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Thursday
Jun162011

The Growth Ponzi Scheme, Part 5 (finale)

There is a fine line one walks when doing a series like this, and I struggle with it myself. On one side of the line, there is a tremendous problem we've identified, it has dramatic consequences that we are largely unaware of as a culture, and I want to yelp at the top of my lungs to make people aware. On the other side of the line is an awareness that the world does not want to listen to a sky-is-falling, doom-and-gloom, pessimist. We tend to call such people "crazy" and, in time, zone them out.

In this regard, I am certain that some people felt my last comment yesterday was unnecessarily provocative. 

Our national economy is "all in" on the suburban experiment. We cannot sustain the trajectory we are on, but we've gone too far down the path to turn back. None of our dominant political ideologies can solve this problem. In fact, there is no solution.

I feel bad, but I am not trying to be provocative. There truly is no solution. This may be disappointing to those of you that have hung with this series -- or by the hit counts on our site, joined mid-week -- because I have no magic bullet, no series of policies and no simple course correction that solves our current financial spiral. There truly is no solution.

Let me pass on an analogy I have used here before. Let's say that a person gets in a car accident. For whatever reason, they are seriously injured -- maybe even disabled -- and they don't have insurance of any type. They are unemployed and have no savings. What's the solution? There really isn't one. But looking at the situation, there are responses that a third-party observer would call "rational" and "irrational". 

America is in a slow-motion car wreck. Lots of people are being hurt by it, some very badly. We've long lost our insurance by accumulating so much debt. We've also relinquished our production capacity. And we have little savings to speak of. What's the solution?

I wish I had one. I really do. I would be a very popular person, indeed. Unfortunately, all I can offer are rational and irrational responses.

For me, the rational response starts with this picture.

This is my hometown as it appeared in 1894. Today this street looks like Dresden in 1945, an empty wasteland of parking lots and low-value, partially-abandoned buildings. But in 1894, this place rocked. Look at it! Look at those buildings -- we'd give anything to have that here today.

Now ask yourself how this existed in the first place. How did we build such an amazing place before the home mortgage interest deduction? How did we accomplish this before zoning? Before the International Building Code? What created this place before we had state and federal subsidies of local water and sewer systems? Before HUD? Before DOT? Before the state highway system? Before Fannie and Freddie and subprime mortgages and collateralized debt obligations? How did we ever accomplish this before tax abatement, tax increment financing, SBA and local economic development? Heck, we did this before the advent of the 30-year mortgage!

Here's the answer, and the key to the correction we need to make: We built places that financially sustained themselves. Do you know how I know this? Simple. If this place did not financially sustain itself, it would have gone away. In 1894, nothing was going to artificially prop it up.

This is not an anti-government argument. In fact, just the opposite. To pull off what my ancestors created -- a successful town in the center of the deep woods of Minnesota -- they had to have excellent government. Their future depended on it.

They had to organize themselves and use their collective resources very wisely. I look at the pictures of the beautiful way in which they maintained our now decrepit parks, the purposeful way in which they placed grand public buildings, the way in which they regulated the public realm and it is clearly evident to my trained eye that these people understood how to wring every penny of value they could out of their built environment. They knew the art of placemaking.

Today we have largely relegated this art to Disneyland and isolated parts of the faux-downtowns we are trying to "revive". We have the New Urbanists to thank for resurrecting the lost knowledge of placemaking, much the same way engineers of the Renaissance recaptured the knowledge of the Roman bridges and aqueducts, an understanding literally lost for centuries. The transition in our understanding has been no less dramatic.

So there's the primary supporting strategy: placemaking. We need to wring more value out of our places and that is only going to happen if we understand how to create value in the first place. This is a monumental task because for two generations we have built our places without bothering to consider how they would be sustained (or whether they would even be worth sustaining). None of our public officials has ever asked the question: Will this public project generate enough tax revenue to sustain its maintenance over multiple life cycles? Try asking that -- you will be amazed.

So a rational response is to start insisting that our places show a positive financial return. That will require a completely different approach to building our cities along with a completely different understanding of growth. If you need help getting started on this, check out our Starter Strategies for a Strong Town as well as our Strong Towns Placemaking Principles

In addition to this, there are two irrational responses that we need to acknowledge. The first irrational response is to simply continue the present course until we are forced to change.

I'm astonished and more than a little depressed at the shallow nature of the public debate we are having over this crisis. Do we cut the budget or spend more? Do we raise taxes or reduce them? Does raising the debt ceiling signal fiscal responsibility or a lack of restraint? Do we build rail lines or highways? How do we restore housing values? How do we lower unemployment? And this is a sampling of the more intelligent lines of thought going on amidst the salacious and the ridiculous.

Nobody has acknowledged that a) the bubble economies of tech and housing were not financially real, b) we can not "recover" to a condition that was not financially real in the first place, and therefore c) we need to start focusing on a transition to something close to reality, which is a long ways from where we currently are.

This brings me to the second irrational response; Clinging to the belief that nothing needs to really change. 

Yesterday I had someone tell me, "Chuck, I think you are right. I can't argue with a thing you say. But I believe in the ability of the American people to adapt and innovate and overcome any challenge we face."

Let me interpret this statement because I hear it all the time. "Chuck, I think you are right, but I believe that someone, somewhere is going to come up with some trick or gadget that will solve this mess and keep me from having to change my lifestyle too much." I wonder if the Americans of 1870 or 1930 had this same belief (or the inhabitants of Easter Island).

I firmly believe that we have the ability to adapt, innovate and overcome. We will emerge from this a better people. But I don't see a way through this that allows us to keep the same lifestyle, the same living pattern and the same lack of productivity in our places. Like our innovative and resourceful ancestors before us, we'll find a way. But like those ancestors, it is going to involve a lot of painful change. Wishing for a miracle is fine, but depending on a miracle is irrational.

At Strong Towns we are trying to explain our current financial crisis -- and the transition in our living arrangement that must happen -- in a way that local officials can understand and discuss in their own communities. We are also working hard to develop the tools that are needed to help our cities, towns and neighborhoods make this difficult transition. If you value what you have read here this week and would like to help us promote the Strong Towns message, consider supporting us with a one-time or a recuring donation. 

The posts this week come from research and information we assembled for our Curbside Chat presentation. If you would like to host a Curbside Chat in your community, please sign up and we'll contact you to make it happen. And if you are unable to make a donation at this time but would like to support our efforts, please share this series with your friends, family, neighbors and the public officials in your community. Here are the links to all five articles:

 

The Growth Ponzi Scheme

 

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Reader Comments (27)

Pessimistic? Maybe. Realistic? Most probably.

JHK would call you downright optimistic.

June 17, 2011 | Unregistered CommenterTom H.

It seems clear to me that we need find ways to support our local economies. Try to take pride in your community, and take a pass on cheap imported goods. Perhaps there are state and local government initiatives and tax initiatives that could help?

Do I sound like a politician?

June 17, 2011 | Unregistered Commentergml4

Great series. You really pulled it all together with this.

June 17, 2011 | Unregistered CommenterJake Krohn

Excellent series and great, reasoned conclusions. Thank you for this!

June 17, 2011 | Unregistered Commentertnrkitect

Great series! Keep up the good work.

I feel that with a little re-tweaking of these, and other blog posts, you have enough material for a pretty solid book!

June 17, 2011 | Unregistered CommenterNathaniel

I think that photo says it all. That city was built to a scale for a society that walked. We aren't that society any more.

In any "Ponzi scheme" there are people who make money and people who end up losing it. And that is true here as well. But I think the Ponzi scheme model is misleading. Government investments are not meant to bring a return to government, they are intended to bring a return to the people.

Lots of people made money or benefited in other ways from the investments you are complaining about. Those streets were not just a benefit to the people who owned property along them, why should the city be expected to recover its cost just from those property owners? That is not a reasonable expectation, these are no truly "local" streets no matter how they are classified.

Which brings us back to that walkable city. Our tax structure is set up to recover costs from people based on that walking scale to benefits from development. But the benefits of city investments are now spread much more widely.

Grand Rapids Minnesota has 15,000 jobs, but only 5000 are held by residents. The rest are held by people who live in surrounding communities and countryside. Those folks use Grand Rapids as a place to work, shop and go out to eat. They attend church in town, belong to local organizations and participate in local arts organizations. They use the local library, civic center and parks. Many of their kids come to town every day to go to school and then hang out afterwards. But the Grand Rapids City government has almost no way of recovering the costs of being the commercial center for the region from those people. The property taxes on local businesses don't begin to cover the costs and are often unrelated in scale to the burden having all those employees places on city services.

The problem is that we have revenue structures scaled to walkable communities. But we have communities that are scaled to the automobile. A local business may serve a market 50 miles in any direction. It draws its customers and its employees from that entire area. But when it comes time to pay for services to support that business, they are drawn from an area within walking distance.

So we end up heavily subsidizing those that fled the "high taxes" of the city for the suburbs and exurbs. And that process is going to be very difficult to stop. Faced with state government shutting down, we have legislators looking for a special session to keep MNDOT operating. The political clout of suburban developers and residents is going to make it very difficult to end the process of building infastructure to allow new development that relies on subsidies to survive. Especially when those subsidies are largely hidden from the beneficiaries.

June 17, 2011 | Unregistered CommenterRoss Williams

"So a rational response is to start insisting that our places show a positive financial return."

This strikes me as a dangerous statement. A financial return for who? And from who? And what are the "externalities" in this transaction? Financial arguments are used to justify many of the decisions, at all levels of government, that Strong Towns would condemn. Those arguments are certainly flawed, but focusing on the flaws and merits of different financial arguments does nothing to illuminate the fundamental flaws with the way we, as a society, think about problems and solutions.

June 17, 2011 | Unregistered CommenterEli Damon

Ross said, "Government investments are not meant to bring a return to government, they are intended to bring a return to the people."

That's just plain insane. If the government does not bring in enough money to operate, it will not operate long. This is especially true at the local level, which is where our focus is. The problem we have today is that our local governments are doing just what Ross suggests, transferring public wealth to private parties and accumulating huge public obligations in the process.

Grand Rapids has done everything it can to accommodate those people living out of town, widening roads and building parking lots everywhere. They have also done everything they can to make the public realm of their neighborhoods into auto-only zones. This is not only an incredibly expensive strategy, it has made Grand Rapids a less-desirable place to live than it should be. Subsequently, people live outside of town as you indicate. The problem is not the tax structure -- although that needs to change too. The problem is that nobody in Grand Rapids ever did a life-cycle analysis on any of their projects as they made this transformation.

Grand Rapids, and all cities in similar circumstance, should ask themselves what they could do to get that person that lives outside of town to actually want to live in town. Following that line of thinking would cause a radical transformation.

Eli, the financial return has to be to the public. If the public is going to take on the obligation, the project has to generate enough tax revenue to sustain it. Otherwise the public if going to be taxed substantially more after-the-fact to sustain it (or it ultimately won't be sustained). Trust me, the Wal-Mart on the edge of town has a tiny per-acre return when compared to even a lowly single family residence on a 4,000 square foot urban lot, yet that Wal-Mart requires millions of dollars of public infrastructure for its very existence.

Thanks to everyone - I'm trying to take an evening off here, but will do what I can to add to this discussion.

June 17, 2011 | Unregistered CommenterCharles Marohn

"Grand Rapids, and all cities in similar circumstance, should ask themselves what they could do to get that person that lives outside of town to actually want to live in town. Following that line of thinking would cause a radical transformation."

While I agree with you, I don't think the community leaders in Grand Rapids care much where people live. They want to make Grand Rapids a great place to work, spend money and own a business. They aren't designing the community for people who live in the city or to make it more attractive to do so.

Ross said, "Government investments are not meant to bring a return to government, they are intended to bring a return to the people."

That's just plain insane. If the government does not bring in enough money to operate, it will not operate long

Of course, government has to be paid for, that's what taxes are for. But there are plenty of public investments in things like parks or sidewalks or schools that produce no direct revenue for the city.

In many cases however, we get back much more than we pay in taxes.Just check on the housing values in places where streets are safe compared to where they aren't. The taxes paid for police are small compared to the value they return. The same is true of parks, schools and sidewalks. Its true of a lot of public services. We pay taxes for things that serve us. That includes investments in infrastructure that allow businesses to thrive, make homes more attractive or simply make our lives better. They are investing our money and we expect that we, not the government, will get a return on that investment. There is no such thing as "public wealth". We pay taxes because it benefits us, not because it benefits government.

The problem for urban areas is allocating the burden (taxes) to those who benefit. The current government structure allocates a lot of benefits to people who don't have to take on much, if any, of the burden of paying for them. You can call that transferring wealth if you want. But the difficulty small towns face is that they are providing huge benefits to a lot of people who escape having to pay for them. And that is not just the direct benefits to developers of publicly funded infrastructure.

June 17, 2011 | Unregistered CommenterRoss Williams

This is an important point.

Ross said, "...there are plenty of public investments in things like parks or sidewalks or schools that produce no direct revenue for the city."

That is true today. It was not true 100 years ago. Back them we invested in these things to make our places more valuable. We located parks and schools strategically to create even greater value. This is what I mean by placemaking -- connecting these public investments to a higher quality of life and creating value for people that live within the neighborhoods of the community.

Today we build schools in the middle of nowhere, creating no value to adjacent properties. We build parks on the edge of town and then add parking lots -- same result. We don't leverage any of our investments to maximize our return. It is simply about more growth.

June 18, 2011 | Unregistered CommenterCharles Marohn

I really liked this series; it is clear and succinct synthesis, has a lot of big picture ideas, and real infrastructure case studies too. Good writing! As for solutions, your ten principles of Strong Towns, elsewhere on your web page, resonate with the principles of Smart Growth of course. Last year I worked on a report that argued smart growth principles can provide economic benefits across a range of stakeholders. You can find it below.

www.growingwealthier.info

At the time I was conflicted about the title "Growing Wealthier" because growing is what causes the problem. However, in the end, growing is what we life forms do, we just need to keep ourselves in balance with the energy flow from our star so we can last as long as possible. Hopefully we can find ways to do that and live comfortably and enjoyably at the same time.

June 20, 2011 | Unregistered CommenterChuck Kooshian

Excellent series! I wish I could make a financial contribution at this time ( hopefully the not too distant future I will) but I tell anyone who will listen about you guys.

I am struck by the picture of Brainerd - lively and lovely which begs the question "why can't we have this today?" Unlike the individual who professed confidence in the people's ability to adapt I'm not convinced. Any politician who broaches the subject and introduces the policy remedies to change the present situation will be laughed off the dais. The large financial interests threatened will embark on a sustained campaign to protect their interests by portraying the solutions "un-American" and "Big Government". Its my opinion that the only thing that will bring any real and sustainable change in the way we live is going to be external - ie., a gas shock that makes auto-centric land use impossible. I wish this wasn't the case but I see no evidence to the contrary. I hope I'm wrong.

June 20, 2011 | Unregistered CommenterMWBrown

I believe there is a rational response at an individual level - personal preparedness. Improving personal productivity, getting out of debt, and increasing self sufficiency will help people deal with these problems. This is not a solution to the “slow-motion car wreck” described by the authors but it is a way to cope with it individually.

I give my children constant warnings that my generation is leaving them a disaster that they can't clean up, but they can prepare themselves to live in it through development of useful skills, strategic purchase of a modest home with a goal of paying off the debt and becoming self-sufficient in every-way possible. I am not advocating a hunker in the bunker mentality but of positive attitude of taking care of yourself.

June 21, 2011 | Unregistered CommenterDale Johnson

"Back them we invested in these things to make our places more valuable."

We still do. But the "place" people live is much larger than it used to be. Back then, most people lived their lives within a very small area. The kids educated in the local schools went into the local work force, created local businesses and added to the local community. Now the best and brightest of those kids are likely going away to college and never coming back. The return for the local community from their education is almost zero.

"We located parks and schools strategically to create even greater value. "

Schools are no longer built by individual communities, they are built by school districts and benefit people from a wide area. Their location has almost no impact on the value of those benefits for most people. The idea that schools pay for themselves from taxes recovered on the increased property values they create is questionable, at best. Same with parks.

"This is what I mean by placemaking -- connecting these public investments to a higher quality of life and creating value for people that live within the neighborhoods of the community."

I didn't really see any real discussion of "placemaking". What I see is a discussion of how we "can't afford" the investments that have made places attractive. If you want to create great places to live it means spending more money on public investments, not less.

That means raising more money in taxes. You can't expect to do that with just the people who live within the taxing authority of a city to paying for those investments. You need recover a bigger share of the private benefits that are derived by people who live in the surrounding area.

Its not that we "can't afford it" or that we have a "Ponzi scheme" going. Its that people don't want to pay for public investments and we have a system of government that allows them to opt out while still getting the benefits from the investment of others.

June 21, 2011 | Unregistered CommenterRoss Williams

Ross - For some reason I feel a need to help you on this, my antagonist. Perhaps I feel your heart is in the right place. I'm trying.

I never said that parks and schools will pay for themselves. Stop trying to attach a narrow political narrative to our work here. I said they were located strategically to create value. That is dramatically different.

If you go and find a neighborhood school from the 1920's, they were all built with good architecture (typically classical) and were located within walking distance of neighborhoods. They had a playground, an auditorium and would often double as a public meeting hall. Their location and design provided added value to the neighborhood. The school was a neighborhood amenity and that translates into a higher financial return for that neighborhood. This is much different than the school campus four miles out of town, which nobody wants to live next to due to the traffic.

Same with a park. How valuable is the land around Harriet Island? It is immense. We took shoreline property, made it a park and built homes around it. Compared to how we have chopped up shoreline for private ownership throughout the rest of the state, there is no comparison in the return on investment.

Now look at those ball fields a mile out of town. Cheap land, sure, and perhaps a nice facility for the 12 weeks they are used in the summer. But how much more valuable would those ball fields be if they were located in a neighborhood where kids could spontaneously gather for a quick game, where people from adjacent houses could watch a game while grilling in the front yard or where a family could wander over to catch a game while their kids played on the playground equipment? What if we could put an ice rink in the outfield in the winter people could walk to? It would add real, financial value to the neighborhood because it would make that neighborhood a better place to be.

Whether we build parks and schools in the middle of nowhere today because we are spread out or we are spread out because we stopped building parks and schools that add value, the argument is chicken/egg. The fact is that we have a desperate need to shore up the finances of our cities -- the places where we have the greatest amount of public infrastructure in place that we are obligated to maintain -- and that will only happen if we start to see the design of our places differently.

-Chuck

June 21, 2011 | Unregistered CommenterCharles Marohn

Chuck -

Understand that I fully agree with you that we are not creating great places to live. The reason that is happening is that the people live in those places have lost control over the places they live. Places are created for people who do business there, not for people who live there

Here is your answer to that question:

"We built places that financially sustained themselves."

"I never said that parks and schools will pay for themselves"

What then, did you mean by this? Because it certainly sounds like you are saying they did pay for themselves 100 years ago.

Ross said, "...there are plenty of public investments in things like parks or sidewalks or schools that produce no direct revenue for the city."

That is true today. It was not true 100 years ago. Back them we invested in these things to make our places more valuable. We located parks and schools strategically to create even greater value.

I said they were located strategically to create value. That is dramatically different.

Yes it is. But I think the folks that are creating auto-dependent communities would argue they are making strategic decisions that create value as well. They are creating value for suburban and rural developers. They are creating opportunities to attract big box retail and other national chains. They are creating a marketplace for businesses that will attract customers from a very wide area. And they are creating jobs for people who live throughout the region.

Cheap land, sure, and perhaps a nice facility for the 12 weeks they are used in the summer. But how much more valuable would those ball fields be if they were located in a neighborhood

Less than you seem to think. The direct value of what you are talking about is to a few neighborhood kids of a certain age. The price they will pay for that is having hundreds of strangers, kids and adults, in their neighborhood all summer. Because this is not a neighborhood park, its a regional recreation facility.

The fact is that we have a desperate need to shore up the finances of our cities

And this is really where I disagree. The problem is not finances, if by that you mean lack of money. The problem is that cities are providing services to a lot of people who don't live there and who get economic and other value from those services. They have no way of getting those people to return some of that economic value to support the services they benefit from.

Grand Rapids has 15,000 jobs, 5000 are done by people who live within the city limits. The other 10,000 are people who drive to Grand Rapids every day from somewhere else to take advantage of the urban services Grand Rapids provides. There is no way for Grand Rapids to recover any of the cost of creating those jobs. And that doesn't count the Walmart, Applebees and other national that also get huge economic benefits from city services, but pay almost nothing beyond limited property taxes which have little relationship to the economic value they get.

In short, this is not a "Ponzi scheme" of public investment that we can't afford. Its a scheme where the economic benefits of the investment are going to people who don't pay for them.

I agree with you that process has destroyed thriving downtowns. Its produced huge incentives for new auto-dependent development at the edge of town that traditional downtowns can't compete with. Not while carrying the financial burden for both their own urban services and for the public investment to support new development.

Five years ago I would have agreed with you. The answer is to create compact, walkable communities. But I have to admit, I don't see how we get there from the current auto-dependent communities we have in rural america. Its going to cost more money, with larger public investments to get there, not less. I think its worth doing, but arguing we can't afford to sustain the current auto-dependent development is not an argument in favor of that. The real argument is that with a much larger public investment we can create better places to live and work that attract young people and restore out thriving communities. Cost is not the issue.

June 21, 2011 | Unregistered CommenterRoss Williams

Thanks very much for this outstanding series. The case studies you've included really are enlightening and persuasive -- it's difficult to argue against those figures. Your message deserves to be heard by as wide an audience as possible.

June 23, 2011 | Unregistered CommenterCharlie

No solution? It's the Malthusian problem. Eventually we'll keep expanding and evolve (albeit "painfully") just like humankind has continued to do. At some point we will be forced to change our behavior. No one seems to know when or by what means our behavior will change. Europeans came to America for essentially the same reason that people in the 50's moved to suburbs. Americans expanded west for exactly the same reason. There's no more New World, however... maybe outerspace. When there are no more sprawls to be built, we'll innovate a way to make more of them.

June 23, 2011 | Unregistered CommenterRyan M

Thank you for a rational point of view. One other item 'overlooked' in most media/political analysis and debate is that governments are hunting in the 'field' of constituents for possible sources of 'responsibility' and revenue and missing the giant, bloated hog that is behind them. That would be 99% of people who have no responsibility or interest in the 'crisis' as compared to the 1% of the wealthy individuals and their corporations who are 100% responsible and should be held accountable. If that point of view was prosecuted, (with a lot of IP/Patent reform) then we'd be back in business and solvent.

June 23, 2011 | Unregistered CommenterJes Lookin

I enjoyed the series and am sympathetic (though I'm not sure I completely agree) with the basic arguments behind it.

But one comment on the photo: the picture is of a parade of some sort — why else is there a line of wagons all moving in the same direction and all those people watching them go by? You don't built a lively place on parades unless really are Disneyland.

June 23, 2011 | Unregistered CommenterBrad B
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