Local Government Finance: Capital Facilities Planning and Debt Administration by Alan Walter Steiss


Economists see the urban structure in two lights. First, they may pursue a descriptive approach that views the city as a matrix of locations for firms--a necessary translation of a national economy into spatial terms. Second, urban economists see the city itself as an economic unit--as a kind of super firm, based upon relations between buyers and sellers, contractors and subcontractors (with the household as the smallest firm), all involved in a giant export-import business. The city is a center of production, trade, and distribution. Even local government, in this view, can be equated to a firm.

The Economic City

The economic city rests upon a division of labor among firms, involving competition and cooperation within the framework of the marketplace, with certain advantages and disadvantages accruing. These factors, in turn, can be analyzed in terms of location theory, multiplier effects, economies of scale, and marginal economies of operations. The city is "in business," and its economic position may be estimated in terms of a "balance of trade."

Core Study Areas

The city is a system that, among other things, provides interaction for the production and consumption of goods. Buyers and sellers meet at all levels; goods are assembled and distributed; labor and materials are brought together for manufacture. Communication and transportation channels are developed and utilized; power is produced and supplied. Financial mechanisms are concentrated in the city to assemble and allocate--through monetary processes--the capital goods used in pro-duction. These mechanisms also supply the medium of exchange. Space for economic functions is sorted out to the various users--itself a productive activity. Government services are also a major factor of production, since they supply critical human wants and needs--security, control, and regulation. Thus, it must be recognized that the economic system is composed of a number of subsystems, each of which must be identified and studies in order to more fully understand the total economic system and its interaction with other dimensions of the urban environment.

Several core areas of study may be identified within the field of urban economics, including studies of:

(1) Structure and growth of the urban economy. The city is viewed in its role as a component of the national economy--an element in a national system of cities. Problems of city growth and decline may be included under this study area.

(2) Intrametropolitan organization and change. The focus is on the spatial dimensions of the urban economy, in terms of the organiza-tion of economic activities their relations to the form of the city and the allocation of economic resources. Land use, urban housing, and urban transportation are specific topics of interest.

(3) Urban public services and welfare. Concerned with the urban public economy, addressing problems associated with efficient allocation of public resources and the interaction of the public and private sectors. Topics covered include federal, state, and local finance and the demand for and supply of urban public services.

(4) Economics and urban human resources. Focal topics are households as suppliers of labor services in the urban market and the urban population as a consumer of final products of the economy. Migration, poverty, and investment of human capital (including education) are examined in an urban context.

(5) Regional accounts. The systematic organization of information flows for economic analysis is the primary focus of this core area. The urban region is the relevant unit for the application of urban economic analysis.

These subfields have grown at different rates and some are still relatively underdeveloped (the economics of urban poverty and discrimination, for example). In particular, the area of human resource economics has lagged behind when compared to the other subfields, reflecting in part the lack of group cohesion among researchers concerned with specific topics under this heading. Labor economists, consumption economists, human ecologists, and fledging human resource economists have rather diverse points of view, so that communications among potential contri-butions to this area of concern often has been difficult.

Economic Impact Studies

Economic impact studies examine the phenomena of: (a) dollar inputs entering a regional economic structure; (b) the process of dollars circulating throughout the system; and (c) the process of dollars leaving the system as regional output and the total wealth generated and its distri-bution. Economic inputs create: (a) economic impacts (employment, taxes, etc.), (b) political impacts (public revenues, service demands, etc.), and (c) physical impacts (spatial expansion-contraction, social diseconomies, pollution, etc.). The function of economic impact depends on whom one asks. Idealistically, its function should be socio-economic welfare. If the process of substantial economic impact does that attain the function of economic welfare, it is sometimes called exploitation. Traditionally, economic impact has always been associated with the functional concept of progress.

Wilbur Thompson discusses economic impact in terms of stages of urban growth. [1] In the first stage--the stage of export specialization--the local economy is dominated by one firm or several firms from the same industrial category. Secondary economic activities are highly dependent upon the economic well-being of the principal industry. As the economic system is broadened and new industries, customers, and/or local suppliers are added, the region moves to the stage of export complex. Critical linkages exist between basic industries and their suppliers and customers. The third stage, that of economic maturity, is reached when imports are replaced by new "own use" or "home grown" productive activities. In this stage, the service sector has reached puberty. In the fourth stage, the localized economy has become a node--a regional metropolis--connecting and controlling neighboring cities in its hinterland. In this stage, the export of service becomes a major economic function. Thompson defines a fifth stage beyond the regional metropolis which he labels the stage of technical-professional virtuosity. In this stage, the economic system has achieved national eminence in some specialized economic function.

Thompson notes that economic growth may hesitate and stagnate between any of these stages if the momentum at the end of a phase is not strong enough to carry the economy to the next stage. He also introduces the concept of the "urban ratchet"--when the urban economy reaches a size in which certain functions are "locked-in" (due to capital investment, markets, etc.), it will not slip backward. While it is not possible to accept any of these classifications as the complete answer to the impact of economic growth, they serve as a necessary first step in gaining a fuller understanding of these phenomena.

Input-Output Analysis

Input-output analysis provides a somewhat more sophisticated approach to the study of economic impact, wherein the economic structure of a community or region is defined and measured in terms of an inter-industry system or matrix. Input-output theory has existed since 1877, when Leon Walras first conceived the basic model in the context of general equilibrium theory. It was not until 1931, however, that the method was first applied in the work of Wassily W. Leontief. Unlike other forms of complex urban systems analysis, the theoretical framework for input-output analysis existed long before computer technology made practical the extensive inversions of mathematical matrices. Widespread application of this analytical approach in an urban context has been hampered, however, by the lack of adequate models and data deficiencies.

Input-output analysis seeks to model the technological interrelationships of production and distribution in the economy through a system of simultaneous equations that can be solved for the total input and output requirements of any particular set of economic activities. As applied to a regional or urban economy, a complete structural description is provided of the transactions taking place and the linkages from each intermediate flow among sectors of the economy. as well as responses to demands arising from outside the region. Thus, input-output theory postulates that any given line of economic activity bears a measurable relationship to every other economic activity in the region, and that these relationships can be set forth in a series of equations (and readily solved by computers). Once the regional or urban economy is subdivided into appropriate sectors of individual industries (i.e., food processing, shoe manufacturing, banking, and so forth) or groups of similar industries (for example, agriculture, finance, wholesaling, retail trade, etc.), interindustry relationships can be expressed in terms of what Leontief has called a huge revenue expenditure accounting system or transaction table. [2]

Input-output analysis is well suited to comparative studies, statistical analyses, and certain forms of dynamic problem solving. It can provide a precise "snapshot" of the intriacies of a regional economy, illustrating the specific indirect impacts of economic activities, so that dollars can be traced throughout the system. By holding the economic structure constant, the effects of changes in income flow (inputs) can be tested.

Input-output analysis is relatively expensive and difficult to do. As a consequence, it often is accepted as a precise and flawless tool--which it is not. Since it is complex, impressive, and has intellectual status, biased arguments may be couched in esoteric terms to accomplished predetermined goals. There is potential for errors in the collection of data, and improper sector groupings can mask important economic welfare considerations. Input-output analysis is a relatively static approach. It assumes that the economic structure (supply channels and production costs) remains constant over extended time periods. Without frequent (and costly) revisions, it rapidly becomes dated in a changing economy.

Income and Product Accounts

As the name implies, the income and product accounts approach to economic analysis involves a system of double-entry bookkeeping (similar to that used in input-output analysis). Unlike input-output analysis, however, income and product accounts are established on the basis of asset changes without tracing interchanges in physical inventories. Therefore, a more inclusive view of all forms of income producing activities can be obtained under this approach.

Until recently, income and product accounts have been viewed primarily as tools for the study of the national economy. Over the past 50 years, the Gross National Product (GNP)--now known as the Gross Domestic Product--and other income statistics have become familiar indicators of the national economic well-being, on the basis of which annual analyses of economic growth and economic projections have been developed.

Application of these concepts at the regional or urban level, how-ever. poses some very different problems. In national accounts, closure in the economic system can be achieved by introduction of a "rest-of-the-world" (ROW) account. At the regional or urban scale, this approach has several pitfalls because boundaries must be established arbitrarily and may cut across important ties with other regions.

In a system of income and product accounts, the economy is seen as a mechanism for the production of goods and services for final disposition as: (a) export sales, (b) private investment in industry and business, (c) government purchases, and (d) household consumption. The first three areas of final demand may be viewed as exogenous elements (i.e., originating outside of the local economy) which are independent of total income, while the fourth element--household consumption--is endogenous (i.e., internal) and dependent on total income. If the total income is the sum of exogenous and endogenous income, then a basic relationship can be established between current and future levels of consumption. A regional multiplier (K) can be applied to determine the impact of shifts in either local economic activity or total income:

where Y is the value added in the local market and T is total income (100 percent). For example, if exogenous activity accounts for 60 percent of total income and the local market contributes 40 percent, the regional multiplier is 1.67. In other words, assuming that the multiplier value remains constant, for every $1 million of additional value added for export, there will be approximately $670,000 of additional local economic activity. Or, if an increase of $100, 000 is experience in the local income level, eventually total income will increase by $167,000.

While these figures are based on the assumption that the multiplier remains constant, this need not be the case. The multiplier may be mod-ified in making projections if new lines of activity are introduced into a region or other events lead to changes in its relative competitive advan-tages vis-a-vis other regions. The use of regional multipliers in economic forecasting requires the preparation of projections that are presumed to be in balance with anticipated economic growth in all regions.

Economic Base Studies

Regional economic approaches--input-output analysis, regional accounts systems, and econometric models--have been used infrequently in the study of the urban economy as a consequence of their late adaption, the complexities of their analytical procedures, and major data obstacles. In contrast, economic base studies employ less complicated analytical procedures and are designed to utilized regularly reported, standard data. Economic base studies have received widespread application and have been a standard technique of analysis for the planner for nearly 50 years.

Basic and Nonbasic Industries

The underlying foundation of economic base studies has been stated by Thompson as follows: Cities survive by selling products or services to the "outside world," thereby gaining the wherewithal with which to pay for indispensable imports, i.e., goods and services not produced in the local economy. By extension, cities rise and fall with the growth and decline of their export industries. [3]

Economic base studies divide the urban economy into two broad categories: (1) basic or export industries--those industries producing goods and services (and capital) for distribution to markets outside a defined local economic area; and (2) nonbasic or service industries--those producing goods and services that are consumed within the local economic area.

Thus, a distinction is made between those economic activities that bring new money into the community (basic industries) and those that simply result in the recirculation of money (service industries). The underlying assumption is that expansion of basic activities usually results in growth of service activities and thus, growth in the total economy.

Some theorists draw parallels between the economic base approach and international trade theory. Economic base studies focus attention on "export balances," which become a measure of the strength of the urban economy much in the same manner that export balances have an important influence on the position of the national economy. As with international trade theory, rising export balances have positive implications, while declining balances, if allowed to continue, have negative repercussions. In economic base theory, fluctuations in the level of a community's exporting base is a prime cause of changes in urban economic activity. Consequently, forecasts of economic growth are based on multipliers that relate local activities to exports.

Richard Andrews, who has made perhaps the most exhaustive analysis of the economic base concept, has suggested that a "purely" basic or nonbasic industry is something of a rarity. [4] For the most part, industries serve a mixture of export and local markets and may be more basic or more nonbasic but seldom exclusively so.

As suggested in Exhibit 1, employment data of some industries or firms must be apportioned between the basic and nonbasic sectors. Andrews suggests that a distinction be made between those firms in which 80 to 100 percent of their sales is either export-oriented or locally oriented (high export or high local) and those in which 50 to 80 percent of their sales has such identifiable orientations. He also subdivides a third class of firms (which he calls "subsidiaries") into base subsidiaries and local market subsidiaries. Examples of base subsidiaries would include advertising, mailing services, machine parts, package manufacturing, etc., while local market subsidiaries might be represented by accounting and legal services, delivery companies, industrial laundry services, "canteen" suppliers, and so forth.

Where the boundaries of the base area are drawn can influence the determination of what activities are basic and what activities are service or local-oriented. Using the political boundaries may result in too narrow a definition, thereby distorting the analysis. Expanding the boundaries too far may result in an "encroachment" on the base area of other economic centers. Several criteria have been developed and some have been tested to determine the best technique for delineation.

N.B.S. Gras advanced the following guidelines: (1) shifts in transportation systems, (2) service areas of daily newspapers and other advertising media, (3) dependence of outlying financial institutions of center for clearances and reserves, (4) provision of auxiliary services to hinterland firms, (5) extent to which local facilities are used for storage, shipping, and marketing by firms in the "hinterland," (6) "service area" for cultural facilities, institutions of learning, and recreational facilities. William J. Reilly developed an empirical approach in the late twenties and early thirties through an examination of some 132 American cities. His Law of Retail Gravitation states that: ". . . two cities attract retail; trade from any intermediate city or town in the vicinity of the breaking point approximately in direct proportion to the population of the two cities and inn inverse proportions to the square of the distances from these two cities to the intermediate town," [5] distance being measured along the most direct improved highway. More recently developed techniques for delineating the retail trade area include: (1) consumer surveys, using household interviews on a sampling basis, (2) sampling surveys of retail and service establishments to determine "customer draw," and (3) parking surveys, whereby auto-mobile license plane numbers are recorded in the central business district or regional shopping centers and checked for home addresses against license registration records. Whatever approach or combination of approaches is used, the final results usually are translated into juris-dictional boundaries so that standard sources of data can be used.

Once these data have been sorted, ratios can be calculated to reflect current conditions in the local economy. Various assumptions can be tested, using these ratios to determine the impact of increases or decreases in employment in the basic sector.

Homer Hoyt, whose experimental work in economic base analysis has provided the contemporary operational model, observed that when employ-ment is used as a measure, a ratio occurs between basic and nonbasic activities. While Hoyt suggested that this ratio was about 1 to 1, empirical studies have shown that it varies over a relatively narrow range --from 1 to 0.5 to 1 to 2 (with the base activity computed as the constant). Some writers have interpreted these ratios to mean that for every worker in the basic sector of the economy, a given number of jobs are "created" in the service sector.

Assume, for example, that the current basic to nonbasic ratio is 1 to 1.5 (each job in a basic industry generates 1.5 jobs in the service sector). In that case, a new economic activity that adds 100 jobs to the basic sector will increase total employment by 250 jobs. If 35 percent of the total population is in the labor force, the ratio of basic employment to total population will be approximately 1 to 7.

These multipliers have been used in making population projections, as well as projections of employment and economic activities (assuming a constant or predictably changing ratio). Unfortunately, these values do not necessarily remain constant for long periods of time, that is, the ratios can exhibit significant shifts, depending upon changes in the economy of the urban area and national economic conditions.

Employment data are also used to calculate location quotients, sometimes called coefficients of localization or specialization. If a given community is highly specialized relative to the region or nation in the production of a particular commodity, the product may be presumed to be an export item. Therefore, solving the following equation for X deter-mines the number of workers that would be employed in industry i if the community produced just enough of that's industry's product to supply its own needs. [6]

If actual employment is in excess of X, then industry i may be assumed to be export oriented; if actual employment is below X, then products of this industry are assumed to be imported.

The use of location quotients provides a relatively inexpensive way of measuring exports for a given community. However, the results obtained depend on the level of Standard Industrial Classifications (SIC) applied, that is, no variation may be noted until four digits SIC codes (or lower) are used. Other criticisms of location quotients include the possibility that a community may be more productive than the national average in terms of output per employee (and therefore would have a lower employment ratio in a given industry) and the argument that residents in one community may have significantly different tastes than those in other communities.

Economic base multipliers and location quotients can be generated for various units of measurement, including: (1) employment data, (2) payrolls, (3) value added, (4) value of production, (5) physical production, and (6) dollar income and expenditure accounts. [7] Each of these measures has shortcomings, and therefore, all feasible measuring techniques should be used in any economic base study. The capacity of the analysis to predict future conditions can be further extended and refined by adding other measures and indexes.

Using employment as the measure of economic activity encounters problems of seasonal and part-time workers. Output per worker (productivity) may increase without parallel increases in employment; rise in productivity may be associated with an increase in the rate and total wage assigned to the individual jobs. While payrolls provide a more significant indicator of economic activity and opportunity than the mere number of jobs, these data are open to highly significant price change adjustments. Payrolls may provide a clue to the standard of living to be expected in a community if these data can be obtained in terms of annual renumeration distributions.

Physical production, value added, and value of production have advantages for analysis within particular sectors of the economy. However, these measures do not apply to all sectors and therefore have limited application. Further, value added and value of production may be clouded by complex price movements and may encounter problems associated with intangible inputs and value products (e.g., educational institutions). While dollar income and expenditures accounts, in combination with employment data, would provide the most compre-hensive measure of economic activity, the complexity and difficulty of tracing monetary transactions, coupled with data reporting problems, limit the application of these measures. As a consequence, the two primary measures of economic base studies have been employment and payroll data.

Employment growth generally fosters population growth because job opportunities attract new residents. But the process works the other way too. Population growth creates employment in retailing, wholesaling, personal services, and related activities. In fact, the relationship goes still further because pools of labor and capital built up to serve a local population, in time, may foster the growth of manufacturing and other activities which are not directly related to servicing the local population.

Much of the present-day appeal of economic base studies stems from their seemingly simplistic application. However, this simplicity can also lead to fallacious and contradictory results. As Pfouts has pointed out, the panacea of base industries have led communities into an economic development policy not unlike the doctrine of mercantilism. [8] While studies have shown that an appreciate proportion of basic industry is necessary for urban growth and development, it does not follow that this alone is sufficient for growth and development. Pfouts' suggests that the service component may be more important as an indicator of growth potential than the basic component. Therefore, he proposes a community income analysis as a substitute approach for economic base studies.

Blumenfeld has also identified a number of misconceptions and contradictions in the economic base concept. [9] He notes that the applicability of the economic base approach tends to decrease with increasing size of the urban center and tends to increase with increasing specialization and division of labor between centers. Therefore, large, highly diverse metropolitan centers survive and grow because highly developed and diverse business and consumer services enable such centers to attract new basic industries for those that may decline. Blumenfeld concludes that the nonbasic activities of such centers are the permanent and constant element--the truly "basic" sector of their economy. He proposes the substitution of studies that would consider the potential vulnerability of local economic activities to outside competition and the potential capacity of local economic activities to expand into outside markets, coupled with "balance of payment" studies that would consider all types of payments, giving equal weight to both imports and exports.

Economic Dominants Analysis

One of the most conspicuous flaws in existing systems of urban economic analysis is that they are not dynamic or continuous. As a consequence of methodological limitations and cost factors, most of these approaches are applied on a one-time basis. More dynamic techniques, such as systems of accounts and industrial complex analysis, suffer from data limitations which make their application very difficult.

Given these limitations, Andrews has proposed an approach that pro-vides an in-depth analysis of selected industry groups rather than broad or universal enterprise coverage. He calls this approach economic dominants analysis. [8] Andrews notes that the appropriate objectives in the study of urban and other small region economics are: (a) the determination of optimum size and character of the economic system and (b) the attainment of maximum operating efficiency of the dominant economic parts of the system as measured by means of carefully conceived goals. Dominants may be export or local in their market orientation and, as industry groups, claim an arbitrary minimum proportion of total area employment--3%, 4% or 5% depending on the local economic structure (and cost constraints of conducting the study).

Selective dynamic in-depth analysis is based on the hypothesis that the quantitative and qualitative character of the total urban or regional economy can be understood and roughly predicted by means of a continuing study of those industries or economic activity groups that dominate the area in terms of employment and other strategic factors. Empirically it is often found that employment dominance is an adequate guide to a more complete picture of overall economic dominance. Therefore, other deter-minants, such as payroll and productivity, can be shifted to later stages and used as weighting factors in the determination of relative importance of dominants in the formulation of development policy. [10]

Under this approach, selected economic dominants (industry groups) are subjected to (a) macroanalysis--involving national, regional, and state level analyses of dominant industry group economic trend characteristics; (b) microanalysis--detailed economic examination of a sample of local firms within each dominant industry groups; and (c) integration of macro and micro findings to determine the nature and degree of deviation between the performance of firms at the local level and trends of the same industry groups at national, regional, and state levels.

The principal objectives of the macroanalysis are: (1) to provide a more complete understanding of the nature and functioning of the broad industry group of which a local dominant industry is a small part; and (2) to establish a scale of performance and develop trends at state, regional, and national levels against which the performance charac-teristics and trends of a local dominant industry group can be measured. A basic assumption of the procedure is that the pattern of conformities and divergences resulting from comparisons of macro with micro data will provide substantial clues to the prognosis of local area activity. The objective of the microanalysis are: (1) establishment of a data and analysis bond between local industry groups and their broadscale counterparts identified under macroanalysis; (2) identification of single problem and problem patterns of dominant industry groups at the local level not revealed by the macroanalysis; and (3) extension of data cover-age beyond the macroanalysis in order to objectify local problem, situa-tions more clearly and thereby to provide the detail necessary for positive economic planning. The product of this analytical procedure is an under-standing of the individual strengths, weaknesses, locational peculiarities, tendencies, and general growth potential of each of the dominant industry groups that make up the local economy.

Across-the-board integration of selected industry group data con-cludes the macro-mirco synthesis and is accomplished by means of the following two steps: (1) formal analytical identification of primary linkage relationships among export and ancillary (local) dominants industry groups at the local level; and (2) summation of the individual dominants on an employment basis for the current year. With the macro-micro synthesis complete, it is a relatively simple matter to show the significant relationship between the total employment of the dominants and each of several economic indicators for the current year.

Subdominant industry groups also may be identified--industry groups whose employment shares are just below the minimum level of dominants but still of significant size. Subdominants are not subjected to first round macroanalysis and microanalysis. They are included in the system because they represent an underlying "seedbed" of established economic activity that is vital to development planning.

This approach, like the others discussed, is not without its short-comings. Andrews has identified the following weaknesses in his approach: (1) the inference of the balance of the economy from trends evident in the dominants--problem of generalizing from a less than the total universe; (2) the analysis does not deal with a random sample which is inherent in the concept of dominance; (3) inability to determine whether the share of total represented by dominant industry groups is adequate; and (4) applications must be on a continuing basis to be effectively used. [11] Given these limitations, however, the economic dominants approach holds a good deal of promise. It is relatively simple to mount, and it lends itself to the more dynamic objectives of a continuous study. Furthermore, in-depth surveys of local industry groups can provide a good deal of spinoff information that cannot be obtained from abstract statistical analyses.


The urban economy has been studied primarily in terms of three conceptual systems--input-output analysis, income product accounts analysis, and economic base studies. Efforts to develop evaluative techniques to deal with the whole range of factors affecting the vitality of the urban economy may be viewed as subjective extensions of the economic base type analysis. It should be apparent that there are a number of similarities in these three conceptual approaches. By shifting emphasis, changing units of measurement, or expanding or reducing the number of sectors included, one approach becomes more like one of the other two. As data sources become more extensive and more refined, and as the data handling capacity of computers receives wider utilization, it is likely that the "rough edges" of these three models will be smoothed away so that they nearly fit as a single system of analysis. When this is accomplished, the integration of broader theoretical concerns of economics will be possible.


[1] Wilbur Thompson, A Preface to Urban Economics (Washington, D.C.: Resources for the Future, 1963).

[2] Wassily W. Leontief, The Structure of the American Economy, 1919-1939 (Oxford: Oxford University Press, 1951), p. 11.

[3] Thompson, op. cit., chapter 1.

[4] Richard D. Andrews, "Mechanics of the Urban Economic Base," Land Economics (November 1953), pp. 344-49; "Urban Economics: An Appraisal of Progress," Land Economics (August 1961), pp. 223-225; "Economic Planning for Small Areas: An Analytical System," Land Economics (May 1963), pp. 145-155; "Economic Planning for Small Areas: The Planning Process," Land Economics (August 1963), pp. 253-264.

[5] William J. Reilly, The Law of Retail Gravitation (New York: G.P. Putnam Sons, 1931), p. 9.

[6] Charles M. Tiebout, The Community Economic Base Study (New York: Committee for Economic Development, 1962), p. 47.

[7] Andrews, "Economic Planning for Small Areas: The Planning Process," Land Economics (August 1963), pp. 253-264.

[8] Ralph W. Pfouts, "An Empirical Testing of the Economic Base Theory," Journal of the American Institute of Planners (Spring 1957).

[9] Hans Blumenfeld, "The Economic Base of the Metropolis," Journal of the American Institute of Planners (Fall 1955).

[10] Andrews, "Economic Planning for Small Areas: An Analytical System," Land Economics (May 1963), pp. 143-155.

[11] Ibid., p. 151.

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