Cities: The art of the (real) deal

As the contours of the general election begin to take shape, it’s time for cities to step into the ring.

Let’s call this the Art of the (Real) Deal.

To put our nation on a path to innovative, inclusive, and sustainable economic growth, we need greater investments in three key areas—innovation, infrastructure, and inclusion. In the eyes of many observers, we now face an investment deficit in these areas of $3-4 trillion over the next decade.

We must invest more in basic science and applied research. We must retrofit our crumbling physical infrastructure and create new state-of-the-art transit systems. We must strengthen our commitment to key parts of the safety net, particularly around affordable housing. And we must create better opportunities for our children through more effective schools and cutting-edge skills training.

Failing to make these investments will undercut our country’s economic vitality in a global marketplace that is more competitive than ever.

In theory, the federal government could be enormously helpful in confronting our nation’s investment deficit. It could lead by increasing investments in basic science and research, particularly around health, energy, and the development of new urban technologies. It could enhance the nation’s safety net by making new investments in housing, perhaps through a universal voucher program for very low-income Americans. It could, like the United Kingdom, empower cities by loosening excessive prescriptions and cumbersome rules and acting in the service of local visions and priorities. And it could leverage private and civic resources for public projects by creating new credit subsidy mechanisms, like new bonding vehicles for major infrastructure initiatives such as qualified public infrastructure bonds and America Fast Forward bonds.

Sadly, it seems very unlikely that any of this will actually happen. Washington’s political paralysis isn’t going to end anytime soon, particularly given the state of the 2016 primary campaign, which has often resembled a reality TV show rather than a sober, evidence-driven debate about the future of our nation.

And no matter who controls the White House, the larger structure of the federal budget isn’t going to change. Growth in mandatory programs like Medicare, Medicaid, and Social Security will continue to squeeze out federal investments in the areas most critical to cities. The Congressional Budget Office predicts that the federal government will spend $1.5 trillion more per year on mandatory programs by 2025 while nondefense discretionary spending will fall to its lowest level as a share of gross domestic product since the 1960s.

Also, few states are likely to be reliable partners in increasing investment. They seem to spend their time telling cities what they can’t do (most recently with Alabama’s state government prohibiting Birmingham from raising its minimum wage) rather than being part of the solution.

This means that cities will need to innovate. They need to develop new instruments, intermediaries, and institutions to supercharge partnerships with the private and civic sector. This is the Art of the (Real) Deal.

This means that cities will need to innovate. They need to develop new instruments, intermediaries, and institutions to supercharge partnerships with the private and civic sector. This is the Art of the (Real) Deal.

First, new financial instruments and practices can help funnel capital toward a range of public activities. Pay for Success bonds have been used to expand educational opportunities for low-income children in Salt Lake County. Green bonds have been used to fund a range of clean energy projects. Major urban redevelopment projects like London’s King’s Cross have been brought together as a single asset class, helping to attract investment.

Source: "The Potential and Limitations of Social Impact Bonds", Emily Gustaffson-Wright and Sophie Gardner, The Brookings Institution, July 2015.

Second, cities need to develop new intermediary organizations that strengthen the ties between the public, private, and civic sector. Many cities across the U.S. have benefited from intermediaries in a range of policy areas—the Cambridge Innovation Center in Massachusetts has matched startups to experts and seed capital, Chicago’s 1871 has linked large firms with entrepreneurial companies and talent, and Near Southside, Inc. in Texas has brought together medical hubs, creative entrepreneurs, and tech incubators with a focus on quality placemaking.

Finally, our cities need to draw inspiration from Europe and create a new breed of quasi-public corporations that unlock the value of assets and help finance transformative projects. These institutions exist in small capacities in the United States, but not at the scale we need. In Hamburg, for example, a company owned by the city is overseeing the largest urban regeneration effort in Europe. In Copenhagen, a company jointly owned by the municipal and national government has used revenue from redeveloping the city’s waterfront to finance major transportation projects. These institutions may be a radical departure from the ways we have conceived the relationship between the public and private sector in the past, but the scale of what they have been able to achieve makes them worth considering.

Regardless of who is elected president, cities will continue to be the engines of our economy and our drivers of innovation. By developing new instruments, intermediaries, and institutions, cities will be able to solve problems more effectively than ever before, and as new approaches are developed they can be adapted in communities across the country. We’re hearing a whole lot of promises from our presidential candidates, but we all know the truth—the real deals driving our country forward are happening in our cities.

This post is based on remarks given to the National League of Cities 2016 Congressional City Conference in Washington, D.C. on March 7, 2016.