The Growth Ponzi Scheme, Part III

So far this week we have examined how the American development pattern of the post-WW II era entices cities to exchange the near-term cash advantages of new growth for the long-term maintenance obligation of new infrastructure. This is a bad trade, because as we also looked at yesterday, the pattern of development costs more to maintain over the long run than it produces in revenue. In short, our development pattern is not productive enough to sustain itself.

A new development goes in. The developer builds the street and then turns it over to the city for maintenance. Houses are built and the city sees its property tax receipts rise. Imagine for a moment that the city took and saved the portion of those new receipts that was to be used for street maintenance. If the city did that every year throughout the life of the street, adding the new tax receipts to those already saved, and then used the cumulative savings to repair the street, here is how the cash flow diagram would look.

Revenues are from collected taxes and expenses are due to infrastructure maintenance costs. Everything looks great until the end of the street’s life cycle. At that point, the cost of the repairs far outweighs the revenue collected. If the city were reduced to this one street, it would be insolvent.

But a city is not one street. A city has many Peters to rob in which to pay Paul. For example, if the project modeled above were repeated every other year — a condition where the city was growing at a steady rate — the cumulative cash flow diagram changes substantially at the end of that first life cycle. By adding the tax receipts from multiple projects together, here is what it would look like.

So growth “solves” the insolvency problem. As long as a city continues to grow, as long as it can continue to exchange near-term cash flow for long-term liabilities, it will be just fine. Or so it may appear at the end of the first life cycle.
Here is what happens during that second life cycle. The model I am using assumes that growth continues at the same moderate pace, with a new development of similar size added every other year. 

The cumulative cash flow of multiple projects in succession over two life cycles.The results are obvious and devastating. When the private-sector investment does not yield enough tax revenue to maintain the underlying public infrastructure, the balance can be made up in the short term with new growth. Over the long run, however, insolvency is unavoidable.

We need to pause here and point out a couple of important things. First, this is actually a model of a well-run city, one that puts money away for future improvements. I’ve yet to see one that has such fiscal discipline. We can spend all day blaming politicians for wasting money on “big government” or giving unwarranted tax breaks to “the rich”. These debates are ultimately tragic sideshows to the underlying lack of productivity in our development pattern.

Second, this model shows the impact of continuous and steady growth. In reality, that is not the pattern most cities experience. Most cities have a phase of rapid growth followed by stagnation and then decline, as described by Jane Jacobs in The Economy of Cities. Superimpose the financial underpinnings of the American model of development and the results are even more devastating – a flood of liabilities all coming due right at the time that growth is starting to wane.

I know I promised “rational responses” for tomorrow, but I need to put that off. [Next time] we will examine how America has responded to the economic reality of our places thus far.