If Strong Towns Is Right and Cities Are Insolvent, Why Do So Many Seem to Be Doing So Well?

A couple months ago, I took part in a series of Twitter exchanges responding to a critic of Strong Towns who has a (self proclaimed) free market perspective on urbanism. It didn’t go well, largely because I began to doubt not only the intellectual rigor, but the sincerity, of the critique. We decided here that, even if the conversation on Twitter wasn’t helpful, there are hundreds of thousands of new people reading Strong Towns—and tens of thousands more each month—and it would be worth it to them to go back over some of the basic ideas and observations underlying the movement we’re trying to build. My seven part series on My Journey from Free Market Ideologue to Strong Towns Advocate was the primer for this conversation.

As part of the original Twitter exchange, we reduced the critique down to five specific assertions.

  1. Cities are not in fiscal stress due to overbuilding of infrastructure.

  2. There is no "illusion of wealth" phase as Strong Towns suggests.

  3. Where cities have struggles, it is because of poor management (union contracts, etc..)

  4. Big box stores are profit centers / no evidence to the contrary.

  5. Bond ratings, city budgets, financial reporting and windshield metrics ("decline isn't a visible problem") are better indicators of how well a place is doing.

Internally, we have tried to steel man (the opposite of straw man) these arguments to present them in the most credible form possible. Today I’ll deal with the first.

Assertion: Cities are not in fiscal stress due to overbuilding of infrastructure.

Steel Man: Municipal bankruptcies are rare. Most cities have good bond ratings. And cities that struggle to provide adequate essential services are rare. People may gripe about nuisances like potholes, but for the most part in America, 911 comes when you call, your trash gets picked up, your waste gets transported and treated when you flush your toilet, the roads are smooth enough to safely get you from anywhere to anywhere, and the really bad roads do get fixed. There are very few signs that we’re struggling to afford to maintain our current level of infrastructure or services.

In addition, any fiscal stress that is inherent is certainly not from excessive building of infrastructure. Cities build infrastructure in order to grow and that growth creates opportunities for economic development, private investment, and entrepreneurship, all necessary ingredients for prosperity.

I’m going to draw a fine distinction here right away because there is a dot between “fiscal stress” and “overbuilding of infrastructure” that needs to be connected: financial productivity. We have overbuilt our infrastructure, and that is causing fiscal stress, but it’s not the building of the infrastructure that we need to focus on, per se. The critical financial fault line is the extremely poor use we have made of those investments.

When a local government builds a street, that street will someday deteriorate and require maintenance. Where is the money for that maintenance going to come from? If we assume the city is not a ward of the state, that it is not relying on the state or federal government to fund basic infrastructure maintenance, then the money needed to fix the street must come from local taxpayers.

More pointedly: If the taxpayers along the new street don’t create enough revenue to pay for the maintenance of their own street, then taxpayers on some other street must produce excess revenue—above and beyond what is needed to maintain their own street—to close that fiscal gap. An investment in infrastructure must result in enough excess wealth to maintain that infrastructure or the system isn’t financially productive. All of this seems quite obvious and not really debatable.

In the seven part series that preceded this, I gave example after example—based on my experience as a professional engineer working on such projects—of streets, blocks, neighborhoods and cities that were not financially productive enough to maintain their own infrastructure. The examples all used data, real numbers from real projects. You can quibble with my conclusions, but at this point, to be credible, such a critique should have similar data analyzing projects where the tax base is productive enough to financially sustain the infrastructure. I’ve seen no such countervailing data set.

To the contrary, everywhere I look, I see an affirmation of the math not working. Just this weekend, my own local paper published an article about the city’s five year road maintenance plan, detailing what length of street was to be maintained at what cost over the coming years. The article begins by stating that the city has “83 miles of roads” and it “aims to redo about 2 miles of streets a year.” Some basic math there suggests a maintenance cycle of 40+ years between projects, which is way beyond what these roads are reasonably expected to last.

Brainerd, MN, Five-Year Road Maintenance Budget

Brainerd, MN, Five-Year Road Maintenance Budget

Taking the numbers at face value (though I would strongly bet they are an underestimate, especially in the latter years) yields a cost per foot of $255. That’s just for the streets, not any of the underground infrastructure.

Using the suggested 83 miles of road at this rate yields a total road maintenance budget of $112 million. Per resident, that’s $8,300. For a household, that’s around $22,000 of road maintenance cost every life cycle. Knowing the property values, tax rates, and how long a street should reasonably be expected to last, these are crazy numbers, more per year than our entire tax levy. Indeed, the only way the city expects to pay for this basic maintenance is to use money from the state and to (illegally) assess (poor) residents (incapable of contesting the assessment) for basic maintenance.

If the state doesn’t come through with transportation aid (and they have their own multi-billion dollar transportation funding shortfall), this funding plan goes from a crazy stretch of reality to a hard stop. If taxpayers join together and the city loses a court case on assessments—with the court pointing out that the state has provided a legal mechanism for cities to collect revenue called the “special service district”—then this plan is a hard stop. When we say fragile, this is what we mean. None of this is in the city’s control. Basic maintenance of critical infrastructure is dependent on the assistance and generous interpretations of others.

Maybe my little town of Brainerd is too small for you. Well, in that case, earlier this month St. Paul Mayor Melvin Carter (who, truth be told, I really like) painted a bleaker picture for his city than anyone here is suggesting about Brainerd. His plan for doing basic maintenance on critical infrastructure: raise taxes and then hope the state and county step in with more money.

Despite $20 million for road reconstruction and resurfacing, Carter said it’s not enough to rescue the city’s crumbling streets. A week after the release of a public works report calling for about $50 million a year for street maintenance, Carter said the city — as well as the county and state — must step up. Without a cash infusion, most St. Paul streets will be “undrivable in just 20 years,” Carter said in his budget address Thursday, echoing the report’s findings.

“While there are no shortage of historical reasons for this disinvestment, we don’t have time to place blame; we must take responsibility,” Carter said. “We must and will work actively with our partners in county and state government to identify new resources to maintain our public right of way.”

St. Paul—a really successful, modern American city that is generally considered well-run as well as a great place to live—is stretching to come up with $20 million a year for street maintenance when, in reality, they need $50 million. At current spending levels, their streets are projected to be “undrivable” in two decades. What are we to make of this besides we have too much street and not enough wealth to show for them all?

Show me a U.S. city where there is a 25 to 30 year maintenance plan for roads that is fully funded by the projected tax revenue of the community. Show me one: send me the report. It might exist somewhere out there, but I’ve yet to see even one.

So, the steel man question comes back to this: If cities are so financially unproductive, why don’t we see more outward signs of this distress?

Or do we?

I have two answers to this. First, get out of the high-growth, affluent neighborhoods of any city and you’ll see—in high fidelity—the most fragile parts of the community falling apart. Get out of the handful of coastal cities and tech or finance -centric centers and you’ll witness lots of communities with struggles. People who claim that cities are doing great—that local governments are prospering—strike me as willfully ignorant. In most any central city, it’s a short walk or drive from affluence to some degree of despair. If you see few signs of struggle, you’re living in a bubble. Start with reading some Chris Arnade and then follow his lead and start walking.

Second, and more urgent, have we not demonstrated as Americans that our greatest ingenuity comes in finding ways to kick the can down the road? Have we not made a national pastime out of pretending we’re better off than our balance sheets suggest, systematically living beyond our means at every turn? The idea that the city with smooth, paved streets must be financially prosperous is an incorrect assumption. It’s as foolish as assuming the guy who lives in the big house and drives the new pickup truck is rich. It’s more likely they’re both totally broke, hopelessly in debt, just floating along hoping the tide doesn’t go out.

I spend a whole chapter on this in my upcoming book, Strong Towns: A Bottom-Up Revolution to Rebuild American Prosperity. I’ll close this piece with an excerpt:

As America progressed through the second life cycle of the Suburban Experiment, it took a cultural shift for its citizens to embrace debt. It seems little coincidence to me that this change in attitude coincided with passing of those who were adults during the debt-fueled speculation of the 1920s. Debt increases fragility by making future growth mandatory. If all you’ve experienced in your life is growth, debt doesn’t seem nearly as risky. 

Beginning in the mid-1970s, but then accelerating dramatically thereafter, the U.S. economy shifted from one based on growth through savings and investment to growth based on debt accumulation. Government debt is an important part of this story, but perhaps more important is private-sector debt. 

In 1980, U.S. households had a 63% debt to income ratio. For every dollar in income, a typical family had 63 cents in debt. By 2000, that had grown to 84%, and by 2008, at the start of a financial crisis, family debt was 124% of annual income. 

While debt has increased, savings have gone down. In January of 1980, the U.S. personal savings rate was 9.9%. By January of 2000, it was down to 5.4%, and by 2008, it had fallen to 3.7%. Over the past three decades, Americans have borrowed more and saved less. 

In classic economics, it is very clear what should happen when there is a lack of savings but a high demand for borrowing; interest rates should go up. That is how the supply and demand of money reaches an equilibrium. When there is not enough savings to meet the demand for borrowing, higher interest rates entice more people to save and fewer people to borrow. Yet, the opposite happened; rates have gone down dramatically. 

At the beginning of 1980, when Americans were saving more and borrowing less, the effective Federal Funds Rate of interest was at 13.8%. It would peak the next year at just over 19% and be on a steady decline through three decades of declining savings and increased borrowing. At the beginning of 2000, the rate was 5.5% and eight years later, it was at 3.9%.

There are many theories to explain this, most having to do with the positive impacts of globalization and happy advances in technology. I’m skeptical of the convenience of these theories because they seem to affirm what we want to believe – that our economy is healthy and going to continue growing. I think it more likely that our economy, like the cities that sit at its foundation, is sick and trying to reset to a stable equilibrium. 

It is only by robbing our families of wealth – using artificially low interest rates to punish those who save and reward those who borrow – that we’ve pulled as much future consumption forward as possible. And where our families have fallen short, public borrowing has filled the gap.

It’s not the building of infrastructure that put local governments into financial distress but the unproductive use of those investments that has created a crisis. That crisis moves closer from chronic to acute each day, with the cash from new growth incapable of filling the insolvency gap from prior malinvestments. The warning signs are there for everyone to see. It’s only by focusing on financial productivity—the return on investment from our public infrastructure expenditures—that we will stabilize our cities, towns, and neighborhoods.

Top image from GoodFreePhotos.