The Difference Between Growth and Wealth

“Charles Marohn is the undisputed leader of the strong towns movement. Now he has captured his thinking and insights in book form—and we are all beneficiaries.

Rebuilding our cities, towns, suburbs, and communities won’t be easy. But Marohn shows us a way to a better future, driven bottom-up by our many and varied strong towns. Marohn has written the playbook for rebuilding our communities. A must read for mayors, city builders, urbanists and all of us who want to live in and create stronger, more vibrant and inclusive places.”

— Richard Florida

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Excerpt from Strong Towns: A Bottom-Up Revolution to Rebuild American Prosperity

Chapter 5: Growth or Stability

Going into the summer of 2005, there was general concern among economists and money managers that a recession was imminent. The yield curve was flattening as investors bought longer-term notes to lock in higher rates ahead of possible interest rate declines. The Dow Jones average was down 7% from the start of the year. The Federal Reserve was raising rates to get some wiggle room should the anticipated rate-cutting stimulus be needed.

Indicators were moving in the wrong direction, and then at the end of August came Hurricane Katrina, which destroyed large portions of New Orleans and the Mississippi Gulf Coast. A few weeks later, Hurricane Rita hit much of this destruction a second time. It was terrible, and like many Americans, I felt a sense of embarrassment over America’s seeming inability to do much to make things better.

I would later have a chance to see some of the neighborhoods in New Orleans that were most impacted by Katrina. Entire blocks were wiped out, generations of accumulated wealth destroyed. Yet, what happened to GDP in subsequent months is telling. Here are the statistics as presented by the Congressional Budget Office:

Estimated Net Effect of Hurricanes Katrina and Rita on Real GDP

(Billions of 2005 dollars at annual rates)

2005, Second Half: –21B to –33B

2006, First Half: +24B to +36B

2006, Second Half: +35B to +48B

2007, First Half +33B to +47B

2007, Second Half +27B to +35B

The overall economy takes a hit immediately after the hurricane, but in the two years that follow, these disasters are a major stimulus. All the cleanup and rebuilding, all the recovery spending and one-time consumption, is a boon for the economy.

That is the dichotomy. What is good for a national economy is not well aligned with what is good for a local economy. The national economy is focused on growth, a short-term metric that is not correlated with real wealth or broad prosperity. In contrast, a local economy depends on wealth accumulation, a long-term reality that correlates to stability.

If we worried about the national economy and didn’t care about what it meant for cities, local businesses, or families, we’d just pick a few random cities to destroy each year and reap the economic benefits of rebuilding. If we worried about our local economies, we’d obsess about real wealth creation, not growth.

It is relatively easy to optimize one or two economic variables at the national level, at least in the short-term, if we’re willing to ignore fragility or tolerate absolute failure in other realms. What our cities desperately need today is a more nuanced approach to capital investments, growth, and development, a harmonizing of objectives that can only happen effectively at the local level.

Ultimately, building a prosperous America is a hyper-local undertaking. Yet, hyper-local undertakings are messy and chaotic. They can be dominated by small-minded thinking, by parochial concerns. In a society as connected and outwardly affluent as ours, where experts in all realms peddle their own low-pain rescue remedies for the challenges we face, American society has developed a low tolerance for the messy and chaotic.

A Paradox of Thrift or Avarice?

Keynes identified the Paradox of Thrift, the damage done to the national economy when individuals and organizations save instead of spend during an economic downtown, but what about the opposite? What about a Paradox of Avarice, where individuals and organizations don’t save but spend all they have? And more. What are the impacts of such a condition?

To serve us, to attempt to solve the great problems humanity has long struggled with, we created an economy that produces growth. When growth is an option, it is a fantastic thing. When we experience growth, it often makes our lives easier. It solves problems and can add to the comfort and beauty around us. Growth is good.

Yet, we have gone to the next step and made continued growth a condition of our prosperity. It is no longer merely a positive experience but a prerequisite for our comfort. And if we should experience a period where we fail to grow, or even grow at rates lower than what we had anticipated, then all manner of hardship is visited upon us.

“In the past, growth served us. Today, we serve growth.”

Czech economist Tomas Sedlacek posed the question: Do we want an economy to be more like a person standing or a person riding a bike? A person standing is stable. They can move forward but moving is not required for stability. In contrast, a person on a bike must keep moving forward if they are to stay upright. For the person biking, standing still is unstable. They must continually move ahead, something that is ultimately impossible in an infinite game.

The economics of a traditional city was like a person standing. It could grow, even very rapidly, but it was also stable without growth. Growth was a positive condition, but not a requirement. In contrast, the post-Depression American city is increasingly like a person on a bicycle; it must keep growing, at ever accelerating rates, or things fall apart.

In the past, growth served us. Today, we serve growth.

In the system we have evolved, the ideal citizen creates growth, not by saving and investing, but by consuming beyond their means. It matters little that this is ruinous to the individual, that such financial insecurity creates enormous levels of instability. Individual avarice is necessary for our national GDP to grow. Savings is punished with artificially low returns while debt is subsidized. Our individual value to the whole is based on our capacity, even our desire, to consume.

Local governments are bribed to take on unpayable long-term liabilities so that the national economy can experience growth today. In the name of efficiency, they are stripped of nearly all means of ingenuity. Our cities orient up the government food chain, allowing themselves to be positioned at the bottom, grateful for the crumbs they receive. This is backward.

To build Strong Towns, local leaders will need to take steps to opt out of these systems. This is difficult because it’s the water we all swim in, and the current gets stronger as things become more desperate. Still, if we are to truly serve the people in our communities, and by extension be there when we discover we need all seven of our scattered plots, we need a new path to prosperity.

Our cities must now intentionally sacrifice growth in order to have stability. In the infinite game we are playing, stability is a requirement, growth an option.

Cities are a collection of us; they are the way we take collective action in our communities. Over the past century, we’ve gradually given up this responsibility, deferring the direction of our places to the priorities of others. If the people are to lead again, if we’re to create a prosperous future for ourselves and our neighbors, local government must reassert leadership.

Mentioned in This Excerpt

• Economics of Good and Evil by Tomas Sedlacek

• John Maynard Keynes and the Paradox of Thrift

• Finite and Infinite Games by James P. Carse

Further Reading from Strong Towns on the Difference Between Growth and Wealth

• Understanding Growth (series) by Charles Marohn

• The Growth Ponzi Scheme (series) by Charles Marohn

• Winning is the Absence of Losing (on the idea of infinite games) by Charles Marohn

• My Journey From Free-Market Ideologue to Strong Towns Advocate, Part 7: The Nature of Markets by Charles Marohn

• The Illusion of Wealth (video)

Podcasts

• Tomas Sedlacek: A More Humane Economics (September 2019)

• America’s Economic Problems Demand a Radical Solution (November 2017)

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