Mithridatizing City Budgets

Photo of Nassim Taleb from Vimeo

Photo of Nassim Taleb from Vimeo

This week we're going to be discussing the book Antifragile by Nassim Taleb. This was (and largely still is) a members-only thing but, because so many people signed up and our members are really amazing, we asked a bunch of them to help lead the conversation. We'll be running some of their thoughts here throughout the week as well.

To move the conversation along, I posed seventeen different questions to the group. I'm going to take up one today that nobody else has offered to tackle.

Mithridates drank poison in small amounts to strengthen himself against poisons. This reminds me of the starve-the-beast political argument that we should simply cut government budgets to make government systems more efficient. This *might* make them more robust but seems unlikely to make them antifragile and, as Mithridates found, might simply make them easier to die by the sword than poison. In an antifragile context, make the case one way or the other. Is there an antifragile way for state and federal governments to fund city operations? 

Nassim Taleb's insights are not often immediately intuitive nor, once understood, easy to apply. When it comes to government funding, it's difficult to envision a cultural consensus developing here in the United States that would prompt cities to become antifragile by voluntarily withholding state and federal funds. I do acknowledge that, rhetorically at least, this case is often made. Step back and realize that the coalition of people making that argument generally represent areas most dependent on these transfers. 

I would argue that American cities of a century ago were, in many ways, antifragile. In other words, the complex social and economic ecosystem of these cities experienced continuous low-level stress which, by being forced to respond and adapt, made these cities stronger. Cities were financially strong -- their development pattern was financially productive, their long-term obligations were generally in line with their wealth, their buildings were adaptable, etc... -- or they ceased to exist. That individuals were often harmed and that entire cities sometimes failed is part of that reality I'm not pretending to ignore (but it is a separate issue).

As America became the most affluent and powerful country on Earth, our acceptance of individual harm and the potential of outright failure of a city diminished. That's a noble thing. Here in Minnesota, we decided that all cities must have a minimum level of public services. That started out four decades ago with not simply sanitation and clean water, but also with paved streets, police and fire protection, libraries and parks. As the Growth Ponzi Scheme has progressed and budgets have tightened, the trickle down to local governments has diminished. Simultaneously, we continue to take tools (except debt) out of the hands of local leaders. So while a long, slow decline has dulled our feedback mechanisms, cities have also given up much of their ability to adapt. Today, cities are really fragile.

Is there an antifragile way for governments to fund city operations? 

I look at my city, which is highly dependent on local government aid (annual transfer payments from the state). A few years ago there was serious talk at the legislature of eliminating these payments altogether, yet my city continues to take on debt as if this funding will never go away. Without it -- an amount that exceeds our local tax receipts -- it's very questionable whether we could (or would) continue to make our debt payments. We're essentially addicted -- fragile -- to these annual state transfers. As a society, we have addressed some of the issues around individual harm but have dramatically increased the probability of catastrophic failure of a part, or all, of the city.

From the city's perspective, I think that would be hard. We're so dependent on it that we'd need a push. Could the state provide that push and, if so, how?

Could a City Aid "Lottery" Work?

One idea -- and I'm going to acknowledge that it is kind of crazy given the current context but I think it is worth thinking about -- is to turn these aid payments into a kind of unpredictable lottery. Here's how that might work.

Colorful lottery balls

I would put each city receiving aid into a lotto. Each year, one out of four (25%) randomly selected cities would receive no aid. Another 25% would receive their full aid payment. Another 25% would receive half of their aid payment and the remaining 25% of cities would get 1.5x their aid payment. In the following year, the city would be excluded from whatever happened to them the year before (they couldn't get zero two years in a row). In year three they can't receive the same outcome as the first two and then in year four they get whatever they hadn't already received.

In short, there are 24 different combinations the city can anticipate for their aid payments in the next four years, although the total amount of aid would be the same. For example, let's say that a city's typical aid payment is $2 million per year. Here's one of the possible combinations:

Year 1: $1 million

Year 2: $0

Year 3: $3 million

Year 4: $2 million

What is the meaning of this? How does this improve antifragility? The concept here is to turn the morphine drip of predictable (but slowly declining) aid payments into the occasional shot of adrenaline. If we came to depend less on aid (fragile) and instead saw it as a way to do something we otherwise wouldn't do (adapt), not only would it give us the resources to make transformative improvements, but it would force us to be more honest in our day-to-day accounting of our situation. 

The obvious response of cities -- as some of you are likely thinking -- will be to simply borrow the funds during lean years so as to treat the lottery like normal cash flow (they are going to get the money anyway). That would likely happen, although it would not need to, and it could be mitigated in two ways. First, I've long argued for a debt cap for cities as one of the only big-brother mandates that is truly justified. Today we take away local government's ability to develop their own tax, fee and other revenue systems and development policies but we allow them to blow themselves up with debt. That should be reversed. Let them tinker with things that can only do limited, local harm, but take away the inter-generational warhead of massive debt. I'd put a cap on local debt at annual payments of 10% of locally generated revenue.

The second mitigation act is to make the lottery cycle longer. A 12-year lottery would give nearly 480 million combinations. Statistically, some cities would go four years without an aid payment. A small stressor -- in Taleb's language -- that would then leave the city eight consecutive years with some type of aid payment. A longer lottery term would amplify the uncertainty and make the payment more of a windfall and less like cash flow assistance.

It's a revenue-neutral plan that does not change the fundamental partnership between cities and their state governments that has evolved post-Great Depression, but does change the way cities -- the people who live in them and those they choose to govern -- utilize these funds.

(Top image of the Mithridates coin from Wikimedia)

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