A report issued earlier this year from California’s Office of Legislative Analyst “California’s High Housing Costs: Causes and Consequences,” cites the following statistics: “Today, an average California home costs $440,000, about two–and–a–half times the average national home price ($180,000). Also, California’s average monthly rent is about $1,240, 50 percent higher than the rest of the country ($840 per month).”
It’s actually much worse than that. Anyone living on California’s urbanized coast, from Marin County to San Diego, has to laugh at the idea that a modest home can be found for anywhere close to $440,000, or a decent rental can be found for anywhere close to $1,240 per month. In most urban areas within 50 miles of the California coast, finding a home or a monthly rental at twice those amounts would be considered a bargain.
These prohibitive costs for housing are mirrored in California’s unusually high costs for electricity, gasoline, water, and, of course, California’s unusually high taxes. The cost of living in California is one of the highest in the nation – along the coast, it’s probably the highest in the nation. For this reason, it’s completely understandable that California’s state and local government unions perpetually agitate for higher pay and benefits for their members. But they’re leaving everyone else behind.
The problem with the oft-repeated mantra “teachers, nurses, police and firefighters need to be able to live in the communities they serve” ought to be obvious. Nobody can afford to live in these communities, unless they’re either very wealthy, or they’re early arrivals whose mortgages are paid off and whose children have graduated from college. Otherwise, if they live on the California coast in a decent home, they’re in debt to their eyeballs.
This is a failure of policy, and the worst possible response is to exempt public sector workers – the most powerful voting bloc in California – from the consequences of these policies. Because the most enlightened public policies that union leadership might advocate – all unions, public and private – are not to raise pay and benefits for their members, but to lower the cost of living for everyone. And the way to lower the cost of living for everyone is to permit competitive development of land, energy, water and mineral resources.
Along with permitting private interests to compete, California needs to change how public money is invested. California’s biggest infrastructure project in decades is the high speed rail project, which was originally sold to voters as costing $9.5 billion. According to a 10/24/2015 report in the Los Angeles Times, here are the latest projections:
“After cost projections for the train rose to $98 billion in 2011, vociferous public and political outcry forced rail officials to reassess. They cut the budget to $68 billion by eliminating high-speed service between Los Angeles and Anaheim and between San Jose and San Francisco.”
The LA Times report goes on to describe how High Speed Rail is again over-budget. If it’s ever built, it’s likely to cost approximately $100 billion. Using an online mortgage calculator, you will see that a 5.0%, 30 year fully amortized $100 billion loan will require total payments per year from taxpayers of $6.4 billion. That’s over $1,000 per year from each of California’s taxpaying households. Don’t count on ridership revenue to help pay capital costs – it is highly unlikely ridership will even cover operating costs.
The opportunity here, however, is that California’s high speed rail project may never be built. Because one of the conditions of the project is attracting a percentage of matching funds from private investors, and these commitments are not pouring in. Unions who are currently fighting for high speed rail will need to find new projects to support. Regardless of what you may think about unions, as long as they have the political clout they’ve got, their support for new projects could be good, if they modify their criteria.
California’s unions need to support competitive resource development and they need to advocate public/private investment in revenue producing civil infrastructure that passes an honest cost/benefit analysis. These policies would not only lower the cost of living, they would create millions of jobs. The problem with high speed rail isn’t that it doesn’t create jobs, the problem is it destroys more jobs than it creates. High speed rail would be a parasitic economic asset dependent on taxes and subsidies to exist, while not even making a dent in California’s overall transportation challenges.
Unions in California need to return to the core ideals of the labor movement, which is to care about ALL working families. And if they care about those ideals, they will make hard political choices. They will take on California’s super-sized environmentalist lobby, along with their powerful friends, trial lawyers and crony green capitalists. They will challenge the biased studies that claim California cannot solve its land, energy, water and transportation challenges without what is essentially rationing. They will recognize that policies that create artificial scarcity only empower the rich and the privileged. They will participate in a new dialogue aimed at identifying measured and decisive ways to unlock California’s abundant resources; aimed at identifying infrastructure projects that are financially viable enough to attract private investment. They will get out of their comfort zone, confronting old allies, and finding new friends.
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Desalination Plants vs. Bullet Trains and Pensions, April 7, 2015
Raise the Minimum Wage, or Lower the Cost of Living?, March 31, 2015
An Economic Win-Win For California – Lower the Cost of Living, December 3, 2014
Reinventing America’s Unions for the 21st Century, September 2, 2014
How to Create Affordable Abundance in California, July 1, 2014
California’s Green Bantustans, May 21, 2014
Public Pension Solvency Requires Asset Bubbles, April 29, 2014
Pension Funds and the “Asset” Economy, February 18, 2014
Exclusive Interview with Joel Kotkin, January 4, 2014
Bipartisan Solutions for California, October 27, 2013
California has one of the highest costs of living in the United States. California also is one of the most inhospitable places to run a business in the United States. And despite being blessed with abundant energy and an innovative tradition that ought to render the supply of all basic resources abundant and cheap, California has artificially created shortages of energy, land and water, and a crumbling, inadequate transportation and public utility infrastructure.
The reason for these policy failures is because the people who run California are the public sector unions who control the machinery of government, the career aspirations of government bureaucrats, the electoral fate of politicians, and the regulatory environment of the business community. To make it work, these unions have exempted government workers, along with compliant corporations and those who are wealthy enough to be indifferent, from the hardships their policies have created for everyone else.
Here’s just a taste of what California’s middle class, too rich to qualify for government handouts and too poor to be indifferent, has to endure compared to the rest of the United States:
It’s not hard to estimate how these premiums, 13% for gasoline, 42% for electricity, and 72% for homes, translate into the necessity to work and earn tens of thousands of dollars more each year in order to live in California instead of almost anywhere else in America. As for the tax and regulatory environment, respected tax fighter Richard Rider maintains a well-researched list of tax and business statistics entitled “Unaffordable California,” updated here quarterly. The substance of that report is this: Californians pay higher taxes and endure more restrictions on business than anywhere else in America. Read the details. It is as mesmerizing as it is disgraceful.
There is a simple and effective solution to ending California’s war on the private sector middle class by public sector unions and their corporate cronies. But first it is important to point out another depredation, one that rivals the unaffordable cost-of-living, wreaked onto California’s beleaguered private sector middle class by public sector unions and their financial cronies.
The following graph, courtesy of Charles Hugh Smith (ref. “The Generational Short, part 2“) shows everything you need to know about saving and investing in the 21st century:
VOLATILITY FOR CIVILIANS, 7.5% GUARANTEED FOR PUBLIC SERVANTS
Careful review of the above graph will indicate that the top of the vertical green line to the far right represents today’s market attainment. A market that, in the case of the DJIA, has whipsawed between 6,000 and 16,000 in less than ten years. You don’t have to be a Ph.D economist to recognize we’re contending with rather unsettling volatility these days. If you were to posit that right now we’re seeing another run up of bubble assets – both for equities and real estate – you’d be in good company. And it doesn’t take much more than horse sense to know that going out and earning a “risk-free” 7.5% per year (more significantly, 4.5% after inflation), average, for the next 30 years, is a fool’s errand.
Yet that is precisely what unionized public employees get “guaranteed” by their pension funds, give or take a half-point. And the fools who guarantee this 7.5% are the taxpayers who themselves are forced to risk their own retirement savings in a market that is at a historic high, in an era of unprecedented levels of debt as a percentage of GDP, that displays volatility sufficient – at any moment – to wipe out an individual’s savings at the same time as professional traders profit on the swings.
And herein lies the solution. Because the seismic outrage that any financially literate taxpayer may feel at being so dispossessed, so insecure despite making utterly responsible financial decisions, is not shared by the 25% or more of the population who live in a government worker’s household. It is not cruel or spiteful, but rather to salvage our social contract, to require government workers live by the same rules as the citizens they serve.
When the people who operate the machinery of government earn comparable compensation, endure the same risks, face the same hard decisions, and live with the same levels of financial insecurity as the rest of the population, they will adopt entirely new attitudes towards legislation affecting the cost of living, the business climate, the tax burden, and the profound public policy challenges of retirement security. Unlike today, their political incentives will be to make common cause with the people they serve.
Instead, their unions broker deals with politicians they elect. They use environmental laws to fight infrastructure investment in order to pay themselves instead. They pour money into pension funds and bond underwriting firms, making government the biggest partner of Wall Street – their proverbial demon. They block development of land, energy, water and transportation assets in order to assist their corporate cronies who control existing supplies to profit from the resulting scarcity and lack of competition. This contrived scarcity also creates the asset bubbles that inflate the tax base and nominally preserve pension fund solvency.
If public sector unions were outlawed, public sector workers would join with private citizens to forge a new political identity freed from vested interests and privilege. They would support policies designed to break up monopolistic entities, creating competition and lowering the cost of living. Public sector workers would make less, but they would also pay less to live, and the savings could be invested in infrastructure upgrades especially for water and transportation. These investments, along with revitalized land and energy development, would render the basic necessities of living abundant and cheap, instead of scarce and expensive. This California renaissance requires only one thing – the abolition of public sector unions.
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“You can’t build a society on artificially inflated asset values, because that accelerates the class division. Immigrants know that even if they work in a low-paying job in a hotel in Houston the chances they can save and buy a house are infinitely better than in California. If you want to have an asset based economy then accept we’re going to have feudalism because the price of entry is just too high.”
– Joel Kotkin, CPPC Interview, January 4, 2014
What Kotkin is referring to is the result of decades of increasing legislative restrictions on cost-effective land and energy development, combined with Federal Reserve policies designed to minimize the cost of borrowing. In the first case, prices for land and energy, the building blocks of a healthy economy, are artificially inflated through constraints on supply. In the second, the supply of borrowed money is artificially increased via ultra-low interest rates.
This so-called “asset economy” might also be called a “bubble economy,” because it cannot be sustained indefinitely. For a while, inflated values of real estate, privately owned natural resources and business inventories provide collateral for additional borrowing at low interest rates, which puts even more money into circulation, bidding the price of assets up even further. Meanwhile, environmentalist legislation of increasing severity continues to restrict supplies of land and energy, driving prices of marketable land and energy higher still. And the bubble grows.
This is the real reason California is unaffordable for working families. Anywhere within 100 miles of the California coast, homes “priced to sell” at $400,000, cost more than six times California’s median household income of $61,400. Thanks to their inflated price, these homes will come with a hefty property tax bill – including local assessments – of over $5,000 per year, and if they were built anytime in the last 20 years or so, there’s a good chance you can tack another several thousand per year of “Mello Roos” assessments – property taxes by any other name.
Who benefits from the asset economy? The answer may surprise you.
The obvious beneficiary of inflated asset values is the proverbial Wall Street crowd. Every time the closing bell rings on an uptick, the trading minions in lower Manhattan clink their martini glasses and bellow with predatory glee. We get that.
Who else benefits from the asset economy? Consider this statement, courtesy of the SEIU, found on their “Fact Check on Public Employees’ Pensions” website page:
“Are taxpayers the ones who foot the bill for public workers’ pensions?
In a word, no. The modest amount the average public worker takes home is covered largely through investment returns–not the emptying of taxpayers’ pockets.”
This quote, “investment returns,” lies at the crux of the disagreement over both the financial sustainability of public sector pensions, and whether or not they constitute an unfair burden on taxpayers. Because in this low-interest rate economy, where the prime lending rate is 3.25% and the 30 year fixed rate mortgage is 4.25%, public employee pension funds are investing all over the world, essentially loaning money at 7.5% interest.
You heard that right. They are loaning money at 7.25% interest. Because the only real difference between an investment and a loan is when investments don’t return the expected rate to the investor, the “borrower” doesn’t have to pay the money back.
One primary reason pension funds have the expectation they can earn 7.5% interest per year is because they are placing more and more of their investments with private equity firms and hedge funds, whose charter is to beat the market – at great risk. Most of the rest of their funds are invested in publicly traded equities or real estate assets – i.e., profitable corporations and corporate holdings whose values currently appreciate at unsustainable rates, thanks to ultra-low interest rates and artificial constraints on supplies in markets where they have monopolistic power.
And in one very important sense, pension funds may be explicitly considered lenders, not investors, because if they fail to earn 7.5% per year on their investments, they have the power to increase the required contributions from the government employers of their beneficiaries. The taxpayers, you see, guarantee those 7.5% annual returns.
It would be hilarious if it weren’t so dangerously prolonging an honest reckoning – the ability of public sector union spokespersons to demonize pension reformers as “tools of Wall Street.” Because it is their pension funds who pour more money into Wall Street than any other financial special interest, and who carry the unique power to cover their losses on the backs of taxpayers. Equally significant, but far more subtle, is that pension funds depend on artificially high costs of living, through artificially appreciating asset values, to ensure their high returns and continued precarious solvency, also on the backs of working people.