AMERICA IS undergoing what is suitably being described as the “omni-crisis.” It is simultaneously confronting what seems like an unceasing barrage of challenges that threaten not only its position on the world stage, but also its very domestic stability. These include: a very tense domestic political situation, overseen by possibly the most controversial president in recent history; a rising geopolitical rival in the form of China; a global pandemic, precipitating economically devastating lockdowns in urban areas and the deaths of over 110,00 Americans; nation-wide unrest, riots, and clashes caused by police brutality; and more.
Yet even before the coronavirus arrived, America was suffering. Its economy, long the envy of the world, has simply stopped working for a large swathe of the population. Real wages have either remained flat or fallen for everyone except the top ten percentile, leaving 43 percent of Americans working for $15 an hour or less. The median middle-class family has just about $4,000 in liquid assets, and would have trouble scraping up $400 in case of an emergency. All the while, living costs—including rent, education, and healthcare—have skyrocketed. In fact, over 10 percent of Americans have no healthcare, with many more remaining underinsured. America’s once-mighty middle class has gone from being first to thirty-second per capita among OECD countries.
All this transpired before the coronavirus hit. Since then, tens of millions of Americans have become unemployed, with millions of jobs likely lost permanently. The virus has exposed a brutal yet simple reality, which is that the United States is acting like a failing nation, passively allowing the degradation of critical institutions and its economy at the hands of an out-of-touch elite—one that seems incapable of realistically assessing challenges, adapting to rapidly-changing circumstances, and responding to threats.
The frustration over this sorry state of affairs is palpable. Look no further than the protests against police after the death of George Floyd, which in some cities curdled in rampant looting and rioting. This behavior isn’t just the result of popular anger against police misbehavior; it’s about everything. It’s the American people being fed up with, among other things, predatory business practices, growing poverty, massive debt, constant violence, and shrinking economic opportunity.
It is painfully clear there is a massive demand for serious social, government, and economic reform. What America needs is an economic reform agenda on the scale of the New Deal, backed by a professional consensus and a bipartisan coalition that is willing to put some political issues to the side in the interest of saving the country from going down a dangerous path. Not only that, but a renewed U.S. economy must be up to the task of being once again competitive on the world stage, especially as it braces itself for long-term great power competition with China.
This will require bold policymaking, rivaling that of changes achieved in previous crises in American history, along with innovative new ideas for economic reform. Three ideas in particular stand out as worthy of consideration: the addition of a new government department to coordinate domestic and international economic and trade policy; the creation of a public state bank system to provide credit for businesses and aspiring entrepreneurs across the country; and a reform of existing land zoning codes, which prevent U.S. cities from being utilized to their maximum extent while simultaneously depriving millions of the opportunity for a better life.
FIRST, IF the United States is to once again pursue global competitiveness, renew its own strategic industry capacity, and address domestic economic needs, then it is essential to devise a new mechanism that can better coordinate and elevate economic and trade policy. This means the creation of an entirely new federal department that can develop and execute a national economic strategy.
This is not a new idea in American policymaking. In 1983, the Reagan administration submitted a very detailed proposal to Congress for a “Department of International Trade and Industry” that would “consolidate the trade and industry functions of the Commerce Department with the Office of the United States Trade Representative.” The concept appeared again in 1992, when third-party presidential candidate Ross Perot argued that the United States “should study Japan’s Ministry of International Trade and Industry, which co-ordinates government and private-sector economic strategy for that country, and adapt such a model for America.” And as recently as 2012, the Obama administration demonstrated similar thinking when it proposed to merge the Department of Commerce, the Small Business Administration (SBA), the Office of the U.S. Trade Representative (USTR), the Export-Import Bank (EXIM), the Overseas Private Investment Corporation (now reformed and known as the U.S. International Development Finance Corporation, or DFC), and the U.S. Trade and Development Agency (USTDA). The resulting empowered Commerce Department would, in the White House’s words, “help entrepreneurs and businesses of all sizes grow, compete, and hire, leveraging one cohesive Department with one mission: to spur job creation and expand the U.S. economy.”
The idea for such a department was revived last year by professors Timothy Meyer and Ganesh Sitaraman at Vanderbilt Law School. In an article for American Affairs, they go further than all of the aforementioned proposals, calling for a “Department of Economic Growth and Security,” which would consolidate numerous offices, agencies, and programs that are currently either independent or located within existing government departments. These not only include the SBA, USTR, EXIM, DFC, and USTDA, but also the International Trade Administration, the Economic Development Administration, the Census Bureau, the National Institute for Standards and Technology, the Bureau of Industry and Security, the creation of a new Economic Security Agency, which “would combine the government’s fractured efforts at export controls, technology transfer, investment controls, and other economic security policies,” and more.
A new federal department focused on all of the above could achieve many things simultaneously: advance American trade interests abroad while, in Meyer and Sitaraman’s words, “addressing economic dislocations and economic security issues that arise from increased global economic interconnectedness” and disruptions; elevate the status of geoeconomic policymaking within the U.S. government; play a key informational function by gathering valuable economic intelligence that can be made available to Congress, the intelligence community, and the public; and reduce the harmful influence of “well-connected but unrepresentative industry interest groups” in policymaking.
Creating this new department will not be a simple task. Putting aside for a moment the formidable challenge of actually reorganizing a significant part of the federal bureaucracy, the sitting president will first have to call on Congress to reinstate the presidential authority necessary to do so. While there may be some partisan opposition to this, given the tumultuous state of American politics, both the necessity of this reform and its achievable benefits should serve as a bipartisan rallying point. Streamlining government to improve the effectiveness of U.S. trade policy while simultaneously making it easier for businesses, especially small ones, to find the help they need to expand and grow is a cause that everyone can get behind.
SECOND, INCREASING economic opportunity for ordinary Americans and addressing domestic inequality requires addressing the problem of concentrated financial power. “Big finance,” unfortunately, tends to be both predatory and speculative if unbound by rules and regulations, resulting in an unstable economic system. And at the moment, the industry is certainly concentrated: the top five institutions (JPMorgan, Bank of America, Wells Fargo, Citibank, and U.S. Bank) make up almost half (around 47 percent) of the total bank assets in the United States. It would behoove the nation if finance could be deconcentrated and credit made available to a wider range of small- and medium-sized businesses via a greater number of smaller, regional banks that are easier to regulate. Rather than taking up the challenge of breaking up the big banks, this task could also be accomplished via the creation of a system of public state banks.
Public banks are exactly what they sound like: financial institutions that are funded with taxpayer revenue and owned by and accountable to the government, serving as a viable alternative to private banks. At the moment, there exists only one instance of such in the United States: the Bank of North Dakota (BND). Created in 1919 with only $2 million, it was intended to serve as a way of protecting local farmers, businessmen, and other commercial concerns from the high interest rates and economic instability of the time. Over the past century though, the BND has proven to be something of an extraordinary success. The bank’s annual reports attest to this, with the 2018 report stating a profit of $159 million and a state return on investment of 18 percent. This funneling of funds to North Dakota’s state treasury has helped it avoid revenue shortfalls for years.
So how does this sort of bank work in practice, and how can it help decentralize American finance? The ongoing story of the Union State Bank—based in Hazen, North Dakota—and its relationship with the BND, as related by an in-depth report in YES! magazine, provides a helpful example. Though it is a small community bank with a bit over $130 million in deposits and $147 million in loans, investments, and other assets, Union State is able to punch above its weight. The bank “served as the lead local lender for a $30.5 million medical center that opened in 2016,” and also “helped finance manufactured housing for new workers attracted by the shale oil boom.”
This is possible because of State Union’s partnership with the BND, which works as a “bankers’ bank, partnering with local financial institutions to leverage the state’s deposits in ways designed to strengthen local banks and credit unions.” In the case of the aforementioned mortgages, for instance, the BND helped by buying up some of these mortgages, similar to how Fannie Mae, the U.S.-government sponsored enterprise that makes mortgages available to low- and moderate-income borrowers, operates.
There are other examples of how the BND helps local financial institutions. Participation loans is one:
In a participation loan, the loan originator covers part of the principal amount borrowed, then it brings in other lenders behind the scenes to cover the rest, and everyone shares in the interest paid on the loan. Participation loans let small banks share the risk with larger institutions, while keeping the larger institutions in the background. Most borrowers don’t know that the Bank of North Dakota is involved through a participation loan unless they ask, says Gary Petersen, chairperson for Cornerstone Banks.
That’s intentional. It allows local banks to leverage a deeper pool of money while maintaining their relationships with their clients. According to its 2018 Economic Development Report, the Bank of North Dakota made 491 commercial loans totaling $971 million and 402 agricultural loans totaling $182 million. The vast majority of those were participation loans in partnership with local financial institutions across the state.
The BND’s success in helping local banks support and grow local businesses also comes with a notable side effect: the partnership model and the accessibility to capital it allows encourages the creation of new financial institutions. As a result, North Dakota has more banks and credit unions per capita than any other state in the country. This is precisely the sort of financial decentralization that would benefit the rest of America and is particularly pertinent given existing economic and racial inequality, as the recent protests over the killing of George Floyd have reminded us. In fact, according to 2013 remarks by Martin Gruenberg, the former chair of the Federal Deposit Insurance Corporation, the role of minority depository institutions, or MDIs (i.e., banks owned by minorities), play a crucial role in economic advancement:
In 2011, the median African-American MDI made 67 percent of its mortgage loans to African-American borrowers. The median Hispanic MDI made 65 percent of its mortgage loans to Hispanic borrowers. And, the median Asian-American MDI made 57 percent of its mortgage loans to Asian-Americans. By contrast, the median non-MDI lender made less than one percent of its mortgage loans to each of these three groups.
Yet the number of MDIs has been steadily decreasing in past years, particularly following the 2008 financial crisis and the passage of Dodd-Frank, which imposed numerous burdensome regulations on all financial institutions. The number of African-American-owned banks has dropped by half, for example. Support from state banks could radically change this dynamic, and lead to the proliferation of new financial institutions that would help ordinary Americans across the country.
Understandably, the BND and its model has garnered attention across the United States. In New Jersey, a 2018 feasibility study for a public state bank estimated that every $10 million invested in lending could yield between $16 and $21 million in gross state product, as well as raise state earnings by $3.8 to $5.2 million and create many new jobs. In California, the state legislature opted to go even further with the idea last year, passing a law making it possible for local municipal/city governments to start their own public banks.
Yet there are a number of hurdles preventing the creation of public state banks, particularly when it comes to the matter of cost. A 2010 feasibility study in Massachusetts estimated that it would take about $3.6 billion to start a bank in the state. The city of Los Angeles realized that, unlike the BND, it cannot initially fund its own public bank using state bonds, and city bonds can only be used for infrastructure projects, thus requiring either allocated funds from the city’s budget or outside money from philanthropists.
It is here that the federal government can help. In 1862, Congress passed the first of the Morrill Land-Grant Acts, which distributed federal land to states and other localities for the purpose of creating agricultural and mechanical colleges. Supported by additional acts in 1890 and 1994, these colleges would grow into the state university system, as well as Cornell University, the Massachusetts Institute of Technology, and a number of other prestigious institutions. Congress should take inspiration from these examples and pass a law donating federal land and/or granting federal funds to the states for the purpose of creating a public state banking system that can encourage and facilitate economic growth and development.
THIRD AND finally, it is imperative that America reclaim the ability to build in urban areas by passing either national or state urban zoning codes. Doing so would unleash the true economic potential of America’s cities, resulting in significant growth, unlocking new opportunities for millions of people, and paving a path to the middle class. This is especially important, given the economic might of major U.S. cities: data from the Bureau of Economic Analysis indicates that a mere twenty-three metropolitan areas account for over half of U.S. GDP, and that share continues to rise. Yet these same metro areas are also plagued by a deep inequality that is threatening our nation’s stability.
Consider the most pressing problem currently plaguing the San Francisco metropolitan area, home to Silicon Valley and America’s tech giants: a lack of affordable housing. San Francisco has the highest median price for a one-bedroom rental (at the time of writing, a little over $3,600 a month) in the country. The average family home costs just shy of $1.45 million. Building a single new apartment unit takes about $700,000, which is three times what it was a decade ago. The situation is so bad that even the tech giants’ own highly-paid employees cannot afford to live there—to say nothing of the blue-collar working class needed for any normal city to even properly function. It is clear that something must be done to lower housing prices, and the best way to do that is to build new units. Yet despite this undeniable need, constructing new apartment buildings to meet demand appears to be impossible, due to restrictive zoning codes. It is a situation that is unfortunately common in major urban areas across the country.
These restrictive codes are the legacy of a 1962 Supreme Court decision on a case called Village of Euclid v. Ambler Realty Co. In essence, the decision affirmed that municipalities have the constitutional authority to decide and regulate what can be built on select strips of land. In practice, this means that each zoned strip of land has a single and specifically allowed use—such as residential, commercial, agricultural, industrial, and so forth. These categories can be rather restrictive: a single-family house and a multifamily home are considered separate uses. Likewise, detached homes and semi-detached homes must be kept as separate categories. As it happens, these rules were used to enforce a discriminatory, racist agenda in the 1960s, as poor minorities (in particular and especially African Americans) rented housing rather than owning it. As such, multifamily homes were simply banned from zoned single-family areas, resulting in white suburbia that used legal measures to keep African Americans and others out. And, to a certain extent, the effectiveness of these measures remains viable to the present day.
The consequences of this decades-long policy are evident: easily-enforceable suburban sprawl that limits land-use and prevents urban density, perpetual housing discrimination against minorities, a near-total absence of mixed-use developing, and plenty of opportunity for low-level corruption through developers pushing for zoning modifications that allow highly-profitable (but not necessarily useful to the broader public) projects.
Is a better way possible? Certainly. A strong contrast to the exclusive Euclid system is something like Japan’s inclusive zoning system, which is enshrined in national law, though local application of the law is left to city governments. This system is made up of only twelve zones (rather than hundreds, as in the Euclid system) of varying density and purpose—from low-density, mixed commercial and residential zones to exclusively industrial zones. By allowing zones to have more than one purpose, the system maximizes land usage. For example, a building can have a commercial store on the first floor, but multiple residential units above it, up to a rational height limit.
The outcome of this system is clear: Japan has some of the densest cities in the world, with millions of inhabitants living in a relatively small amount of land but without the burden of unbearably high rent prices due to lack of supply and excessive commuting times (normally a result of having to live in the more-affordable outer limits of a city). Moreover, the use of mixed-use zoning creates economic opportunities for many new businesses that see regular foot traffic. Combined with well-planned public transit systems, this style of zoning allows for walkable and livable environments, reducing a reliance upon automobiles, thereby saving people money and further attenuating the need for stagnant occupied space (parking lots and the like) in urban settings.
While it would be prudent for the United States to adopt a zoning system similar to Japan’s, the question of how it would be implemented is rather tricky. Though Congress may in theory have the power to set local zoning codes aside, it has not once bothered to address this issue. Attempting to create a national zoning law now would be uncharted territory in national politics, and though such a measure would conceivably receive wide support from many segments of society, it would also likely provoke a furious reaction from entrenched interests. Thus, this effort requires strong bipartisan cooperation and effective presidential and Congressional leadership, all of whom must be willing to take on this radical challenge at a high political cost.
THIS IS not the first time that America has found itself in throes of great instability born out of an unbalanced socio-economic system. In fact, these crises tend to be a recurring feature in U.S. history. But at the same time, they tend to present opportunities to pursue long-overdue political and economic reforms. The Constitution was born out of a need for the federal government to be granted the necessary powers to regulate commerce, tax trade, and ensure cooperation between the states. The Civil War grappled not only with the evil of slavery, but also the major economic differences between a protectionist, industrialized North and a free-trade, agricultural South, eventually culminating with numerous government and economic reforms—the creation of the Department of Agriculture, the Morrill Land-Grant Acts, the Homestead Act, the Pacific Railway Act, the Legal Tender Act, the National Banking Acts, and more. The Great Depression and its ruin led to the New Deal, significant financial reform and regulation, the creation of Social Security, and an unprecedented era of economic prosperity.
Charting a path for America’s future, especially in light of the various ongoing crises, will require similarly bold and dramatic change. Policymakers will have to reconsider the structure of our current economy and retool their conception of how government can affect and help the daily lives of ordinary Americans. This will neither be a simple nor easy task. But as William Signius Knudsen, who led America’s war production effort during the Second World War, aptly put it: “We can do anything if we do it together.”
Carlos Roa is the senior editor of the National Interest and a 2020 Constitutional Fellow at the American Conservative & Center for the Study of Statesmanship.