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Monday
Jun132011

The Growth Ponzi Scheme, Part 1

The underpinnings of the current financial crisis lie in a living arrangement -- the American pattern of development -- that does not financially suppport itself. The great experiment of suburbanization that America embarked on following World War II has no precedent in human history. As it enters its third generation, the flawed assumptions that were overlooked are now coming back to bite us in a cruel way. Like any Ponzi scheme, there is only one way this ends.

The Growth Ponzi scheme is a major part of our Curbside Chat presentation, in which we go out to communities across the country for a discussion on the future of America's cities, towns and neighborhoods. Please visit the Strong Towns website if you are interested in hosting a Curbside Chat, contributing to the creation of a Chat video or supporting the Cubside chat program.

In the great American experiment of suburbanization following World War II, we redirected our county's extensive resources into a living arrangement unseen at any point in human history. We abandoned thousands of years of history, knowledge and tradition in building cities and towns in order to try this new -- and completely untested -- approach.

In a way, this was an odd thing for such a pragmatic generation, having been conditioned on financial depression, scarcity and war, to undertake. I don't think they ever saw it that way, however. The Great Depression had cut short efforts to improve the industrial city. With the automobile offering the promise of mobility for all, it was seemingly within our grasp for each American family to one day live the life of European royalty, complete with a country estate outfitted with all the modern trappings. America's ascendancy and absolutely financial domination worldwide made this dream appear possible. We likely never stopped to think it through.

What is more puzzling -- at least to those that think about it -- is how there has been so little questioning of the logic behind this arrangement. American suburbanization is a grand experiment, but one where the hypothesis -- suburban development provides prosperity -- is never really tested. It is basically a law, not a theory, that has crept into our ethos. It is only the collapse of the housing market, along with the much less talked about but even more consequential collapse of the commercial real-estate market, that has allowed critics of suburbanization to avoid the label "kook".

Suburban development has become equated with the American dream. It's continual propagation is nearly unquestioned. Even those who think we are in a deep financial hole that will take years to correct ultimately envision "recovery" to include a return to building more and more of this same pattern. But is that even possible?

Following World War II, there are four ways that American cities have grown (we call these the Mechanisms of Growth). They are: 

  1. Government Transfer Payments
  2. Transportation Spending
  3. Debt
  4. The Growth Ponzi Scheme 

Focusing initially on the first three, they all share two things in common. First, the initial cost to the local government for new growth is minimal. If the state or federal government provides a grant or low-interest loan to subsidize a project -- for example, the extension of a sewer or water line -- the local government may have to pay something, but it is nowhere near the total cost. Where the DOT comes in and builds a highway, widens a road, puts in a signal, builds an overpass, etc... there may be some local funds contributed, but again, the vast overwhelming majority of the money is spent by the DOT. When a developer comes into a community and uses leverage to finance a development project, and then when families or business owners come in and take on mortgages and real estate loans to acquire a property within the development, the local government spends little or nothing to make this happen.

That is the first characteristic these growth mechanisms share: a low initial cost of entry for cities. Even though the city gets local tax revenue from the new growth, it usually doesn't cost them much up front.

The second characteristic they share is that, with each increment of new growth, the city assumes the long-term liability of maintaining all improvements deemed "public". This typically includes sewer and water systems as well as roads and streets, but will also include treatment systems, pumps, water towers, meters and even storm water ponds. All of this stuff ages, degrades, breaks and ultimately needs to be replaced.

Put these two characteristics together and you have a key insight; Cities routinely trade near-term cash advantages associated with new growth for long-term financial obligations associated with maintenance of infrastructure.

To financially sustain itself then, a city or town utilizing the American suburban development pattern and making this tradeoff must believe one of the following two assumptions to be true:

  1. The amount of financial return generated by the new growth exceeds the long-term maintenance and replacement cost of infrastructure the public is now obligated to maintain, OR
  2. The city will always grow in ever-accelerating amounts so as to generate the cash flow necessary to cover long-term obligations.

Of course, with the suburban model, it is physically impossible for a city of finite dimension to grow indefinitely, let alone at amounts that accelerate forever. Even realtors are now starting to acknowledge that assumption #2 is not true. Later this week we'll show how assumption #1 is also not true, and by extension, why our pattern of development is a classic Ponzi scheme, one that we cannot fix or "recover" from.

Additional Reading

 

Strong Towns is a 501(c)3, non-profit organization run by three professionals volunteering their time and resources to change America. If you would like to help us spread this important message, consider making a supporting, tax-deductible donation.

Thursday
Jun092011

Friday News Digest

This week I have been sequestered in my office, working until 3 AM on two nights, to finish off a report for a small town here in Minnesota. This is for my real job - the one I am paid to do with Community Growth Institute. I'm sharing this information here because a) it explains why there are 400+ emails in my "unread" folder (sorry everyone) b) it will explain why this News Digest is so short, and c) because I hope to share the report with you here once the city has had a chance to comment on it. We basically took a simple project to design a couple of cross sections showing a bike path and turned it into a redux on the economic and social change of small towns, as represented in this one community. In other words, I got a little carried away, but hopefully they appreciate it. My sharing it here is to hopeful get a tough, open source review from all of you. That would be a great help and we can teach each other something.

In the meantime, enjoy this week's news.

I really liked Marohn’s analysis of what a complete street is and what a complete roads (I’d be curious to hear what the engineers out there think). The language we use in these discussions is so critical to the realization of our shared goals. The complete streets vs. complete roads division also resonated with me because it illustrates the challenges of coordination and communication between different project stakeholders. One project can mean vastly different things to the various people involved in its execution, and everyone is advocating along their own interests and priorities.

Naked streets are primarily European, and emphasize narrow streets lined with pedestrian uses and amenities, no signage whatsoever, no barrier between pedestrian and motorist whatsoever, and very subtle (texture changes are popular) differentiation between vehicular and non-vehicular "zones" on the street. Since scale and detailing prioritizes the pedestrian, a naked street is in essence a pedestrian zone the motorist "borrows" for the duration of his trip. Since this is not the motorist's element, the perception of a lack of safety, on his part, is greater, and thus (ironically enough) the street is safer*. They are clearly rooted in traditional urban paradigms, and are thus of great interest to Old Urbanism, as a nascent movement of sorts. Unlike complete streets, narrow streets can fit in far narrower rights-of-way--even as narrow as the 12 ft.

  • The Old Urbanist site also took our conversation in a unique direction, talking about pedestrian safety and pointing out how the revered Jane Jacobs did not think cars should be on parity with pedestrians (which is the thrust of Complete Streets) but that the public realm should be a pedestrian space. Some great insights.

This is why I think Jane Jacobs was on point in when, in terms of improving the city's streets and other public spaces, she referred to "an attrition of automobiles by cities" (Death and Life, p. 474) rather than today's "efforts to improve pedestrian safety."  The difference may seem minor, but Jacobs' statement identifies the culprit not as insufficient accommodation for people on foot — which implicitly acknowledges the primacy, or at least inevitability, of the automobile — but the automobile itself, the culprit behind pedestrian deaths along suburban arterials and urban streets alike.

Amy Klobuchar last week provided one of the more nauseating moments in recent Minnesota politics when she came out in support of Michele Bachmann's sprawling bridge to nowhere proposal in exurban western Wisconsin. Klobuchar's support means that almost the entire Minnesota congressional delegation is on record in support of breaking environmental protection rules for an unnecessary 700+ Million Dollar sprawl-inducing freeway bridge through the Federally protected St. Croix river valley.

  • And I continue to be blown away by the rich and beautiful ways in which Chuck Wolfe uses our work. In this article he compares the images of my hometown of Brainerd in its 1894 version with the organic and functional design of an African village. As usual, beautiful photos accompany the elegant prose.
  • NY Times columnist Thomas Friedman had a column about social volatility in China. It is worth a read, but I'm going to go back to my arguments against consolidation (blog, podcast) and pull this nugget out of his piece.

The second trend we see in the Arab Spring is a manifestation of “Carlson’s Law,” posited by Curtis Carlson, the C.E.O. of SRI International, in Silicon Valley, which states that: “In a world where so many people now have access to education and cheap tools of innovation, innovation that happens from the bottom up tends to be chaotic but smart. Innovation that happens from the top down tends to be orderly but dumb.” As a result, says Carlson, the sweet spot for innovation today is “moving down,” closer to the people, not up, because all the people together are smarter than anyone alone and all the people now have the tools to invent and collaborate.

Though a significant rise in interest rates could be toxic for a softening U.S. economy, the Federal Reserve has said it will end its program of purchasing $600 billion in U.S. Treasury bonds as planned on June 30. The Fed is estimated to have bought about 85 percent of Treasury’s securities offerings in the past eight months.

That leaves the Treasury, which is slated to sell near-record amounts of new debt of about $1.4 trillion this year, without its main suitor and recent source of support, and forces it back into the vagaries of global markets. Among the countries that will have to step forward to prevent a debilitating rise in interest rates are ChinaJapan and Saudi Arabia — and even hostile nations such as Iran and Venezuela with petrodollars to invest, according to one analysis.

  • And while you are contemplating the implications of higher interest rates, know that our nation's banks are using their too-big-to-fail implied backstopping of the Federal government to continue business as usual, making sure that they get theirs before the whole thing blows up. No joke.

None of America's largest banks raise money on the free market. Every single one of them is propped up by an implicit taxpayer guarantee that is very similar to the backstops provided to Fannie Mae and Freddie Mac.

It is a huge subsidy by taxpayers to the banks, enabling them to be far more profitable than they would be otherise.

  • If you are interested in some more CNU 19 coverage, check out our podcasts where we are now posting clips from the Congress. You should also swing by CNU 19's Liveblog where they have a summary of blog coverage, including a link to this site (thank you). And for the video watchers out there, you can check out the 1st and Main YouTube Channel where they have a number of videos put together during the conference.
  • And for those of you who did not believe it possible, here is a video of Andres Duany actually delivering a Pecha Kucha style presentation - 20 slides, 20 seconds each - and he did it like a pro. Enjoy. 

Enjoy your weekend.

 

Earlier this year we started collecting donations to cover the cost of producing a DVD version of the Curbside Chat. Our goal was to connect with 100 of our readers that would be willing to donate $25 each. We've taken quite a bite out of this so far -- we've signed up 37 -- but we still have a ways to go. If you value what you read here or what we produce in our podcast, please do what you can to help us spread this message.

Wednesday
Jun082011

Change is a comin'

We’ve talked often on this blog about how our current pattern of development is financially unsustainable. The evidence was sufficiently apparent before the steady, and in some cases, precipitous drop in housing prices that began a few years ago. Now, as housing prices continue to fall – or at least fail to bounce back as some had hoped (wished?) – it is only becoming more apparent. Put in its most simple terms, we have simply built more infrastructure than we are able to maintain by any realistic financial calculation.

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On top of the financial costs of maintaining infrastructure, there is also the rising cost of gas for our vehicles and the rising costs associated with heating and cooling our large homes. Just as our overall development pattern is becoming more unsustainable, so are the oversized homes that we have been building for at least two decades now.

In essence, the last 50-60 years (and especially the last 20 years) have amounted to a grand American experiment in using the vast wealth we once had to buy space. We bought space in the form of a vast network of highways and freeways that allowed us to move about more easily. We bought space in the form of housing located far from our places of employment. We bought space in the form of large lots that gave us separation from our neighbors. We bought space in the form of ever-increasing square footage in our homes. We bought space in the form of multiple vehicles for our families. And we even bought space within those vehicles so that we’d be more comfortable as we spent more and more time driving.

Now, let’s be clear. I like space. I grew up on a 19-acre hobby farm 10 miles outside of a moderately-sized city. I enjoyed many days playing wiffle ball in the backyard with my siblings and friends. Building forts out in the woods. Catching bugs in the small stream running through our property (unfortunately, there were no fish, so bugs were the next best thing). Even now, I live on several acres and enjoy the sense of space that we have, while having the convenience of being just a few minutes away from my office and all the services I need. Our house is certainly not huge by modern standards, but it is more than we would need if it came right down to it.

Still, as more and more people begin to come to grips with this reality – that our experiment with buying space will be over for the vast majority of people – we will be faced with what will be a hard pill for many of us to swallow. We will no longer be able to afford to buy as much space as we once did. At some point, I may need to give up some of the space our family currently has – even if I find that hard to imagine now.

Up to this point, most of the efforts to change our development pattern have been based on convincing people to voluntarily change where they live. We’ve touted the benefits of urban living – where you can walk to more places, where you have the option of public transit to get to work and other locations, where you have access to a wide variety of social and cultural activities. We’ve tried various ways to “guilt” people into living more densely by pointing out the environmental impact that comes with suburban living and inventing terms like “carbon footprint”. In more recent years, we’ve noted the rising level of obesity as a way to encourage people to change where they live and to trade in their auto-centric neighborhood for a more walkable neighborhood. And while all of these efforts have managed to convince some individuals to change their living patterns, the vast majority of people have continued to seek out space whenever they can afford it (and often, until recently, even when they couldn’t afford it).

We are coming to a time though, where the cold, hard reality of economics is kicking in. When we will all be faced with higher property taxes, unsustainable heating and cooling bills, oppressive costs associated with filling our gas tanks with $5/gallon or higher gas. As a result, we will be forced to realize that the cost of that space that we value so dearly will simply be too high. But rather than making the change out of a sense of duty or guilt, it will be a decision based almost entirely on personal finances.

At this point, I would suspect that most people dread the idea of living in a house that is not only smaller, but also much closer to other homes. Where there will no longer be a large yard, or rooms dedicated exclusively to the TV, or a three-stall garage with room left over for storing all our “toys”. But as we are forced to give these up in larger and larger numbers, our communities and the types of products and services that the private market offers will need to adapt.

Specifically, I can see the following adaptation needing to occur – some of which are already happening:

1. Our communities will have to become much more adept at facilitating the redevelopment of existing buildings and underused land. In some places, there will be enough value to land to justify a private landowner or developer covering the costs of tearing down old buildings, assembling land from multiple owners, or creating redevelopment projects at the scale of entire blocks. In others communities, where the values are not yet sufficient, we will need to develop strategies for building such value and redeveloping properties in small, incremental steps.

2. Our standard “Euclidean” zoning code that is focused on separating commercial from residential from industrial, creating large spaces between buildings and requiring large amounts of parking space will need to be completely overhauled. In most cases, they will need to be entirely replaced with new form-based codes that focus more on how buildings orient themselves to public infrastructure and to eachother.

3. Building contractors and architects will need to become much more skilled at finding ways to create a sense of privacy and space for homeowners even when their homes are much closer together. Thoughtful design, rather than simply relying on large lots, will become more and more in demand.

4. All of us will need to re-learn what it means to live closer together, with all the benefits and challenges that it provides. No longer will we be able to “escape” from those annoying neighbors, from underperforming schools, or from bustling urban settings simply by moving to a suburb 20 miles away.

5. Small and rural towns will need to adjust back to a time where living in a small town did not mean living on a large lot and having to drive 20 miles to the nearest grocery store or to find work. For many current suburban and exurban dwellers, the preferred alternative to moving back into the large metropolitan city will be moving further out to a small city. These cities will need to be prepared to accommodate new residents and businesses - something they haven’t had to think much about for at least a generation.

Recently, we started collecting donations to cover the cost of producing a DVD version of the Curbside Chat. Our goal was to connect with 100 of our readers that would be willing to donate $25 each. We've taken quite a bite out of this so far -- we've signed up more than 30 -- but we still have a ways to go. If you value what you read here or what we produce in our podcast, please do what you can to help us spread this message. We thank you, especially if you are one of our 930+ Facebook connections! It was only a year ago we were still below 200. Thanks for spreading the word.