Want Your City to Prosper? Then Forget Everything You Think You Know about Economic Growth (Episode 37)

And I found in thinking about this, looking around the country, there are a lot of communities in America today that you couldn’t say were financially strong and resilient. So many of our communities are cash strapped, we don’t have enough resources, we don’t have the kind of economic development we need. Our social networks are often fraying and communities, I think, are also strikingly vulnerable. More vulnerable than they should be to being up ended by unexpected bumps in the road. It just seems like there are a lot of problems that communities are facing that they, for some reason, don’t have the wherewithal to solve maybe in the way that they used to.

Chuck is one of the best people I know to talk to about why this is. He does a great job of dissecting what exactly is wrong with how most communities approach their own growth and development. Chuck was trained as an engineer and a planner and so he has this great ability to look under the hood and basically do the math, if you will, that shows why many of the ideas that we hold about how our communities are supposed to grow and develop are actually wrong.

So Chuck is a great myth buster but Strong Town’s main focus is helping people figure out how to take control of their communities, what they need to do as citizens to make the places they live strong and resilient. And Strong Towns is working to build a movement around these ideas across the country so I’m really excited to talk to him about what he’s seeing and what’s happening out there.

Before we dive in I want to take a moment to thank all of you who made a donation to ILSR as part of our annual end of the year fundraising drive. Our target for donations from individuals is $53,000, that’s what we need to meet to raise our budget for this year. And thanks to many of you we’re making really good progress on that but we still have more to go. So if you didn’t have a chance to contribute at the end of 2016, please consider making a donation to start the year off or perhaps becoming a monthly sustainer where you give a little bit every month.

You can do that by going to ILSR.org and clicking on the donate button. Again, that’s ILSR.org. Your donations mean a lot and we put them to great use and we really appreciate the support. And with that, let’s dive into the conversation with Chuck. Chuck, welcome to the podcast.

So I want to start, correct me if I’m wrong, but I believe that you worked as an engineer before founding Strong Towns. And what I’m really curious to know is what it is that you started to notice doing that work. What was it that was the first clue that something was amiss and tell me a little bit about your thinking around that and how it is that you went on to found Strong Towns? 

And I liked it. I knew I wasn’t a very good engineer. And actually my skills in the engineering profession were less … The things I was good at were less the technical stuff and more of what in a consulting firm would be the project salesman. But in the way you would want it to be would be like the project planner. The person who helped line things up and made decisions about stuff. You know, made recommendations on what you should do.

So I actually left and went back to school and I got a planning degree. And when I was in graduate school, a bunch of cities that I had done engineering kind of work for called me and wanted me to do planning work for them. And I wound up doing that. And so by the time I got done with graduate school, I had actually started my own planning company and hired a couple of my classmates, was working all over the state.

Doing that kind of work, having both of those experiences, doing planning, things like zoning permits and new developments but also having done the engineering work, I think it allowed me to see some of the ridiculousness of the projects that we do. When I was an engineer a lot of things didn’t make financial sense. We would do these big projects and the money would be coming from all these different places and I just kind of assumed that other people knew what was going on. It wasn’t my job to worry about the money, it was my job to worry about the engineering. So I just assumed someone smarter than me has got this figured out.

When I was actually doing the planning, I was closer to where the money went through the pipeline and I just saw the ridiculousness of it. I saw these projects where you would be doing a million dollars worth of work and I knew at the end of the day that we were gonna collect a tax base that would not collect even a fraction of that. It was obvious these projects weren’t gonna work and I was in a position to say, “Whose job is this?” And the answer was, it was nobody’s job. Nobody really looked at this. Nobody was responsible for making sure that the city was financially sound.

And so by the time we got to 2008 and the whole housing crisis and the election season that year and the economy kind of in free for all, I was just, I don’t think disillusioned is too strong of a word. No one was talking about this in the way that I was seeing it. And I thought, maybe I’m nuts. But maybe I’m not. And I decided that I was going to get my thoughts together by writing. And I sat down and I said I’m gonna write three days a week. And I started to write and that is what ultimately grew into a set of ideas and ultimately an organization. And now a movement of people known as Strong Towns.

What I realized and what I understood, it was very clear to me, was that we would have zero capacity to maintain any of this. Any of this stuff we’re building, we were not gonna create enough wealth, enough tax base to take care of it. Now I’ll give you a very specific example. I was working with a city where the state was coming in with federal dollars and building a bypass around the city. And kind of the obvious engineering thing to do when you’re doing a project like that is to put the sewer and water in underneath the new roadway before you build it. When you put it in, basically in green field, basically a virgin ground, it’s really cheap to go out and trench that. You don’t have to go under the roadway, you don’t have to do any directional boring. It’s like the cheapest pipe you can lay.

And so before this bypass was going in, the recommendation from the engineer, which I fully supported, was let’s run the sewer and water out there before the road is built. I sat down and I said, I wonder how much tax space we would need to be able to actually pay for this pipe. And I ran the numbers. I sat down and I just put pen to paper. I said if we were gonna try to collect our money back within 20 years for this investment, how much new tax space would we have? We would have had to nearly double the entire tax space of the city just to run this 3/4 mile pipe up there. All the new frontage roads that would be built, all the pipe that would be built along those frontage roads all those costs, those are gonna be more. Just to get the ante to develop in the future was going to take more tax space than the city would ever have any concept of getting.

I worked in some small towns and small towns can be kind of extreme situations. I had another project where a developer had purchased this land really cheaply because they didn’t have any access to it. It was on a lake and the lake property was all selling for a premium. But you couldn’t get to this stuff. So it was all kind of land locked. And this developer, you know, developers are crafty people, this is what they get paid to do, figured out a way to get a road in there. But it was going to require a mile across public land. They got the county to sign off on this and the city, their policy was you can do it as long as you bring the road up to the city standards.

So the developer was going to pave this road. Come in and put in a patinous asphalt top on it. And it was gonna cost him a lot of money but these lots were gonna be worth quite a lot and they figured they could cash flow it and make it work. As a city planner, I sat down and I said look, if all these people develop as premium lake shore property, which this was not. But I said, let’s assume that you get huge lake shore mansions out of this that are worth a lot of money and we take the tax space from that, here’s how much it would be. And it was like $6,000 a year. Well we were taking over a $1.2 million road. And I said, $6,000 a year, you can’t even pay to plow the snow off this road, let alone some day go out and fix the cracks, fix the potholes, replace the surfacing and do all this. It’s not even close. I mean, you’re talking about over the life of this thing bringing in a dime or two for the dollar you’re gonna have to ultimately spend.

As soon as we started doing these, they just showed up everywhere. And I actually got to the point where I thought I’m doing something wrong. Because every development that I model, every one I can get numbers for and start running through this, we’re losing not just a little bit of money, we’re not even coming close to breaking even. This is crazy stuff.

And it took me a long time to realize, no, this is what we do. We’re really good at building things, we’re horrible at maintaining stuff. And this is why. This stuff benefits us in the short term but gives us these huge long term liabilities that we just have no capacity to take care of.

And then if you go to the other side of the ledger and actually pencil out the property tax revenue that’s generated, it’s very little in the scheme of things. Because it’s a big surface parking lot, basically. It really doesn’t add up to a lot of value. And yet, I think your point about how communities, it’s just so easy … We’re kind of growth obsessed so it’s so easy to look at new road, new bypass, new big box store as being about growth and not really looking at the underlying, ongoing math behind it. 

So I did work for both of those. The argument I would make for the city or the presentation I would make, and it was just bought wholesale and I believed it. I was not there fibbing or anything, is these big box retailers would come in and they’ll pay for everything. They’ll pay for the frontage roads, they’ll pay for the traffic signals, they’ll pay for the sewer and water, they’ll pay for everything. You, the city, no cost out of your pocket.

And so you’d look and you’d say how can you not make money? How can you not be money ahead as a taxpayer, as a city, as a local government? How can you not be money ahead if the private sector is gonna pay for the whole thing? There’s an Upton Sinclair quote that I think is really important and it goes along the lines of it’s hard to get a man to change their mind about something when their job depends on them not changing their mind.

I think for me, I was in this job, I liked it, I was doing good work. I was getting paid. These projects, when I would do them, were very successful. Everybody was happy with me. There was no incentive for me to really question this very much. And so I bought into that argument that my client here is paying for everything. You’re doing great, everybody wins. It was only later on when I started to ask these questions about the second life cycle that actually the big box stuff became the huge problem. I mean, residential subdivisions, when they’re auto based are really bad. The frontage road stuff is really bad. The big box stores are atrocious. I mean, they’re the worst financially because they give you the biggest sugar high up front. They actually decimate everything you have that’s viable in your core downtown. And then they don’t hang around very long.

The pipe you’re putting in the ground will have a 50 year to 70 year lifespan. The road that you’re building will have a 20-30 year lifespan. Then you’ve got to go out and fix those things. In both of those instances, that big box store is no longer there. It’s gone and you’re either looking at a vacant building or you’re looking at something that’s much lower on the economic order. Cities don’t factor that in. They don’t ponder it, there’s no incentive to ponder it. There’s no requirement for them to ponder it. Even the way cities account for their liabilities, in a transaction where a big box store came in and built everything for you, you would show on your city public balance sheet a huge addition of assets and no long term liabilities.

And so we’ve wired everything in our system to make this look like a really good deal. And it is initially. It’s just long term, it’s a disaster. And it is literally bankrupting our cities.

Before the great depression, we built cities incrementally on a continuum of improvement. So everything was built to the next increment. If you start out with a single family home, that would then evolve into a duplex, that would then evolve into a quad unit, that would then evolve into row houses, into apartment buildings and on and on and on until you were at Manhattan. And not every city got there but you were on this continuum. And things happened incrementally and there was, essentially, always a built in assumption that there would be a renewal of the place you were in. It was all driven by the underlying land values, which the goal of development was to improve the value of land.

After World War II when we put all this money into auto infrastructure, what we did was we separated the value of land from the value of what’s on it. We actually drove down the value of land. If you just look at it from a supply/demand standpoint, what we did with the automobile is we dramatically increased the supply of developable land. This did have the effect, and this is what they were trying to do, of driving down costs. But what it also did was it made our development now, we lost that incremental growth part.

So the way we build now is we build things all at once and we build them to a finished state. There is no contemplation of a second life cycle. There’s no concept in our society that if you build a home, some day it will evolve into a duplex. Or if you build a commercial building that some day it will evolve into a two story or a three story commercial building. You build a big flat big box store and that’s gonna forever more, by our codes and ordinances and financing and everything, that will forevermore be a big box store.

And what you see happened is that instead of development having cycles where it has a boom and then a stagnation and then a renewal and then another stagnation and then another renewal, what you see is that current development just has a boom and then stagnation and then steep decline. And this is everywhere. This is the new subdivision, this is the commercial strip, all of it goes through this life cycle. We can’t go back to what we had. We’re not going to, we have different starting conditions. But I think we can learn from some of those principles. And so for me, the way that I describe it today to people is that we need to start making incremental investments again. We need to start making small investments over a broad area over a long period of time. We need to get our neighborhoods, our core neighborhoods, our downtown’s and any place else where we can create a critical mass, we need to get them growing again incrementally on this continuum.

The challenge we have is that we have way more stuff than we’ll ever maintain. And so you look at a city like Detroit and I would describe Detroit as just being a couple decades ahead of the rest of the country, they were the model that we all copied after World War II. They were the first ones to run the highways through the middle of town, create a commuter culture. They were the first ones to just basically go all in on what became the post war development pattern. They were the model. But they’re 20 years ahead of everybody else. And they’ve had to go through this gut wrenching experience of deciding what neighborhoods to keep and what neighborhoods to let go. If you only have enough money to replace a mile of pipe and you have 10 miles of pipe, which one are you gonna replace? Those are really hard problems.

I think we make that challenge easier and more humane and fiscally more responsible if we start today shifting our development pattern to one of not building all at once to a finished state in large blocks and chunks, but getting back to building incrementally over the broad swap of our community. 

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Now we’re back with Chuck Marohn of Strong Towns. Chuck, before the break you were outlining this vision of a more incremental and organic approach to how our communities develop and grow over time. And one of the things that really struck me in listening to you describe that is in a way you’re arguing for something that would involve a larger number of small players, if you will. That would disperse power and responsibility much more widely. So instead of having giant big box stores and big national developers and large scale projects that are developed to this finished point and really aren’t reusable and giant infrastructure and so on, we would be, as communities, all of us would be much more engaged in a way at the local level in making that incremental growth happen. Whether it’s a local business maybe opening a second location or enlarging their location or a property owner who adds onto a building or you know, that kind of small scale development approach.

That’s something we really believe at ILSR, not only for all the reasons that you’ve outlined but it’s also more democratic. And it enables our communities to develop in ways that suit them, that suit their particular circumstances and needs instead of this one size fits all model. However, it’s really challenging to convince city officials and the powers that be that this is the way to go. I mean, incremental development just, it’s hard to see it add up in a way that feels as big as the big projects. And so when you have new members and citizens that are joining Strong Towns and you’re connecting thousands of people across the country who are trying to address this in their own places, what’s the advice that you give them? How do they start this conversation and what’s the most … How do they frame this and get people to start to think differently?

Instead of having an ecosystem of many different businesses providing many different options for you, you’ve got one big box store. And if that goes away you’re done. Or if that doesn’t offer the thing you want, your community’s done. If you can’t get a job there, you’re not getting a job in some places.

What we try to have people understand is that there is a trade-off for this. And it’s often not a trade-off that we’re willing to make when we think about it in this way. And as families, we invest in our own savings. I’ve got two daughters, we’re saving for college. We would not go put all our savings in one stock, right? Like Google’s the greatest company around, we’re going to go put all our stock in Google. Okay, maybe you do really well with that but what you’ve done is you’ve made your investments very efficient. But you’re also really vulnerable. You’re vulnerable to whatever happens with that particular investment.

When we look at the portfolio of a city, it’s no different. It’s very easy to, as a staff, administer one big project with one big player. It’s very easy, as a government, to plan around one big site with one big player. It’s much harder to deal with all these small little players, people with all their complexity and all their different challenges and they come in and they whine and they complain about stuff and they’ve got their pet issue over here and over there and oh, wouldn’t it just be easier if we could deal with the corporate attorney and the corporate engineer and just slam out this project and get it done? It’d be way more efficient.

When we trade efficiency, when we trade away our resiliency for efficiency, we wind up with really fragile places. And at the end of the day, that took me a long time to figure out. The writings of Naseem Taleb and the Black Swan, his book, and his book Anti-fragile were really helpful in that for me. But we have, systematically across this country, traded, in the name of efficiency, our very strong healthy resilient cities with a lot of messy redundancy and complexity, for systems that are hyper efficient and very, very fragile. And that is, at the end of the day, the thing that freaks me out the most.

When we explain that to people and when they get it, they understand because they feel the fragility around them. They feel that their places are not working. They don’t have a lot of slack in the system. And at the local level, that’s really disconcerting. So once you get people thinking this way, I think it’s an easy nudge to make. The harder nudge is when you actually have to talk to them about what it means to them and what it means to their house and their neighborhood and their place because it means, at the end of the day, building in change. And change is always a challenge. It’s always tough, it’s always scary.

If you go back to a city in the early 1900s, if I think about my hometown here, the new neighborhoods were built without all the amenities. They didn’t have roads, they didn’t have water and sewer, they didn’t have sidewalks, they didn’t have shops, they didn’t have libraries, they didn’t even have really fire protection or anything. The first people that moved there, moved there and built in little tiny houses. And their hope was if this neighborhood takes off and does well, we will add on, more people will be here and eventually we’ll be able to run the water pipe out here and have good water.

And then as more people show up and the neighborhood continues to expand, some day we’ll get paved streets. And as more people move in, we can add a library. There was this benefit from the more people that moved in, what we call it as a party, the more people that showed up at your party, the better the party got. Because the more stuff you could do, the more things you could handle, the better your situation became.

The way we build today, this is largely a byproduct of the way we finance growth and development, as well as our cultural ethic about it, when we go out and build that new subdivision, not only do we build the sewer, the water, all the roads, all the streets, all the sidewalks, but we put in the parks, we put in the amenities, we put everything in it. It’s like a full turn key kind of thing.

And so you move into this thing that you see as idyllic. It’s like, this is it. This is where I want to live. It’s got everything you ever want. And the last thing you want is for it to change. The problem we’ve got is that the finances of that doesn’t work. N so in a sense, when you move in that day, there’s a ticking time bomb, everything, the decline is built into the equation. You can put it off, you can forestall it, you can use regulation to do that, you can use incentives to do that, you can hope that you’ve got the neighborhood with the most affluent peoples so you can put off that decline. But decline is essentially inevitable. If you cannot renew a place, if you cannot bring it to a higher level of use, ultimately, the pipes age, the streets age, the siding ages, the shingles age, your appliances go bad. And ultimately the neighborhood goes into decline.

And so really what we’re talking about here is having people come to grips with this fact. That their only real long term options are decline or incremental renewal. The idea of stasis is not a viable option. And that’s hard for people because people crave that stasis.

That old run down block has 78% more wealth, it pays 78% more taxes to the city than the brand new one, even though they have the same cost, the same amount of infrastructure, everything about them is the same. What you realize is that that old block, it’s already killing it financially. It’s already outperforming the stuff we build brand new right now. So make it even better, it doesn’t need some million dollar investment, it doesn’t need the city to come in and completely redo the streets and put in brick sidewalks and decorative lights. It just needs a little love. Like, someone go out and sweep the sidewalk, right?

So what you have is you have the traditional pattern of development is incremental approach that has a huge upside financially because it can change and evolve and adapt and grow. And very limited downsides financially. And then you can trust that with our new approach, which is built to it’s peak and only experiences decline afterwards. This goes to the core of why our cities struggle. Why we build places that wake up one day and you realize that you’re really fragile. We have way more stuff and we have not enough tax space to take care of it all.

These are rude awakenings we’re waking up to that this development pattern doesn’t work.

One of the things I would recommend to people is the stuff you’ve done around the infrastructure crisis. Which, as you say, is not the crisis that people think it is and we should all be aware of the federal government wanting to build infrastructure in our communities. So people should really take a look at that.

But I want to close by asking you about another common misperception that you’ve written about that’s sort of near and dear to my heart, which has to do with height limits. Often I hear people say, and I live in Portland, Maine, this is common here where we have not enough housing, more people are moving into the city, we don’t have enough housing and we definitely don’t have enough affordable housing. We have a city that’s relatively modest in terms of our heights in our older residential neighborhoods that are multi-family dense. But they’re still only like three and four story buildings. Downtown we have some taller buildings.

But there’s a kind of constant drum beat with this idea that we should okay these giant towers that people want to build and that will increase the supply of housing. But you point out that that doesn’t always work out and that, in fact, this can actually decrease the availability of housing and maybe even affordable housing. Can you walk through why height limits are maybe a good idea and this notion of towers doesn’t always work out the way people think? 

And you have this bizarre situation where, I mean I saw this many, many times in Portland. You would have homes that, in my community, which is not a wealthy place, would be considered really run down and dilapidated. You would look at them from the outside and they would be in poor condition, the yard wouldn’t be mowed, there’d be garbage all over, a window would be boarded up. And there were people living there. And then you would say, how much is that house worth? I’d look it up on Zillow as we’re going by and it’s like $1.2 million. How is that possible? How is that possible?

It’s only possible if the land is worth $1.19 million and they’re planning on scraping off the house and building something new. Well, when you do that math, what you realize is that no one’s doing that to put in a single family home. That would be absurd. In that market it doesn’t make any sense to buy the land at that price and put in a single family home. What you’ve done is you have a piece of land where they’re planning on a tower. The land is priced, speculatively, for a tower.

And I’ve studied the cultural dynamic that brings this about. It is not rational, it is not based in any market principles, it is more of a psychological effect that happens in boom markets where you get land not priced on supply and demand curve, but really priced in a Robert Schiller, irrational exuberance kind of way.

And what it does is it takes options out of the marketplace. It stagnates markets. It drives up housing prices across the board. And it gives you only a couple small outlets for alleviating that crisis until you have a huge bust. And then everybody loses money, the city is in a really difficult position and then you have relatively more affordable housing but in a really, really painful way.

The counter of this, and the reason why I have been an advocate, not necessarily of a hard height limit, but what I’ve called a dynamic height limit, gets back to this idea of incrementalism. Our neighborhoods all need to grow. They all need to breathe, they all need to flex. And so I’m really supportive of the stuff that Portland has done to allow, by right, AVUs and some of the more intensive, the next level of intensity in some of their residential neighborhoods that have otherwise been stagnated.

But I think that same mindset needs to be applied to some of these other places where we’re inducing huge speculative investments and really distorted prices because the anticipation is not for the next increment of development, the anticipation is for some huge leap. And I think that the huge leaps price people out. I don’t think they’re helpful, I don’t think this is a problem that we’re going to solve just by inducing way more building. I don’t think we’re going to build our way out of this unless the idea is to build your way into collapse. What you want is you want to market that response incrementally to the incremental growth that you’re having.

People talk about how fast Portland is growing or Austin is growing and some of these other places. When you sit back and look at it, it’s like one and a half percent a year. Now that’s a huge amount of growth. I would agree with you in numbers. But as a total part of your system, it’s not even that much. It’s not like you’re growing 10% a year. In a system that big, you should be able to handle that without creating a housing crises. The crises is because places like that have tried to be too tactical in how they create these dense nodes and they’ve messed up their underlying land values. And I think to the detriment of their own people.

It’s a complicated issue but I’m a really strong advocate of incremental development and the idea that our neighborhoods need to be able to grow and flex and change and evolve. And I think if you did that in Portland, you could easily sap up one and a half percent growth rate every year from now until the end of time without creating any kind of boom bust scenario, which is what I think you’re setting up right now. 

The other thing I’d love to see us do is we’ve had tons of surface parking lots right in the heart of our city, as a lot of places do. Back from urban renewal, they tore everything down and we have these surface parking lots. And I look around at that and think what a stupid us. If this land is so valuable, how is it that we’re just letting it sit here mostly empty? Occasionally there’s a car. But mostly empty. 

And if you’re the city of Portland and you can have land prices artificially really high, yes that hurts people and yes you’re trying to deal with that with all these inclusive zoning rules and different things, but at the end of the day your whole budget process is made easier because of this speculative bubble. The hard part for Portland, particularly, is going to be if and when, and I think it’s a when, there’s a correction. And that’s a, when increases of 5-10% property taxes every year goes away and actually becomes a major decrease and then a stagnation.

The core of Portland, I’ve called a planner’s Disneyland. It really, in many ways, is a remarkable place in North America. But when you get outside of that, it’s very American. I mean, it’s very much like every junky city in the US. You have all the liabilities that every other place has and those neighborhoods have no tax space to handle that. You’re gonna have the same problem but without the stable tax space. And I think that’s the bust side of the boom and bust. And in many ways, I think these fast growing cities are priming themselves for some really tragic conversations in the future because they’ve been intoxicated by the boom part of it.

I’m a nostalgic guy. I do think that our best days are yet to come. We’re going to have to get through this crisis of our own making. But once we figure it out, you can look at Detroit today and I think Detroit’s an exciting place. Lots of challenges, but I think exciting and on the right track.

This show is produced by Lisa Gonzalez and Nick Stumo Langer. Our theme music is Funk Interlude by Dysfunctional. For the Institute for Local Self Reliance, I’m Stacy Mitchell, I hope you’ll join us again in two weeks for the next episode of Building Local Power.