Best of 2019: My Journey from Free Market Ideologue to Strong Towns Advocate
If we went back to 2005 and could review my thoughts at the time, I am sure that we’d discover that the 32-year-old version of me was fully committed to free market economics. I also likely would have defaulted to describing that free market by citing the things around me that I experienced as working well, from my position.
Housing, of course, was part of a free market, and the insane appreciation of a townhouse I had sold the year prior—a home I owned for a little over three years while I went to graduate school—was simply the result of supply and demand economics. I had made a good investment—I’m a smart guy—and so, of course, it was going to appreciate in value.
Along with my pro-free market leanings came a deep skepticism of everything involving government. In retrospect, this was somewhat ironic since I was running my own planning and engineering firm whose only clients were local governments. Nonetheless, wherever market outcomes were not what I liked—say something like gas prices too high—it was easy to point to a regulation or bureaucratic obstacle that was distorting the market.
Then my very successful business, over half of which involved working as the permitting agency for dozens of small cities around Minnesota, collapsed. In time I understood why—you don’t need a permit if you aren’t going to build a home, you don’t build a home when nobody can buy a home—but I didn’t grasp the ramifications of the housing collapse.
I was in the early days of understanding the Growth Ponzi Scheme bankrupting cities and being able to explain why the financial sugar high of new growth created a long-term hangover of liability, but I hadn’t connected it to anything beyond infrastructure. And even there, I hadn’t perceived this was something found beyond my hometown.
What happened over the next few years—the housing price collapse, bailouts, stimulus, and all the enabling of moral hazard during the first Obama administration—reshaped my understanding of the free market. Combine that with travels that brought me around the country where I presented hard facts and data only to see repeated over and over the craziness I’d experienced back home, often to even greater excess, and I clearly understood that what I thought was a free market was anything but.
My remedy was not to become anti-market. I believe in the power of markets, and anyone who has taken biology class seriously must be as well. What I stopped believing in was the fairy tale of the “free market”. Every market has constraints, whether they come from the heavy hand of government, the limits of size, or the subtly coercive power of community bonds. The choice we have is how to set those constraints.
I’m still for limited market intervention and I still think price signals are one of the best signals. I’m just not so foolish and conceited as to think that outcomes I like are the byproduct of a free market at work while outcomes I don’t like are the result of an intervention I should oppose.
Ultimately, the invisible hand in Adam Smith’s Wealth of Nations can’t be properly understood without the insights of his Theory of Moral Sentiments. The way we transact with each other in a community has a moral dimension, one that warps any established market to be something more than a mere financial exchange and into something else. The benevolence of the butcher indeed comes from their own self interest, but the restraint of that same butcher also comes from their desire to be lovely to others.
I’m more convinced than ever that markets operate best when they operate locally, that stripping out the moral dimension from a transaction, then replacing it with some type of distant morality enforced through collective state or federal action, is a recipe for both economic and social decline, if not worse.
This series was written in response to a modern day ideologue (and internet troll), but I really wrote it for my former self. May today’s over-confident 32-year-old technical experts (among others) find an easier path to insight than I struggled, and continue to struggle, along.
“At this point I was becoming painfully acquainted with the words of Upton Sinclair: “It is difficult to get a man to understand something, when his salary depends on his not understanding it.” My salary, and my worldview, depended on me not understanding something I could not un-see.”
Part 1: Introduction
Remer did not have enough money to sustain 300 feet of pipe. To solve that problem, I had helped them build another 2.5 miles of pipe, doubled the size of their wastewater treatment ponds, and built them a huge, new lift station. Where were they going to get the money to fix any of this—let alone the water system, the drainage systems, and the streets—the next time it fell apart?
I looked at this extreme example with critical eyes and concluded the only thing a reasonable person could: Remer is a ward of the state. It lacks the capacity to sustain its most basic infrastructure systems. Just replacing the main sewage pump would cost half the city’s budget in any given year, and the pump would not last more than a couple of decades. Without the continued, ongoing benevolence of the state and federal governments, Remer would cease to exist, at least in any modern, civilized sense of the word.
I had taken a financially fragile city and, to solve a short-term problem, made its long-term crisis even more unsolvable.
Part 2: The Pequot Lakes Bypass
We had an estimate for how many dollars the community would spend and now we were going to get one for how many dollars we would get back. I felt very confident, based on my years of experience, my expertise in community development, and my free market principles applied to a growth economy, that bypassing the city using the most aggressive infrastructure investment alternative was going to be the highest returning approach.
The data came in. For every dollar spent on infrastructure during the project, here is the estimated return on that investment:
I wrote about this in [the Strong Towns book].
The city of Pequot Lakes was expected to lose money on all but one scenario. The only scenario they would not lose money on was one where the state highway bypassed the community with the city doing next to nothing, a giving up strategy that felt a lot like losing. In the alternative I personally supported, the city would spend $1.5 million and expect to see revenues, over the life of the improvements, of just $121,000. This just didn’t seem possible.
Yet, I had the numbers in front of me. I had set up the study asking a question I assumed I knew the answer to, yet had never seen calculated by any engineer, planner, or economic development advisor before. It was disorienting to look at the data in this way.
I became obsessed with understanding municipal finance. As an engineer, I knew how to calculate the cost of infrastructure. It had never occurred to me that I could calculate the associated revenues. I never needed to. Nobody had ever bothered to ask!
Part 3: What Is Infrastructure?
In very simple terms, infrastructure is a platform for expanding wealth. The reason to build infrastructure is that it builds wealth in a place beyond what would happen without infrastructure. Period. That’s it.
If infrastructure doesn’t build enough wealth to justify its construction, it’s not a productive investment. It’s merely a form of consumptive spending.
Of course, that’s not what I used to think. I used to buy into all the narratives for why infrastructure was such an unquestionably positive thing (and I’ll acknowledge up front that, as the guy being paid to make that happen, I had little financial incentive to question those narratives). Let me go through a few of those incomplete narratives.
Growth. The ubiquitous macroeconomic narrative is that investments in infrastructure grow the economy. This is unquestionably true, but a very limited observation. It’s like saying that sugar gives you energy; it’s a true statement, but also very incomplete in its description of the effects of sugar consumption. I ran my own consulting firm for more than a decade and understood—sometimes as a painful lesson—that growing the business didn’t always make us more prosperous or successful. Experiencing short-term growth is not hard, especially for a city, if there is no concern for the long term. I’ve written extensively about the difference between growth and productive growth, including in my upcoming book Strong Towns: A Bottom-Up Revolution for Rebuilding American Prosperity, as well as in Five Ways Macro-Economists Get Local Infrastructure Wrong and What Clearly Makes Us Richer.
Part 4: Analyzing the Cul-De-Sac
Image source.
For the Quantum Theory of Economic Development to hold—for my belief in not only the value of my work, but the premise that my work was a manifestation of the free market I so believed in, to be affirmed—something had to be wrong. As my narrative made the rounds among the professionals I knew, the answer came back pretty unanimously: You need to look at commercial development.
What people were saying to me was: Alright, even if residential is a huge financial loser, we more than make it up with good commercial development. Your results are interesting, but not conclusive because they don’t take commercial development into account.
At this point I was becoming painfully acquainted with the words of Upton Sinclair: “It is difficult to get a man to understand something, when his salary depends on his not understanding it.” My salary, and my worldview, depended on me not understanding something I could not un-see.
Part 5: Commercial Development
And with banks failing, housing prices collapsing, gas prices spiking, insane bailouts, and a crazy election cycle [in 2008] that didn’t touch on anything I thought important to it all, I found myself more and more on the outside looking in. I was the guy nobody wanted in their meeting, which is not a good career trajectory for a consultant, especially one with young kids at home.
I was screaming into the void, a voice in the wilderness, and nobody was listening. In retrospect, I can’t blame them; I was really angry about it all.
I had lost faith in my foundational beliefs, in the people I had relied on to guide my career, in the professions I had selected for my calling. Was there anyone else out there who was seeing what I was seeing? Was the whole world crazy or was I crazy? I wasn’t sure.
I sat down and started to write. I would soon find a whole bunch of people eager to help me figure this problem out.
Part 6: Organic Markets in the Traditional City
Nicholas Nasim Taleb (L) and Joe Minicozzi (R)
This marketplace is not serving our preferences. We’re serving the preferences of this marketplace. I could not longer claim that the widespread adoption and delivery of my preferences — at the time: a large lot, single-family home, with congestion-free transportation access to big box stores, strip malls, and fast food — represented something I chose freely, or something whose emergence I could trace back to a state of nature. If I wanted to remain an advocate of markets, I had to acknowledge that the outcomes I had come to prefer were not the result of a market-based system. Confronting this cognitive dissonance was painful and disorienting.
Ultimately, I started to ask myself: What does a truly market-based system developed and utilized by irrational and fallible humans look like?
My extensive reading of Nassim Taleb gave me a push toward an insight. Cities are complex, adaptive systems. They are organic, not mechanical. So at what point in the past did cities function more or less organically? The answer is debatable, but the work of Joe Minicozzi gave me a powerful framework to identify a turning point.
Part 7: The Nature of Markets
Americans today—especially the policymakers and influencers that have come to be known as “the elite”—are willing to see individual cities and states fail in order to have overall stability in the nation. Cities and states are fragile while the nation is strong. The markets we have established reflect this underlying value system.
A Strong Towns approach is fundamentally different, although I will freely acknowledge that—as with any approach—it’s not without tradeoffs. We are willing to see individual blocks and neighborhoods fail in order to have overall stability in the city. We place the strength and stability of the city at the peak of our value system. In our view, neighborhoods and blocks are fragile while cities must be strong. The markets and approaches we advocate for are far more localized than currently experienced, a reflection of our set of values.
The Christmas Cookie Inflation Index has risen 6.2% in the last year. This is compared to the official inflation rate of 2.6%.