When this piece originally ran last spring it created a very interesting reaction from our audience. There were some of you that found it illuminating, as if I had revealed some hidden truth that I had been keeping to myself. Others were bewildered and felt this simple way of evaluating resiliency—the ratio of private investment to public investment—was way off base.
There are times when I know I need to go back and explain things again, in slightly different ways and with more deliberation, because what is so clear to me as to not even bother mentioning is sometimes elusive to others. Don't fret; there are countless things that are obvious to others that my dim wit fails to see. (Yesterday was my 20th wedding anniversary which, in terms of me not grasping the obvious, is more a testament to my wife's patience than anything).
So when prompted to deal with the density issue yet again, this is what I came up with. I appreciate now more than I did then just how novel this might be in a practical sense. While many engineers do look at things this way—I'm not original in these thoughts—it is not often vocalized for various reasons (most common: most engineers try and vocalize as infrequently as possible AND it is generally not in the interests of the engineer to point out this problem).
To me it is obvious that there needs to be enough private wealth in a place to provide enough public revenue (which, in my way of viewing the world, is essentially excess private wealth) to maintain the systems that support that private wealth. In short, we don't just exist in order to build roads, sewers and storm drains. These things are a means to an end—wealth creation and prosperity—not the end in and of themselves.
If all this public investment is not providing adequate returns, it will fail. Period. That's not a theory; that's math.
What is the right density for a Strong Town?
The most common question I receive by email is some variation of: What is the right density for a Strong Town? What is the magic number that makes all the math work and that we should plug into our zoning codes to get the optimum place? The act of asking such a question indicates to me that the sender (a) has not read much from our website or (b) has read from our website but not spent much time thinking about it. Either way, in the extreme triage that is my inbox, these emails rank pretty low.
Just before I went on vacation, Jim Kumon sent me another one (he gets a lot of these emails first now) and suggested, based on the number of times it has been asked, that I give it another go. Here’s the specific question this time:
Something that I think would be valuable for planners and everyone else, is to have a reference for how to build financially solvent towns at varying levels of density/size. What is the right kind of infrastructure for a town of 5000 with 800 people/sq mi, versus a town of 15000 with 2000 people/sq mi?
Let me restate the question: Something that I think would be valuable for planners and everyone else who finds it painful to think independently but instead to take comfort in misapplying “data” provided by others deemed experts (see parking codes as one of many examples) is to have a table of densities that will allow us to zone a Strong Town.
I hate density as a metric and whenever I hear someone talk about it my mind reflexively moves on to something more worthy of my time. Yours should too. Density is not our problem or our solution. Insolvency is our problem. Productive places are the solution.
Anyone who remotely comprehends the number of variables at play here would never ask such a ridiculous question. How valuable are the units? How well is the street maintained? What is the inflation rate for construction costs? What is the city’s bond rating? Will the association properly maintain the roof of the building? What will happen to the building across the street currently in probate? Does the city’s code empower NIMBY’s?
I could go on and on and on…. If density matters for anything, it is a byproduct of success, not its cause. And I’m not even sold on that.
How to think about Density
Here’s how we should be thinking about this.
Consider the following: You own a $200,000 house. I come to you on behalf of the city with a proposal. We are going to fix all of the infrastructure directly in front of your home. We’re going to fix the street and the curb and the sidewalk. We’re going to replace all the pipes and service connections. And when we’re done with this project – a once a generation undertaking – we’re going to give you the bill.
And when we give you the bill for the stuff that directly serves you – the stuff that only you needs – we’re going to also give you a bill for your share of the communal infrastructure. In other words, you are going to also pay a once-a-generation charge for the maintenance and upkeep of all the arterial streets, interchanges, traffic signals, lift station pumps, water towers, treatment facilities, etc… It will only be your share – everyone else will pay theirs – and you won’t be billed again for a generation.
Remember that you own a $200,000 house. What if I said your total bill was $200,000? Would you pay it? I’ve been asking people this exact question for the past two weeks and have yet to have anyone who didn’t immediately say, “No, there is no way.” And, of course, nobody would pay this. If the house is worth $200,000 and my additional cost of maintaining the infrastructure to allow me to live in that house is an additional $200,000, than that’s a really bad investment.
What if I said your total bill was $100,000; half the value of your house. Again, everyone I asked this question to would give up their house and look somewhere else before shouldering this bill. And even if you are not one, all your neighbors would be, which would spell the end of your neighborhood.
So how about a $20,000 bill? Now we’re starting to get into the “it depends” range. If you had no equity in the home, then you’re almost guaranteed to walk. If, on the other hand, you own the house clear and free, then you’ve got some incentive to suck it up and pay, albeit grudgingly.
It is only when I got to $10,000 where people in large numbers would agree they would pay and, at $5,000, I started to get universal acceptance. For a $200,000 house, it is definitely worth an additional investment of $5,000 to keep everything around it functioning.
I think this is a reasonable thought process and it points to a powerful conclusion. At a property value to infrastructure investment ratio of 1:1, everybody walks. Nobody sensible is going to invest $200,000 in infrastructure in a property and have it end up being valued at only $200,000. What’s the point?
The Density Ratio
At a ratio of 10:1, resistance starts to soften and we see people with different circumstances start to respond differently. Somewhere between 20:1 and 40:1 we cross over into no-brainer territory. Nobody is going to walk away from a $200,000 investment if all they have to put in is another $5,000 once a generation to keep it all maintained.
So instead of density, what we’re really talking about here is a target ratio of private investment to public investment of somewhere between 20:1 on the risky end and 40:1 on the secure end. If your city has $40 billion of total value when you add up all private investments, sustaining public investments of $1 billion (40:1) is a doable proposition. Public investments totaling $2 billion (20:1) starts to be risky with outside forces of inflation, interest rates and other factors beyond your control starting to impact your potential solvency.
Let me explain this a different way. If you own the Empire State Building in NYC, which is appraised at $2.5 billion, finding a few million to fix the street and pipes in front of the building is not going to impair the value of your property. It’s not a deal killer. Push comes to shove, you’ll make that happen. However, if you have a 5-acre lot with a house worth $320,000 and the city comes to you with an $80,000 bill to provide you sewer, water and a street (I've seen that exact scenario proposed and shot down), that’s going nowhere. It doesn’t make financial sense.
And, at the end of the day, we’re talking about building cities that make financial sense.
Public Inftrastructure vs. Private Investment
If all of this is logical to you, let me deliver the bad news. And by “bad” know that I’m understating substantially. Let me deliver the tragic news that demonstrates why discussions of zoning, new highways, high speed rail across America, recreational trails, decorative lights and every other fetish of the modern planner/zoner is a sad distraction from our urgent problems. I’ve now done this analysis in two cities—one big and one small—and for a $200,000 house in either of these cities, the once-a-generation bill for your share of the infrastructure would be between $350,000 and $400,000.
That’s right; these cities have more public investment than private investment. As we gather more data, I suspect these two examples will not be anomalies. Forget sensible ratios of 20:1 or 40:1. In pursuit of our fanatical belief that public infrastructure investment drives private investment, we have cities that have actually accumulated more public infrastructure liability than they have total private investment.
That is bizarre. There is no way all this public investment will ever be maintained. In the coming years and decades, our cities are going to contract in ways that are foreseeable, but not specifically predictable. Yet most are still obsessed with growth and, the “progressive” among us, with issues of density.
Instead of density, here’s the question that should keep you up at night: What combination of increase in private investment and downsizing of public investment will give my city a private to public investment ratio of 30:1?
If you can answer it theoretically before Detroit discovers it through trial and error, perhaps you can avoid the pain all of our cities seem destined to experience.