Memo to Bankrupt Cities: Try Competition

As cities across the country face growing deficits, instead of their current strategy of raising taxes and cutting services, they might like to take a look at a few case study examples of how those before them solved their challenges.

As an example, ten years ago we hosted the then-mayors of Indianapolis, Stephen Goldsmith, and Oakland, Jerry Brown, at the Independent Institute’s conference center to discuss some creative ideas. Stephen Goldsmith had been elected mayor of Indianapolis—with a population of 900,000, 25% of it African-American—only to discover the city had a billion dollar deficit. He shared the steps he took that successfully turned that situation around. Excerpts follow:

Mayors get elected, they have lots of problems of poverty and urban decay. They’re intent on doing good deeds. In order to do the good deeds, they need money. So they tax the people who have it in order to redistribute it to those who don’t.

Now, this process was particularly aggressive east of the Mississippi, where essentially mayors taxed their way further into poverty. And my office is on the 25th floor of our City County building and on a very bright, clear day I can see dollar bills float across the city line and land in the suburbs, where the tax rate is less, the regulatory burdens are less, the crime rate is less and the schools are often better.

So we had this dynamic, a lot of people were moving out of the city, the tax rates were too high, the infrastructure was decaying, and it was clear that we really couldn’t continue to do business the way we had done it. I then began to look at ways to change the way government functions.

Mayor Goldsmith started his term by going around and doing a different city job each week. In the process, he learned that

the theory that public employees are inherently inferior to private employees is really not fair. Public systems are inherently inferior to private systems because they lack competition—they’re monopolies and bureaucracies and the people are trapped in those systems. So I wanted to see what I could do, structurally, to unlock these systems, to unlock the power of competition, to help the people who really wanted to do a good job perform better and buy the best I could from the private marketplace at the same time.

So we began this effort that we call marketization or competition. And we’ve done 80 of these. Without taking you through them all, let me just say the concept basically is: competition produces value and makes for more efficient delivery of public services. And we then created this model to let our public employees bid against the private sector.

So I reached an agreement on our labor contract and said, “I won’t privatize but I am going to submit a number of these transactions to the marketplace. You have a 90-day window in which to bid. We’ll provide you consultants. We’ll provide you help, but we want you to bid.”

In one example—fleet management—the union and their consultants figured out how to get rid of two-thirds of their own managers. They contracted out custodial service. They froze their wages. And as workers retired, they decided they didn’t need to fill the now-vacant positions. Bottom-line: they were able to submit a bid that won out over the private competition, and:

So we’ve now been through 80-plus of these, saved $400 million. And this effort is really not the end, obviously. The end is a higher quality of life for city residents. This was a way of freeing up capital to invest in either reducing taxes, more police officers, infrastructure, as the situation may be.

Mayor Goldsmith also learned:

Regulatory reform is important, as well. We fought the licensing issues and the permitting issues and the cab cartel issues…I had the Republican Council against me, the Democratic Council for me, and the NAACP on my side, because basically they were saying, “Our citizens are under served and we have a lot of folks who want to go in this business. And why is it the government is prohibiting small and minority-owned businesses from having an opportunity for enterprise in this community?

This was kind of a classic free market fight, one that we had actually lots of opposition and great fun in fighting and eventually won, and predictably, as the work of The Independent Institute would suggest, urban service went up; 60 new operators came into the marketplace, many of them moms and pops, and the configuration of services changed once the cartel was removed.

For the complete presentation, see here.

And for more creative ideas, see The Voluntary City: Choice, Community, and Civil Society

Mary L. G. Theroux is Senior Vice President of the Independent Institute. Having received her A.B. in economics from Stanford University, she is Managing Director of Lightning Ventures, L.P., a San Francisco Bay Area investment firm, former Chairman of the Board of Advisors for the Salvation Army of both San Francisco and Alameda County, and Vice President of the C.S. Lewis Society of California.
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