The global metropolitan revolution

This speech was delivered at the Annual General Meeting of Kommuninvest, a Swedish local government funding agency, on April 21^st, 2016.

As you may have heard, in less than seven months the United States will hold a presidential election.

This presidential campaign has been characterized by a degree of angry populism that we in America have not experienced in decades. It is an angry populism that resembles many of the political movements that have risen to prominence across Europe. On both sides of the Atlantic, we are witnessing deep discontent over issues like income inequality and wage stagnation, serious concerns about competitiveness and job growth in an age of rapid technological progress, and real fears about migration and security.

Yet the U.S. presidential election and national elections in other countries share something else. Our political conversations have perpetuated a certain kind of 20^th century conventional wisdom about where power and responsibility lies in modern societies.

This conventional wisdom says that national governments sit at the top of the hierarchy—setting laws, promulgating rules, raining down resources, running the country.

Cities are at the bottom of the heap—performing ministerial tasks or acting as mere delivery vehicles for national programs or state governments.

I think 20th century conventional wisdom doesn’t quite fit our disruptive century.

National governments are really powerful, but I no longer look to Washington to right all wrongs.

National governments play critical roles, but I no longer believe in Washington to be the vanguard of social progress.

I believe in cities.

I believe that cities and their broader metropolitan areas are the level of society that will address many of the economic, social and environmental challenges facing the world today.

I also believe that cities can often do so in a way that is more efficient, more effective and more democratic than national governments.

Across the world—but particularly in the United States and Europe—cities and metropolitan areas are stepping up and tackling some of the toughest challenges that national governments either can’t or won’t address.

Climate Change

Income inequality

Social mobility

Demographic change

International migration

Economic Competitiveness

I believe that city power and problem solving will define this century to the same extent as national power and problem solving defined the last one.

I call this the Metropolitan Revolution.

The Metropolitan Revolution

Signs of the metropolitan revolution can be found in cities large and small.

In Portland and Copenhagen, cities are growing their economies while reducing carbon emissions.

In Denver and Los Angeles, they are investing in state-of-the-art transit.

In New York and London, they are tackling the affordable housing crisis.

In Houston and Hamburg, they are integrating immigrants and giving workers the skills they need to thrive.

In Cleveland and Sheffield, they are making manufacturing a priority again.

In San Diego and Stockholm, they are devising trade strategies around exports and foreign direct investment.

The United States and Europe are remaking themselves from the bottom up.

Cities are doing these things because they must. 

With many national and state governments mired in partisan gridlock and paralyzed by ideological polarization, cities are essentially on their own to grapple with super-sized economic, social and environmental challenges.  The cavalry is not coming.

And the cavalry won’t come.  The aging of our societies is compelling national governments to shift enormous resources to care for our elderly populations.  The federal government in the United States, for example, dedicates ¾ of its budget to safety net programs and the military—it is essentially a health insurance company with an army.

As a consequence, adequate national funding for everything from roads and bridges to research and schools is no longer predictable or stable.  Cities and metro areas are becoming increasingly responsible for investing in the nation’s future through innovation and infrastructure, schools and skills and quality place making.

Cities are doing these things because they can. 

Urbanization is the dominant, unifying trend in the world today.  With more than half of the world’s population now living in urbanized areas, cities have become the indisputable engines of national economies and the centers of global trade and investment.

The top 300 metropolitan areas worldwide house 20 percent of the world’s population and generate nearly half of the world’s GDP.

The top 100 US metropolitan areas sit on only 1/8 of our land mass but house 2/3 of our population, generate 3/4 of our GDP and constitute 75, 80, 85, 90 percent of the nation’s share of every indicator that matters in driving economic and social prosperity—whether it’s around skilled workers or efficient infrastructure or innovation.

There is, in essence, no American Economy or Swedish Economy or European economy. Rather all of our nations are networks of metro economies and our national economic performance is simply the aggregation of the performance of our metro areas.

Cities are doing these things because they’ve done them before.

Before there were nations, there were cities. Before there were unions of nations or even a United Nations, there were networks of cities.

In 1241 the cities of Lubeck and Hamburg concluded a “treaty of friendship and free trade.”   The cities were natural allies, united by strategic location, complimentary economies and mercantilist orientation.  Lubeck, located on the Trave River, a tributary to the Baltic Sea, was a major exporter of herring.  Hamburg, located on the River Elbe, which flows into the North Sea, had close access to salt mines, the key ingredient in preserving fish.

The growth of trade between these two river cities and their merchants (the “Hansa”) altered the economic evolution of Northern Europe.  It spurred innovation in ship building and increased demand for infrastructure like canals, products like barrels, and other essentials—like beer and taverns—to fuel the fishing, the salting and the packing.

Ultimately other cities like Cologne, Malmo, Riga and Tallinn joined and what emerged was a Hanseatic League of Trading Cities “with far reaching trade agreements and almost total control of North European trade.”

The past is prologue. 

The world is evolving as a network of global cities that trade with each other, learn from each other and come together to solve pressing challenges and bend global, national and state policies to their will.

Power is devolving to places and people who are closest to ground and oriented towards collaborative action.   This shift is changing irreparably who our leaders are, what they do, and how they govern.

The Metropolitan Revolution has only one logical conclusion: the inversion of the hierarchy of power.

In this new model, national and state governments sit in the service of cities.  They perform the functions that cities cannot perform—setting a platform for environmental protection, food safety, banking and trade; providing a safety net for our populations; and investing in basic science, applied research and transformative infrastructure.

Cities are then responsible for solving many of the pressing challenges of our times, sometimes in partnership with national and state governments, often not.

I think this is a recipe for success.

National and state governments are governments—they can be hijacked by partisanship, and every idea or solution or initiative is seen through the lens of political calculation. National and state governments reward individuals who adhere to party discipline and ideological purity.

By contrast, cities and metros are networks of firms, institutions and individuals that work together to problem solve across sectors, disciplines, artificial borders and, yes, even political parties.  Cities reward leaders who catalyze action and get stuff done—run businesses, provide services, educate children, train workers, build homes, and develop community.  City leaders are, therefore, pragmatic to the core—they put place over party, collaboration over conflict and evidence over dogma.

Problem solving close to the ground rather than policy making from a remote national or state capital also has real, tangible benefits.

It tends to be more effective since it yields solutions that are integrated and innovative rather than compartmentalized and rule driven.  A national transportation agency tends to treat transportation challenges—say traffic congestion—with transportation solutions, often widening a road.  “If you have a hammer, everything looks like a nail.” A city is more likely to bring to bring other solutions to bear—say around housing or land use or technology—to solve the same problem.

A city solution can also be a more efficient use of public resources since it is more aligned with the distinctive needs of that distinctive place—around say the demolition of blighted housing in a weak market city versus the building of new housing in a prosperous one.  National governments tend to enact one-size-fits-all solutions.  And, for political reasons, they like to spread public resources thinly—like nutella across a slice of bread.

A city solution can also be more democratic since it provides ample opportunities for the active, constant, participatory engagement of residents rather than the passive act of periodic voting.  City solutions can be a response to the emerging democratic deficit in nations, where citizens feel removed from distant central governments and unaccountable bureaucracies.

Start Your Revolution

So how does a city and metropolis start a revolution?  Here’s a roadmap for transformation:

First, form a network of leaders and citizens who take responsibility for economic and social progress. In some places your Mayor or County Executive or Governor can convene the network. But if they don’t or won’t then you can step in. Take a look around your metropolis. There are leaders everywhere—in companies and philanthropies; in universities and unions; in civic, environmental and community groups. Convene yourselves. Collaborate to compete. Do grand things together.

Second, declare your distinctive vision, one that is rooted in sound economic thinking and local evidence. The defining essence of metropolitan economies—your city’s special advantages, its unique offer—differs from place to place. What makes Houston competitive on the world stage is different than what propels Hamburg. And building on those differences rather than trying to be like everyone else is the key to success. So follow the wisdom of Dolly Parton: “Find out who you are and do it on purpose.” Be the best 21st Century Version of Yourself.

Third, find your game changer.  Discover and deliver the intervention that alters the trajectory of your economy, changes your image or identity and re-makes the form and shape of your community.  In Detroit, building a modern transit system in the home of the automobile sends a signal.  In Cleveland it was repurposing their incomparable industrial heritage. What’s your game-changer? What will put your city on the global map as a community with imagination and aspiration and the resolve to get stuff done? What will be your gift that keeps on giving?

Spread the Revolution

The metropolitan revolution will not begin or end in isolation; it will spread “horizontally” across cities, like an idea virus, adapted to the unique circumstances of disparate places. Cities are fast, eager learners, ever observant of their peers, able to move quickly to spot innovation elsewhere and apply it at home. This revolution is being televised—via 21st century means. Metropolitan ideas and practices are leap-frogging state and even national borders with the speed of a click or the conciseness of a tweet.

The end result: a smart housing strategy in Hamburg will inform thinking and action in New York or Los Angeles or Chicago.

But it doesn’t and cannot stop there.

If cities are to be the world’s problem solvers, they need new patterns of urban growth, new forms of urban finance and new norms of urban governance that are concrete, imaginative, integrated and, ultimately, transferable.

Let’s take an area that everyone in this room knows well—finance.

By conservative estimates, U.S. and European cities will need to invest trillions of dollars over the next decade to address pressing economic, demographic, and environmental challenges.  Traditional public finance resources and tools are inadequate to meet this demand because of what I discussed before—the rising share of elderly people in our populations and the rising share that health care and retirement benefits make up of national government budgets, crowding out investments in other domestic activities.

The fiscal writing is essentially on the wall.  Going forward, cities will be increasingly responsible for investing in the catalysts of future growth and prosperity including, most importantly, infrastructure, housing, quality places, and the schooling and skilling of children and young adults.

To accomplish this, cities and metropolitan areas will require financing in many forms and from a variety of public, private and civic sources, often pooled and combined in intricate ways.  In essence, a new field of what I call “metropolitan finance” will be needed to aggregate and deploy public, civic and private capital across multiple dimensions.

The heart of this new metropolitan finance: the creation of new institutions, intermediaries and instruments to unlock the private and civic capital necessary for transformative urban investments.

New Financial Instruments and Mechanisms:

Cities and metropolitan areas and a broad range of other investors must invent new financial instruments and practices to channel capital toward a number of sustainable and inclusive activities. In the US, much attention is being paid to impact investing and the rise of Pay for Success Bonds, recently used in Salt Lake County to expand pre-kindergarten to economically disadvantaged children.  This reflects the broader invention of organizations and funds that are geared to generate measurable, beneficial social and environmental impacts alongside financial returns.

Yet new instruments and mechanisms are springing up in many other areas of policy. Green Bonds have emerged as a means of funding clean energy and energy efficiency projects. Pension funds are also beginning to treat large urban redevelopment projects like London’s Kings Cross as a single asset class, recognizing the synergistic effect of disparate investments that strengthen and reinforce each other’s value, rather than as a collection of separate and unrelated investments. This is a major departure from the status quo where large commercial banks and governmental agencies compartmentalize all aspects of financing (equity investments, debt lending and grant making just to name a few) even though the focus of these investments (e.g., housing, infrastructure, small business) are physically located in small geographies and interact in a way that enhances value for each of the separate elements.

New Intermediaries

Second, cities and metropolitan areas will need to create new intermediaries that can more seamlessly link local and non-local capital to needed investments. In Detroit, for example, an intermediary called Invest Detroit has established a series of funds (e.g., a Predevelopment Loan Fund, an Urban Retail Fund, a Lower Woodward Housing Fund, a New Markets Tax Credit Fund) that try to match the expectations of private and civic investors with the financing needs of small- and medium-sized firms that serve different market functions in the downtown and midtown area.  In Cambridge, MA, incubators like the Cambridge Innovation Center have matched startups to experts and seed capital. Hubs like Chicago’s 1871 have paired large companies like United and State Farm with entrepreneurial firms and talent.  Social innovators like LaunchCode in St. Louis have linked newly minted coders to good jobs in mature companies.  Other intermediaries like the Texas Medical Center in Houston are acting as the connective tissue between large anchor institutions (like hospitals and universities) to achieve greater innovation through collaboration.

New Publicly Owned, Privately Managed Institutions:

Finally, cities and metropolitan areas will need to form new kinds of special-purpose publicly owned but privately managed institutions to unlock the value of underutilized public assets and finance a wide range of transformative projects.  In Hamburg, a company owned by the City government is overseeing the redevelopment of HafenCity, the largest inner-city regeneration effort in Europe through the redevelopment of former port and industrial sites.  In Copenhagen, CPH City and Port Development, a company jointly owned by the municipal and national governments, is developing areas along the waterfront.  In the United States and elsewhere, Community Land Trusts have provided stable foundations for affordable housing. And CORTEX in St. Louis and 22@ in Barcelona have governed the build out of innovation districts in those two cities.

Many of these new entities use innovative mechanisms to capture upfront the anticipated value appreciation of local property from improved infrastructure, thereby making available resources to finance the market-shaping improvements. Many U.S. cities already use tax increment financing (i.e., “TIFs”) to support infrastructure projects by borrowing against the future stream of additional tax revenue the project is expected to generate. For example, a TIF was used to finance infrastructure improvements for the Atlantic Station project in Atlanta, a streetcar in Portland, and urban renewal projects in Fort Worth. Many cities also use land use and zoning changes to enhance the market value of properties in downtown, midtown and waterfront areas thereby unleashing private investment.

These examples represent a mix of innovative finance tools, partnerships, and approaches, yet they illustrate several defining elements of the new metropolitan finance:

First, the new metropolitan finance reflects the fact that cities and metropolitan areas are not just governments but networks of institutions and leaders that cut across sectors as well as jurisdictional and disciplinary lines.  The financing potential of cities, therefore, does not rely exclusively on the balance sheets of local governments or authorities. Rather, it is the balance sheets and asset bases of a broad set of stakeholders that are used to make important investments in the drivers of productive, inclusive and resilient growth (innovation, infrastructure, skilled workers.)

Second, the new metropolitan finance provides a proper accounting of the role that a range of public, private, and civic investors play in building cities and metropolitan areas. Although much focus is placed on federal investments or the health of municipal government finances, the fact is that many elements of local and metropolitan infrastructure are already designed, financed and delivered through a range of private and private/public institutions including utilities, telecommunication firms, special quasi-public authorities, and major anchor institutions.

Finally, the new metropolitan finance reflects the multi-dimensional reality of city and metropolitan growth and the multi-layered nature of many complex financial transactions.  The fact is that that cities and metropolitan areas require financing in many forms and from a variety of sources, often pooled and combined together in intricate mixes, to shape their economies, make quality places, and equip their workers with the skills they need to compete.

Conclusion

Let me go back to the beginning.

I believe we are experiencing a Metropolitan Revolution in Evolution.

With many multi-lateral institutions and national and state governments incapable of meaningful action, cities and metros—and their networks of public, private, civic and university institutions and leaders—are becoming the vanguard of problem solving and policy innovation in the U.S. and the world.

The logical conclusions of this are profound.

The relationship between the nation state and the city will be fundamentally altered.  National governments will lead where they must (e.g., by financing basic science and enacting immigration reforms) and empower cities where they should (e.g., by giving local leaders more flexibility to decide how to allocate national resources).  This is already happening.  Smart national governments are recognizing that strong, empowered cities are central to national prosperity.  Hence the institutional reform in Denmark that has consolidated hundreds of local governments in the past decade.  Hence the devolution wave in England that is giving leaders in Manchester, Sheffield and elsewhere the freedom to decide and freedom to deliver.  Hence the emergence of metropolitan-scale governments in Paris and Torino.

The relationship between city and metropolitan stakeholders and macro and global capital will also be dramatically reshaped.  Going forward, local actors like municipal governments and anchor institutions will invent new financial instruments and mechanisms with institutional investors focused on the long-term, like pension funds and sovereign wealth funds.

And, finally, and most importantly, cities will begin to crack the code on some of the toughest challenges they face:

Recapitalizing metropolitan transit systems to ensure the mobility of people;

Redeveloping major under-utilized parts of the metropolitan core

Retrofitting our suburban communities

Developing housing for migrants that is socially integrated and well-connected to the rest of the metropolitan area

Shifting to low carbon energy use to reduce greenhouse gas emissions

Providing our children and our adults with the technical skills they need to succeed in a disruptive era;

Feeding the start-up and expansion needs of new entrepreneurs outside leading hubs like Silicon Valley, New York, Stockholm and Berlin.