I say YES...shrinkage can be a good thing. I was recently reading this article in Fast Company magazine about 
Flint, Michigan's plan to bulldoze neighborhoods and shrink the locality's footprint. The city is considering bulldozing several blighted and near-vacant neighborhoods...shrinking the city by as much as 40%. This will allow the city to better manage the services. This is akin to a business downsizing to make itself more profitable and better able to compete.
But there's another aspect the article fails to mention...and that's the possible impact on the natural areas surrounding the city. Bulldozing blocks and blocks of homes opens up natural space and creates more open areas for animals and people to enjoy.
Such an endeavor must be done systematically and with a long term plan in place. Just as the "Growth at any Cost" concept is obviously flawed- so is the concept of "Shrinkage without a Long-Term Plan".
Mike: You are correct. Although shrinkage like this can be painful... it can certainly lead to a rebirth of a city. Currently the only "shrinkage" I am working on... is losing weight. That, too, can be painful. LOL.
Hi Mike ~ Interesting thought - I hadn't heard of this though remember from Michael Moore's documentaries how Flint - his hometown - has been in rough shape. You're right - if some thought goes into this - and long range planning - not our country's strong suit - it could be a good thing. I just love the European model - a city of town surrounded by countryside - so much nicer than sprawl and pavement absolutely everywhere.
Liz
I would love to see Flint used a model for rebirth...kind of like Greenburg has been a model for Green rebirth.