When we build all at once to a finished state, when the public sector takes the risk and leads the way on new development, then what is built is designed to decline. It lacks adaptability, both in its design and in the cultural expectations of its occupants. We’ve transformed our human habitat into a bad party.
Earlier in this chapter, I described the value of taking small steps in the dark and the dangers of large leaps. There is an important variation on that story that applies to situations where many people are leaping simultaneously.
If we collectively don’t care how many broken noses there are so long as we gain knowledge of where the door is, just have a bunch of people take huge leaps in different directions. If nine out of ten people come to ruin breaking their noses crashing into things, but one discovers the exit, then the desired knowledge has been gained. Subsequent leapers can confidently follow that one successful person through the dark to the door.
In our post–World War II affluence, we’ve developed a broad cultural willingness to have our cities take large, repeated leaps in the dark. We’ve simultaneously increased our aversion to broken noses. We want great risk and rapid advancement, but we don’t want any sacrifice or pain. Unfortunately, that’s not how complex systems work.
Note
1 Census.gov, https://www.census.gov/const/C25Ann/sftotalmedavgsqft.pdf.
3
An Infinite Game
Should cities seek to run a profit?
I routinely ask audiences this question, and the feedback I get generally falls somewhere between contempt and disgust. People say, of course, local governments should not run a profit. The very suggestion is offensive for many who believe that local government is about serving people. It is the way we work together to do things – services that a marketplace focusing on profit just can’t accomplish.
Even though it is wrong, I understand this reaction. When the term profit is used, it is not difficult to envision the corporate CEO whose supposed duty to shareholders is to maximize profit, particularly near-term profit, regardless of the costs to others. That doesn’t seem like the kind of mentality we want directing the actions of local government.
Yet, profit is merely an accounting term that describes a condition where revenues exceed expenses. On a year-to-year basis, an orphanage must run a profit. A shelter for abandoned pets must run a profit. A palliative care clinic must have revenues that exceed expenses or, regardless of the public good that they perform in their mission, they will cease to exist.
Cities are not exempted from having to run a profit. Although a city can sometimes run a deficit year-to-year, over the long term, a local government must have revenues that exceed expenses. The only difference in this regard between a local government and a business, orphanage, or pet shelter is that, if the city fails to run a profit, it doesn’t cease to exist.
An insolvent city will linger on, performing its functions poorly, failing to serve – and in some instances, doing harm to – the people that form the community it governs. For cities to function properly, running a profit is essential. For those involved in local government, it must be a functional obsession.
An Infinite Game
A baseball game has a beginning and an end. There are rules for keeping score and a way to determine the winner once the game has concluded. The pursuit of victory, within the constraints of the rules, will lead to many different strategies – approaches that can be tested, refined, and adapted over multiple games.
Now, imagine a baseball game that didn’t end, one that went on inning after inning, forever. Pitchers took the mound, batters came up to the plate, runs were scored and outs were made, but the game never concluded. The rules of how to play the game might be the same, but without a condition for finality, the game would be played much differently. The objective would shift from scoring the most runs to outlasting your opponent, from run production to lineup stability.
An infinite game wouldn’t be played to win, but to survive. In such a game, the day-to-day play would become ultra-conservative. Not only would players consider opportunities to score; they would also heavily weigh the risk involved with each move. A chance for a big gain would not be worth it if it entailed even a moderate chance of failure.
In fact, keeping score as a way to measure one team against the other would become meaningless, as eventually would the scoring of runs. Even if the rules of how to play remained the same, the game would fundamentally change. Instead of players focusing on competition with a rival, the focus would shift to supporting the players on one’s own team. Without any chance of final victory, new forms of cooperation with the other team – sometimes called the “unwritten rules of the game” – would also emerge. Nobody would slide hard into a base, throw a fastball high and tight, or run over the catcher on a play at the plate. In an infinite game, these things wouldn’t be accepted.
Now, imagine that individual baseball players were compensated based on how well they performed within the infinite game. Players who scored a lot of runs were paid more than those who didn’t. This would create a personal incentive that runs counter to the communal instinct brought about by the infinite nature of the game.
It’s not hard to see how this could create tension. The communal dynamic of the team in an infinite game would be threatened by a player who could gain individually in the short-term at the expense of the team’s long-term stability. Different ways to harmonize these competing objectives would evolve as the game progressed.
Players might work cooperatively to make sure everyone gets a chance at a bump in pay. They might enact sanctions, like shunning players who act selfishly or benching players who refuse to play in the team’s best interest. They may give added prestige to players who act selflessly. In an infinite game, a culture would evolve reflecting the unique dynamics of each team.
This is all difficult to wrap our minds around because baseball, as we experience it, is a finite game. It has a beginning and an end, a way to score, and a clear measurement of victory. We can watch an entire game, and identify the victor, in an afternoon.
While over a longer timescale, this is the same way we experience private-sector businesses. We get excited when a new coffee shop opens up the street. When it serves us well, the owner makes a profit. Other coffee shop owners take note, adapt to the demands of patrons, and there is healthy competition. Over time, weaker competitors will leave the market – they will lose the game – and new competitors will emerge.
A coffee shop owner who is too conservative – serves only one form of dark coffee – will fail and go away. A coffee shop owner who takes too many risks – introduces line after line of expensive chilled drinks – will eventually make a serious mistake, fail, and go away. Run this competition out in time, and all competitors converge on the same outcome: They will all eventually fail and be replaced by new upstarts. Running a business in the private sector is not an infinite game.
This makes both the baseball game and the private sector business very different than a city. The development of a city is an infinite game. A successful city does not have an end date. There might be some scorekeeping along the way, but there is no path to ultimate victory. As uninspiring as it may be, the primary goal of a city must be to endure.
This makes the development of a city an inherently conservative undertaking, one where risk-taking should be embraced only to the extent that it adds to the overall stability of the community.
There is a natural tension in successful cities between the collective goal of the community to endure and the individual goals of those within it. The individuals, families, businesses, and other organizations that make up the city are playing finite games. They are out to win, however they measure that. Their goal is not to endure indefinitely. In this way, the short-term incentives of individual players conflict with the long-term objective of the community.
The community must operate at a profit; its wealth must exceed its liabilities and its revenues must consistently
exceed its expenses. There are many other objectives that can be pursued within that framework, but survival is a prerequisite for all of them. In a sense, it is the primary rule. If the city is to endure, the individual competing objectives must be harmonized so they do not undermine the community.
As previously noted, traditional cities – the human habitat evolved over thousands of years through trial and error experimentation – achieved this balance in novel ways. These mechanisms were quite often constraining and harsh, as all evolved systems can be. I’m not attempting to discount that reality. Yet, they fulfilled the prerequisite: They endured. Places that were not successful in harmonizing competing interests went away, their failures adding to a reservoir of cultural wisdom on how to build great places.
Our modern experiment in city-building has drained this reservoir, sacrificing the stability of the community for the short-term objectives of finite players. In many cases, the inspiration for change was virtuous, but even good intentions don’t exempt communities from having to operate at a profit.
Revenues and Expenses
Nearly all local governments generate their revenue from the wealth of the community. Cities levy taxes and fees to tap into this wealth. It is a common historical practice to tax property or land. Sales taxes or transaction fees are commonly used to extract wealth when money changes hands. Local governments also charge fees for services.
Public infrastructure is a communal investment to accelerate wealth creation within a community. When, in the infinite game of city-building, the public assumes the obligation of maintaining a piece of infrastructure, the wealth that results from that investment must not only eternally cover the maintenance costs of that infrastructure; it must also contribute to the overall prosperity of the community.
If the city spends $1 million repairing a street, it’s not sufficient for the tax base served by that street to only produce $1 million of revenue over the life of that street. If that’s all that results, then why bother? The public doesn’t build infrastructure just to have infrastructure.
For that $1 million street to be a public investment that benefits the community, it needs to do more than merely support the tax base needed to cover its own maintenance. It also needs to induce enough wealth to pay for the police and fire protection the development requires. The homes and businesses along that street must produce enough tax revenue to pay for their share of maintaining the parks, keeping the street lights on, operating the library, and running elections.
And where they do not, other places in the system must produce excess wealth to make up the difference. It’s one thing to widen that two-lane street to a four-lane to handle increased traffic flow, but if that increase in traffic doesn’t generate more wealth – if it is merely the same people driving more, just with fewer delays – then those added lanes are more of a luxury item than an investment.
From a financial standpoint, for something to be an investment, it must pay a return. For a city to endure, its wealth must be sufficient to maintain its basic infrastructure, provide for all the required services that accompany that development, and pay for the nonreturning luxury items we desire. Those are serious, but very real, constraints.
This makes it sound like we can’t have anything nice. That is true only if we ignore the return on investment, if we don’t bother to ensure that the wealth we are creating generates sufficient revenues to cover our expenses. If we obsess about running a profit, we can have things that are very nice. Quite spectacular, in fact.
Consider a standard city hall building from the early 1900s. This is one of those required investments, something that is necessary to support the community. That didn’t keep our ancestors from constructing city halls that were spectacular works of art. Poor and struggling communities across North America had city halls with Roman columns, vaulted domes, and marble staircases.
They didn’t do this because they were vain. They didn’t do it to exalt government employees or local elected officials. And they didn’t do it because they had excess cash laying around. They built them this way because that is how you squeeze a return out of an otherwise nonreturning investment.
When a local government builds a new city hall today, our cultural consensus is to look for the cheapest land available that can accommodate a nondescript office building surrounding by parking lots. The building serves a one-dimensional function and so the objective is to lower the public’s cost as far as possible. Sometimes we’ll squeeze in a little bit of public art so the person getting their dog license can be exposed to an abstract painting, but the art is a luxury, not a wealth-creation strategy.
Our ancestors did the opposite. They put city hall in a prime location, often at the terminating point of a major street to make it more visible. They used Classical architecture – strong, vertical symmetry – as a billboard to advertise the enduring stability of the community. They filled the building and the area around it with statues and icons to promote cooperative behavior among citizens, from the Ten Commandments to a statue of a local dignitary, someone who had done something noble, perhaps sharing their wealth for the construction of the building.
By constructing city hall in the manner in which they did, they took a building that would otherwise be merely functional and transformed it into something that radiated wealth to the community. Others would now want to be in proximity to this great building, either next door or along the street that it terminated. Land values would go up, the virtuous cycle of redevelopment continued.
This same approach can be observed with parks, schools, libraries, and even street lighting. These were luxury goods – they were not essential, but they did improve the quality of life – yet they were generally built in a manner that went beyond utilitarian and into wealth creation.
When they were built, that is. Cities never started with the ornate city hall. That came later, after there was sufficient wealth to justify it. In the decades preceding its construction, public business might be conducted in the local saloon or the back office of the school building. That’s because the city hall building is not an investment; for the community, it’s a luxury.
Our common language describes many things as “investments” that don’t have a measurable return. We invest time with our families because it pays off in happiness. We invest money in parks because they improve our quality of life. We invest in education because it improves society. I value all these forms of investment, but in the context of the collective undertaking of running a city, these luxuries – which add so much value to our lives – are the reason we must be disciplined about the return on our financial investments.
In the infinite game of city-building, a financial investment must pay a return. If it doesn’t pay a return, it should be looked at as a luxury. The wealthier a city becomes, the more luxuries it can support. Cities can be particularly successful with luxuries when they leverage their placement, design, and functionality to accelerate the community’s wealth.
Infrastructure Not as a Means, but as an End
I ran my own planning and engineering firm for more than a decade. One of our clients was the city of Pequot Lakes, Minnesota. During the time I worked with them, Pequot Lakes struggled with a decision on whether to widen a two-lane highway that ran through the middle of town into a four-lane or construct a four-lane bypass around the entire core of the city. It was a deeply contentious conversation.
One of the things we did to help public officials reach a decision was to study the financial costs and benefits of each alternative. For each alternative, the city was going to have infrastructure costs of its own as part of the project. The city engineer had recommended variants on each of these to allow the city to either (a) do the minimal amount necessary, (b) make timely maintenance investments to replace old infrastructure, or (c) make additional investments to facilitate future development within the city limits. We asked the engineer to provide costs for each of these variations.
We also brought in an o
utside financial expert named Jon Commers from the firm Donjek1 to determine the revenue potential with each of these scenarios. We asked Jon to examine the city’s tax base and make projections for how much private wealth could be created based on each level of public investment. Then, given the city’s tax rates, we asked Jon to tell us what that would mean for the public’s return on investment. In net present value, how many dollars did the city expect to get back for each dollar it spent?
Going into the meeting where the results were shared, I had a pretty good sense of how things would go. After all, I had been advising cities on making multimillion-dollar infrastructure investments for some time and felt confident in my approach. I agreed with the city’s engineer’s recommendation to, essentially, go big or go home: make the larger strategic investments now and the city was going to have financial rewards in the future. It was option (c), with my hunch that the bypass would prove to be the most profitable.
I was at a total loss when the results were presented. This was before the 2008 housing crisis, thus optimism was built into these calculations. Even so, for every dollar potentially to be invested by Pequot Lakes, here is the projected return on investment in each scenario:
Through Town Alternative
Required Improvements: –$7.34
Required and Maintenance Improvements: –$34.32
Required, Maintenance, and Growth Improvements: –$46.63
Bypass Alternative
Required Improvements: +$1.43
Required and Maintenance Improvements: –$3.11
Required, Maintenance, and Growth Improvements: –$12.62
Strong Towns Page 5