Projections

We routinely rely on projections when we plan for the future. The "best" plans theoretically anticipate where growth will happen, in what amounts and in what form it will take. Local officials then proceed to make huge bets on the future based on those projections. If we look back at the track of record of success or if we look ahead at the myriad of complexities and unknowns that face us, we clearly see the folly of this approach. In 2012, building resilience must happen in the absence of projections.

For those of you in California, we have two opportunities still available during our April trip to your state. First, on April 14 we are giving a planner's tour of Disneyland for up to six people (only five slots remain). This is a fundraiser for Strong Towns and the cost is $200, which includes ticket and a meal. If you are there for APA or live near the park, please consider joining us for a fun and informative tour. The second opportunity is that we have an open speaking date on Monday, April 16. Every other day of the trip is booked solid, but if you are a community located near Los Angeles or between L.A. and San Diego and are interested in hosting a Curbside Chat, get a hold of Justin Burslie to schedule.

While my plan was to finish up the "from the mayor's office" series, I must admit that my mind has been distracted over one issue since my testimony last week at the legislature. During the Q&A, we got into a discussion on growth projections and I made the remark that, if the legislators wanted to take a first step, they should start to ponder a state where we have no real growth for a prolonged period of time.

Of course, the implications of that are something we've thought about in this space a lot (although not for a few months). Our system of finance is dependent on growth. We've literally set it up that way. All U.S. dollars are loaned into existence and thus, to service the interest on that debt, the economy must continually expand. For governments -- particularly local governments -- costs increase and obligations grow each year. Unless there is sufficient growth, things start to go bad really quickly.

I can crystallize this all down to one question that I would like to see asked of Ben Bernanke, Barack Obama or any of the Republicans that are in the running for president:

How confident are you in your economic forecast?

This is, in a sense, an unfair question from a Strong Towns standpoint as the two logical answers are both incorrect. The most likely answer is going to be some derivation of, "Yes, I'm confident," to which my response is, "why?".

Why are you confident when your post 2008 projections have all been wrong to the optimistic side? What about your experience or the results you have seen give you the confidence of your predictions? What about the post-2008, fiat-currency economy is similar enough to the 1930's, gold-standard economy to give you confidence in the applicability of the lessons of the Great Depression? What gives you the confidence to believe that you understand the infinite complexities of the economy to even make a prediction?

I personally find the confidence we display in our current approach puzzling. At the federal level, we have little problem expanding the debt annually by 9%+ while the economy grows at just a fraction of that. At the local level, I routinely see cities evaluate their borrowing capacity as they prepare to tap into the debt markets to fund routine maintenance. They consider themselves good stewards if they keep borrowing below levels the market currently considers less risky (ignoring the trajectory of their debt, their obligations and the bond market in general).

In an economy where are literally in uncharted territory, we should not be this confident. Consider how seriously we are in a place we've never been: 

• We are 40 years into a fiat, digital currency; a monetary system backed by nothing but faith and trust. We've never been here before, and neither has anyone else.
• Our federal debt exceeds our GDP and is at levels that Rogoff and Reinhart, in their widely respected work This Time is Different; Eight Centuries of Financial Folly, indicate has historically been unstable. What makes this time different?
• We have a financial system that just "surprised" us a few years ago with instruments nobody in the regulatory fields apparently knew about and few people investing in them even understood. Are we sure there are no more surprises?
• We know that the level of interconnectivity in our financial system has never before been pondered. Indeed, the complexity of this international system is absolutely baffling. AS a small example, we still don't know what caused the 2010 Flash Crash. What makes us confident we understand this system?
• We have been at zero interest rates for a long time, and very low interest rates for long stretches of time prior. Why do we remain confident that monetary policy -- the adjustment of interest rates -- has a solution to our problem?
• It is self evident that our economy is dependent on cheap energy. It is also self evident that, with China and India attempting to provide their citizens with growth sufficient to give them a fraction of the U.S. standard of living, that the world energy markets are going to highly competitive indefinitely. What makes us think we can sustain even a 3% level of growth with energy price volatility?

Any confidence I might have had in our system disappeared the day Henry Paulson told us all that he needed nearly $1 trillion within 48 hours or the entire financial system would melt down. Any system where that is a possibility is not stable enough for me.

So what if the question were answered the other way; "No, I'm not confident." Then the immediate follow up is, "How can we be betting so much of our future on continued growth -- with no Plan B whatsoever -- when you have no confidence in the projections?"

The reality is that nobody who is in a position where they need to predict the future of the economy can say that they lack confidence in their predictions. If they did acknowledge that, we would find them to be incompetent and replace them with someone who pretended to know more. That is true even though we can clearly see, if we pause to look, that there is no basis for confidence and no record of success in making predictions. 

Many of you reading this are likely thinking, "But Chuck, we need forecasts to be able to plan. We need to make them on the best available information. Nobody could have foreseen the housing crisis, or 9/11, or a war between Israel and Iran, or...."

At the local level, this is precisely the logic that needs to change. We need to build a society that does not need projections, where we don't need a snake oil salesman masquerading as an expert (who may even have convinced themselves they are right) to tell us what the future holds. If you listen closely, that expert is only saying, "...based on the information available to me...." What good is that in such a hyper-connected, complex society?

To build resiliency in a local economy, the best available information is not enough. We actually need a growth pattern that is resilient. If you are wondering what that looks like, let me give you two simple examples:

• Spending $40 million on a new industrial park on the edge of town so as to attract new businesses and new jobs under the mantra of, "If you're not growing, you're dying." Not resilient.

• Taking a routine street maintenance project and tweaking it so that the street supports and attracts higher levels of investment on the same framework. Building resilience.

At the local level, we intuitively know more than we think we do. Or to say that a better way, the "experts" we routinely rely on -- from the Ben Bernankes of the world to the snake oil salesmen pimping us projects that will ostensibly solve our problems -- know a lot less than they pretend. Once your eyes are opened to that reality, they can't be closed.

So open them up. Take back control of the future of your community. Start building a strong town.

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Comments

[RR]

We use projections in transportation planning all the time. I am not convinced they are sound. Dealing with the provision of commuter parking for a commuter railroad, for example, we rely on population forecasts from the metropolitan planning organization along with some in-house variables that assumes most people will drive to use transit. But if we build the transit station so that the only way to access it is by driving, than we are fulfilling our own prophecy. With energy costs dramatically increasing, is it rational to be planning for the continuing use of the car as the predominant mode of transportation in our community? This is not an example of Strong Towns planning...

[Jennifer Krouse]

Chuck, there's a strong parallel between the ideas that you express here and the ideas that Eric Ries expresses in The Lean Startup. Basically, whether you're talking about a startup or a place, you're trying to build something under a great degree of uncertainty, which makes the commonplace methods of development inappropriate and even downright risky. Check out the book, if you haven't yet - you'll get a lot out of it.