMSA Racial Group Living in: White Black Year Central City suburb Central City suburb 1960 48% 52% 78% 22% 1985 30% 70% 75% 25% While whites comprised 82% and blacks 18% of central city population in 1960, by 1985 whites will account for only 69% of central city population and blacks will constitute 31%. While black population will increase slightly in the suburbs (it is impossible to tell from this data whether this growth is concentrated in several black suburbs, as is likely), the shift of whites from the central city to suburban areas will intensify the imbalance of race between the two. By 1985, 70% of whites in the SMSA will be living in its suburbs, while more than 70% of its black population will be living in the 5Hodge and Hauser, Challenge, pp. 34, 51. 184 central city. Hodge and Hauser's conclusion is that If the geographical separation of white and non- white population occurs as projected, America by 1985 would be well on the road towards a society characterized by race stratification along social and economic lines as well as geographical structures. Our data on Detroit reveal what most disparity studies do not: that the aggregation of all suburbs together in juxtaposition with the central city obscures the divergence among the suburbs them- selves. This is particularly true of racial statistics. The per- centage of non-whites in the Detroit suburbs is an average 4%. How— ever, instead of a normal distribution of communities around this mean, there is a bimodal distribution with eight suburbs accounting for almost all these nonwhites, and the remaining suburbs worthy of the label lilydwhite. The following table has been constructed from 1950 and 1970 data on the percentage black population in a number of Detroit area communities. The trends for the so-called lily-whites are not shown because they have simply remained all white. The general trend among these communities is for the black pOpulation as a percent of the total to increase. Inkster is a surprising exception. 5. Trends in Dependency Ratios. Hauser and Hodge project de- pendency ratios for central cities and suburbs. A dependency ratio is the ratio of the number of dependents, children under 15 years and adults over 65, to the number of residents between ages 15 and 6Ib1d., p. 53. TABLE 4. Percentage Population Black, 1950 and 1970 185 7 City 1950 1970 Highland Park 8.6 55.3 Detroit 16.4 43.7 Ecorse 32.5 38.3 Inkster 53.7 44.5 River Rouge 31.8 31.9 Pontiac 9.5 26.7 64. They found that in 1960, central cities had a dependency ratio of 61, which is expected to increase to 62 by 1985, while suburban areas had a 1960 ratio of 67, expected to crease to 62 by 1985. Thus the burden of dependency is expected to grow in central cities and decline in the outer areas. The following table was developed for selected Detroit area cities to show the relative disparities in old age dependency among cities in 1950 and 1970. The table indicates that the differential has widened. Older area communities have more than their share of the elderly, while the younger peripheral communities have very low dependency ratios. Segregation by age appears to be increasing. 7Figures for the 1950 year from Census, 1950, Table 10. 8Hodge and Hauser, Challen e, p. 46. TABLE 5. Dependency (% Population over 65) Ratios, 1950 and 1970 186 9 City 1950 1970 Hamtramck 5.0 15.7 Grosse Pointe Farms 6.0 15.1 Grosse Pointe Park 8.8 13.6 Highland Park 9.4 12.8 Ferndale 4.7 11.5 Detroit 5.7 11.4 Madison Heights - 3.1 Taylor - 3.0 Garden City 2.7 3.0 Riverview - 3.0 Sterling Heights - 2.3 6. Trends in Eduational Background. The following table come pares the educational status of selected Detroit area cities in 1960 and 1970. The figures represent percent population over age 25 who have at least a high school education. The table indicates that there has been some increase in formal educational status of resi- dents in all areas. distributed among the cities. This increase appears to be fairly equally There is no apparent diminution of 9Census, 1950, Table 10; cities which have no ratio were either smaller than 2,500 or not considered urban places in 1950. 187 the gap. TABLE 6. Education Status, 1960 and 197010 City 1960 1970 Ecorse 23.1 29.5 Hamtramck 22.8 30.9 River Rouge 27.4 35.5 Hazel Park 31.9 37.4 Pontiac 27.7 37.7 Detroit 34.4 41.8 Farmington 67.6 77.2 Grosse Pointe Woods 67.8 79.5 Grosse Pointe Farms 74.4 84.8 Birmingham 79.2 85.4 Beverley Hills 79.0 90.6 7. Trends in Housing. The data on housing suggests that dif- ferentials in price range of housing among metropolitan communities is increasing. The 1970 census shows that the increase in median value of owner-occupied housing in Michigan's central cities was an average 30%, while the increase in the suburbs was 55%. The average central city home went from a median value of $11,800 to $15,300, 10Figures for 1960 from Census, 1960, Table 32. while its suburban counterpart went from $13,300 to $20,600. 188 A selected number of Detroit area median values changed as follows: TABLE 7. Changes in Median Value of Owner Occupied Housing, 1960 and 1970 City 1960 1970 Hamtramck 8,700 10,100 Highland Park 10,700 13,600 Ecorse 10,400 14,200 Detroit 12,000 15,600 Warren 12,600 23,400 Allen Park 15,800 22,100 Birmingham 20,200 31,900 Data on indicators of housing quality are hard to compare because of the change in tabulation of published data by the 1970 census. The figures below represent 1970 figures for percent housing without come plete plumbing facilities and 1960 figures for percent housing without complete plumbing facilities apg_all units classified as dilapidated in that year. While different data inclusions make it difficult to 11Census, 1970, Demographic Trends, p. 10. 12Census, Housinngichigan, 1960, Table 1; Census, Housing- Michigan, 1970, Table l. 189 TABLE 8. Housing Quality in Selected Cities, 1960 to 197013 City 1970 1960 Highland Park 6.58 11.33 Hamtramck 4.22 9.08 Detroit 2.75 6.21 Warren 0.83 1.19 Livonia 0.59 0.65 Allen Park 0.30 0.22 Farmington 0.27 0.74 Grosse Pointe Farms 0.23 0.33 compare these two periods, we can at least note that the differential remains very great. On balance, the housing evidence indicates that differentials are not diminishing. The trends sketched above should be interpreted with caution. They are presented here only as indicators of changes over time in the socio-economic and demographic features of communities in the metropolitan area. In order to predict future change, we could pro- ject these trends into the future, as Hodge and Hauser have done in their study. Such projections are only as good as the assumptions underlying them. 13Census, Housing-Michigan, 1960, Tables 12, 18, 22, 25; HousipgeMichigan, 1970, Tables 8, 18, 23. 190 We can note, however, that the time series data on our social indicators attests to the continuation, and in some cases exacerba- tion, of differentials among communities. we can comfortably reject the hypothesis that differentials are diminishing. Thus the data offer limited support for the predictions of Chapter VI. D. Conclusion The indirect evidence assembled in this Chapter supports the market construction hypothesis. It confirms, with both behavioral and socio-economic characteristics, the suggestion that the role of the local municipal government in a metropolitan area is not simply a parroting of the firm in supplying local public services in a com- petit-ve atmosphere, but that it involves shaping the cost and demand characteristics of its own local market. The analysis of the Detroit area reveals that citizens and their governments have successfully patterned a stratified array of communities in which there is clearly a distributional hierarchy. The historical study of annexation and consolidation confirms the suspicion of a concerted effort on the part of suburbanites to construct and maintain an independent local market for public services, protected from.the redistributional implications of participation in the larger metropolis. CHAPTER X SUMMARY AND CONCLUSIONS We have attempted in this thesis to develop a new theory of local public output. This new theory emphasizes that the distribu- tional impact of the local public sector is a strong factor in in- fluencing the residential location choice of households, in addition to and perhaps in conflict with the allocative motivation presented in the Tiebout theory. The inclusion of the distributional factor allowed us to construct a theory of local government behavior and performance which predicts that the economic role of the local govern- ment is to construct as best it can its own market for its services, by manipulating community entry and public sector tax and expendi- ture structures. We began by surveying the literature. We reviewed Tiebout's hypothesis that a plurality of local governments in a metropolitan area facilitates efficient resource allocation in the public sector by allowing public service customers to express their preferences by voting with their feet. No adequate empirical test of this hypothe- sis has yet been undertaken. Other economists have worked on public choice, migration and externality approaches to the existence and desirability of fragmented metropolitan government. Our theory involves the use of utility theory to analyze the choice confronting the household in deciding upon a community in 191 192 which to reside. Concentrating on public sector characteristics, we look at the local tax and expenditure impact on household utility, noting that the public sector process is necessarily redistributive. Thus there are actually two ways in which a particular local govern- ment affects the well-being of a potential household. First, as Tiebout hypothesized, the mix of public-private consumption avail- able in that community has an allocative impact on the household. Second, the redistribution of income or the benefits of income to- ward or away from the household within the public sector process constitutes a distributive impact. We demonstrated that since both these impacts exist, it is im- possible to predict which is actually more important in the house- hold location decision. Thus we rejected the Tiebout conclusions that residential choice reflects a revealed preference for a certain package of local public services, since a move could be as much or more a response to a preferred distributional position and may even violate a preference-maximizing position in the process. Since households themselves respond to two different incentives, we proceeded to examine the behavior and performance of local govern- ments in their role as producers of local public output. we hy- pothesized that since communities tend to be socio-economically homogeneous, given the conditions for satisfaction with one's commun- ity derived from the above analysis, governments tend to be respon- sive and to operate straightforwardly in the interests of residents as if they were maximizing the representative utility function 193 themselves. Decision-making includes not only the allocation of budget funds to different public services, but also the determination of tax and expenditure structures and the molding of entry into the community. We termed the local government's economic role as pri- marily one of market construction, in which it attempts to minimize cost elements and maximize revenue potential in the community. Local governments, therefore, exacerbate the tendency toward stratification by adopting rules that engender homogeneity and discourage socio-economic variety among households. In the long run, this pattern of behavior and differentiation of communities develOps into a dynamic process of community building in an outward direction away from the hub of the metropolitan area, sapping the central city and its inner suburbs of sources of public revenues and leaving them the highest-cost elements of the pOpulation and physical structure. A Marxist class analysis leads to similar results. Uniqueness of individual utility functions is replaced here by assuming that various classes have the same "tastes" within their ranks, providing the same stratification of communities on the basis of class or sub- class position. The analogy with colonial imperialism can be made. Finally, we attempted to test the validity of our theory. The evidence presented in support of the theory was indirect. However, it was sufficient to confirm the major points of the theory with some exceptions. First of all, the inquiry into stratification and homogeneity indicated that there are large disparities among communities in 194 metropolitan areas. The data on Detroit illustrated this well; cost and income differentials are large and tend to parallel each other across the ranking of communities. The variance analysis indicated that there is significantly less variety within communities than across the entire metrOpolitan area. These results, and the non- existence of similar studies for other metropolitan areas, indicate that further empirical work should be done on disparities. In addi- tion, such studies should not lump all suburbs together to contrast them with the central city, but should treat them.individua11y,. Until such work is done, it is impossible to know if the Detroit pattern is representative. The brief excursion into the history and usage of annexation and consolidation as devices for achieving unified local government in urban areas indicated that neither has been very effective in the past nor is very promising for the future. Suburban and rural inter- ests have managed to institute and maintain legal safeguards for their insulated local public service markets. There is little hope that areawide consolidation will be successful in the large metro- politan areas of the East, Midwest and the Older cities in the west. There are two groups of cities which are exceptions, however. The older cities of the South have in some instances managed to use consolidation to unify central cities with outlying areas. The younger middle-sized cities of the Southwest have in some cases been able to use annexation to prevent defensive incorporation of sur- rounding areas and to grow as cities unified under one or very few 195 local governments. However, with these exceptions, the success of home rule and voter resistance to metropolitanization in general supported our contention, in Chapter V, that local governments and their constituents have constructed and maintain their local public service markets to achieve distributional gains (or insulation from distributional losses) from the larger areawide public sector. Finally, trend analysis indicated that the predictions of Chapter VI are valid, at least for most large urban areas in the country. Fragmentation, stratification and homogeneity will continue to be characteristic of the complexion of metropolitan America. 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"Some More Thoughts About the Determinants of Government Expenditures." National Tax Journal, XVII (June, 1967), 171-180. Siegel, Sidney. Nonparametric Statistics for the Behavioral Sciences. New York: McGraw-Hill Company, Inc., 1956. Sparks, Gordon. "Professor Musgrave's Theory of Public Expenditures." Canadian Journal 2: Economic and Political Science, XXX (November, 1964), 591-594. Thompson, Wilbur. .A_Preface.£2_Urban Economics. Baltimore: Johns HOpkins Press for Resources for the Future, Inc., 1965. Tiebout, Charles M. "A Pure Theory of Local Expenditures." Journal ‘2; Political Economy, LXIV (October, 1956), 416-424. . "An Economic Theory of Fiscal Decentralization." Public Finances: Needs, Sources and Utilization. Edited by James Buchanan. Princeton: Princeton University Press, 1961. , and Houston, David. "Metropolitan Finance Reconsidered: Budget Functions and Multi- level Governments." Review Lf Economics and Statistics, XLIV (November, 1962), 412-417. Warner, Sam B. Jr. Streetcar Suburbs: The Process 2; Growth in_ Boston, 1870-1900. Cambridge, Mass.: Harvard University Press and the M.I.T. Press, 1962. Warren, Robert. "A Municipal Services Market Model of Metropolitan Organization." Journal Lf the American Institute Lf Planners, XXX (August, 1964), 193-204. 201 . Government lp_Metropolitan Regions: A Reappraisal g: Fractionated Political Organization. Davis, California: University of California, Institute of Governmental Affairs, 1966. Williams, Oliver P., Herman, Harold, Liebman, Charles, and Dye, Thomas. Suburban Differences and Metropolitan Policies. Philadelphia: University of Pennsylvania Press, 1965. Wood, Robert C. suburbia: Its People and Their Politics. Boston: Houghton Mifflin Company, 1958. . 1400 Governments. Cambridge, Mass.: Harvard University Press, 1961. Government Publications Advisory Commission on Intergovernmental Relations. 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Census of Housing: 1960. Vol. I, State and Small Areas. Michigan. Final Report HC(l)-24. 202 . U. S. Census of POpulation and Housing: 1970. Census Tracts, Final Report PHC(1)-58, Detroit, Michigan SMSA, 1972. . U. 8. Census of Population and Housing: 1970. General Social and Economic Characteristics. Final Report PC(l)-CZ4, Michigan, 1972. . U. S. Census of Population: 1970. Final Population Counts: Advance Report PC(VI)-24, Michigan, January, 1971. . U. S. Census of Population: 1970. General Population Characteristics: Advance Report PC(V2)-24, Michigan, February, 1971. . U. S. Census of Population and Housing: 1970. General Demographic Trends for MetrOpolitan Areas, 1960-70: Final Report PHC(2)—24, Michigan. . U. S. Census of Housing: 1970. Vol. 1, Housing Character- istics for State, Cities and Counties, Part 24, Michigan. APPENDIX Wu 3‘ {I .' e uuurwn forms, In: I 36 38 40 48 50 5'2 :34 56 58L Table A-1. 203 Assigned Ranks ..- .——_ ...-__. LISTING 0F RANK DATA MATRIX, 47 ROUS BY AREA HIGHPK- HAHIRK DETROI RIVBOUM PONTIA ECORSE MTCLEM VUYANDO FERNDL INKSTR HAZLPKH . NLVNDL. uArueuw. PLYMTH.. LINCPK-‘ DEARBN ROSVLEw~ TAYLOR ‘ CENLNE>~T MADMGT~ BERKLY HESILD. ORARLN ._ ROYBAK EDETRTO HH‘Y 1 2 a U! :~ to ON 19.. ,11 12 13 ..15. 16 17 18' 19 20.. 21, ‘22 ’23 24 1 2 a U 00) 01 8‘ 12 :0 11 13 is 27 .16.. .14 I 18 19 22 20 17 93 21' ‘ FAN-Y Povarv 3 1 10 14 12 15 21 13 11 .17 13 .M27 22 35 30 23' 16 EDUC 10 ~2 20 17 11 16- 35. 26 14 12 15 21 32 23 24 36 13 VAGE .4. '1 6. 10 16 _ 18 11._- 12... . 5,.-.” .33_,.., .-21-.._ .27H-. .xpo. -15_11.2 25.] .7. , 37.... 44 .241". w. ..43.._. 23 39 ,, ,3.) __ 7 COLUMNS. INCORP GROWTH -14 .6, 1 .12 . 10 ,33-. (’15 .-41. 16 13 37~ .44, 20' n.31 17. .43. .wae 6 1.. 3 2 22- 19 10 .7. 12 13 ,..4.. 24 ”37. 338 . 11 5 '34 35 20 .30. 9. 14 . 23 .24. 15 3L1 AREA HARRuD CLAusN SOGATE GARCTY STCLSH WARREN DRBNHG FRASER STGHGT RIVRVH OAKPAK TROY ALLNPK TRENTN GRPIPK LIVONI BIRMHM FARHTN SFIELD GRPTUD GRPTFM BEVHLS pH-Y 26 27 28 29 30 31 32 33 34 35 36 37 38 39 4o 41 42 43 44 45 46 47 204 Table A-1. (Continued) ran-v 3o 26 24 23 32 28 29 31 34 35 37 39 36 38 43 4o 42 41 44 46 47 __..-- ...-— POVRTY 28 24 31 28 26 32 33 40‘ 45 37 29 38 41 39 19 43 34 46 36 44 42 47 EDUC 29 33 18 19 27 22 25 30 34 28 37 39 31 4o 42 38 46 43 41 44 47 AGE 8 34 42 45 29 4o 31 41 47 46 20 28 36 35 13 25 14 19 3o 21 38 19 26 31 42 34 45 39 24 33 35 4o 27 28 18 11 36 29 25 47 INCORP GROWTH 18 33 29 27 28 44 42 47 39 16 4s 26 36 17 41 21 43 46 32 40 205 Rank Statistics Table A-2. 00.000 m3.6 6~.6 33.4 mo.~ 63.6 64.6 Hm.m 0n.o a Xah occ.~ dmm. who. mNm. 00m. Ame. mm». mmo. 900. m K4» m¢.¢ 00.000 o¢.m hm.m ho.m m¢.¢ no.5 0N.m mm.o @1340 «mm. ooc.~ Nm0. ope. 05m. 9m.o o¢.m 00.000 oo.m ~m.m mo.¢ 05.0 oo.¢ o~.m :haomo who. ch. ooo.~ m¢o. 3H.¢ ~m.m oo.m oo.omo. ch.m oo.n hm.o om.m Hm.¢ amouz~ mumpm~hhm>oa mmh. mos. enh. 000. «n.m om.m 66.3 am.m mm. mo.0~ V66.- 00.000 oo.om >Iz111 000. ¢q~. ado. Nam. mmm. nos. hmo. «ah. szJQ mmo. ham. odh. cum. ode. mH0. 0900 M00. Nmm. rhzoxo 00002“ 0N0. 5N3. NNM. m¢m. wwq mzo~h<4maaou zzom NN~. m¢0. who. coo.~ mo0. >12111 x 262 62366 rezomo aaoUz~ mos unum >hm>oa snxau >11: 0 xqp mznsa 142616 accoz_ moq uaum >ha>oa »1zqm >111 206 > Table 3. Full Matrix Statistics 94. COEFFICIENTS CALCULATED FOR RANKS 1 THRU 9. COEFFICIENT OF CONCORDANCE = .645 I MEAN SPEARNAN COEFFICIENT = .600 . COEFFICIENT 0F SIGNIFICANCE = 266.880 . ....F, wh—“m- -. . —..—m-*—- 1. -... ‘dn- .. -. ...—....m .— -..... ..._ ...... cCEEEICIENTs CALCULATEO FOR RANRS 1 THRU 4. _~w~n ~COE€£IGItNI—OfimCONCORDANCE - .926——~.-—.m4~~4424mn MEAN SPEARMAN COEFFICIENT = .902 COEFFICIENT OF SIGNIFICANCE = 170.419 COEFFICIENTS CALCULATED FOR RANKS 2 THRO 4. i . COEFEICIENT 0F CONCORDANCE s .919 MEAN SPEARMAN COEFFICIENT = .878 § ’ COEFFICIENT OF SIGNIFICANCE = 126.792 COEFFICIENTS CALCULATED FOR RANKS 5 THRU 7.‘ COEFEICIENT OF CONCOROANCE a- .760< MEAN SPEARMAN COEFFICIENT 3 .639-~ COEFFICIENT 0F SIGNIFICANCE 3 104.821 COEFFICIENTS CALCULATED FOR RANKS 1 THRU 7. l . COEE§ICIENT or CONCOROANCE . .663} MEANSPEARHAN COEFFICIENT a .606 COEEEICIENT or SIGNIFICANCE s 213.383 207 Table 4. Listing of Community Income Data 0636. 90°F 3L.6~ Onosa 6666~ msnog Npmow ~mm- b0‘ow amcma ~3omm 0~0n3 6066 onn_~ M-0 00mou ~330 M6636 60~6 -63~ 3666‘ N06:— .660 ~63-n ~6~6~ 6066 Amos homHQOA Q31 hob 0n¢~N hm:o~ finned caaou co~0~ nhmmm onh€~ boatu oon¢~ cum:— ~0N¢~ Mao!“ .~666_ n03n~ ~0nn~ 0-n~ ®0=MA Qflnma awkw— mo-~ nmcwa n~x- ommaa n~a~— nacaa 0n~c~ N—QO Nnmn‘ r 2(u! smo— so: mom am 0mm 0mm o- onm on :0 ~n~ 33 61 _3 is 6m mm 3: 6A 66 66 666. 66 NA 6~ --~ cacao nomn ~6- AN". 040“ ~6- 666 mo- 6364 nn- 636 66m" ~66~ 36m ~mm 6mm 6N6 "an 3»: 6mm mm: ~66 ~66 66m nmmmd 63c no~ 666 666.6 oomhn 6366 comm oumn mnnn o—0o~ 00~m dome ann~ ¢-o o0~m om!» csn¢~ nuom :snm nnow 000m 3n- amen 0006 06mm 66w: pnNN m~o~ munch 0~0~ n.6_ ma- acousm coacw ommm ¢h- onha mm0~ mncm ONNN onn: Mom: MNoc ommn amp: :Maog h30~ ¢3nN Nomm has: N=~N Nm0N om:— m¢on ¢¢0n omum h~o~ mccmm «nun coca N~0 omccmn oomna 66.1 «mo sfim~ om- Nmmn ~m¢~ ¢n0~ wn0m 0osn ~o- ~o0~ 6666 ma:— monm -- comm ~nm~ 66mm can“ c0n~ n0on 005a nncm 66663 mmnw on0 ~60 6499M. coo—~ 666 3.6 663 6:6 amo. Nmn abna omma cmmu 636 6696 ocaw .66 66A mno N~¢~ 0,0 _66_ ono «wad 6_.~ 666 666 ~6~m~ n00. moo. cum «heme 0:00 66. 666 3a? 66~ 666 66m ~66. -0 n~n 000 onaw 666 66. N666 6:6 666 66. ~66 666. 666 666 6666~ ~63. 666 666 636.6 coma DNM o- :on man n00 con 0n~ 00~ :~—~ Q4: own :n¢~ 30M :33 «Mb 00: moo mnn 6m: nmm ~n-~ n~c~ ~04 n¢m onxn: conh 00N no~ mmm mmm Ohm 0m~ mm: 30m own awm 0~m o0~ ~0— :nm p~m n~m NNN Nun nun —¢¢ can as: ONM -~0q mmod 04: Ohm €00~n some 66_ men 666 666 66m No: 666 3~3 36m Msfl 66m 666 ~66 666 no~ 66.66 666 6N6 666 666mm oonm n~ 1 a m4<>zuhz~ uzouzu ~nm no «aw o0~ 0m~ 3:4 6): 0‘0 36m n~4 666 nn: Mam «on Nun NON onm- N~w nmn aw: Vanna canfi mom and :36 :0N no: ~m~ ~0~ mnn 0:0 nu~ nmv nqd son and new 0~M new o3~ nun mom 0Nfi0« nnn can o~n oom0u comm 0o. 0n san baa 33V «no ~0 maN on“ «mg and NnN :MN nmv Nmmoq ado ca: 0~¢ Nahum aomN no" un rum )6“ «NH ‘0 :¢~ 33M 66m «3: fix 03~ nod and mud o- 30 36‘ sn~ ‘0. now 63~u~ ~36 onw awn 0066~ coma 461 30 on In an” 0: m- no. :71 66 no— 0a o0~ {an 3V. ~6~ qn—- :60 com on mamng cam «:64~4 .12114 oerrL t<:r31 znlxug harobn LmJubn 26724. updapn ozhunw >~urqo qunuc enrawz ziung Jaarum m3>m01 193»4p Oauu.¢ xhncz~ uatbuu qquou tibia; {1E9HL qmzn lupin: (m04 208 Tans 5. INCOME STATISTICAL BREAKDOWN EQUAL. or COEF. 0F SORT or AREA F-STAT. VAR.-STAT REL. VAR. REL. VAR. SMSA 1.000 91560022 .500 .707 HIGHPK 1.572 58254295 .605 .778 HAMTRK 1.771 51699301 .503 .709 PONTIA 1.765 51867594 .478 .692 OETROI 1.356 67507080 .556 .746 INKSTR 1.560 58686197 .419 .647 UYANUO 1.775 51578674 .366 .605 TAYLOR 2.069 44263148 .285 .534 ROSVLE 1.737 52726525 .327 .572 FERNUL 1.473 62140793 .384 ”.619 LINCPK 1.706 53682526 .323" .568 MADHbT 1.797 50941940 .297~ .545 NESTLO 1.864 49129843 .285 .534 GARCTY 1.863 49152849 .274 .524 EOETRO 1.372 66756215 .367 .606 SOOATE 1.760 52019237 .277 .527 RARREN 1.521 60213230 .306 .553 STCLbH 1.380 66338616 .326" .571 STGHGT 1.591 57537152 .280 ’.530 OEAR8N .950 96395952 .454 .674 ROYOAK 1.111 82390691 .386‘ .621 DRBNHG 1.233 ' 74261697 .342 .585 ALLNPK 1.100 83253628 .357 .597 'LIVONI 1.130 81009520 .312 H.559 TROY .969 94533454 .364 .603 OAKPAK .745 122842857 .457 .676 BIRMHM .482 190075423 v.454” .674 1.11m»~*-——S£IELD~"—_*_~4480———130134842“——_——+413———————+643—wwn_w