By Foundation for Economic Education (FEE)
Like any place that generates significant wealth, cities also generate significant incentives to capture the wealth.
Last week I answered a question from a FEE reader on how the Federal Reserve creates money. This week, Aaron, a FEE Daily reader, asks a very different question:
“Why is it that more populous cities seem more inclined to adopt laws and regulations that restrict individual autonomy, and attract residents more likely to vote for representatives who advocate such policies?
What can residents in growing cities do to avert this tendency?”
This question is a little less straightforward than a typical economics question. As we learned last week, there’s a clear relationship between interest on reserves and the supply for money. But there’s no clear direct channel which explains why cities skew anti-autonomy.
Nonetheless, economics is a valuable tool we can use to explain all kinds of behavior. We’ll begin by considering Nobel prize-winning economist James Buchanan’s dichotomy of the romantic view of politics versus politics as exchange.
Politics: Romance or Exchange?
There are two potential views of politics. The first is a romantic view. In this view, politicians are altruistic, sacrificial public servants. Voters are well-informed and always choose those candidates who have the best interest of the public at heart.
In other words, politicians are angels. If the romantic view of politics is true, there’s a simple explanation to why cities seem more inclined to adopt laws that restrict individual autonomy. People who live in cities believe that is what’s best, and politicians cater to that desire.
There are clear problems with the romantic view of politics, but the biggest is that it is inconsistent with how we analyze most institutions.
Take businesses, for example. If businesses have the opportunity to increase profits by polluting, what will they do? Generally, economists will assume they will choose to pollute. Firms are assumed to be interested in making the most profits and will pollute if they don’t bear the costs of doing so.
So we assume business owners are selfish. This begs the question, why would we assume politicians are selfless?
It would be arbitrary and unconvincing to take a sober view of business but a romantic view of politics. Nothing about existing in government confers angel wings on individuals. If anything, we should expect the opposite.
It would be more symmetric to assume politicians, like business-owners, are pursuing their own ends which will not necessarily align with the ends of the public as a whole (though there is good reason to believe businesses will align with the public more often).
For example, it will sometimes be in the best interest of politicians to restrict liberty. They could do this by passing higher taxes to increase their budgets, doing favors for special-interest groups, or lobbying political actors to increase their influence.
In this alternative view, politics involves self-interested exchanges between politicians and, for example, interest groups.
But this still leaves us the question, why do big cities tend to have more of this seemingly selfish political exchange, assuming that’s often what’s going on with big-government policies?
The Problem with Piles of Money
Wealth is a dangerous thing to flaunt. When I have to run into a store quickly, and I have my laptop bag with me, I’m always careful to place it out of sight in the car. Sometimes I put it under a seat cover, sometimes I move it into the trunk, and, on occasion, I decide to take it with me.
It’s not difficult to understand why. I hide my laptop when I leave it for the same reason people store their valuables out of sight. When you have more wealth, and people know it, you are a bigger target for extortion and theft.
It’s no secret that cities tend to have a lot of wealth concentrated in a small area. This isn’t to say everyone in the city is rich, but all the production and exchange in cities make them hubs of wealth.
And, like any place that generates significant wealth, cities also generate significant incentives to capture the wealth.
Consider, for instance, that a group of taxi cab drivers is seeking to keep its would-be competitors out of the market. In order to do this, the company might lobby for regulations (like a limited number of permits) that would restrict competition.
What sorts of cities would be the best places to create this kind of monopoly? Big cities with a lot of customers would seem like a good target. The return to cutting out competition by lobbying the government is pretty low when your potential customer base is in the hundreds rather than the thousands.
So, the group of cab drivers could form an association which donates to the mayor’s campaign and lobbies for a permit system.
But if politicians did something so egregious as this, couldn’t citizens vote them out? They could, but it’s unlikely that they will. Let’s say the city has one million people and there are one hundred drivers in the cab driver association. If the regulation adds $10 of cost to the one million people, that generates $10 million to be divided among the one hundred cab drivers. That’s $100,000 per cab driver.
So the cab drivers can earn a lot more money by getting the regulation passed. The citizens only lose $10 each. They don’t like this, but it’s hardly worth the time to organize against the regulation (or even learn about it in the first place). This is known by economists as the logic of special interest groups.
Smaller cities are different. First, there are less people to take money from. Second, the average income is probably lower. Lastly, it’s easier for a small number of people to organize and oppose regulations like this than a large number.
Admittedly, this increased lobbying of big municipal governments would increase competition for lobbying, but as long as there’s some fixed cost of lobbying that exists without regard to city size, I’d expect this problem would be bigger in large cities.
Another group that has more ability to capture wealth in big cities is bureaucrats. If we assume bureaucrats are only interested in the welfare of citizens, they would keep the size of their bureaucracy down. But if bureaucrats care about power and prestige, they may seek to grow in size beyond what makes sense.
It seems obvious that bigger cities will need more workers than smaller towns. Services like road maintenance, utilities, sewage management, courts, fire departments, and administrative workers will grow as the population grows.
If the number of bureaucrats merely kept up with the growing population then there’s no problem. But if each of the new bureaucrats lobbies for larger budgets, bigger office buildings, and more coworkers, we can imagine bureaucratic growth feeding on itself.
Each new government worker brings with them demands for an even larger government (and the taxes necessary to fund it).
In big cities, this sort of growth can be hard to track. How many bureaucrats are needed to successfully manage the budgets of the municipal water provision in New York City? I haven’t the foggiest.
In my town, I know exactly where the office for that manager is. There is one employee there and I know her by name. If they added another employee it wouldn’t be a big deal. But if I walked in and there were five new people working there, I’d probably be a little suspicious about why that was necessary.
It’s much easier for voters to gauge bureaucratic bloat when they live in small towns.
What Can Cities Do?
If my above thinking is right, then government overreach is to some extent a function of what makes a city, a city. A very dense, large number of people seems to result in this sort of overreach.
The fact that this question was asked in the first place is a good indication that big cities and big governments go somewhat hand-in-hand (at least in the US).
But not all is hopeless. I’m not keen on political solutions, but I’m very optimistic about bottom-up entrepreneurial solutions.
For example, the taxi medallion cartel in New York City wasn’t broken up by regulatory change. Uber, Lyft, and rideshare apps juked regulators and their special-interest cronies.
This seems to me to be a model of the best way forward. Rather than spending resources trying to overcome bad political incentives, I trust entrepreneurs’ profit incentive to keep innovation one step ahead.
Peter Jacobsen teaches economics and holds the position of Gwartney Professor of Economics. He received his graduate education George Mason University. His research interest is at the intersection of political economy, development economics, and population economics.
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