This is false. Go to NYC and you'll find some poor children that did, in fact, grow up in one-room efficiencies, or lower-middle-class families in Tokyo. Their houses become places to sleep, and the entire city becomes the house most of the time otherwise. It is not common in America but it is certainly doable. Whether or not it is desirable to the children or the parents is a different story.

Well you can also raise kids in a single-room mud hut. That doesn't mean it's a desirable way to live in 2016.

Also, in most localities in the US, good luck getting custody of any kids if they don't have a separate bedroom.

Alas, alone that commenter would not be able to change this.

On a policy level, we can make almost arbitrary amounts of rooms in cities: just build up.

That's the really annoying thing: there's no really good reason cities can't build more decent housing in high-rises. I suspect the problem is bad zoning laws and developers able to make more profit doing other things. Ideally, cities should be able to get developers to build lots of high-rises with moderately-priced condos and apartments, to pack more people in, which would also increase the efficiency of public transit. And these units should have a decent amount of space, by building up, so families can have a reasonable amount of living space. They just need to take action to clear out older, smaller buildings taking up valuable space (probably with punitive property taxes), and encourage development of high-rises (with property taxes which punish buildings that are too small).