In an interview with Paul Kedrosky of the Kauffman Foundation, Paul Romer discusses a different kind of charter city:
Kedrosky: Okay. So I’m curious, and I think one of my Kauffman colleagues has been talking to you about this idea as well. But as you sort of think about that idea and you think about it, you talk about it in the context of unoccupied land and so on, but obviously within this occupied land known as the United States, we’ve got cities that we’d love to see reenergized and even resurgent. And you think about a city like Detroit. Is there anything you can take away from what you’re thinking with respect to charter cities into some of the cities that are currently having their own troubles in the U.S. today?
Romer: Yeah. Well, I think it’s actually very informative to exploit the analogy between cities and firms. So what I’m talking about is a startup dynamic and applying it in a developing world where cities are very scarce. The developing world needs urban environments for billions of people in the next incoming decades. The United States is quite different in the sense that we’ve largely urbanized, so you don’t need a whole lot of new urban space. And what we’re dealing with more are questions like, you know, what’s the analogy for a workout mechanism when a city gets into a position where it’s in effect in a form of political or economic bankruptcy? And we don’t have good mechanisms to do a workout. We don’t have anything like takeovers and we should be thinking about those, I think, rather than a startup part of the process for dealing with most of the problems with [inaudible]. But the two illustrations of things that are a bit like a workout are in New York City, there was a reform agency set up by New York State when the City was going through serious financial difficult and that was part of a key turnaround in New York. Just by historical accident, Washington D.C. is under the formal control of the Congress, so when Washington D.C. got in a position that was, you know, as bad or maybe worse even than Detroit, the Congress basically just imposed a kind of workout process on D.C. as well. So I think we should really be thinking about basically the analogue of bankruptcy and takeover as a way to deal with assets that are trapped in cities where the current leadership and organization is not succeeding.
Kedrosky: But to press that a little bit further, and I buy that analogy, is part of the issue though then, and to bring back in the startup idea a little bit, that cities, as strange historically as it might seem, maybe they don’t fail often enough and part of the problem is they live on long past their sort of economic and political usefulness and we, for institutional reasons, try to find ways to continue to keep them there like Frankenstein on the slab? And maybe the answer is that we need to find a way, not even past workout, to let cities in some sense fail?
Romer: Yeah. Remember what bankruptcy does for firms. I mean, it doesn’t like blow up the assets of the firm. It just reuses them. It just puts them under a kind of control and redeploys them. So you do have these valuable fixed assets like infrastructure which ideally you would efficiently repurpose and reuse. So it’s probably not efficient to think about like putting up a chain link fence around, you know, some city and just saying, “Okay, nobody go there. It’s a dead zone.”
Kedrosky: Right.
Romer: We really should be thinking about how do we do in effect a kind of an organizational change that can use the existing assets more effectively.
Kedrosky: And this may be getting outside the sort of thing you follow. But I don’t know if you’ve been tracking what’s been going on with respect to one attempt here in California to do something like that in the context of the bankruptcy or the attempt at bankruptcy, the city of Viejo, California up in the San Francisco – well, up in your area – which I think declared bankruptcy a little over a year ago and it’s been trying to go through a workout process and a judge trustee process, and it’s been very interesting to watch. And one of the main things, pace your comments, that it’s kind of revealed is that we don’t have a process at all for doing any of this.
Romer: Yeah. I think it’s really a big gap in our legal and political structure that there isn’t some way to trigger something like, you know, like a voluntary reorganization. I mean, you know, just hypothetically, imagine that the residents in some city had the option to vote through, say, a referendum process to place the entire city political structure under the control of some, you know, like reorganization authority. You know, it could be a state authority, it could even be national. And suppose that authority also had the ability to just rewrite every, you know, every contract, every obligation of the city. So at some point, the residents of the city had the option not just to change who’s the mayor or who sits on the city council, but basically to pitch the whole control structure for the city to this other entity. You know, maybe there’s even a couple of competing reorganization authorities that, you know, manage workouts of these cities.
Kedrosky: So – and we’ve just got a minute or two left, a couple of minutes left. But as sort of an, and I’m guessing we both know the answer. It’s the same answer for all sorts of fresh ideas. But what’s been the response maybe both in the policy, but also in sort of the economic community to some of the ideas you’re proposing around charter cities? Shock, amazement?
Romer: No, actually, the response, both from policymakers and from academics, has been, you know, quite – there’s quite a lot of interest in rethinking some of these things that we’ve just taken for granted and haven’t examined before. So universally people have said, you know, this is a new idea and it’s interesting and we should be asking these questions. Now, a long side of that response, there’s a very common response which is, oh, but this is just not going to be politically feasible. And there, I think people are too kind of trapped by what’s familiar. It’s a very common fallacy. This is one of the things the entrepreneurs are the ones who kind of see through this. But most people are trapped by the kind of the fallacy that if something’s unfamiliar, then it’s impossible. And you know what the entrepreneur sees is, well, it’s something unfamiliar and something new, but it’s perfectly feasible, so we could do it. So I think people have been overly skeptical about the practical possibilities of something like this. And ultimately when this happens, everybody’s going to update and revise and say, “Oh yeah, you know, this actually could happen.” But still what’s been gratifying is how receptive people are to saying the questions you’re raising are very important questions and we should be thinking much more broadly about these questions and how to achieve this goal of basically transforming systems of rules that trap people.