To Grow the Economy, Grow America’s Cities

With the 2012 election completed Washington faces a daunting overhang of substantial economic, fiscal, and governance problems. Reform must begin now.

Yet from where will the impetus for progress come? In a different era, the federal government might have launched decisive initiatives on its own to restructure the economy, address the budget, and renew governance. Today, however, the polarization of Washington raises serious questions about the likely quality of such interventions.

There is, however, hope in another quarter. As befits a federal republic, cities, metropolitan areas, and their states are stepping up to develop new solutions and point the way to renewal. Attuned to the localism of the economy, metro areas—the true drivers of the national economy—and their states are working hard to deliver a new growth model focused on inciting innovation and advanced industries, providing crucial infrastructure, and improving education and skills training.

Which is why the Metropolitan Policy Program at Brookings has made the needs of “bottom up” state and metro creativity the core preoccupation of Remaking Federalism / Renewing the Economy--a new federal reform agenda that is launching this week and that calls for an entirely new approach to the work of the federal government. Our assertion: The reform debate in Washington cannot be just a technical exercise of balancing the budget but must entail a full discussion of national priorities that takes into account the critical role and needs of the nation’s metropolitan engines of growth.

As we write in a new framing paper published today for the series, it is now essential that Congress and President Obama look beyond the Capitol as they seek to reform Washington and get the economy moving.

Why should Washington look outward? Looking outward is essential because deficit-constrained Washington can no longer do it all and because the real dynamism of the American economy resides out there in America’s metropolitan regions and needs to be aided and abetted.

All of which suggest why our initiative--acknowledging the need to curb the debt but also insisting on the need bolster the “bottom up” energy of the economy--calls for the federal government to “do less better” through a limited set of initiatives in which Washington would:

• Cut to invest, meaning that it should reprogram inessential spending into a combination of deficit reduction and necessary investments that will establish a platform for “bottom up” growth

• Invest but reform, meaning that it should reform its activities to make them not only more efficient and effective but more catalytic and encouraging of local and state problem-solving

• Strengthen federalism, meaning that it should maximize the power of its dynamic partnership with the nation’s localities and states to solve problems

As to what this means in specifics, it means many things, some of which are spelled out in a series of action-oriented policy briefs that have also begun appearing today.

What do we mean by “cutting to invest,” for example? This is all about finding sufficient funds to both reduce the national debt and invest in what matters for prosperity and a vibrant economy. In this regard, Congress and the president should get started by establishing a base-closing-type Cut-to-Invest Commission tasked with identifying $200 billion in budget cuts over 10 years and channeling half of that--$100 billion--to debt reduction and half into high-priority investments in prosperity such as a permanent and richer R&E tax credit; a network of advanced industries innovation hubs; or the designation of 20 “manufacturing universities.”

Alternatively, cutting to invest might mean restraining the growth of the mortgage interest deduction (the subject of a forthcoming brief) and directing the savings in part to fund a “Race to the Shop” competition to fund the best bottom-up advanced manufacturing initiatives or to exempt Private Activity Bond (PABs) from the Alternative Minimum Tax (AMT) to accelerate private infrastructure investment.

Or what about “investing but reforming? What does that mean? By this, we mean that Washington should seek out opportunities to leverage smarter policies and program reforms to unleash private- and sub-national problem-solving. For example, Washington should open up well-established investment structures like master limited partnerships (MLPs) and real estate investment trusts (REITs) to renewable energy investment, as propose Felix Mormann and Dan Reicher of the Steyer-Taylor Center for Energy Policy and Finance at Stanford University. Likewise, Congress and the Obama administration should overhaul the Section 8 Housing Choice Voucher Program to lower costs and improve effectiveness by remedying the currently balkanized system of administration.

As to “strengthening federalism,” we mean by that that Washington should do everything it can to put itself in the service of metropolitan areas, which power the U.S. economy. One immediate reform would be to establish a national Public/Private Partnerships (PPP) unit to help states and localities leverage private capital in smart ways for much-needed infrastructure projects. Another long-overdue one would be to enact legislation once and for all supporting the use of Property Assessed Clean Energy (PACE) financing for residential energy efficiency and clean energy upgrades. And how about this? Why shouldn’t the government set up a federal “delivery unit” to green-light and fast-track projects of state and metropolitan significance? It’s high time, in short, to simply “get stuff done.”

With the budget cliff looming and economic restructuring imperative, Washington needs to square the goals of fiscal reform and economic retooling. To do that, it needs to take steps that facilitate--rather than impede--the ongoing emergence of a new kind of “bottom-up” economic renewal.

Bruce Katz is Vice President and Director, and Mark Muro is Senior Fellow and Policy Director, of the Metropolitan Policy Program at the Brookings Institution, where this was originally published. View a full suite of actionable federal policy recommendations that can support the nation’s states and metropolitan areas as they move toward a new more innovative and production-oriented economic model.