There are many theories to explain this, most having to do with the positive impacts of globalization and happy advances in technology. I’m skeptical of the convenience of these theories because they seem to affirm what we want to believe – that our economy is healthy and going to continue growing. I think it more likely that our economy, like the cities that sit at its foundation, is sick and trying to reset to a stable equilibrium.
It is only by robbing our families of wealth – using artificially low interest rates to punish those who save and reward those who borrow – that we’ve pulled as much future consumption forward as possible. And where our families have fallen short, public borrowing has filled the gap.
I have witnessed countless local governments make up for cash-flow shortfalls with debt. As a professional engineer, without fully understanding what I was suggesting, I recommended many such tradeoffs. If we couldn’t pay to maintain a road out of cash flow from our wealth, then borrow the money and turn that cash flow into payments. It solved the immediate problem, I got paid, and – of course – there was the assumption that the prosperity we anticipated in the future would take away any pain our future selves would experience meeting that obligation. Nobody ever analyzed why there were cash-flow problems in the first place.
This is the same logic that underlies the public pension crisis, and it’s why it’s so intractable. During difficult budget cycles, government employees voluntarily agreed to give up salary and benefit increases. In exchange, they received promises of increased future pension benefits. This was perceived as a great exchange because, of course, the economy was going to continue to grow, the future would be more prosperous than the present, and there would be far more resources to pay those pensions when they came due. Who is now responsible for the failure of that gamble is a question as unsolvable as it is morally ambiguous.
To keep growth going, we sacrificed in the present and we borrowed from our future. Both of those actions only made us more dependent on the realization of that future growth. This is one reason why our economy has become a series of recurring crises and panics whenever growth starts to slow. And it’s why we’ve been more and more willing to cede power to those who could restore us to our unsustainable economic path.
We’ve been through a savings and loan crisis and bailout, hedge fund failures that threatened the entire market, the runup in Internet stocks with the subsequent crash, and a housing bubble followed by a crisis in subprime lending followed by a re-inflating of the housing bubble. The economic tremors of overreach seem to be increasing in intensity.
Through all of this, the Federal Reserve lowered interest rates all the way to zero and kept them there for nearly a decade, while printing trillions of dollars in digital money in an unprecedented experiment known as Quantitative Easing. This occurred while the federal government ran deficits at levels rivaling those of the world wars. We have brought forward more than a generation of consumption capacity and, in a classic sense, should anticipate a generation of corrective sacrifice.
Right on cue, a new experiment is starting to gain popularity, one that promises to rid us of the few remaining financial constraints. Called Modern Monetary Theory, it promises to deliver growth by embracing the abstract nature of a currency backed by nothing tangible. Under this concept, the centralized government can issue a nearly unlimited amount of currency to pay for whatever lawmakers prioritize. The only constraint is the capacity of workers to mobilize resources in response and our willingness to tax wealth when things go off the rails.
Regardless of the economic religion one subscribes to – be it Keynesianism, supply-side monetarism, debt capitalism, freshwater economics, saltwater economics, New Keynesianism, or Modern Monetary Theory – the common denominator is the need for more growth as measured at the national level. Ultimately, this is what is broken.
Does Growth Serve Us?
The United States, and by extension most of the world, suffers from a tragic reversal. We once created growth in our economy because it served us. Growth addressed the age-old problem of how to split one loaf of bread between two hungry people: create a second loaf. It is easy to understand how the need to experience economic growth became a national consensus, particularly for the generation that lived through the Great Depression and World War II.
The tragic reversal comes from the realization that growth once served us, but now we serve growth. The constraint of modern America is that we must experience annual growth in our economy. Without growth, we can’t service our debts, pay our retirements and pensions, and keep up with the rising costs of health care and education.
For a long time, the Suburban Experiment presented an easy solution to this problem. By pouring money into highways and infrastructure, by making it easy for families to buy new homes in distant places and by establishing funding mechanisms for the mass development of commercial real estate, we experienced the longest and most robust economic boom in human history in the decades after World War II.
Yet, each iteration of new growth creates enormous future liabilities for local communities, a promise that the quickly denuding tax base is unable to meet. Not only did these new areas need police and fire protection, street lights, libraries, and parks, but all those miles of roads, streets, sidewalks, curbs, and pipe; all those pipes, pumps, valves, meters, culverts, and bridges would eventually need to be fixed and replaced. At the local level, we traded our long-term stability for near-term growth.
As one example, the city of Lafayette, Louisiana, had 5 feet of pipe per person in 1949. By 2015, that had grown to 50 feet, an increase of 1,000%. They had 2.4 fire hydrants per 1,000 people in 1949, but by 2015, they had 51.3. This is a 2,140% increase. Over that same period, median household income in Lafayette grew just 160% from an inflation-adjusted $27,700 to $45,000.7 And if national trends hold locally in Lafayette, which they almost certainly do, household savings decreased while personal debt skyrocketed. Lafayette grew its liabilities thousands of times over in service of a theory of national growth, yet its families are poorer.
Today, nearly every U.S. city has a backlog of routine infrastructure maintenance they will never be able to perform. This represents miles of street that won’t be fixed, and huge lengths of pipe that will never be replaced. This infrastructure serves the homes and businesses of Americans. It is the foundation of their personal wealth. Ultimately, none of that will matter.
In pursuit of growth nationally, we have rendered our cities financially insolvent. The base assumption of all our theories seem to be that a strong national economy would trickle down to strong cities, towns, and neighborhoods. This belief held true whether the trickle-down mechanism was large government or large corporations, government spending or tax cuts, the empowerment of centralized bureaucracies or centralized corporations. America’s leaders seemingly believed that, if we strengthened the top, it would strengthen the bottom.
This is an incorrect understanding of how complex, adaptive systems grow stronger. In such systems, strength and stability are always built from the fractal level. Successful blocks beget successful neighborhoods. Prosperous neighborhoods make up a prosperous city. A strong and stable state is an assembly of strong and stable cities.
In Cities and the Wealth of Nations, a book I believe presents the most insightful economic analysis since Keynes, journalist and author Jane Jacobs describes how cities, not nations, are the only coherent level of economic analysis.
Distinctions between city economies and the potpourris we call national economies are important not only for getting a grip on realities; they are of the essence where practical attempts to reshape economic life are concerned.8
A measurement of GDP tells us as much about American prosperity as a measurement of the average wealth of a hundred households when one of those households includes billionaire Jeff Bezos. How does a measurement like inflation have any credibility – or real meaning – when health care, college tuition, home prices, and construction costs have inc
reased annually for decades at rates much greater?
What is lost in all the centralization and efficiency is local nuance, or what most people would consider real meaning.
The Difference Between Growth and Wealth
Going into the summer of 2005, there was general concern among economists and money managers that a recession was imminent. The yield curve was flattening as investors bought longer-term notes to lock in higher rates ahead of possible interest rate declines.9 The Dow Jones average was down 7% from the start of the year.10 The Federal Reserve was raising rates to get some wiggle room should the anticipated rate-cutting stimulus be needed.11
Indicators were moving in the wrong direction, and then at the end of August came Hurricane Katrina, which destroyed large portions of New Orleans and the Mississippi Gulf Coast. A few weeks later, Hurricane Rita hit much of this destruction a second time. It was terrible, and like many Americans, I felt a sense of embarrassment over America’s seeming inability to do much to make things better.
I would later have a chance to see some of the neighborhoods in New Orleans that were most impacted by Katrina. Entire blocks were wiped out, generations of accumulated wealth destroyed. Yet, what happened to GDP in subsequent months is telling. Here are the statistics as presented by the Congressional Budget Office:
Estimated Net Effect of Hurricanes Katrina and Rita on Real GDP (billions of 2005 dollars at annual rates)
2005, Second Half: –21B to –33B
2006, First Half: +24B to +36B
2006, Second Half: +35B to +48B
2007, First Half +33B to +47B
2007, Second Half +27B to +35B12
The overall economy takes a hit immediately after each hurricane, but in the two years that follow, these disasters are a major stimulus. All the cleanup and rebuilding, all the recovery spending and one-time consumption, is a boon for the economy.
That is the dichotomy. What is good for a national economy is not well aligned with what is good for a local economy. The national economy is focused on growth, a short-term metric that is not correlated with real wealth or broad prosperity. In contrast, a local economy depends on wealth accumulation, a long-term reality that correlates to stability.
If we worried about the national economy and didn’t care about what it meant for cities, local businesses, or families, we’d just pick a few random cities to destroy each year and reap the economic benefits of rebuilding. If we worried about our local economies, we’d obsess about real wealth creation, not growth.
It is relatively easy to optimize one or two economic variables at the national level, at least in the short-term, if we’re willing to ignore fragility or tolerate absolute failure in other realms. What our cities desperately need today is a more nuanced approach to capital investments, growth, and development, a harmonizing of objectives that can only happen effectively at the local level.
Ultimately, building a prosperous America is a hyper-local undertaking. Yet, hyper-local undertakings are messy and chaotic. They can be dominated by small-minded thinking, by parochial concerns. In a society as connected and outwardly affluent as ours, where experts in all realms peddle their own low-pain rescue remedies for the challenges we face, American society has developed a low tolerance for the messy and chaotic.
A Paradox of Thrift or Avarice?
Keynes identified the Paradox of Thrift, the damage done to the national economy when individuals and organizations save instead of spend during an economic downtown, but what about the opposite? What about a Paradox of Avarice, where individuals and organizations don’t save but spend all they have? And more. What are the impacts of such a condition?
To serve us, to attempt to solve the great problems humanity has long struggled with, we created an economy that produces growth. When growth is an option, it is a fantastic thing. When we experience growth, it often makes our lives easier. It solves problems and can add to the comfort and beauty around us. Growth is good.
Yet, we have gone to the next step and made continued growth a condition of our prosperity. It is no longer merely a positive experience but a prerequisite for our comfort. And if we should experience a period where we fail to grow, or even grow at rates lower than what we had anticipated, then all manner of hardship is visited upon us.
Czech economist Tomas Sedlacek posed the question: Do we want an economy to be more like a person standing or a person riding a bike?13 A person standing is stable. They can move forward but moving is not required for stability. In contrast, a person on a bike must keep moving forward if they are to stay upright. For the person biking, standing still is unstable. They must continually move ahead, something that is ultimately impossible in an infinite game.
The economics of a traditional city was like a person standing. It could grow, even very rapidly, but it was also stable without growth. Growth was a positive condition, but not a requirement. In contrast, the post-Depression American city is increasingly like a person on a bicycle; it must keep growing, at ever accelerating rates, or things fall apart.
In the past, growth served us. Today, we serve growth.
In the system we have evolved, the ideal citizen creates growth, not by saving and investing, but by consuming beyond their means. It matters little that this is ruinous to the individual, that such financial insecurity creates enormous levels of instability. Individual avarice is necessary for our national GDP to grow. Savings is punished with artificially low returns while debt is subsidized. Our individual value to the whole is based on our capacity, even our desire, to consume.
Local governments are induced to take on unpayable long-term liabilities so that the national economy can experience growth today. In the name of efficiency, they are stripped of nearly all means of ingenuity. Our cities orient up the government food chain, allowing themselves to be positioned at the bottom, grateful for the crumbs they receive. This is backward.
To build Strong Towns, local leaders will need to take steps to opt out of these systems. This is difficult because it’s the water we all swim in, and the current gets stronger as things become more desperate. Still, if we are to truly serve the people in our communities, and by extension be there when we discover we need all seven of our scattered plots, we need a new path to prosperity.
Our cities must now intentionally sacrifice growth in order to have stability. In the infinite game we are playing, stability is a requirement, growth an option.
Cities are a collection of us; they are the way we take collective action in our communities. Over the past century, we’ve gradually given up this responsibility, deferring the direction of our places to the priorities of others. If the people are to lead again, if we’re to create a prosperous future for ourselves and our neighbors, local government must reassert leadership.
Notes
1 https://www.jstor.org/stable/3673760?read-now=1&seq=19#page_scan_tab_contents.
2 Jared Diamond, The World Until Yesterday (New York: Penguin Books, 2012).
3 https://fraser.stlouisfed.org/files/docs/publications/books/posteconprob_harris_1943.pdf.
4 St. Louis Fed, https://fredblog.stlouisfed.org/2015/01/on-household-debt/.
5 St. Louis Fed, https://fred.stlouisfed.org/series/PSAVERT.
6 St. Louis Fed, https://fred.stlouisfed.org/series/FEDFUNDS.
7 https://www.strongtowns.org/journal/2015/9/14/lafayette-pipes-and-hydrants.
8 Jane Jacobs, Cities and the Wealth of Nations: Principles of Economic Life (New York: Random House, 1985).
9 https://money.cnn.com/2005/07/12/markets/bondcenter/bond_yields/.
10 http://futures.tradingcharts.com/historical/DJ/2005/0/continuous.html.
11 https://money.cnn.com/2005/08/09/news/economy/fed_rates/index .htm?cnn=yes.
12 “The Macroeconomic and Budgetary Effects of Hurricanes Katrina and Rita: An Update” (Washington, DC: Congressional Budget Office, September 29, 2005).
13 Tomas Sedlacek, The Economics of Good and Evil: The Quest for Economic Mean
ing from Gilgamesh to Wall Street (New York: Oxford University Press, 2011).
6
Rational Responses
Our cities made decades of bad investments, sacrificing their stable wealth in exchange for new growth as part of a continent-wide experiment. Most local governments are functionally insolvent, having more long-term obligations than they have revenue potential. They react to this imbalance by trying to grow even more.
The fundamental lack of financial productivity in our development pattern has made our governing systems fragile, despite our best intentions. Calls for more efficiency, greater centralization, and much more spending reveals a lack of awareness, along with an embedded desperation. This can’t continue.
I’ve presented these facts hundreds of times, to audiences big and small, across the North American continent. The most common question I receive is also the most predictable: What is the solution?
People have gotten angry with me, quite indignant, over this. Once, at the end of one of my lectures, someone stood up and yelled at me, “Chuck, you’ve come here and scared us all. Don’t tell me you did this without a solution in mind. What are we supposed to do? What’s the five-step plan?”
Of course, I have ideas of what we should do, but I don’t have any magic that can keep decades of bad investments from unwinding. Much of what happens next is already baked into the North American cake. I’ve heard Chris Martenson, economic researcher and author of The Crash Course, frame an answer to a similar question in this way on his podcast:
Problems have solutions. Predicaments have outcomes. This situation has moved beyond a problem into a full-blown predicament. We need to stop trying to come up with solutions and instead shift to a conversation about managing outcomes.1
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