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How U.S. Cities Lost the Economic Development Plot – Common Edge

In the 1950s, Robert Moses bulldozed a swath of the South Bronx to build the Cross Bronx Expressway, displacing an estimated 60,000 residents and gutting one of the most economically diverse urban neighborhoods in the country. The logic of the time was efficiency: move cars faster. By the time the expressway was completed, the same idea was imposed upon the entire city: rationalize land use and separate urban functions into legible zones. What was lost in the process was harder to quantify: the density of small businesses, the overlapping networks of suppliers and customers, the informal economic relationships that give neighborhoods their vitality.

While Jane Jacobs is widely known for her critique of midcentury urban planning in The Death and Life of Great American Cities, she applied a similar analysis to urban economies in her underappreciated second book, The Economy of Cities. She made the case that the hyperfocus on market efficiencies comes at the expense of economic innovation, growth, and shared prosperity.

The neighborhoods that planners considered chaotic were in fact some of the most productive environments human beings had ever devised. The “inefficiencies” planners sought to eliminate were the friction that generated new ideas, new businesses, and new economic sectors. Rationalize the city, Jacobs argued, and you rationalize away its generative capacity.

Today, the consequences have become impossible to ignore, particularly as AI ushers in an unprecedented wave of creative destruction. According to the 2024 McKinsey report Generative AI and the future of New York, “By 2030, as many as 1.1 million occupational shifts may be required in the New York region, and one-third or approximately 380,000 of these shifts are directly attributable to the impact of gen AI” (emphasis added).

By almost any measure—market share, profit, equity value, political influence—a small number of very large companies in technology, pharmaceuticals, and finance now dominate in ways that would have been unimaginable (and even illegal) not that long ago. The middle of the economy has thinned out considerably as new business formation has stagnated.

The number of new business startups per capita in the U.S. fell by nearly half between 1978 and 2012 and has only partially recovered since. The small and medium-sized enterprises that once formed the connective tissue of local economies —manufacturers, independent retailers, specialty service firms—have been squeezed by consolidation, by commercial real estate costs, and by a financing environment that has never been well calibrated to their needs. What’s left is being hoovered up by private equity.

Cities that once had diverse, locally robust industrial bases gave way to a relatively small professional class and a much larger stratum of service workers whose wages have not kept pace with housing costs in any American metropolitan area for at least 20 years. In city after city, what took hold was a theory of economic development that Jacobs would have recognized immediately as the urban renewal mistake in a nicer suit. The logical extreme of efficiency is monopoly.

The Attraction-Retention Trap

Most American cities and states have some version of the same strategy: identify large anchor employers, offer them sufficient tax incentives and infrastructure investment to choose one jurisdiction over another, and then spend the next decade providing more incentives to stay. The logic is efficiency: concentrate resources on the largest possible return, eliminate friction, optimize for the biggest fish. This attraction-retention model has dominated state and local economic development despite the fact that it has a surprisingly weak evidence base.

And yet state and local governments spend $50 billion annually on incentives, with roughly $47 billion directed toward tax breaks and cash subsidies primarily geared toward attracting and retaining firms. Both New York State and New York City are the biggest spenders on this model, peaking at $11 billion during the pandemic, which has not substantially come down since.

Research suggests that these resources could generate significantly greater returns if redirected toward investments in workforce development, infrastructure, and support for existing businesses—areas that more directly shape regional productivity and long-term growth.

Modeling further shows that shifting resources toward customized services for locally rooted small and midsize firms—such as job training partnerships, technical assistance, and infrastructure investments tied to existing industry—can produce substantially larger income gains that accrue disproportionately to lower-income residents compared with the minimal benefits provided by traditional corporate attraction strategies.

What’s more, place-based firms are more likely to recirculate profits within the regional economy, while...