Why Massive Piles of Cash Can Be Bad for Both Companies and Cities

On September 30th, WeWork cancelled its plan to sell shares on the stock market due to shocking revelations about the company’s finances. They had $47 billion in rental liabilities and had made frivolous investments, including a $60 million jet. Signs of mismanagement had gone unchecked, such as when the CEO bought buildings and rented them back to the company.

How did all this happen? Planet Money argues it can be traced to the investment strategy of WeWork’s biggest backer, SoftBank. They pour many times more money into startups than other venture capital funds in hopes that the extra money will give young companies an “unfair advantage.” In theory, the piles of cash would enable startups to slash prices, expand faster, and invest heavily in research, so they can crush their competition.

At Strong Towns, we expect this cash tsunami to do something else. Excessive money can mask problems until they grow into disasters. It erases the discipline to make careful decisions about priorities. It encourages people to take big risks, instead of growing incrementally. And it can mask the incompetence of leaders until it is too late. What happened to WeWork is not an anomaly. It’s what happens when too much money hides the feedback between one’s decisions and their consequences.

WeWork’s story helps to highlight why piles of money can harm cities too. To illustrate, consider the career one of the most successful politicians alive today in North America.

Hazel McCallion was Mayor of Mississauga, a suburb of Toronto, from 1978 to 2014. She was nicknamed Hurricane Hazel, and throughout that period, no one mounted a credible campaign to oust her.

In Her Worship, Tom Urbaniak argues McCallion’s success can be explained, in part, by the city’s financial comfort in those years. The city charged massive fees on new construction to pay for infrastructure and services. During McCallion’s reign, the city was expanding quickly, thanks to Toronto’s growth, ensuring a constant inflow of cash.

A city facing financial trouble can cycle through mayors quickly, as no one seems able to solve their problems. Financial windfalls, meanwhile, can lull a city into feeling that they have no problems, which saps the heat and urgency out of politics, and allows a reasonably-competent politician like McCallion to stay in place for decades. She once bragged, “we have eliminated confrontation on council.”

For Strong Towns, these words can only mean disaster. All cities have problems. The only way to become stronger is to constantly confront them, so that a city may consistently fix them while they’re still small. This is what Nassim Taleb calls “antifragility,” the ability to become more successful overtime thanks to continuous exposure to small stresses. Unless a city has reached a stable state of urban utopia, a lack of controversy can only mean that it is ignoring signs of trouble.

Downtown Mississauga. Mississauga is Canada’s sixth-largest and fastest growing city. Photo via  Adam Bishop .

Downtown Mississauga. Mississauga is Canada’s sixth-largest and fastest growing city. Photo via Adam Bishop.

During McCallion’s reign, Mississauga largely built low-density, car-dependent, single-family homes, an urban form that saddles cities with unsustainable infrastructure liabilities while generating little revenue. The city also did little to create a more lucrative downtown to bring in more sustainable financial income, and never built a viable transit system to address its heavy traffic woes. Now the city is trying to do both, and the effort is far more expensive and precarious than it could have once been. As all the infrastructure ages for the city’s many subdivisions, it may also yet hit a financial time bomb.

Nearly all city governments assume they would be more successful if they had more money. Mississauaga, however, would likely be more successful today if it had faced financial trouble earlier, and was forced to make difficult decisions about changing its growth model. A limited budget forces uncomfortable conversations and disagreement that, over time, can help a city make better choices. Pouring money onto this process makes it feel easier, and for exactly this reason, makes it less effective.

Sudden influxes of cash can generate other problems, such as raising the temptation to gamble on massive, risky megaprojects, like stadiums. Federal grants can distort local priorities, leading city governments to build projects that had previously been rejected as too expensive or unnecessary. In all these ways and more, big money can obscure the important questions about the what incremental investments a city really needs.

We should think about WeWork and Mississauga when we hear proposals to spend tens or hundreds of billions of dollars on a Green New Deal. While it certainly makes sense for the government to shift investment from highways to transit, the funding must not erase difficult questions about how to spend a limited local budget. Good, antifragile funding should ensure that local decisions about how to spend federal funds remain difficult and controversial. If budget decisions are easy, it’s a sign that something’s wrong.

We all know how having too little money can hurt cities and companies, but having too much money can hurt them too. Making decisions about how to grow and invest must be painful, because otherwise, the pain of insolvency may one day hurt more. 

Top photo by Eloise Ambursley.

About the Author

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Tristan Cleveland is an urban planner with Happy City. He is also a PhD candidate at Dalhousie University's Healthy Populations Institute, studying how to ensure communities are designed to support human health.

You can connect with Tristan on Twitter at @LUrbaniste.