The Growth Ponzi Scheme

by Charles Marohn

We often forget that the American pattern of suburban development is an experiment, one that has never been tried anywhere before. We assume it is the natural order because it is what we see all around us. But our own history — let alone a tour of other parts of the world — reveals a different reality. Across cultures, over thousands of years, people have traditionally built places scaled to the individual. It is only in the last two generations that we have scaled places to the automobile.

How is our experiment working?

At Strong Towns, the nonprofit, nonpartisan organization I cofounded in 2009, we are most interested in understanding the intersection between local finance and land use. How does the design of our places impact their financial success or failure?

What we have found is that the underlying financing mechanisms of the suburban era — our post-World War II pattern of development — operates like a classic Ponzi scheme, with ever-increasing rates of growth necessary to sustain long-term liabilities.

Since the end of World War II, our cities and towns have experienced growth using three primary mechanisms:

Transfer payments between governments: where the federal or state government makes a direct investment in growth at the local level, such as funding a water or sewer system expansion. Transportation spending: where transportation infrastructure is used to improve access to a site that can then be developed. Public and private-sector debt: where cities, developers, companies, and individuals take on debt as part of the development process, whether during construction or through the assumption of a mortgage.

In each of these mechanisms, the local unit of government benefits from the enhanced revenues associated with new growth. But it also typically assumes the long-term liability for maintaining the new infrastructure. This exchange — a near-term cash advantage for a long-term financial obligation — is one element of a Ponzi scheme.