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Reflections on Federalism and Localism

Below is the Nowak Metro Finance Lab Newsletter shared biweekly by Bruce Katz.

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April 3, 2019

Over the past ten days, I have been in Israel and the United Kingdom exploring how to adapt US market dynamics and tools — innovation districts, opportunity zones, city investment prospectuses — to foreign shores. As often happens when I leave the United States, a trip abroad has sharpened my sense of the special assets that America possesses at home and some of our keenest liabilities.

Unlike our federal republic, where power is divided among multiple layers of government (and across multiple sectors of society), Israel and Britain are ruled strongly from the center. In both countries, tax revenues flow disproportionately to the central government where they are deployed by powerful national agencies that remain highly specialized and compartmentalized, vertical hierarchies during a period of horizontal networks. Cities like Tel Aviv and London are simultaneously strong economically but weak politically and fiscally. (Israel, of course, has its own distinctive mix of centralized control and entrepreneurial chaos, but that’s for another piece!).

Israel is in the midst of another divisive election. On April 9, Israeli voters will decide whether to return Bibi Netanyahu to another term as Prime Minister. The political situation, already tense, was made more stressful during my visit by the reigniting of the Gaza crisis. (Being shown the “safety room” at my hotel was a new experience).

Britain, of course, is in the midst of a structural meltdown. Brexit has paralyzed the central government and created a complex daily interplay of politics, personalities and policy with a language – “Soft Brexit,” “Hard Brexit,” “No Deal Brexit” – which is almost impossible to decipher for the uninitiated.This self-inflicted, reckless wound has left the central government helpless and distracted, hoping mostly for the least bad result.

The United States, of course, is undergoing our own self-made crisis. The Trump Administration doesn’t even make a pretense of governing large portions of the domestic agenda. Yet the United States is unbelievably resilient. As Jeremy Nowak and I wrote in The New Localism, the country keeps moving forward, filling the vacuum left by a drifting and dysfunctional national government.

Federalism, and its close relation, localism, give the United States some powerful assets and attributes.

First, solutions are more naturally created bottom up rather than delivered top down. Collaborations are easily formed and re-formed across public, private and civic sectors and a plethora of disciplines and professions to hack at problems, large and small. This stands in sharp contrast to top down, prescriptive programs offered by silo-ed national agencies.

Second, solutions are fueled by “metro finance,” a mix of public, private and civic capital and of different forms of subsidy, debt and equity. The financial system is, in turn, enabled by data and information that can now be mined and mapped in ways that unveil assets and hidden potential.

Finally, solutions scale fast. An innovation in one city gets captured and codified and then moves quickly to other cities, via established constituency networks, financial institutions, new intermediaries and even social media.

All of this is playing out in real time with Opportunity Zones. A tax incentive created by the federal government to channel market capital to areas of disinvestment is being routinized only partially by the traditional route, i.e., the promulgation of federal rules. In addition, cities and investors are creating norms and models that could drive a new system of community development (see here). Already we are seeing new community regeneration visions (e.g., the “street corner” thesis), new market tools (e.g., Investment Prospectuses), new mechanisms for building “capital stacks” or community desired projects (e.g., financing charrettes) and new community institutions (e.g., the Baltimore Neighborhood Impact Fund, the Erie Downtown Development Corporation) that bode well for the future.

Our federal republic, of course, is far from perfect. There are functions – creating a strong safety net, for example, and closing the widening gap between sluggish incomes and raising prices – that can only be performed at scale at the national level. And the local institutions we do have can be dramatically improved and strengthened. As Luise Noring and I recently wrote for CityLab, countries like Denmark and Germany have created powerful local institutions that are better at leveraging publicly owned land and buildings than US counterparts. And the Danish cooperative structure has enormous potential to share benefits rather than extract wealth (see here).

All of this is true. And there is much work to be done. But I return home marveling at the special DNA of this messy, maddening, divided nation.