Homelessness & Housing Policy in the Golden State

2020-03-16 · Guest: Lawrence J. McQuillan (Independent Institute) · 52:04

Filed under: Housing and land · Regulation and the administrative state
Topics: Housing Policy · Property Rights · Regulatory Capture · Zoning

California housing crisis and government supply restrictions

Bob Zadek and Lawrence J. McQuillan of the Independent Institute discuss the root causes of California’s housing crisis, focusing on government-induced supply restrictions. They explore how zoning, building codes, and the California Environmental Quality Act (CEQA) have stifled development and suggest market-based alternatives like private homeowner associations.

Topics: Housing Policy, California Economics, Zoning, CEQA, Property Rights, Independent Institute, NIMBYism, Regulatory Capture

Speakers:

• Bob Zadek - Host
• Lawrence J. McQuillan - Senior Fellow and Director of the Center for Entrepreneurial Innovation at the Independent Institute

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Introduction to the Housing Crisis [00:18]

Bob Zadek: Hello everyone, welcome to the Bob Zadek Show, the longest-running live libertarian talk radio show in all of radio. We are this Sunday and always the show of ideas, never ever once the show of attitude. Thank you so much for listening this Sunday morning.

This morning’s show we’re going to examine one of the, probably the second most important issue in California and therefore in the nation today. We got elbowed out by Gavin Newsom’s edict. We are not the most important issue in California, we got dropped down to the number two slot, but it is an important issue nevertheless. And the issue is—and we are going to use a lot of overused words this morning—we are going to discuss the issue of the housing and, now get ready for the finger quotes, “housing crisis” in finger quotes in California. Is there a shortage of housing? What does that even mean? If there is a shortage of housing in California, how did it happen? Did it happen naturally? Is it inevitable that we’re going to run out of places for people to live, or is it artificial and government-induced? No headline there.

The Golden Fleece Award [01:01]

Bob Zadek: To examine this issue, I’m happy to welcome back to the show Lawrence McQuillan. Larry has studied this issue long and hard and has recently written about it. He will share the results of his examination this morning. Larry is the Senior Fellow and Director of the Center for Entrepreneurial Innovation—and don’t we love those two words, entrepreneurial innovation—at the Independent Institute. The Independent Institute is a wonderful think tank located in Northern California in Berkeley. It does magnificent work. It has a wonderful cadre of very hard-working, knowledgeable scholars, economists, philosophers, and the like. I commend both the writings of the Independent Institute and of Larry specifically. Larry has a special distinction which he will share with us: he has invented a very valuable tool for evaluating government. He has invented the Golden Fleece Award. We will start with that. Larry, welcome to the show this morning.

Lawrence J. McQuillan: Good morning, Bob. It’s great to be with you again.

Bob Zadek: Good morning. Nice to have you back. Now Larry, before we get into the business at hand—and it will be relevant, I dare say, in the margins—tell us about your California Golden Fleece Awards.

Lawrence J. McQuillan: Well, we’ve been doing this for several years now, and we spotlight government waste, fraud, and abuse, both at the state and local level in California. So as you can imagine, it’s a very target-rich environment and we’re never short of ideas on what to write about. But the intent of the award is to bring to bear a special focus on an issue that is particularly oppressive to Californians across the political spectrum. Housing, as you mentioned, is a perfect example of that. And to give the public a deeper understanding and more information they would normally get from the media in order to hold local and state government officials’ feet to the fire and hold them accountable, and hopefully kind of arm them with the ammunition they need to make meaningful change in public policy in California.

Bob Zadek: And you perform a wonderful service in doing so. I’m reminded, I think, that there was a Senator Coburn who had a similar process in the Senate. He was, I believe, from Oklahoma and he was doing—he copied your idea probably, maybe he started it first, who knows—but that was very effective and it was very readable and very interesting. And it helps interested taxpayers, interested citizens to really get an insight into their government in a way that’s not otherwise available.

Lawrence J. McQuillan: Right. We kind of see it as a transparency project, a public’s right to know, and to let them know how government really works and what policy is really doing, the effect it’s really having on the state of California, and just to arm people with a lot more information so that they can approach their public officials with more facts and more understanding of what’s really going on and hopefully make some positive change in policy.

Bob Zadek: My only criticism with the structure of the Golden Fleece Award is I believe you do it every quarter? You give a new award? It should be every day, a new one. But of course, it might require an increase in your staff, I understand that.

Lawrence J. McQuillan: Yeah, there’s no lack of targets.

The Origins of the Housing Shortage [03:01]

Bob Zadek: For sure. Now Larry, this morning we’re going to be discussing an issue that, together with the related issue of homelessness where California is numero uno in the country in producing homeless people, we’re going to discuss the subject of the alleged—and I’m going to say alleged, but that’s not supposed to be an in-your-face comment, just my view—the alleged lack of housing, the housing crisis in California. And the study of housing in California is a wonderful concept to study because there’s a rich history. It goes back maybe as far back as California’s statehood when California became in the 1850s and through and including perhaps ten years ago or less, a magnet not for the country, but for the world of people to move here. And California loved to have that image. It just didn’t—wasn’t able for one reason or another, you’ll discuss the reasons, to accommodate the results of its own success. It was able to instill in the minds of citizens of the world, let alone the country, how desirable California was. Single-family houses, orange trees in the backyard, the surf, and all that goes with this California lifestyle. So California had the world’s most effective real estate advertising campaign, profoundly successful, and then was, in one way or another, you will explain, victimized by its own success.

Now before we get into the details, let’s do some big-picture stuff, if you will, Larry. And everybody—in the news quite frequently until it got elbowed out by the coronavirus news, which elbowed out everything else—in the news has been for some time the absence of housing, the housing crisis in California in general and in the Bay Area and perhaps L.A. as well. So to the extent that you agree that there is a crisis, help me understand, help our listeners understand, what exactly the crisis is. What’s wrong with housing big-picture in California today? What is the source of the crisis?

Lawrence J. McQuillan: Well, the source of the crisis dates back to around the mid-1980s where both state government and local governments started to erect more and more artificial restrictions to housing development in California. I would say after World War II up until through the 1950s and 1960s, the housing market worked very well in California. And as you said, I mean, we were kind of a victim of our own success in a way because we had this sun and the surf, the California lifestyle, booming economies both in entertainment and aerospace and eventually in Silicon Valley. So people from not only around the United States but around the world wanted to move here. And the housing market worked well for about the first 30 years of that where it was flexible, it accommodated new construction. You saw a lot of big tract housing go in, especially around the Bay Area in places. So there was a lot of allowance of the supply to expand the growing demand.

But over time, as I mentioned, in the mid-1980s, we saw all of these new impediments to new housing passed by state and local governments. And as a result, we didn’t see housing entrepreneurs entering California and investing the capital that was needed to meet the growing demand and to keep housing prices either stable or in some cases actually declining for a while. And now we’re faced with housing costs of about two and a half times the national average because we’re not building to meet our growing success in California in terms of drawing new people to the state.

Economic Efficiency and Market Interference [05:51]

Bob Zadek: Now Larry, let’s unpack a little bit and let’s do a little economics. You said you talked about artificial limitations on the market. Of course, any governmental measures are artificial if by artificial you mean interfering with the natural supply and demand in the marketplace. So any minimum wage laws are artificial impediments to economic growth. So per se, any government, any regulation of the free market is artificial because artificial only has one meaning, which is outside of the free market.

And the second comment is: there’s a word that often is used in discussions of policy issues and often used on my show, and that is this word that to me is mischievous. It is “it was working.” I always perk up when people that I’m having a conversation with use that concept of something is working or not working. And the question is: there has to be an underlying standard that the speaker has in mind when saying something works or doesn’t work. It cannot work or not work in the abstract; it’s got to be according to criteria. So when you say the market was working at one time for housing and then it stopped working, what does “working” mean in that context?

Lawrence J. McQuillan: Well, to an economist, that would mean that the market allows for entrepreneurs to invest new capital into a market to, in this case, build housing up until the point where you’re no longer receiving what economists call normal rates of return on that capital investment, so therefore the additional investment would stop at that point or slow down at any rate. So “working” to an economist means basically that capital can flow from one use to another use freely until the point of when entrepreneurs are making normal rates of return. Beyond that point, they would make below-normal rates and the capital then would move on to other industries or other sectors of the economy. I mean, that’s how an economist would look at it. And these impediments that are imposed by government artificially restrict the movement of capital and the investment in housing in California. So to an economist schooled in free-market economics as I am, I mean, that would be seen as an artificial impediment to a market working efficiently and correctly. And therefore you get what we’ve seen in California, which is housing and rental prices that are sky-high and continue to increase.

Regulation as a Barrier to Entry [08:51]

Bob Zadek: But if prices are sky-high, there’s no indication that the demand for sky-high housing prices is diminished. In fact, housing prices are high and are still being built only because there is a demand. So isn’t the supply and demand still working, i.e., housing is being built because the demand is there? So isn’t it fair to say the problem is not the supply and demand for housing isn’t working, but the result of that supply and demand is forcing up the price of housing so certain types of housing is not being built, but housing in gross, there’s still a demand or else they wouldn’t be building new, albeit expensive housing? Is that a fair observation or am I missing something?

Lawrence J. McQuillan: Yeah, I mean, what you said is partially right, I would say, because the Bay Area is obviously, compared to other labor markets in the economy in the U.S. and around the world, very productive. And people that work here command very high salaries. And as a result, the people who do move here, not only from around the world but around the country, but also outside the country to a large extent, especially in Silicon Valley, are making wages far in excess of anything that they could get in their home country or their home area. And it’s much higher than what we see in other parts of the United States. So that income then is helping to drive the prices higher for housing in California. And some housing is being built, as you mentioned, and it does tend to be at the higher price of the spectrum of housing prices. So it doesn’t mean nothing gets built. But we’re seeing a very select, elite group of people who are able to afford the housing here, and things at the lower rungs of the housing ladder aren’t being built that could be built, but aren’t being because of the restrictions on the supply of new capital coming into the housing market.

Bob Zadek: Ah, now we’re getting somewhere. Now the question is, just following this thread a little bit further: is there a housing crisis in Beverly Hills? Is there a housing crisis in Palm Springs? After all, housing in those two markets and many others are very expensive. Is there a housing crisis on Park Avenue condos? Well, the answer is “crisis”? Well, of course not. But for sure there is a shortage of low-income housing. So now we’re going to drill down, Larry, and really do the good stuff. So exactly, if there’s no housing crisis in Beverly Hills, if there’s no housing crisis on Rodeo or Park Avenue or any of the other very high cost of housing areas around the country—and there are many, many—if that is not a crisis, then why is it a crisis if there’s no cheaper housing in San Francisco? Isn’t San Francisco or the Bay Area just becoming one big Park Avenue, one big Beverly Hills? And why is that a crisis if that is the case?

Lawrence J. McQuillan: Well, I would phrase that a little differently and say that people in Palm Springs and Beverly Hills can afford the costs of government regulations. It’s not that it’s not having an impact, and in fact, I think we would see more housing built in those areas as well without the restriction. But it’s just that people of that income range can afford to pay for all the restrictions that are imposed, whereas in other parts of the state where people don’t have that kind of wealth or don’t make that kind of salary, they can’t afford it and therefore the housing doesn’t get built.

Bob Zadek: So therefore, the crisis is—but if the crisis only is in the Bay Area that some people can’t afford to live there, then they don’t live there. And people don’t have an inherent birthright to live in the most valuable real estate on earth. It’s not a right people have. People have a right, perhaps, or at least a reasonable expectation that they want to live comfortably, but it doesn’t mean in the most expensive real estate on earth. And maybe the crisis is that to take the Bay Area—and by the way, what’s happening in the Bay Area is happening all over, this is not a California topic, the issue is nationwide—but what’s happening in California or in the Bay Area is: the Bay Area has this tradition of having a wonderful mix in its population of low-income people, a mix in ethnicity, a mix in people on the various rungs of the wage scale. But it has that concept of itself and it’s in effect legislating, as we will learn, that concept away. So San Francisco either has to be willing to accept being Beverly Hills North in terms of housing prices or adjust the policies that you will explain at the second half of the show. So it’s only a crisis if you say, “But we like it the old ways, we like it the way it was in the summer of ‘68, we like it to be cheap,” and yet they legislate to make sure it’s not cheap. So is the crisis nothing other than a lifestyle crisis rather than an economic or a housing quantity issue?

Lawrence J. McQuillan: Well, I would agree with you that nobody has a right to live wherever they want to live. But I would also add to that is that nobody has a right to use government force to exclude other people from having a roof over their head. If a housing entrepreneur is willing to build a home for someone and someone wants it or needs it, I don’t think anyone has the right to use government to stand between that entrepreneur who’s willing to build a home and the person who needs a home. To me, that’s immoral. And that’s what these rules and regulations do: they impose a barrier that no longer allows that link between the entrepreneur and the customer to take place and allow for housing to be built that’s needed.

Bob Zadek: And you’ve gotten to the heart of the matter by pointing out—and now we’re going to get back to a word that you mentioned earlier, which is artificial. So now, Larry, you’re exactly right, of course you are, and we’re getting to the heart of the issue and that is the artificiality, the property rights issue, which we are going to focus on in the second part of the show, is that the free market acting without artificial, i.e., government interference, the free market would satisfy that need. It knows how to do it. And the alleged crisis, which is artificial because it’s governmentally induced, prevents the free market from doing its thing and satisfying the need for low-income housing. So what the lesson that you will explain in the second half of our show is all of the subtle ways that NIMBYism and a government’s view of what the world ought to look like prevent, prevent the market from supplying the housing needs. So this is a government-induced crisis, not a crisis caused by the free market. And when we come back from our very short break with Larry, Larry will help us understand by looking under the hood of government operations and point out to all of us how government, which on the one hand professes to be determined to solve the housing “crisis,” in fact by its actual behavior prevents that, and government has been the cause of the absence of housing. It’s very sinister, very scary, but most importantly, it is solvable and Larry will explain how. This is Bob Zadek speaking with Larry McQuillan. Larry has studied the housing crisis in San Francisco and in California at large at length and he understands, and he will help us understand, what the problem is and most importantly how we fix it, because the fix is right around the corner. We’ll be back in 30 short seconds.

(Commercial break)

Restoring the California Dream [15:31]

Bob Zadek: Welcome back to the Bob Zadek Show, longest-running live libertarian talk radio show in all of radio. Thank you so much for listening this Sunday morning to my conversation with Larry McQuillan. Larry is a Senior Fellow and Director of the Center on Entrepreneurial Innovation at the Independent Institute, a wonderful think tank, a productive think tank operating out of Berkeley, California. Larry has just released a new study, “How to Restore the California Dream,” where he examines how we got to this “crisis” in the absence of affordable—whatever that may mean—housing in California. And since his study is how to restore it, Larry doesn’t just point out the problems but offers the solutions as well. And Larry, the solutions are of course an equal part of the discussion. But first, Larry, help us understand: what have been the tools which government in California and elsewhere uses so effectively, if not inadvertently, to suppress the supply of housing?

Lawrence J. McQuillan: Well, in the report, we itemize about eight different rules and regs that have the biggest impact in terms of suppressing investment in housing in California. So I’ll just tick off some of the major ones. Obviously, zoning and other land-use restrictions is one of the most important, especially for multi-family housing development, or what we would call like apartments or condos or duplexes, triplexes, that sort of thing. Many communities in California prevent any construction of apartment buildings and have done so for up to a decade. So only thing that’s zoned is single-family homes, that’s the only thing you can build, but you can’t build multi-family homes. So that’s really worked to suppress the amount of housing, especially low-income housing.

Private Alternatives to Government Zoning [18:01]

Bob Zadek: Now Larry, just a question on zoning. Zoning is to me one of the hardest issues for me to form my own opinions about, and here’s why. And I find myself parting company uncomfortably with other libertarians on this issue. I start with a very kind of simple to me question: what’s wrong, as I sit in my home, what’s wrong with my wanting through local government to control the character of the environment, the town, the street on which I live? That’s quite natural, I think everybody would like to have some control of that. Some people can and some people can’t, but I want to protect the value of my property, and zoning is either hurting somebody else or helping me—it’s helping me. So help me understand that I’m really—it’s a cry for help—help me understand what I’m missing about that natural desire to preserve the quality of my life. I’m not harming somebody else. Help me understand the issue.

Lawrence J. McQuillan: Sure. So let me try to convince you on this point. So there’s nothing wrong with trying to maintain the character of your neighborhood. The question is how you do it. There’s a right way to do it and, in my opinion, a wrong way to do it. The wrong way to do it is through government zoning restrictions. And the right way to do it is through private neighborhood associations or community associations or homeowners associations where you form a contract between neighbors and you say, “This is now a private community, we’ve set up this charter or contract amongst the people who live in this community, and these are the characteristics we want to maintain in this community.” Absolutely nothing wrong with that.

And what it does allow then is for outsiders to buy the right into the community. So if I was a developer and said, “You know, I wanted to build some additional housing in your homeowners association community,” I could go to the homeowners association members and say, “I’ll give you $2,000 each,” or whatever the amount is, to build additional homes in there, or build a convenience store or a school or whatever it is. Today, everybody has an incentive to say no, nobody has an incentive to say yes. So with a private neighborhood association, you could at least create this incentive system where you could buy your right into a community by offering the members of the private association a payment in order to build. Today, people have no incentive to ever vote yes for new housing. There’s no reason, or new anything in their community, because all they see is negatives, all they see is downsides: more traffic, more people. There’s no benefit to them. And even some of the downsides are imaginary, I think, and some are real. But whatever they are, real or imaginary, people just see the negative impacts of development because there’s no incentive for them to say yes.

So I think moving towards private neighborhood associations, which we’ve written a lot about at Independent Institute in a book called Voluntary Cities, would be the way to go because neighborhoods, local communities can control the character of their neighborhood—no problem with that, it would all be done through contract, it would be enforceable—and but yet you maintain this opportunity to still change it somewhat voluntarily by buying your right into the neighborhood. So in my opinion, that would be the right way to go. And private homeowners associations are very popular around the country. People love them. And they love them because it does limit what economists would call negative externalities being imposed on them.

Bob Zadek: So zoning is of course, by zoning you decrease, artificially decrease the opportunity to increase supply, thereby the supply and demand dynamic simply, if you decrease the opportunity to increase supply and the demand is a constant, the cost goes up. So that’s quite clear, that’s how it all works. What are some other artificial, i.e., statutory or regulatory events that increase artificially, as we have said, the cost of housing?

Building Codes and Environmental Blackmail [21:01]

Lawrence J. McQuillan: Well, another one is building codes, which have really decimated single-room occupancy apartment buildings. These are very low-cost housing for low-income people, many of them homeless or previously homeless people. And they used to be very common in cities; oftentimes they were older hotels that were converted into what’s called SROs. But now the building codes have really almost made it impossible to operate one or build one anymore because building codes mandate perfection in many cases. You have to have a kitchen in every unit, you have to have a bathroom in every unit, you have to have what’s considered proper ventilation or proper rules about how many people can live in a unit or density restrictions, how many people can live on a particular lot. And all of these rules and regs have worked to suppress and basically eliminate housing at the very lowest rungs of the housing ladder. And now we’re seeing even building codes that are targeting some of the highest levels of housing in California with solar mandates. Now we have residential solar mandates in California where if you build a new home, you have to have solar panels on the roof. That’s going to add anything between $10,000 to $40,000 a unit. And so these building codes, which appear very helpful—you know, we’re looking out for the interest of the poor—actually end up doing the opposite in terms of eliminating housing that they—it’s no-frills housing, obviously, but it’s housing that they can afford and it’s much better to have a roof over your head and live in a clean environment rather than live on the streets. And unfortunately, for a lot of people, when these SROs disappear, the streets are their first option for housing, or lack of housing.

Bob Zadek: And when you say it’s no-frills housing, I would make the world’s most mild disagreement with your labeling of SROs and the like being no-frills housing. I would prefer to say they are less-frills housing. The fact that there are windows, the fact that there is heat, the fact that it is protection from the elements, the fact that it is infinitely better than the alternative below it, of course it has more frills than what’s below it and less frills than what’s above it. So no-frills kind of begs a question, but that’s okay, Larry, we’re still friends.

Lawrence J. McQuillan: Good. And another one that I’m sure you’ve talked a lot about on your show already is the California Environmental Quality Act, CEQA. And that’s used time and again to either delay or stop housing development projects by demanding these lengthy, detailed environmental impact reviews that are usually challenged then in court. And these court costs, court delays can go on and on to the point where developers just back out of developing the project. They’ll build in Arizona or Texas or Nevada where they can get things done quickly. Any kind of CEQA litigation on average increases the delay of a housing project in California by about two and a half years. Most developers and builders don’t have that kind of time to waste; they’ll just move on and build elsewhere, and that’s what we’re seeing. But as you know, CEQA is also used—these environmental reviews are used to basically blackmail developers into either hiring union workers or paying union wages to workers. So again, that increases the cost of construction because now you’re adding higher construction salaries or wages onto the bill of that project.

Bob Zadek: And Larry highlights an issue where in fact there is a California-only verb. It’s a verb in the English language but only in California, where unions will approach a prospective building project and threaten that they will “CEQA” you. CEQA becoming a verb, which means bring an environmental quality lawsuit, knowing that’s going to add to the cost tremendously and the delay. And they say, “However, we will not CEQA you if you accommodate our modest needs of union labor, etc.” So that’s how sinister it all has become. CEQA was a statute that had good intentions in the beginning at the very nascent stages of the environmental movement. But now has become—and the secret in CEQA, without getting too much into the weeds, is that you don’t have to be an affected party. Anybody in California can bring a lawsuit under CEQA to attack a development or proposed development, even if they are totally unaffected by it. And that’s where the club comes about. So believe it or not, that’s the status of the law in California. And all of these issues, as Larry has pointed out, add profoundly to the cost of housing. So it’s not greedy builders, it’s not exploitation, it’s that we have no—the builders have no choice. We have to charge more than it—the cost of construction to make a profit to be induced to do so. So take the costs, add our regular profit, and that’s why housing is so expensive.

Defining the Housing Shortage [26:31]

Bob Zadek: Now you also mention, I think, Larry, in your study, NIMBYism. You and I will have a short conversation about whether that is a problem or whether NIMBYism is a right that people have. So explain NIMBYism to our friends.

Lawrence J. McQuillan: Well, NIMBYism, I mean, that stands—NIMBY stands for “Not In My Backyard.” And over time, it’s become very organized in California where you have groups that are constantly active challenging housing developments in California, particularly in local communities. And they’ll say, “Okay, perhaps you can build here, but it has to look like this, X, Y, and Z. And if it doesn’t look like this, we’re not going to allow it.” And usually, that’s through building permits, which is another thing that I didn’t mention yet, but the city or county just won’t issue the building permits that are necessary to build it unless it complies with the vision of the NIMBYs, which is usually, if it is allowed to be built at all, it’s going to be very like stack-and-pack housing near transit hubs. That’s usually what’s permitted. Otherwise—and that kind of plays into the climate change green vision of the NIMBYs as well. So it’s very limited housing in very specific areas, and it doesn’t allow for the expansion of housing at the rate that’s necessary to bring prices down across the spectrum.

I mean, as we talked about earlier, expensive housing is being built for wealthy or well-off people. But at the medium and lower ends of the housing ladder, things aren’t being built. Just to give you a perspective, despite all the hand-wringing by politicians and all the pronouncements to fix this problem, California issued fewer residential building permits in 2019 than in 2018. So we’re actually headed in the wrong direction if by measuring this we measure it by building permits issued. And even an issued building permit doesn’t mean the building will be built. Oftentimes they decide not to use the permit and not to go forward with the project because of all of these other costs that get piled on or all of these delays, as we mentioned, with the environmental regulations. So but if you just look at the permits alone, we’re actually moving in the wrong direction rather than the right direction in terms of the amount of housing that’s being built. And a lot of that is driven by NIMBYs at the local level that are using their political persuasion and votes and campaign contributions to limit housing in their community.

Bob Zadek: And NIMBYism is again an area that I am less disturbed by it than other people in this regard. I say, “Not in my backyard.” Well, darn it, I would like to control what is built in my proverbial backyard. I would be very unhappy if I couldn’t control it, and I’d be very unhappy if my neighbor or somebody nearby could do something with their property that makes the quality of my life lower. And we have had in the common law forever the principle of common law nuisance where in fact I can prevent somebody from performing an activity next door, like smoke blowing into my property, where I am given and have always been given under the common law the right to stop it. So to me, it’s nothing other than an extension of the law of nuisance, which is accepted by all of us as an appropriate common law concept. So NIMBYism to me is directly associated with and perhaps an extension—and maybe you would say too much of an extension—to the common law of nuisance. But I’m not worked up over that. I am worked up over the hypocrisy of those who say “not in my backyard” but yet “do something about the absence of housing.” I don’t say the second, but I kind of feel strongly about the first because it affects me personally in an adverse way and I have paid what I paid for my housing because I want what it offers, and I don’t want people to take it away. So that’s to me an issue that can be discussed further. The hypocrisy is unacceptable, but merely wanting to preserve the quality of your life if it’s not directly harming somebody else—it may be indirectly by increasing the cost of housing, but that’s what the market is.

Lawrence J. McQuillan: Right. Well, again, as we talked about earlier, in my mind, there’s a right way and a wrong way to do it. The right way is through contracts between homeowners to preserve the character and quality of their neighborhood. I don’t have any problem with that. But zoning—oftentimes with zoning, people who don’t even live in that neighborhood control how it’s used. I don’t understand why people in the Sunset District in San Francisco, which is way out by the Pacific Ocean, should have any say about what goes on in the Marina District, which is way on the other side of the city. So I just think that with private homeowners associations, the people who are impacted and share the same common interests would make the decisions about the character of their neighborhood rather than people who are not even in that neighborhood and probably pass through it maybe twice a year and really don’t even care about the neighborhood. And I don’t see how that’s efficient or effective way of structuring things. But I do agree with you in terms of there—you should be able to form a contractual relationship and control behavior in that area. Like it puts limits on you, like you can’t have parties after 11 o’clock because of the noise enforcement in that community or something. But also as a result of that, you benefit because your neighbors can’t impose that cost on you as well. So you give up a little freedom, but you gain freedom by tying the hands of your neighbors to do things that are going to harm you. I have no problem with contractual clauses like that or charters like that. I think that’s the correct way to do it.

Proposed Solutions and Policy Reform [28:01]

Bob Zadek: We are in simpatico, we agree 100%. Now before we get to the solutions and before we run out of time regretfully, just one question I’d like to ask you. It’s conceptual and that is: is there a housing shortage in California and in other metropolitan areas? And if the answer is yes, what does that mean?

Lawrence J. McQuillan: Well, to get back to what I was talking about very early on the show, an economist would look at a shortage in terms of capital flows. Is there capital that entrepreneurs want to invest in a market to build good X, whatever that good is, and supply more of it to the market that’s being prevented from doing so by, again, these restrictions that we talked about? That’s how an economist would look at a shortage and say there’s a lot of entrepreneurs lining up to produce more housing here and are willing to invest more capital, but because of the delays and the costs and the restrictions, it can’t be done. And so they’re doing it in Arizona or Nevada or Texas, which are booming right now in terms of housing construction. So that would be how an economist would look at it. Because we really don’t know how many kids living in the basement of their parents’ home would want an apartment if the apartment prices were a lot lower. I mean, we’re just making a guess in terms of what that would be. I’m sure some of them would move out and have their own apartment if apartment costs were lower. But how many? I don’t know, nobody knows. I mean, it’s just guessing. And we don’t know how many people would start new households if the housing prices were a lot lower so people would move out of the granny flat in their parents’ backyard and buy their own home. Again, I mean, that’s really just speculation. So what I would look at is not prices, it would be at capital. Does more capital want to come into that market? Clearly in California, entrepreneurs would trip over each other to get in here if it was profitable to do so. And all the restrictions eliminate the profitability and therefore they go elsewhere to build.

Bob Zadek: Now Larry, we have only about a minute. What are some of the headlines of the easy low-hanging fruit solutions that government could easily adopt to increase the supply of housing? We have about a minute, Larry.

Lawrence J. McQuillan: Well, I don’t know if they’re easy, but I think the things that would have the biggest impact would be to abolish CEQA and to use it maybe for—not to use it for infill development, which is development in already developed areas. It seems ridiculous to have CEQA reviews for development inside a bustling neighborhood, that makes no sense to me. So that would be I’d either radically modify or abolish CEQA because as you mentioned, it doesn’t serve its original intent anymore to protect the environment. All it does is reduce construction of much-needed housing.

And zoning, again, I would favor the private neighborhood association model rather than the current zoning model. I think you’d get a lot more built. I don’t think any of this would be easy though because in California there’s just so many well-organized groups: the NIMBY groups but also the environmental groups, there’s the established homeowners that are going to fight back. Senator Scott Wiener from San Francisco has introduced SB 50 repeatedly, three times now, which was intended to kind of take away some of the regulatory authority from local governments and allow for more construction to be built, and that was struck down three times in a row. So for me personally, I think the best way, the quickest way to get out of this regulatory thicket that we’re in is a ballot initiative, a state constitutional amendment that would re-establish private property rights to housing development in California, would allow residential housing to be built on private property.

Bob Zadek: Larry, sorry to interrupt, Larry, but we’re running out of time. Follow Larry at Lawrence McQuillan at @EconDoc, follow him on Twitter and the Independent Institute as well. Larry, thank you so much for your time today and stay well and stay happy and get outside.

Lawrence J. McQuillan: You too. Thank you, Bob.

Bob Zadek: Thanks, Larry.

Show prep notes

Bob’s own preparation for this episode.

Jerry Brown’s Time to Shine – McQuillan on CA Pensions

Audio/Video Introduction

External Articles/Papers

California Dreaming: Lessons on How to Fix Ca’s Pension Crisis [AMAZON - eBook]

Miscellaneous Other Articles

McQuillan on CA Pensions

The State of California is dreaming, according to Lawrence McQuillan – an economics and finance expert with the Bay Area’s own Independent Institute. His new book (California Dreaming: Lessons on How to Resolve America’s Public Pension Crisis) points out that Governor Brown and the Democrats in the legislature are failing to deal plainly with the reality of economic trade-offs: it’s either worker pensions or government services. Perhaps the Golden State has gotten away with tax hikes for so long because of its natural beauty and ideal weather, but McQuillan says this is no longer an option. He joins Bob to discuss the real reason behind UC tuition hikes and cuts to state and local services. Learn how politicians like Gray Davis sold out future generations, raising pensions during the dot-com boom, bankrupting California both financially and morally. Stay tuned for links and infographics, and for the live show this Sunday (8/16), 9AM on 910AM. Let’s hope Governor Brown is listening.

Planning call at 12pm PT on Saturday

Twitter: @econ_doc

Lawrence McQuillan [BIO]:

Senior Fellow and Director of the Center on Entrepreneurial Innovation at the Independent Institute

Written about America’s Tort System, Prosperity, Entrepreneurship,

• Formerly, Illinois Policy Institute,

• Director of Business and Economic Studies at the Pacific Research Institute,

• Research Fellow at the Hoover Institution, and

• Founding Publisher and Contributing Editor of Economic Issues

Audio/Video Introduction

Lawrence McQuillan, “California Dreaming” | WKBK Radio

• If you can’t switch to a Defined Contribution plan, Defined Benefit formulas should be based on 2.5 - 4.5% investment returns, not 8%

• Los Angeles could go bankrupt like Detroit (see Vox.com explainer on Detroit bankruptcy)

• Not unusual in California for public sector workers to have 200k or 300k pensions, and some are as high as 700k.

Opinion Journal: Defusing California’s Pension Bomb

• $600 billion pension debt from decades of refusing to pay benefits

• Counting on massive stock market returns to obtain solvency (8% year after year)

• Prescription: Allow municipalities to vote to turn Defined Benefit into Defined Contribution

• Since Republicans barely exist, the campaign must be led by Democrats, like Chuck Reed (fmr. Mayor of San Jose) and Joe Nation (fmr. state representative from Marin/Sonoma)

Lawrence McQuillan discusses his new book | Newsmax Now, May 29, 2015

• 13 teachers making over 100k in pensions in Bakersfield, CA.

• Advocates switching to 401k 10% Defined Contribution plan, and contributing a larger percentage than the private sector. Still generous but could be used to pay down deficit

• People worry about volatility of stock market for retirement plans, but TV host points out, the stock market has recovered since crash.

• Detroit demonstrates that pension obligations are not untouchable

External Articles/Papers

UC’s Pension Fiasco | National Review Online by Lawrence McQ. May 5, 2015

• Tuition hikes are not going towards better education, but administrator pensions.

Pension Debts Could Cause Tuition to Skyrocket at the University of Illinois and University of California System, Among Others - The Atlantic

• Demonstrates the trade-off that liberals seem fundamentally unwilling to deal with: services or pensions.

• Illinois also struggling with massive $111 billion pension debt

• “We’re no longer really funding students. We’re funding benefits.”

California Dreaming: Lessons on How to Fix Ca’s Pension Crisis [AMAZON - eBook]

Compensating differentials in government

McQuillan opens by describing the many great things about California to contrast them with our fiscal woes. He doesn’t make the point we’ve talked about, which is that taxes and wasteful government rise in California and elsewhere in proportion to how desirable the state is. Jerry Brown gets away with passing high taxes, because that’s the price of living in the Golden State. Economists call this “compensating differentials” when applied to prices and wages, i.e., the pleasantness of a job, holding skill-level/education requirements constant.

Even democrats are waking up

Democratic politicians are sounding the alarm bells over the state of the Golden State’s woefully underfunded pension benefits:

“And as Stanford University Professor Joe Nation notes: “A funded status of less than 80 percent precludes systems [in the private sector] from improving benefits or making payments in accelerated forms (such as the lump-sum option within UCRP) that are otherwise available. None of these restrictions applies to public-sector pension systems.” The bottom line is that officials at California’s public pensions are permitted to engage in behavior that would be considered criminal under ERISA if done by officials overseeing private-sector pensions. (Kindle Locations 426-431)

…

As Stanford professor Joe Nation has concluded: “In short, public pension systems utilize assumptions and methods supporting a consistent theme of understating liabilities, overstating assets, and pushing costs into the future.” 16 This has allowed California’s public pensions to hide the true extent of the funding problem from the public.” (Kindle Locations 471-474)

“As noted by David Crane, a Democrat and former special advisor to California Governor Arnold Schwarzenegger: ‘If CalSTRS’s deficit is not addressed, then the next generation will be forced to spend at least $ 45 billion per year meeting CalSTRS’s bills. In other words, either our generation starts paying $ 4.5 billion per year towards promises we made for services we received or we force the next generation to pay ten times as much for promises they didn’t make and services they won’t receive. That’s not hyperbole; that’s math. It’s also injustice.’” (Kindle Locations 821-826).

Reasons for Californians to be afraid – very afraid:

“In his book Plunder! journalist Steven Greenhut explained that CalPERS bet big on property at the peak of the real estate bubble, including “some highly risky deals involving vacant land.” When the bubble burst, “CalPERS lost 103 percent of the value of its housing investments in one fiscal year” because it had borrowed money— up to 80 percent in some cases— to finance the deals. CalPERS had to pay back the borrowed money because it guaranteed the debts.” (Kindle Locations 857-860).

Just how far off are their assumptions?

“CalSTRS earned an approximate 1.84 percent one-year return on a performance basis in fiscal year 2011– 12, well below the actuarial assumed rate of 7.5 percent. According to the June 30, 2011, actuarial valuation for the DB Program, the gap between the value of assets and the value of its obligations, or funding gap, has grown to approximately $ 63.8 billion. CalSTRS estimates it cannot invest its way out of its projected funding shortfall.” (Emphasis added.) CalSTRS admits it cannot invest its way out of this problem.”(Kindle Locations 544-548).

Counties are in trouble too:

“that none of the twenty-four [county] systems have a funding ratio at or above 80 percent, and twenty-one of the twenty-four systems have ratios below 60 percent”. Kindle Locations 569-570).

Trade-off between services and pensions

Ex: Vallejo goes bankrupt, reforms health care benefits but can’t touch pensions because of the California Rule, which makes it unconstitutional to restructure Pension benefits. Vallejo fears legal action from CALPers if it tries to further cut, so it must cut from local services

“Vallejo, for example, which exited a 3-year bankruptcy in 2011, restructured its employee compensation including making significant cuts to retiree healthcare benefits. But Vallejo did little to curb its pension bills largely due to threats of legal action by CalPERS. Because of this, Vallejo is now at risk of a second bankruptcy. Its pension costs, which stand at more than $ 14 million a year, have increased nearly 40 percent in the past 2 years and are projected to increase another 42 percent over the next 5 years. Meanwhile, Vallejo’s roads are littered with potholes, a third of its fire stations are closed, and police staffing is down almost 40 percent while crime surges— all because the budget is being swallowed by rising pension costs.” (Kindle Locations 601-606)

“Michael Fletcher of the Washington Post described the process of service-delivery insolvency in San Jose: Here in the wealthy heart of Silicon Valley, the roads are pocked with potholes; the libraries are closed three days a week, and a slew of city recreation centers have been handed over to nonprofit groups. Taxes have gone up even as city services are in decline, and Mayor Chuck Reed is worried. The source of Reed’s troubles: gold-plated pensions that guarantee retired city workers as much as 90 percent of their former salaries. Retirement costs are eating up nearly a quarter of the city’s budget, forcing Reed (D) to skimp on everything else.” (Kindle Locations 1336-1341).

Unfairness to Private Sector Workers/Taxpayers

Date: 3/22/20

Guest: Lawrence McQuillan

Phone/Planning Call: (916) 208-4139.

Website/Title: Senior Fellow and Director of the Center on Entrepreneurial Innovation at the Independent Institute

Topic: Homelessness and Housing Policy

NOTES:

Libertarian Minute:

• This is Bob Zadek here with the Libertarian Minute

• Have you ever noticed that every time the government declares war on something, the alleged problem gets worse?

• I’ve covered this ironclad rule so many times on my show that I’m dubbing it “Zadek’s Law.”

• Take the war on drugs:

• We spend $50 billion each year on prohibition – infringing civil liberties, inflaming racial tension, and filling our prisons and all in the name of some fictional moral high ground.

• Prohibition makes buying and selling drugs more dangerous, hence violent crime associated with drugs. But it’s the prohibition that creates the risk of violence - not the drugs.

• The Drug War doesn’t prevent abuse or addiction.

• In a free society, we should allow people to consume what they want – even if it’s bad for them.

• Tune in every Sunday morning 8am for The Bob Zadek Show – the libertarian show of ideas, not attitude.

Lawrence J. McQuillan: The Independent Institute

Lawrence J. McQuillan is a Senior Fellow and Director of the Center on Entrepreneurial Innovation at the Independent Institute. He received his PhD in economics from George Mason University, and he has served as Chief Economist at the Illinois Policy Institute, Director of Business and Economic Studies at the Pacific Research Institute, Research Fellow at the Hoover Institution, and Founding Publisher and Contributing Editor of Economic Issues.

Dr. McQuillan’s books and major studies include California Dreaming: Lessons on How to Resolve America’s Public Pension Crisis, A Brighter Future: Solutions to Policy Issues Affecting America’s Children, California Prosperity: Roadmap to Recovery 2011: Ten Steps to Return California to Prosperity, Jackpot Justice: The True Cost of America’s Tort System, U.S. Tort Liability Index, The Facts about Medical Malpractice Liability Costs, U.S. Economic Freedom Index, An Empire Disaster: Why New York’s Tort System Is Broken and How to Fix It, Tort Law Tally: How State Tort Reforms Affect Tort Losses and Tort Insurance Premiums, Bringing More Sunshine to California: How to Expand Open Government in the Golden State and The International Monetary Fund: Financial Medic to the World?

He further created the California Golden Fleece Awards to highlight a state or local spending program or regulation that fleeces California taxpayers, consumers, or businesses. He has been an advisor for the California State Assembly Judiciary Committee, Socioeconomic Council of Madrid, Colorado Governor Bill Owens, Heritage/Wall Street Journal Index of Economic Freedom, Governor Arnold Schwarzenegger’s task force on a constitutional spending limit for California, California State Senator Tom McClintock, Tax and Fiscal Policy Task Force of the American Legislative Exchange Council, Law and Judiciary Policy Committee of the Georgia Chamber of Commerce, Swedish Office of Science and Technology, Adriatic Institute for Public Policy, and elsewhere.

Dr. McQuillan has appeared on NPR, Fox Business Network, CNBC, C-SPAN, CNN, and radio stations across the U.S.

Independent Institute

Date: 3/22/20 1

NOTES: 1

Independent Institute 2

Tweets 2

BLURB 3

Links: 3

Related Shows: 3

How to Restore the California Dream: Independent Institute [Full Report - 27 pages] 4

Causes: 4

Recommendations 5

Other Articles: 6

AUDIO/VIDEO: 6

Tweets

#followfriday:

@antiplanner

@ChristianBrits

@stevengreenhut

@lindagorman

BLURB

Solve this mystery: Why does it cost three times as much to rent a U-Haul going from San Francisco to Austin than going in the other direction?

Answer: When all the movers are heading one direction (SF to Austin), you have to pay somebody to drive them back.

Lawrence McQuillan, a Senior Fellow and Director of the Center on Entrepreneurial Innovation at the Independent Institute, connects the dots in his new report on California’s dysfunctional housing policy. How to Restore the California Dream explains how the “Golden State” became the poster child for high housing costs and, relatedly, homelessness.

Through a combination of regulations, zoning taxes, and higher labor costs associated with union requirements, we’ve pushed thousands of low and middle-income residents to other states (or in the extremes, to the streets). Lawrence finds that California would need another 4 million additional housing units just to stabilize prices, yet this is impossible given the amount of red tape.

As lower income people look for cheaper and cheaper housing, they crowd out those already living on the edge. Thus the homelessness has become a state of emergency.

Last time I had Lawrence on my show, we discussed California’s pension crisis. This Sunday, we’ll discuss housing and homelessness, and how a proposed Constitutional amendment could resolve the affordability crisis.

Finally, I’ll ask Lawrence to define a “housing shortage,” which I argue cannot exist by definition. Are exorbitant housing costs simply the price we pay for living the California Dream?

Find out this Sunday on the show of ideas - not attitude.

Links:

• Independent Institute

• Lawrence McQuillan (@Econ_Doc) / Twitter

• How to Restore the California Dream: Independent Institute

• A Proposed California Constitutional Amendment to Resolve the Housing Affordability Crisis | Lawrence J. McQuillan

Related Shows:

• Jerry Brown’s Time to Shine? Lawrence McQuillan on Pension Reform

• The Rent Control Bomb with Christian Britschgi, June 10, 2019

• Rent Control with Ken Carlson, Jun. 12, 2011

• Randal O’Toole on Rising Rents, 1/8/16

• Get Paid More Than You’re Worth – What A Deal! With Linda Gorman, 4/7/13

• California Dreamin’ – About Sane Government, with Steven Greenhut 9/1/13

Listen LIVE, Sunday - 8-9am PACIFIC!

California Golden Fleece Awards: Independent Institute

Founded by Lawrence McQuillan

Every three months, the Independent Institute highlights a state or local government spending program, tax, or regulation that fleeces California taxpayers, consumers, or businesses. On occasion, the awards also spotlight a federal program that disproportionately harms Californians.

The California Golden Fleece® Awards expose waste, fraud, and abuse in California government. To receive this ignoble designation, a spending program, tax, or regulation must violate common-sense principles of responsible government, be considered wasteful by people of varying political philosophies, and must be well documented.

Submit a CandidateWe encourage people—both inside and outside of government—to send us Fleece candidates. Public participation will help make the California Golden Fleece® Awards a more valuable resource for exposing government waste, increasing transparency, and holding government at all levels accountable when they swindle taxpayers or break the public trust.

How to Restore the California Dream: Independent Institute [Full Report - 27 pages]

People are voting with their feet.

Normally, increasing prices create incentive for new supply, but in CA regulation impedes construction.

TII awards its 9th California Golden Fleece® Award to the state and local politicians, government planners and regulators, and anti-development activists who obstruct new housing.

Solution: allow markets to respond by providing additional supply.

Causes:

1. High cost of regulation - most heavily regulated state in the country.

2. In 1960, LA was zoned for 10 million people but by 1990 was downzoned to 3.9 million

3. PLAs (project labor agreements) and prevailing wages

4. Union driven phenomenon.

5. Benefit politically connected and powerful unions who deliver votes and contribute to campaigns.

6. NIMBYism

7. Activism couched in noble terms but really people wanting to preserve local character or control of their neighborhoods.

8. Faux environmnetal lawsuits

9. One of the alibis for NIMBYism – California Environmental Quality Act requires local governments to hear CEQA-based appeals against projects, which are often grounds for court challenges that can drag out for years.

10. Bureaucratic Redevelopment Subsidies

11. Command and control directives for development (rather than market-based) contingent on “which include affordable housing, transit-oriented development, infill development, and revitalizing and restoring neighborhoods.”

12. Whenever additional goals get mixed into housing policy, it weakens the main aim – even “affordable housing” stipulations make housing less affordable by slowing market-based development.

13. Downvoting Upzoning

14. Passing the Buck on Homelessness

15. Gavin Newsom’s state of Emergency authorizes $1 billion in aid to California cities – but a similar law passed by Jerry Brown didn’t prevent the surge in homelessness.

16. A task force of politicians and “regional experts” will offer advice on how the many should be spent… Sounds like a recipe for more Golden Fleece Awards.

“In San Francisco, where homelessness has reached crisis levels, Mayor London Breed led the fight for passage of a $600 million affordable-housing bond measure on the November 2019 ballot—the largest housing bond in city history—to potentially fund 2,800 units. Voters approved the bond measure, Proposition A), in November 2019. City officials have also advanced plans to build new housing to shelter a portion of the homeless population. Local opposition, however, threatens to delay or block these new construction plans through expensive litigation.”

Recommendations