CORRUPTION WATCH-Like other addicts, the City would sooner die than give up its dependence on excessive construction. In fact, it might try to justify its abusive economic behavior by calling upon John Maynard Keynes.
According to Keynes, when the down phase of the business cycle begins, governments should spend money. He used the example that it would be wiser to employ people to dig holes and fill them up again than for government to cut spending. (The General Theory, Bk 3, Ch 10, § 6) When the government spends money, workers have more money to spend where they shop, so businesses sell more and in return the businessmen buy supplies, and this spending passes on the money to other businesses who pay employees who spend that money at other businesses. It’s called the Multiplier Effect.
Naturally, it is more complicated than that. The economic question arises whether to give money to the poor or to the wealthy. The Marginal Propensity to Consume (MPC) answers the question. Poor people have a high MPC, while the wealthy’s MPC is low. If one wishes to stimulate the economy, then it is vital to get money into the hands of poorer people. In Los Angeles that can be a family of four earning less than $75,000 per year since our housing costs are so high. Los Angeles, however, has a hybrid system in which workers and suppliers are paid a lot of money to construct unneeded stuff while the wealthy skim off hundreds of millions of dollars. Despite this developer greed, the overall MPC is sufficient to stimulate the economy.
Building Housing is Good, Building Housing is Bad
According to Keynes, one should do something useful with money. In Los Angeles, we have violated Keynes’ law and have been doing something harmful, i.e. building into a glut of the dense apartment housing. Stimulating the economy by constructing apartments and condos has been economic folly and socially harmful here in LA. The results are excessively high housing costs and an undesirable environment, both of which cause productive people to leave the City.
The Downside of Giving Money for Excessive Development
The present glut is in apartments and condos comes at a time when LA has a shortage of rent-controlled attached units and a shortage of single family, detached homes. The destruction of rent-controlled housing to facilitate the building of luxury apartments means that more people are becoming homeless. As the supply of low-end apartments decreases, the rents in the low end of the rental market increase so that poor who have been thrown out of the rent-controlled units cannot afford the non-rent controlled housing. A larger homeless population costs the taxpayers more for paramedics, hospital fees, police, and jail facilities, etc. Also, the homeless then camp near residential areas and can cause fires, as happened in Bel Air recently.
The construction of dense apartments, however, has serious ill effects. A high-rise that lacks sufficient tenants to be financially viable can attract enough people into a small section of town to significantly aggravate traffic congestion. Consider a modest Infill project: if five single-family homes are destroyed and the new 21-unit apartment is only 70% occupied, the density has increased by 300% (15 units is 300% greater than 5 units). Repeat that ten times and traffic gridlock can affect a wider area. Judge James Chalfant found that just one mega-project, the Millennium Towers in Hollywood, would add so much traffic to the Hollywood Freeway that the it would become non-functional as a means to convey traffic from the Valley to DTLA and Hollywood surface traffic would back-up as gridlock at the on and off ramps.
Also, the government’s doling out billions of dollars to developers significantly increases the cost of housing because developers buy up residential property by paying the higher Development Value which is significantly greater than Living Space price. Knowing that the city will permit them to build whatever they please and will subsidize them for it, developers then willingly pay way over Living Space value. Thus, the cost of residential housing increases for everyone.
LA’s Corruptionism Turns Keynes on His Head
Ironically, the result of housing corruption is to subtract money from the consumer economy. As housing prices rise in response to developers’ speculative buying, rents go up and consumers spend more money on housing. Most of that extra money has left the LA economy and gone to Wall Street. This process has deprived all other LA businesses of those consumer dollars. While the spending on unnecessary projects stimulates the economy, the siphoning off of money to Wall Street retards the economy.
Los Angeles is a Prime Example of Market Dislocation
Both Adam Smith and Keynes recognized that the Supply and Demand System was a fragile mechanism that needed protection from corruption. The market value of a commodity, be it a house, a car, or toothbrush, is set by mutual agreement between a willing buyer and a willing seller. “Willing” presupposes accurate knowledge. Thus, selling tainted food that gives people food poisoning is outlawed. The buyer is not willingly purchasing botulism. The proper role of government is to protect the Price System so that there is enough information for people to make accurate decisions about the proper prices of commodities.
Los Angeles, however, actively disseminates false data hyping the population, and hence, falsely exaggerates the demand for housing, as Judge Goodman noted in his January 2014 decision rejecting the Hollywood Community Plan. Since 2014, the City continues in its deception. As a result, the public has been conned into squandering billions of dollars on high-rise housing and mass transit Los Angeles does not need and which harms society.
If LA were to stop wasting its money on building more mixed-use projects in Transit Oriented Districts and on fixed rail transit, the economy would probably crumble before it could reconstitute itself. On the other hand, the long run results of further densification and more fixed-rail transit will be worse.
Building “affordable Housing” sounds logical but is a scam. The money is used to subsidize market-rate apartments and condos in dense area like DTLA and Hollywood. After the developers skim off millions, they declare bankruptcy and then a judge will remove the affordable requirements “in the interest of justice.” The $1.2 billion for poor people’s housing will primarily support market-rate housing without providing any affordable units. (See In re Sunnyslope Housing Limited Partnership)
Power Corrupts, Corruption Destroys
These corrupt housing practices tend to drive out the young middle class. Because banks are not selling foreclosed detached homes, thereby further inflating the prices of detached homes, many young middle-class families cannot afford to buy in Los Angeles. Since building equity in their home is the number one priority of Family Millennials, they shun high-rent apartments and move away from LA. Thus, we have a significant brain drain, which turns into a double whammy for businesses. They have a smaller qualified worker pool and they must pay more so that their workers can survive in LA’s high cost environment. Thus, many employers also move to Texas.
Los Angeles is on a corruption merry-go-round. It will die before it stops its spending on unwanted and unneeded high rises and fixed-rail transit. Everyone says that a crash cannot happen, until it does.
(Richard Lee Abrams is a Los Angeles attorney and a CityWatch contributor. He can be reached at: Rickleeabrams@Gmail.com. Abrams views are his own and do not necessarily reflect the views of CityWatch.) Edited for CityWatch by Linda Abrams.