Popular rhetoric suggests that the health and revitalization of downtown districts are important for the development of cities. Since their formations in the early 20th century, downtowns have had peaks and troughs in importance due to the growing concentration of pedestrian traffic and mass transit in certain areas. Currently, Harrisonburg, home to the writers of Econ488, is pushing an initiative to expand downtown. According to an organization called Harrisonburg Downtown Renaissance (HDR), the city has had $66 million in private investment and $23.1 million in public investment from 2004 to 2015 in downtown initiatives. HDR claims that the revitalization effort has and will continue to create new jobs, new businesses, and higher tax revenues. So, is an investment in downtown areas smart, or a misplacement of funds in the city?

A classic argument in favor of strong downtown districts is that pedestrians shopping downtown are more likely to make a purchase after making another, separate purchase. Behavioral economics suggest that this tendency is due to a decreased marginal cost of making the second purchase since the actor is already in the proximity of the second shop. A study by Popovich and Handy examined spending behaviors of bicyclists in downtown Davis, California. In their study, bicyclists proxied for consumers who took advantage of downtown structures, as opposed to automobilists who would typically park at one store and then leave. What they found was that, on average, the cyclists spent more per visit than did consumers who traveled by car. While the study’s focus was on whether to make Davis more automobile or pedestrian friendly, insight on spending behavior for downtown consumers enhances the narrative of traditional downtowns producing extra expenditures per visit.

Neighboring downtown organizations also are more inclined to create social network markets. Traditionally, consumer demand is derived by finding a consumer’s maximum utility within a budget constraint. However, economists insert that with imperfect information, it is harder to predict consumer demand. According to economists Potts, Cunningham, and Hartley, while consumers may seem “irrational”, they are acting based on perceived attributes of products based on the information given. Lack of full information paves the way for markets to coordinate as complex social networks. The marginal benefits of deriving consumer demand together rise, leading organizations coordinating in markets and understanding consumers through analytics. The ease of coordination rises as the proximity of the organizations shrink, as well. Not only does the cost of communicating shrink, but customers overlap, thus making interpretation of consumer bases easier. The growth of social network markets is facilitated with a healthy downtown area when organizations are close in proximity. Examples of this phenomenon include Silicon Valley and Hollywood. Information is spread easier, leading to better outcomes for suppliers in the local market.

The new presidential administration hopes to add to middle-class development through tax reform. If their goals are met, consumers would have higher after-tax wages. An increase in disposable income could increase expenditures in downtown areas. According to a study in the American Economic Association, lower tax rates typically lead to higher short-term consumption, especially among higher-income individuals. However, there are some issues in the regression that are addressed in the paper. The paper used a panel-data approach, which proved to be very sensitive to different instrumental variables which attempted to control for bias. Thus, it is important to interpret results with skepticism as different results can be a result of manipulative instrumental variables. In economic academia, an instrumental variable that produces and F statistic over 10 is generally accepted, leaving room for user-error. However, the hypothesis of this paper is lower taxes would lead to higher spending, possibly in downtown areas.

A major negative externality of downtown build-up is the association between taller buildings and raised crime rates. Although writers Newman and Franck find a smaller association between building size and personal crime than popular literature, they still find a strong relationship between building size and downtown residents’ fear of crime. The defensible space theory, postulated in a book by Oscar Newman, claims that taller buildings lead to a lack of perceived control and responsibility for its residents due to higher amounts of residents-per-capita. Externalities are an important part of any economic model. Marginal benefits need to be weighed against the marginal costs in decision-making to decide if an economic decision, like the build-up of downtown, would maximize the benefits of the group. If a town decided that the risk of crime due to downtown revitalization paired with lowered housing prices due to higher perceived risk of crime outweighs the benefits, then it would be a better decision to refrain from the renovation of downtown areas.

Initiatives to “shop local” are debated by economists. It is usually unclear if higher prices for consumers outweigh the benefits of local suppliers receiving a higher income. However, there is another element to the debate: carbon emissions when buying local and when buying at a retail chain. In a 2009 study, it was measured that if “shopping local” consisted of driving over four miles, then carbon emissions of “shopping local” were greater than shopping at a chain. The items used in this study were vegetables. Larger companies used economies of scale to develop advanced cooling techniques which used fewer carbon emissions. There are a range of products sold in downtown areas, and environmentalists will need to determine if downtown initiatives are helping or hurting their cause.

It might be difficult to make a general recommendation for or against downtown revitalization due to different sizes of different city economies. Faulk argues for a set of general guidelines to enhance downtown areas. However, there would be significant differences for the revitalization of downtown Harrisonburg versus the revitalization of downtown New Orleans. New Orleans has a GDP of around $80 Billion. Their downtown renovations would have to include protections of buildings against hurricanes due to its vulnerable ocean-front location, as was seen during Hurricane Katrina in 2006. They also have a specific consumer base which expects utilization of their ports and celebrations during Marti Gras. Harrisonburg, a small historic downtown near a mid-sized university would need to grow in a different way. They would need to appeal to their historic aesthetic while growing to the needs of a predominately college-aged demographic during school months. Thus, prescribing downtown revitalization for economic growth can imply very different things for different places.

There are clearly many factors to consider when debating downtown revitalization. Downtowns seem to promote higher expenditures per visit for consumers. They also promote coordination and collaboration through social network markets. However, they are also associated with higher crime. Downtown’s effects on the environment and between different scopes are also currently ambiguous. Thus, this paper suggests a slight tax subsidy for downtown development. There seem to be positive effects of downtown revitalization, but there are also some externalities which need to be considered and explored.

Downtown Revitalization