I was in Galveston long enough (since '96) to see some changes. Generally, things got better as property values went up, more restaurants and stores and bars opened, and the appearance of the island improved (a little). I had difficulty understanding the anger and resistance that these changes drew from many Galvestonians. Why would you be opposed to gentrification when so much of the island was so crappy? But I realized that people don't like change in general and a lot of residents were worried about getting priced off the island. A lot of people also have an unrealistic vision of Galveston as a bucolic working-class seaside village. This picture is unrealistic because it is too expensive to live on the island or locate a business there do to cost of hurricane mitigation and real estate prices elevated by a resort industry. The Port and UTMB (which may be going away anyway?) will not support the whole town, and most of these workers live on the mainland anyway. You can force developers to build 2,000 square foot homes, but they will still cost $50-100 thousand more than on the mainland.
Now, people will pay more to live in a city, but it has to offer more amenities. By amenities, I don't mean a pyrimids, crappy seafood, or muddy beaches. Galveston needs to provide better entertainment and dining venues, parks, sidewalks and bike trails. If Galveston can start to attract upper-middle class working-age residents (as opposed to retirees) certain businesses which are highly dependent on human capital will follow them to the island. This way Galveston can avoid becoming a resort town.
Along those lines here are some more specific thoughts of mine that could boost Galveston:
Focus on and invest in the Strand district.
Close cross streets in the Strand district in favor of parking and pedestrian areas.
Develop a mechanism to make the downtown merchants and residents pay for increased parking.
More and better lit sidewalks everywhere.
Bulldoze Magnolia Homes (the housing projects between the Strand District and UTMB) and sell half of the property and use the money to build a public/private biotech incubator on the other half.
I like the idea being tossed about on the GCDN forums of turning part or all of the Seawall into a park.