A recent email exchange asked the question about whether growth pays for itself, and thought some people visiting the blog might be interested in some slightly edited thoughts and references on the isue.
Whether growth pays for itself is a highly localized question. Over the long run, and in a regional context, it does. In fact, it has to. I"m not aware of many cities (in fact I'm not aware of *any*) that went bankrupt because of growth. Several have gone bankrupt for lack of growth, but not because they had too much growth.
More to the point, the National Homebuilders Association has several pretty robust econometric models that show that over time growth pays for itself. The property tax and sales tax revenues generate surpluses after 2-5 years. So, there is an immediate cash outflow, but over time the revenues more than make up for it. A nice and sophisticated example of this effect is estimated in a report produced for the Home Builders Association of Greater Cincinnati by the NAHB. .
While growth pays for itself on a regional level, it may not pay for itself on the local level. A critique of the cost of growth literature can be found in the Reason Foundation's "Sprawling of America" report. While a bit dated, the conclusions are still relevant.
Most critics of the cost of growth rely on so-called "Cost of Community Service" reports. These are highly unreliable sources and inevitably show that residential development doesn't pay for its. Interestingly, the better studies show that residential development often pays for itself on basic infrastructure, but the balance sheet becomes "negative" when school costs are added. For more on whether schools costs should be included in this calculation, see my testimony on school impact fees.
In some cases, however, growth doesn't pay for itself. Whether the community should make growth pay for itself is a policy question. A strong argument can be made that forcing growth to pay for itself is contrary to sound public policy. Cross subsidization has always been part of the public good argument for providing public services. One reason property taxes for schools are so low is that commercial and industrial property pay for schools too. There are classic public good arguments for continuing this.