The Case for New Cities
- By Jake Auchincloss & Jonathan Gruber
It has become a truism that America can’t build anymore. Housing, infrastructure, and all nature of public goods are nearly impossible to build and irrationally expensive when we do so. The facts are stunning for such a diverse and dynamic economy. California is annually building 100,000 fewer homes than it needs to address affordability. A mile of subway costs two to seven times as much in American cities as in major European cities. One Chinese shipbuilder constructed more shipping tonnage in one year than America has since World War II. Georgia’s new nuclear power plant was seven years late and $17 billion over budget. And the list goes on.
The solution seems straightforward: Cut the regulations that hold back builders. Over the decades, litigation and legislation have snowballed the number of veto points between the conception and execution of projects. Advocates on both the right and the left have argued against this vetocracy, cogently summarized in recent books like Abundance and Why Nothing Works.
That solution isn’t working fast or fully enough. Get-stuff-doners have been snipping away at the vetocracy for decades, with more frustration than success. In Massachusetts, for example, years of YIMBY effort culminated in the MBTA Communities Act, which compels higher-density zoning on sites near transit. Even the most optimistic projections, though, expect it to deliver no more than 40,000 units over the next decade for a state that needs a quarter million.
These efforts deserve more support, but taken alone they won’t unlock enough building. This decade needs to deliver seven million units of housing and five Hoover Dams’ worth of nuclear power for America. We need radically new ideas.
Instead of just arguing with existing cities, states should also build new ones.
The potential for new cities
This proposal starts with the enormous parcels of land currently owned by the federal and state governments that are not locally zoned. The federal government is the largest real-estate manager in the nation, with more than 34 million acres of land that are not parks or conservation land. For example, there are 1,300 acres of federal land in the Pittsburgh metro area. States own tremendous developable acreage, too. Two decommissioned military bases in Massachusetts—Fort Devens and Weymouth Naval Air Station—are both within commuting distance of Boston.
Proximity to productive cities matters. A key economic force driving growth is agglomeration, which can be summarized as: Smart people want to live next to other smart people. As cities gain population they become more productive. This is due to the network effects of the knowledge economy, where interactions between people produce more than the sum of their parts. When a metropolis adds one more engineer, it’s gaining not just that worker but valuable interactions with other engineers. And those interactions are what drive innovation.
So, the more people, the higher the productivity. The higher the productivity, the higher the wages—and not just for well-off engineers, but also for legions of workers in trades and services that accompany city growth, from electricians to personal-care attendants.
Unfortunately, productive American cities are shrinking relative to the rest of the country, for a simple reason: No one can afford to live there. Economists estimate that if we allowed these urban hubs, along with their suburban satellites, to grow to their potential, our economy would grow 50% faster.
Building new cities next to productive cities is the “have your cake and eat it too” of economic development. “Having your cake” is agglomeration. Adjacent hubs generate the interactions that drive innovation, which increases productivity, which boosts wages. “Eating it too” is affordability. A new city can build housing and infrastructure at the scale and speed necessary to produce enough supply to drive down costs. This benefits not just the denizens of the new city, but those of the existing one, too, since housing markets are as regional as labor markets. Over the long term, new cities can become links in a new economic geography, radiating economic opportunity inwards from the coasts and forging a more geographically inclusive nation.
States should consider four elements as they develop new cities: site selection and stewardship, financing, regulatory reform, and experimentation. We discuss each in turn, offering proposals as a basis point for states to adapt to their own realities.
Site selection and stewardship
The effort to build new cities could be led by an independent commission charged with making this vision a reality. A New Cities Commission (NCC) could be chartered by the State House and appointed by both parties’ leaders based on real-estate and infrastructure-development expertise. The commission would map all sites in the state where it sees the potential for productive new cities, creating a catalogue of development opportunities.
The commission would operate both top-down, reviewing federal and state land of its own accord; and bottom-up, accepting solicitations from private landowners and localities. Its recommendations could be voted up or down in the State House with minimal amendments, to prevent political strings from getting attached. The NCC could also revoke designations through due process.
In addition to site selection, the NCC would be the steward of the initiative. It would own nothing, but it would be the quarterback between state governments and all other stakeholders to start the flywheel spinning.
Financing
To support the efforts of the NCC, a parallel financing arm would exist; let’s call it the Development Corporation. This entity would likewise be chartered by the State House; it would, however, be privately capitalized, similar to the structure proposed on the national level by the bipartisan Federal Infrastructure Bank Act. Its mission would be crowding in the capital necessary to create economic momentum, ideally with federal partnership to make the financing even more cost-effective. We offer ideas across three risk levels for how to de-risk investment.
- Low risk—construction financing for housing.
The Development Corporation could offer low-interest construction loans for housing development. This would lower the cost of capital for developers. Some states, like Massachusetts, have begun to do this, and former Treasury official Jim Millstein has proposed that Fannie Mae and Freddie Mac could unlock millions of units of housing by using $50 billion to $100 billion to securitize construction financing, as they currently do for mortgages.
- Moderate risk—tax financing. The primary way localities fund their public services is through local property taxes, which assess and levy both the land and improvements made upon it. This creates a major potential risk for new cities: There are minimal improvements upon the land at the beginning, and the value of the land is depressed because there is limited economic activity upon it. Yet the potential cities require large up-front investments before actual property tax revenues are known and realized.
The Development Corporation could help by following a lesson learned from new health insurance programs: the use of risk corridors. Programs such as Medicare Part D and the Affordable Care Act exchanges dealt with aggregate uncertainty facing insurers by creating risk corridors whereby the government insures a share of the downside risk but takes an equal share of any upside gains. The Development Corporation could similarly set property tax risk corridors for the new city. On a temporary basis, the Development Corporation guarantees supplements to local property taxes if they are below expectation and takes excess revenues if they are above expectation. This could be combined with tax increment financing (TIF)—a tool already deployed to induce infrastructure investments in depressed areas—to ensure a financing stream for future development. - High risk—project financing. Many types of power, transportation, and civil engineering projects have significant execution, legal, and political risks. They go past deadline and over budget. They face lawsuits. They get tripped up by local politics. States could both replicate and tap into methods deployed by the federal government to de-risk these hazards.
The federal Development Finance Corporation, for example, has a $40 billion portfolio dedicated to mobilizing capital to projects in tough investment environments overseas, using political-risk insurance and other financial tools. It generates money for taxpayers. The Environmental Protection Agency helps decontaminate and redevelop brownfield sites through the Superfund program, which has been hailed by both parties. The Department of Energy used the Loan Program Office under President Joe Biden to boost clean energy and advanced transportation deployment. The Department of Defense uses the Office of Strategic Capital to strengthen supply chains for critical technologies. NASA uses milestone-based payments to audit and reward performance of risky endeavors by partners such as SpaceX. And advanced market commitments, which promise to buy a given volume of a product that does not yet exist, have been used by many outfits, both corporate and governmental, to mobilize inventors and investors. Most notably, Operation Warp Speed, which brought the COVID-19 vaccines to market in record time, depended critically on an advanced market commitment.
The Development Corporation could be empowered to use these types of high-risk financing tools to support new cities in their development of energy, transportation, and civil engineering requirements. Importantly, this infrastructure may be both internal to the new cities or externally connecting them with the places where jobs are concentrated. Ultimately, policymakers may decide to use any of the financing tools that prove effective beyond the remit of new cities. We believe in reinforcing success.
Different financing tools could also be used together to maximize impact. For example, off-site construction of modular housing has the potential to reduce cost per unit, for the same quality. For the same reason that Ford can manufacture millions of cars for much less than it would cost you to build your own car, mass-producing housing units is cheaper per unit than stick-built, custom houses. Turning construction projects into manufactured products is an increasingly effective way to drive down costs. Construction productivity has declined in the United States since the 1960s, compared to an eight-fold productivity increase for manufacturing in the postwar era.
Offsite construction has always struggled with the chicken-and-egg problem of scale
and cost. Until there is scale, cost stays high. But as long as costs remain high, there is insufficient demand to reach scale. The Development Corporation could use a combination of advanced market commitments and construction financing to push off-site construction down the production-cost curve.
Regulatory reform
Governors and State Houses not only need to assent to designating parcels for new cities, they also need to pass the land-use and permit reforms necessary to turbocharge infrastructure and development. This will be met with politically painful local opposition. Here, the New Cities Commission and the Development Corporation are the stick and the carrot.
The NCC’s designation of sites makes them eligible for Development Corporation financing. In this respect, NCC can be the political air cover for governors and other state officials to make hard calls that will anger certain constituencies. States already do this for mayors and city councils on housing and environmental issues. Our approach extends the top cover to give governors a helpful political foil.
The NCC can also provide a carrot of direct technical assistance and act as a liaison for federal permitting, particularly environmental review. As a stick, the terms of financing required by the Development Corporation will impose market discipline on infrastructure investment and real estate development.
Based on these carrots and sticks, states can shape a regulatory climate favorable to building new cities. The goal is to effectively fuse state capacity and private-sector enterprise.
Experimentation
The opportunity to build new cities is not just economic. Starting fresh is a chance to challenge assumptions about how humans live together. One example is the relation of cities to cars. The best built environments were developed before the automobile age. (Think Paris.) For American cities, car-centric inertia, particularly over parking, is hard to shake. New cities can break from the status quo, implementing car-free zones, congestion pricing, Donald Shoup–style parking reforms, and superb cycling and walking infrastructure from first principles.
New cities could also experiment with public finances. To raise money, economists have long heralded the use of utility fees and land-value taxes, instead of property taxes, to levy rent-seeking by landowners and also promote dense development. The Strong Towns movement’s finance decoder makes transparent to planners and residents how walkable density improves operating budgets and fiscal resilience.
Walkability is also family-friendly. Downtowns built to human scale, not dominated by automobiles, could be particularly liberating for children. Social psychologist Jonathan Haidt has compellingly chronicled how, for those born after 1995, play-based childhood has been succeeded by a phone-based childhood. American children have been cast adrift in the digital realm, where social media corporations are making them lonelier, angrier, and sadder. They are simultaneously deprived of autonomy in real life, to safely spend time together free of programming or parental supervision. New cities offer an opportunity for urgent intentionality around designing places and spaces for children to safely be together, in person.
There are as many more potential experiments as there are smart and ambitious people waiting to move to these cities. The ideas above are a starting point. But we must begin in earnest. As the development of new cities proceeds, we should take a portfolio approach to measuring its success. There will be failures, even embarrassments. What matters is that there is a massive burst of housing and infrastructure development in America, not that every idea works perfectly.
Current ideas to address this problem have focused on local zoning and regulatory reform. These are good ideas. But such efforts are not enough. The lack of affordable housing anywhere near plentiful high-paying jobs has frustrated voters and hampered American growth. The Northeast, Pacific Northwest, and California have been particularly sclerotic. It’s time for a bold new approach that marries the availability of land outside of local control, and near productive urban areas, with reforms and investments necessary to build new cities. This radical initiative would benefit the whole country, both expanding existing high-growth hubs and extending these hubs into a new geography of prosperity.
About The Author
Congressman Jake Auchincloss, representing Massachusetts’s Fourth District, serves on the House Energy and Commerce Committee. He is a Harvard and MIT Sloan alum, Marine veteran who served in Afghanistan, and former city councilor. He lives in Newton, Massachusetts, with his family.
Jonathan Gruber is the Ford Professor of Economics and the chairman of the economics department at MIT. He is the co-author of Jump-Starting America: How Breakthrough Science Can Revive Economic Growth and the American Dream.
