There are two seemingly contradictory stories about cities and metropolitan areas in the United States right now. One says that cities are dangerously weakened by fiscal crises, brought on by unfunded pension obligations, plummeting property tax revenues and cuts in state aid. The other says that cities and metros are solving problems and driving economic growth while the federal government remains paralyzed.
Both stories are true.
The fiscal crisis is very real for some places, but it's not universal. Most cities are fiscally healthy, thanks to hard choices and smart budgeting. Bankruptcies like Detroit's are rare. While Chicago's pension gap has made headlines, there are also places like Charlotte, N.C., Milwaukee and San Antonio, where pension costs are well under control.
(Read more: Pandemic of pension woes is plaguing the nation)
More important, turning around the economies of cities and metros does not depend exclusively on the city government's balance sheet. Even with Detroit in bankruptcy, an abundance of investment is happening within the city boundaries. Quicken Loans founder Dan Gilbert has invested $1 billion in downtown properties through his company Rock Ventures. Philanthropies like the Kresge Foundation and the New Economy Initiative, along with the Department of Transportation and Small Business Administration, have provided critical grants and loans. Nonprofits like Midtown Detroit Inc. and the Detroit Economic Growth Corp. are brokering deals and connecting investors to opportunities. As a result, there has been a powerful revival in two neighborhoods: Midtown and Downtown. These areas could be the engine that drives the recovery in the rest of the city.
Why are even struggling cities like Detroit attracting investment? Because economic growth depends on human capital, innovation and infrastructure—assets disproportionately concentrated in cities and metros. Detroit's downtown and midtown, like the downtowns and midtowns of other large cities, are home to major educational institutions, start-ups, hospitals and a core of residents wanting proximity to jobs, entertainment options and other people. Recent research has shown that proximity and density also spur innovation, so dense places create a virtuous cycle of creativity, more density and more creativity.
(Read more: A snapshot of urban America)