The Completely Decentralized City: The Case for Benefits Based Public Finance

American Journal of Economics and Sociology, The, Jan, 2001 by Fred E. Foldvary

FRED E. FOLDVARY [*]

ABSTRACT. An alternative to centralized top-down city governance is a multi-level bottom-up structure based on small neighborhood contractual communities. This paper analyzes the voting rules and public finances of decentralized, contractual urban governance and the likely outcome of such a constitutional structure, substantially reduced transfer seeking or rent seeking. Tax and service substitution, with lower-level funding and services substituting for higher-level public finance, is the general process by which the governance would devolve. Land rent is the most feasible source of such decentralized public finance, and local communities could also engage in local currency and credit services. Some empirical examples demonstrate the implementation of some of these governance structures.

I

Governance

THIS PAPER PRESENTS AN ANALYSIS of a decentralized and voluntary contractual city governance.

Gordon Tullock (1994) theorizes that many urban services can be delegated to the neighborhood level, which could become a predominant level of government. Bryan and McClaughry (1989) also propose devolving much of government to a more local level, between the level of a village and a county. Tullock (1985) also proposes "associations with quasi-governmental power" which, like churches, would not necessarily have a unique geographical jurisdiction.

This paper carries the decentralist concept further, exploring the concept of a purely voluntary city based on neighborhood associations, in which all governance is voluntary and contractual. It examines a voting strucutre, based on this governance, that would reduce the capability of special interests to capture the democratic process and shift funds to their special privileged benefits. The public finances suitable to voluntary territorial associations is then analyzed and the provision of local financial services is noted. A few brief case studies show how some of these principles have been implemented.

Ultimate power in a purely voluntary city would be completely decentralized, down to the individual household and family. Its governance structure would be bottom-up, power ultimately based on sovereign individuals. The distinction between the government and private sectors would disappear, as voluntary governance would be based on contracts among private members and property owners.

The dynamics of voluntary association can proceed in two ways, via evolution or devolution. The evolutionary method consists of the joining together of individual households into an association to provide services for the members. If there are more than a few households, it is efficient to create a governing body, a board or council elected by the members, who delegate some authority to the board. The financing of the services can come from equal dues or payments by the members, as done by some of the private communities in St. Louis, or by assessments based on the value of the real estate or land owned by the owners, or on some other basis such as income or wealth. Financing is discussed in Section II.

Devolution is the transfer of political authority, property, and programs from a higher level to a lower level of governance. The devolutionary method recognizes that any path to a voluntary city would start with the status quo of imposed government. Devolution would therefore consist of various degrees of secession and substitution of lower-level for higher-level governance, and the legal ability to create lower-level governance. We thus begin with a neighborhood which is part of a city and its government. Households as well as the owners of commercial property would be able to form a neighborhood association, which would then be recognized by the city as a lower-level governing agency, or even as a new separate jurisdiction. Authority, property, and programs would then be transferred to the association and the taxes that were imposed to fund these would be eliminated or reduced, to be replaced by the association financing.

Devolution can be partial, with residents of an association withdrawing only from some services such as schooling, and then not paying taxes for the state schools. Generally, "tax substitution" would allow residents to replace those services provided by the city with local services, with an equivalent reduction in tax liabilities. Some cities now do this for garbage collection; condominiums may contract with a private service and receive a tax rebate.

In the evolutionary model, the neighborhood associations would themselves federate into higher-level associations to facilitate the coordination of programs such as security and to provide services with economies of scale that make them more efficient to produce for a larger population or territory. The higher-level association would have a council or board which could either be directly elected by the households or by the neighborhood councils.

The election of representatives by a large number of voters, termed here "mass democracy," leads to the governance disease that economists have called "rent seeking" or "transfer seeking." Public choice, the branch of economics that studies choices made by voters and government officials, theorizes that when the benefits of transfer seeking are concentrated in a few recipients while the costs are spread thinly among consumers and voters, the incentives to organize are high for the beneficiaries and low for the payers. Also, since with mass democracy the voters are so numerous that they do not personally know their representatives, candidates rely on the mass media for their campaigns. Special interests can profit from providing much of the campaign financing in return for programs that transfer wealth to them. Mass democracy thus leads to the capture of the governance process by special interests. Besides the wealth lost by the consumers and taxpayers that is transferred to these interests, there is a social cost from the resources spent to obtain the transfers and from the disincentives created by taxes that pay for the transfers.