Before the Great Depression, economic growth and development was primarily a local concern. Job creation, business development and most new infrastructure investments were either the byproduct of a productive local economy or they didn’t happen. While there were some modest state and federal initiatives, there was no focused outside effort to induce growth at the level of specific cities and towns.

That changed dramatically during the Depression. By the 1930’s, advances in transportation and communications technology made it possible for governments in Washington D.C. and the state capitols to actively participate in the day-to-day functions of local municipalities. The despair of extraordinary nationwide unemployment made such centralized intervention seem appropriate, even necessary.

These were radical, and controversial, initiatives, not because of their success or failure, but because they fundamentally changed the relationship between the federal and local governments.

Federal initiatives like the Public Works Administration and Works Progress Administration put millions of people to work building municipal infrastructure, city buildings and other very local facilities. These were radical, and controversial, initiatives, not because of their success or failure, but because they fundamentally changed the relationship between the federal and local governments. For the first time, job creation and local economic growth was a responsibility shared between leaders in Washington D.C., the state capitol and city hall.

The Unemployment Act of 1946, which established the White House Council of Economic Advisers and the Congressional Joint Economic Committee, assured a continued federal role in managing the economy at the local level.

Success in World War II also culturally validated the fragile social construct of the 1930’s. Regardless of what one thought of the New Deal, the ability of a centralized authority to mobilize the national resources necessary to fight a massive two front war was on impressive display. Not only was the war effort a success of centralized military structure, the mobilization of the home front demonstrated the tremendous amount that could be accomplished through order and efficiency directed at a national scale.

While the war time command economy – one of price controls, rationing and other top down efforts – ended after the troops returned, the private sector picked up many of the lessons learned. Retooling the war machine to meet a massive housing shortage[1] inspired people like William Levitt to develop approaches for mass producing homes. Other companies followed with assembly line production of new home accessories, everything from automobiles to appliances.

For municipalities that were growing, primarily the new suburbs, this was a time of unprecedented wealth. The federal government helped pay the capital costs necessary for new infrastructure, which was quickly followed by housing, new jobs, business opportunities and a flood of cash into local government coffers.

Photo from Wikimedia

Photo from Wikimedia

The federal government did not necessarily lead this transformation, but their policies reinforced the wave of progress. The Federal Housing Administration, along with the Federal National Mortgage Association (also known as Fannie Mae[2]) continued to work to expand home ownership. The G.I. Bill provided low cost mortgages, subsidized loans for business startup and tuition assistance to veterans. And, of course, no other federal initiative transformed local economies like the Federal Aid Highway Act of 1956, a program to construct a standardized system of interstates across the nation.

Many who lived through this period look back at the decades immediately following World War II as a golden age of American prosperity. New York Times columnist Thomas Friedman, who was born in 1953 and grew up in a Minnesota suburb, authored a book in 2011 in which he observed that America’s “formula for success” included having “the world’s best infrastructure.”[3] It was all seemingly so easy for a country that had lived through great hardship, conquered great evil and now was forging a great peace.

For cities, that “formula for success” was relatively simple. A prosperous place was one that was growing rapidly. It was one with new streets, new homes and new businesses. It was attracting new investment and creating a growing number of opportunities for employment and business startup. Success = new growth.

To experience new growth, local governments use three basic financial mechanisms: government transfer payments, transportation spending and debt.

Federal and state grants, loans and subsidies allow cities to build things – business parks, buildings, infrastructure – that serves as a platform for growth, creating jobs in the process. Transportation spending is delivered differently but serves the same function locally. As these two mechanisms have been spread thin, the third mechanism – debt – has grown more important.

The municipal bond market, which includes state and local borrowing, was just $20 billion at the end of World War II, roughly 1% of gross domestic product (GDP). By 1960 it had grown to 2% and then to 6% by 1980. Since 1980, municipal debt has exploded from $361 billion to $3.7 trillion. Municipal debt is now 27% of GDP, an 18,400% increase since World War II. By comparison, the U.S. economy has grown by 584%, an enormous increase in wealth yet insignificant when compared to the explosion in municipal debt[4].

Even so, municipal debt is a modest part of the debt-based growth equation. Far more important is private sector debt, the ability of individuals, developers and corporations to secure long term financing at low rates, have those notes sold onto a secondary market, securitized and sold around the world as dollar-based debt instruments.

This is essentially City Administration 101. We generally evaluate the success of elected and appointed officials based on how much stuff they can get built during their tenure. A city administrator in a fast-growing city with tens of millions of dollars of projects is going to have a better resume than a rival administrator who competently managed the sleepy hamlet.

America’s cultural belief is that growing cities experience not only opportunity and prosperity today, but the growth allows them to experience success far into the future. There is a built-in assumption that new growth pays for itself today and generates enough wealth to sustain itself generation after generation.

These are flawed assumptions.

[1] While the U.S. population continued to grow during the Great Depression, housing construct stalled. This created a housing shortage, a gap in supply and demand that grew to crisis levels when G.I.’s returning from World War II began to marry, start families and seek houses of their own.

[2] Fannie Mae was a government sponsored entity, a corporation established and then used by the government to enhance the flow of credit to certain sectors of the economy. Fannie Mae did not become a publicly traded company until 1968.

[3] Friedman’s book, which was co-written by Michael Mandelbaum, is called That used to be us: How America Fell Behind in the World It Invented and How We Can Come Back. The book details five parts to America’s “success formula”. I’m not a Friedman-basher (he’s from Minnesota so I get him on some level), but I often found their prescriptions dangerously simplistic.

[4] These numbers come from the SEC and GSP numbers (spreadsheet)

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