The Public Wealth of Cities
Socialism at a local level?
The Public Wealth of Cities is a book by Dag Detter and Stefan Fölster. Dag Detter is a Swedish investment banker who transitioned into government when he headed State Industry for Sweden from 1998 to 2001. Stefan Fölster is a Swedish economist and professor. The pair came together to write The Public Wealth of Nations, published in 2015. The follow-up, published in 2017, covers public wealth management and investment strategy at the municipal level.
I heard of this book when Matt Bruenig recommended it during one of his podcast episodes after a viewer asked about building socialism at the local level. Public wealth and collective ownership at the local level are under-discussed topics, so I picked the book up to see what Dag and Stefan had to say. Overall, the book is a novel take on the topic of local wealth management, and it serves as a useful blueprint for almost anyone organizing at the municipal or state level in the U.S. or abroad. It turns out, proper wealth management can have a big impact on your community without raising taxes. Let’s summarize and critique The Public Wealth of Cities.
The Big Takeaways
Many on the left would like to see an expansion of city services and investments. Some might even want to see an expansion of public ownership. As the authors point out, these goals can work in tandem, and are also within the grasp of local governments should they choose the correct set of policies.
Throughout the book, the largest single takeaway is that cities own a large portfolio of assets, but they often account for these assets using outdated valuation methodologies or they fail to account for them at all. To put this in perspective, the authors used the example of Cleveland, Ohio (p. 91), which had public assets equal to $6 billion. The authors note that this is ‘book value’ not ‘market value.' Cities often derive book value using the historical cost of assets rather than their present-day market value. The authors note that a ‘conservative’ price-to-book ratio of 5x puts Cleveland’s public assets worth around $30 billion at the time of writing the book. A small yield on these assets of 3% would generate $900 million for the city, which eclipses the total investment budget for the City of Cleveland.
As a fiscally constrained local government, this tax-free financing represents a significant expansion of socially valuable investments. The authors caveat that they assume the exact price-to-book ratio and the yield of these assets, but they also make clear that there is some multiple on these assets that could generate some yield, should the city manage these assets optimally.
The authors argue for separating city assets into two buckets: policy and commercial (p. 15). Policy assets are assets that cannot easily generate revenue, and they are often run as quasi/pure public services. These assets often have explicit social goals. For instance, a city-owned library is not meant to maximize profits or value. Libraries aim to roughly break even while providing people a community center and access to books. Commercial assets are assets that can generate substantial return. Detter’s ‘rule of thumb,' which he describes as ‘nearly universal’, is that these commercial assets are worth at least 1x GDP of cities. This would mean Houston, for example, in theory, has commercial asset capacity well into the hundreds of billions.
The reason for this division, as the authors argue, is that mixed-objective assets can get dicey for cities. Once a city says an asset should generate return and accomplish some social purpose, it invites interference from local politicians, who are not always the most qualified to generate return, nor are they always acting in good faith, resulting in suboptimal performance of these assets which lowers returns to taxpayers.
The authors aren’t overly skeptical of assets with social objectives, but they believe there should be a large portfolio of assets that are independent from politics and professionally managed. Therefore, two big policy recommendations from the authors are (1) invest in a robust system of public accounting and (2) after separating policy and commercial assets, transfer commercial assets to a holding corporation.
Cities often fail to understand and account for the degree of their public ownership. Condemned property, liens on property, rights of way, donations, empty/unutilized public property (like old office buildings), underground tunnels, etc. are all ways in which cities come to own substantial real estate portfolios, yet these assets aren’t often considered for commercial purposes, and to the extent that cities are aware of their holdings, they often attempt to flip property for sale in order to fuel short-term spending needs. Proper accounting of these assets leads to greater transparency and public accountability, but it also represents the first step in commercialization. You can’t commercialize something if you are either unaware of its proper value or unaware of its existence.
The authors divide commercial assets into two main buckets: operational and real estate (p. 123). Operational assets are assets like airports, utilities, trash services, etc., and real estate is housing and land owned by the city. Operational assets are more visible and thus better accounted for, but both operational assets and real estate should transfer to independent holding corporations. The authors stress throughout that these assets are best in the hands of management professionals with the goal of maximizing value. The holding corporation allows this value to flow to the public without as much worry about cronies scraping money off the top or unqualified politicians running the portfolio into the ground. The authors talk about organizing holding corporations into an ‘Urban Wealth Fund’ (p. 135).
The holding corporations would work exactly like any other corporation. They would need to be efficient, maximize profits, and develop assets. The authors talk about several ways to ensure the fund’s political independence. They suggest requirements for board appointment (i.e., conflict of interest rules, experience requirements) and clear performance metrics by which the public can evaluate the board of directors. They also stress the importance of transparency through reporting and audit requirements. An interesting point they make about the holding corporation is not just that it insulates commercial assets from political influence, but that the holding corporation also insulates politicians and governments from financial risk, which serves both a political and strategic purpose.
The whole purpose behind the invention of the limited liability company was to encourage further entrepreneurial activity by limiting investors’ risk to the actual amount of money invested in the company. By the same token, a way must be found to distance a city from commercial and financial risk and thereby also limit fiscal risk. A city administration not only lacks a proper balance sheet, which is required to understand the concept of financial risk in the first place, but it also lacks the mandate, institutional setup, and capacity to take on [and] administrate commercial risk. (p. 133)
Obtaining a reasonable return on assets requires risk-taking. A city's politicians might struggle to achieve market-competitive rates of return as its political managers fail to take strategic risks relative to professional managers. In this case, politicians risk appetite might be too low, leading to less income for taxpayers. The holding company can thus allow for an entrepreneurial and high-return portfolio without risking poor management by political players.
Chapter 6 presents several case studies into models like these and the successes thereof. The authors end the final third of the book talking about ‘social debt’ and ‘human assets.' I find these portions of the book valuable as a brief introductory framework for understanding good public investments, though this portion of the book isn't as novel.
The authors make the point that governments should understand certain things as ‘social debt’, and that long-term investments in people minimize this cost. For example, if a child grows up without proper resources, they might fail to live up to their potential at best, and, at worst, they might cost the public a significant amount of money by committing crimes, experiencing incarceration and/or homelessness, etc. Similarly, a government failing to address the mental and physical health of its population will only result in higher collective costs down the line with crime, homelessness, and medical expenditure, making long-term investments in things like childcare, education, mental health treatment, etc. positive on several policy fronts.
Human assets are intellectual abilities or skills of people, and the value of these assets is the price employers are willing to pay for them. The authors prefer this term and framing over ‘human capital’ as they feel the term ‘human capital’ has become nebulous. Human assets, on the other hand, provide cities a clearer roadmap for policy. Since the authors define value as the price employers are willing to pay, that means investing in cutting-edge and in-demand skills training and instituting policies that make a city a generally favorable business environment. They stress the ‘generally’ part, as the authors are skeptical of the success of particular incentive programs. They say cities giving special tax breaks to certain businesses or industries haven't shown to yield as much return to cities relative to city-wide policies that encourage investment and entrepreneurial activity.
Critiques
These are critiques of the book as a book, not a critique of the book’s content. The content itself appears well-sourced and sound. However, the book suffers in parts from meandering on topics I didn’t find particularly interesting. For example, there are at least a dozen pages about the history of accounting and the utility of double-entry bookkeeping. I don’t think the history of accounting bits are core to the book’s main message, and while double-entry bookkeeping is a nice basic primer to throw in to understand how to assess the financial health of a city, I’m not sure that we needed that many pages dedicated to it. Then again, maybe the book should appeal to both the accountants and economists of the world.
The final third of the book about social debts and human assets was quite short and arguably unnecessary. Perhaps I just found it less interesting because the concepts weren’t as novel as the part about public asset management, and maybe I’m more of a public asset management fiend than anything else.
Perhaps my biggest criticism of the book is that it reads as very repetitive. There’s a lot of “Political independence is very important, and by the way independent management is key, and politically insulating these assets is crucial, and also independence from political cycles is a prerequisite to success, etc.” The keys of political independence, holding corporations, and understanding asset values are important to the book as a whole, but it felt like a lot of these things were often repeated information.
Overall, it felt like the authors could cut or streamline a solid 30-40 pages (out of 221). This doesn’t take away from the content of the book, and I’m sure many would read the entire book without this feeling depending on their background going in.
Final Thoughts
The Public Wealth of Cities provides an excellent roadmap for city policymakers, administrators, and local advocates who value the egalitarian and fiscal benefits of public assets. It’s terrifying and fascinating to imagine the already collectivized wealth at the fingertips of urban populations. The solutions for maximizing the utility of these assets are also quite simple: (1) account for and value all public assets, (2) form a holding corporation with a professional board to manage these assets, and (3) profit.
Although the advocacy required to forward these goals is more opaque and practically difficult, there are cities that have done this well, and this platform is compatible with contemporary left-YIMBY policies and the fiscal constraints of local governments.
This book is overall very good. On a scale of 1 to 10, where a 1 is among the worst books I’ve ever read, a 5 is an average book, and a 10 is among the best books I’ve ever read, I’d give it a 9 out of 10. I learned a lot from reading this book, and the only things dragging it down are some pacing issues rather than its content.