Pension Funds, Meet the “Super Bubble”

Earlier this month, outgoing California Governor Jerry Brown predicted “fiscal oblivion” if California’s state and local agencies are not granted more flexibility to modify pension benefits. As if to help Governor Brown make his point, U.S. stock indexes took an obliging plunge. The Dow Jones average cratered in December, dropping nearly 16 percent in three weeks, from 25,826 on December 3rd to a low of 21,792 on December 24th. And whither hence? Nobody knows.

If history and trends are any indication, however, “up” is unlikely. Depicted on the chart below is the performance of the Dow Jones Index from 1995, when the markets began first showing signs of “irrational exuberance,” to the extremely exuberant present day. Clearly shown are the past two bubbles, the internet bubble of 2000, the housing bubble of 2007, and what we may call the “super bubble” or “everything bubble” of 2018.

Dow Jones Stock Index – 1995-2018 

It doesn’t take an economist to notice a pattern here. The Dow Jones Index, which tracks closely with all publicly traded equities in the U.S., more than doubled in the four year heady run-up to its January 2000 peak, than went into decline for nearly four years, before doubling again between 2004 and 2007. Then when the housing bubble popped, the Dow went off a cliff, dropping to half its 2007 peak in little over a year. In the ten years since 2009, the Dow has exploded again, tripling to a high of 26,743 in September 2018. What now? Visually, at least, another correction is past-due.

There are all kinds of economic reasons why what is visually indicated on the above graph is exactly what’s going to happen. At best, we may hope for stocks to merely stop going up, which is sort of what happened after the internet bubble popped. But what’s different this time?

One key difference is that this time, lowering interest rates is not an option. In January 2000 the Federal Funds rate was 5.5 percent. By June of 2003 it had dropped to 1.0 percent. When interest rates drop, stocks become relatively better investments than fixed rate investments. Lower interest rates also induce more people to borrow, creating liquidity, stimulating consumer spending, which helps corporate earnings which drives up stock prices. The cause and effect is reflected in the stock market history – by 2003, after lowering interest rates by 4.5%, the stock market finally began to recover.

In October 2006 the rate had risen to 5.25 percent. In September 2007, as home sales were starting to drop, it was lowered to 4.75 percent. When the housing bubble popped, and the stock market crashed, the Federal Reserve responded by steady lowering of the Federal Funds Rate. By December 2016 it had dropped to 0.25 percent, the lowest rate possible. What should be of concern, is that the rate today, 2.5 percent, is only half as high as it was during the past peaks. During the previous two bull markets, the Federal Reserve was able to bounce the rate up to around 5 percent before the bears came calling. This time, assuming we’ve hit the peak, only half that increase, to 2.5 percent, was achievable.

A consequence of low interest rates is more borrowing, which is a good thing if that borrowing stimulates economic growth that translates into investments in productivity. But borrowing has not been used to stimulate productive investments. Instead, much of the corporate borrowing over the past decade has been used to finance stock buy-backs. This is a dangerous strategy, causing short-term growth in earnings per share, but loading debt onto corporate balance sheets that will have to be refinanced at interest rates that are increasing, at the same time as investment in research and modernizing plant and equipment has been neglected.

In recent years, borrowing has also been an overused tool of government, starting with the federal government. Federal borrowing accelerated in mid-2008, and hasn’t slowed down since, climbing to over $21 trillion by the 3rd quarter of 2018. As interest rates rise, servicing this debt will become far more difficult. Meanwhile, all U.S. credit market debt – government, corporate, and consumer – has continued to increase. After dipping slightly to $54 trillion in the wake of the burst housing bubble, it was up to a new high of $68 trillion by the end of 2017.

When interest rates fall, not only is the stock market stimulated. Bonds make payments at fixed rates, so when the market rate drops, the price of these bonds increases, since they can be sold for whatever price will give the buyer the same return as the current market rate. Interest rate reductions also cause housing prices to rise, since when interest rates are low, people can afford bigger mortgages since they will be making lower monthly payments. The opposite is also true, which is unfortunate for investors. All else held equal, rising interest rates means lower prices for bonds and housing.

What does this mean for pension funds?

When the super bubble pops this time, all assets will drop in value. Everything pension funds are invested in, equities, bonds, and real estate, will all drop in value. Even if extraordinary measures are taken to stop the decline – such as the fed purchasing corporate bonds – there will be nowhere to run. Public sector pension funds have not prepared for this day of reckoning. CalPERS, for example, in its most recent financial statements was only 71% funded. That would be ok at the end of a bear market, but at the end of a bull market, that is a disaster waiting to happen.

As it is, using CalPERS as an example, government agencies are going to have to nearly double their annual payments. The primary reason for this increase appears to be so the participating agencies will eliminate their unfunded liability on a 20 year repayment schedule. To-date, agencies were making those repayments on a 30 year term, and using creative accounting to minimize the payment amounts in the early years. CalPERS does not appear to have lowered the amount they are expecting their investments to earn, and this is critical. Because while they have lowered their expected rate of return to “only” 7.0 percent, they have also quietly lowered their long-term assumed inflation rate. This means they are still relying on nearly the same real rate of return for their investments.

When the super bubble pops, the challenges facing pension funds will not be the only economic problem facing Americans. Unwinding the debt accumulated during a credit binge lasting decades will impact all sectors of the economy. The last thing the fragile finances of government agencies will need is even higher required contributions to the failing pension funds. Instead those running these pension systems need to try new approaches, including modifying benefit formulas, but also redirecting investments into local infrastructure projects – projects that not only create jobs, but address practical and urgent goals such as building resilient, upgraded backbones for supplying water, energy, and transportation.

In early 2019, the California Supreme Court is about to issue one of its most consequential rulings ever, in the case CalFire Local 2881 vs. CalPERSIt is possible this ruling will grant government agencies (and voters) more flexibility to modify pension benefits. Such an opportunity cannot come too soon, if fiscal oblivion is to be avoided when the super bubble finally pops.

Can Public Sector Union Power Ever Be Stopped?

unionImagine you’re hoping to support a candidate for local office who will enact reforms that will improve your city, maybe even save it. Someone who will fight tirelessly to eliminate work rules that force agencies to hire more people than are actually necessary. Someone who will insist that incompetent public employees are fired. Someone who will finally do something about compensation and benefit packages that are threatening to bankrupt the city.

What do you say to them, when their response to your suggested reforms is this: “That’s all great, and I’d like to do it all, but who’s going to give me the million dollars for my campaign that I’m not going to get from the public employee unions if I actually try to do any of it?”

That is the sort of conversation that takes place, or would take place if anyone bothered to ask, multiplied by thousands, every election cycle in California.

Public employee unions run California. They exercise nearly absolute power in the state Legislature, and in nearly every city, county, school district and special district. Can public sector union power ever be stopped?

Earlier this year, a California Public Policy Center analysis estimated that for 2016, total membership in California’s public sector unions was 1.15 million, and total revenue was $812 million. This equates to a stupefying $1.6 billion that these unions collect and spend every election cycle.

 

California’s Public Sector Unions (including local affiliates)
Estimated Total Membership and Revenues

While the figure of $1.6 billion per election cycle is a credible estimate, attempts to come up with precise information on California’s public sector union dues is nearly impossible. In California there are many hundreds, if not thousands, of individual local public sector union affiliates. All of them file separate 990 forms, often including financial transfers between entities that have to be offset in any thorough analysis.

Determining how much of California’s public sector union revenue is spent on politics is also a nearly impossible task, despite several online “transparency” portals, including OpenSecretsFollowTheMoneyVoteSmart, and the California Secretary of State’s Campaign Finance “Power Search.” These portals are primarily focused on national races, and in some cases, statewide races, but none of them descend to the thousands of California’s local races, where hundreds of millions of dollars are spent every election.

Moreover, the portals can only display the information they’re given. California’s government unions, like most sophisticated political players, mask their total spending through multiple committees and transfers.

An excellent analysis of how much of teachers union dues end up being spent on political campaigns was written in 2015 by RiShawn Biddle, editor and publisher of Dropout Nation – a leading commentary website on education reform. He writes: “The pro bono consultants who went through the unions’ published national, state, and local tax returns estimated based on their research, interviews, and sampling that roughly one third of the unions’ efforts went toward political advocacy.”

One-third. In California, that is equal to approximately $540 million per election cycle. That is, California’s public sector unions likely spend over a half-billion per election cycle. And this spending does not include other “non-political” spending. For example, not reportable as political spending can include massive public education campaigns that are designed to influence voters but aren’t engaging in explicit advocacy.

Also not considered political spending, but having immense political impact, is litigation. There are countless examples of how government union power is exercised in California’s courts. Pension reforms in San Jose and San Diego, approved by voters, were eviscerated through relentless court challenges. Statewide pension reform pushed by Gov. Brown and partially realized in the PEPRA legislation of 2012 was undermined, and continues to be undermined, beneath an ongoing avalanche of lawsuits. Charter schools are the targets of continuous litigation designed to wear them out. You can do this, when you have hundreds of millions of dollars pouring in every quarter, year after year.

California’s political landscape over the past 20-30 years has been defined by public sector unions. While the recent Janus v AFSCME decision by the U.S. Supreme Court has taken away the ability of government unions to compel payment of fees, the unions are resorting to clever contractual gyrations to make it extremely difficult in practice for anyone to stop paying. That too, will have to sort itself out in court, where union money guarantees tenacious defense and endless appeals.

Even if public employees can easily withdraw from paying government unions, in many cases, why would they? These unions have made California’s public employees some of the highest paid public servants on earth. A California Policy Center study in 2017 concluded “The composite average total compensation (pay and benefits) for a full-time city, county or state worker in California during 2015 was $121,843; for the average full-time private sector worker in California, including benefits, it was 62,475, which is 51% of what the public sector worker earned.” As a result, it is no coincidence that California’s state and local governments confront over $1.0 trillion in debt and unfunded pension liabilities.

The political and financial power of public sector unions has transformed California politics. Their influence is felt everywhere; education, environmental policy, the business climate, important cultural issues. In every area, their primary agenda is to grow their membership and influence. The effect of this agenda is pernicious. If schools fail, spend more public money on schools. If crime increases, hire more police and build more prisons. Wherever society fails, grow unionized government.

Perhaps the next major U.S. Supreme Court case concerning government unions will abolish them due to this inherent conflict between their agenda and the public interest. Perhaps someday they will be outlawed entirely. That would be a happy, happy Thanksgiving indeed.

This article originally appeared on the website of the California Policy Center.

California’s Legislators Lack Private Sector Experience

CapitolBack in the days of adding machines and manual ledgers, final election results in California were usually done by midnight on election day. Sometimes there would be a few precincts counting ballots into the wee hours of the morning, and you wouldn’t know a result till the next day. Fast forward to 2018, and the age of global interconnectedness, with instantaneous algorithmic management of everything from power grids to Facebook feeds, yet here in California the complete results of the 2018 midterms won’t be available until December 7th. Go figure.

While California’s ability to count ballots runs contrary to the otherwise dazzling march of progress, by now we have enough information to offer a pretty good look at California’s state Legislature for 2019-20. The Democratic supermajority has been re-established. With 28 confirmed seats in the Senate, and 56 in the Assembly, the Democrats hold 70 percent of the seats in both houses. Even if Republicans achieved the unlikely capture of all four Assembly seats that remain too close to call, nothing would change. Overall, so far there are 84 Democratic legislators, and only 32 Republicans.

How Many State Legislators Have Private Sector Experience?

Three election cycles ago, a California Policy Center analysis compared the biographies of California’s state legislators, asking how Republicans and Democrats differ in terms of what they did before they became politicians. To repeat this exercise, 2018 election results were obtained from the California Secretary of States “District Races” page for the Senate and the Assembly. For incumbents who were re-elected, biographies were obtained from the Senate and Assembly websites. For newcomers, a trip to Wikipedia, Ballotpedia, or their campaign websites was sufficient.

When one considers the professional background of California’s politicians, a clear pattern emerges. And while compiling this data requires some degree of subjective interpretation, no reasonable interpretation would fail to reveal dramatic differences in experience between Democrats and Republicans.

California State Legislature, 2019-2020 Membership
Business vs. Government Background

As seen on the above table, in California’s 2019-20 state senate, 79 percent of the Democrats have no private sector experience. On the other hand, 58 percent of the Republicans had no public sector experience prior to running for elected office, although most of them ran for local offices prior to running for state senate. The same story applies with California’s state assembly, where 73 percent of the Democrats have no private sector experience, and 55% of the Republicans have at least some private sector experience.

Before continuing, it’s interesting from this perspective to compare this 2019-20 state legislature to the 2013-2014 state legislature. Back then the proportions were generally the same, but there were almost no Democrats – only five in both houses – compared to 14 of them today. Conversely, back in 2013 there were 25 Republicans who had an exclusively business background prior to holding elected office, compared to only 15 today. Over the same period, the number of Republicans with only public sector experience prior to holding office has more than doubled, from four back in 2013 to 11 today. Overall there are now even fewer Republicans – down from a paltry 36/120 six years ago to a vanishing 32/120 today.

California State Legislature, 2013-2014 Membership
Business vs. Government Background

What might explain this tepid drift to the center, at least in terms of more Republican state legislators with public sector experience, and more Democratic state legislators with private sector experience?

One explanation could be the open primary, which makes it less likely an extreme candidate will survive the general election. Another could be the decision made around 2010 by California’s beleaguered business community to start supporting pro-business Democrats. Finally, as Republicans in California fade further into irrelevance, the alliances and allegiances formed in public sector work offer Republican candidates with that background a better chance of electoral success.

Public Sector Unions Pick Public Sector Careerists to Run for Public Office

Back in the 1950’s and 1960’s there were plenty of pro-business Democrats, so called “Pat Brown” Democrats, who worked with Gov. Brown Sr. to build freeways, bridges, power plants, and the finest system of water storage and conveyance the world had ever seen. Those same Democrats cooperated with Republican Governor Reagan a few years later to build the finest public university system in the world. The opportunities available to California’s middle class were unrivaled. What happened to these Democrats?

The problems began in the 1970’s when public sector unions were allowed to form. Steadily acquiring political power through automatic dues deductions, they used taxpayer’s money to lobby for the interests of government workers instead of the interests of the people they serve. Increasingly, business-backed candidates started losing races to candidates backed by government unions. Almost invariably, unions backed Democratic candidates. The more powerful these union-backed candidates became, the more laws they enacted to further consolidate their power. Today government union rule in California is absolute.

The tragedy of unionized government is not merely that they have taken over California’s state legislature and nearly every city, county and school board in the state in order to pursue their membership’s interest above the public interest. It is that most elected officials no longer understand business. These union anointed elected officials come from government agencies, union bureaucracies, nonprofits, activism, and public education. Most of California’s legislators have never had to balance a budget, make a payroll, or convince a customer to voluntarily purchase a product so they could earn a precarious profit in a competitive market.

California’s lawmakers, to the extent they are elected with the support of public sector unions and to the extent they lack business experience, not only face a conflict of interests every time they have to deal with a reform that threatens the power of the unions. They are also less qualified to understand the financial and operational realities that apply in any  efficiently ran, productive organization, large or small. They are in over their heads.

To exemplify this, consider how California’s democrats are crowing over a $6 billion budget surplus. Compare that $6 billion surplus to the nearly half-trillion in bond debt that California’s state and local governments have piled up, including another $23 billion on Nov. 6th. Compare that $6 billion surplus to, by most reasonable estimates, the more than half-trillion in unfunded retirement benefits that are going to blow sky high in the next market downturn.

Hint. A trillion is a thousand billion.

How to NOT Solve California’s Housing Crisis

house-constructionThere are obvious reasons the median home price in California is $544,900, whereas in the United States it is only $220,100. In California, demand exceeds supply. And supply is constrained because of unwarranted environmental laws such as SB 375 that have made it nearly impossible to build housing outside the “urban service boundary.” These laws have made the value of land inside existing urban areas artificially expensive. Very expensive. Other overreaching environmentalist laws such as CEQA have made it nearly impossible to build housing anywhere.

Then there are the government fees attendant to construction, along with the ubiquitous and lengthy permitting delays caused by myriad, indifferent bureaucracies with overlapping and often conflicting requirements. There is a separate fee and a separate permit seemingly for everything: planning, building, impact, schools, parks, transportation, capital improvement, housing, etc. Government fees per home in California often are well over $100,000; in the City of Fremont in 2017, they totaled nearly $160,000 on the $850,000 median value of a single family home.

This is a shakedown. It has caused a politically engineered housing shortage in California that enriches billionaire property developers that have the financial strength to withstand decades of delays and millions in fees, because they reap the extreme profits when they sell these homes at inflated prices. Also enriched are the public servants whose pay and pensions depend on all taxes – definitely including property taxes – and all fees being as stratospheric as humanly possible. Public employee pension funds also benefit from housing scarcity, as their real estate investment valuations soar into bubbleland.

When litigious environmentalists, insatiable public sector unions, and an elitist handful of left-wing oligarchs control a state, artificial scarcity is the consequence. Welcome to California.

REJECTED POLICY – REAL SOLUTIONS TO THE HOUSING CRISIS

To decisively solve California’s housing shortage, some of California’s more than 25,000 square miles of rangeland, currently occupied by cattle, would have to be approved for suburban development. California is only 5 percent urbanized, although if you listen to environmentalists, you might get the impression it only had 5 percent remaining open space. You could fit ten million people onto half acre lots in four person households and you would only use up 2,000 square miles – that’s only 1.1 percent of California’s land area. Why aren’t massive new housing developments spreading out along California’s 101, I-5 and 99 corridors?

Real solutions to California’s housing crisis would also require increasing the capacity of California’s water infrastructure and transportation infrastructure. In both cases, investment would be cheaper if this expansion was done on raw land. Real solutions to California’s housing crisis would mean rescinding the mandatory rooftop solar requirement on new home construction, and instead recommissioning and expanding the nuclear power complexes at Diablo Canyon and San Onofre, and embracing development of additional nuclear power and natural gas power plants. In a less confiscatory regulatory environment, the private sector could fund all of this while lowering costs to consumers.

Reforming environmental restrictions and unleashing private sector development of homes and infrastructure is the fastest, easiest way for home prices in California to return to near the national average. In turn, that would solve nearly every problem associated with a shortage of housing. California’s families would be able to afford to buy homes, or pay affordable rent. California’s employers, most definitely including government agencies, would be able to attract workers at prices that would not break their profits or their budgets, which would benefit the economy. And far fewer people would be rendered homeless.

APPROVED POLICY – COMPLETELY USELESS “SOLUTIONS” TO THE HOUSING CRISIS

As long as environmentalist litigators, public sector unions, and left-wing oligarchs run California, none of these real solutions will ever happen. What are they proposing instead?

To summarize, all politically viable housing solutions in California involve densification, i.e., cramming ten million more people into existing urban areas, and, predictably, more taxes, bonds, fees, subsidies and government programs.

Rent Control, Government Subsidized “Affordable Housing” and Government Funded Homeless Shelters

California is the epicenter of America’s “progressive” power structure. In California, in addition to controlling the public bureaucracy through their unions, progressive ideologues control the press, social media, search media, K-12 public education, academia, most corporations, the entertainment industry, and virtually all serious political campaign spending. As a result, California’s progressives can use ballot initiatives to con a brainwashed populace into approving their latest housing policy agenda. The common thread? Government control; government funding. For example, on the ballot this November are propositions to permit cities and counties to enact rent control, issue state bonds totaling $4 billion to build “affordable housing,” and use state tax revenues to build more government-run homeless shelters. It is possible all three of these measures will pass.

Already in progress is the implementation of California state laws that took effect Jan. 1 – AB 2299 and SB 1069 – which amend existing state laws governing “accessory dwelling units.” These new laws force California’s counties to streamline the process whereby homeowners can construct additional homes in their backyards. Does that sound good? Not so fast.

Doubling Suburban Population Densities ala Government Subsidized “Accessory Dwelling Units”

There’s a reason people work hard for decades to pay off their mortgages so they can own homes in spacious suburbs. It’s because they value the leafy, semi-rural atmosphere of an uncrowded suburban neighborhood. AB 2299 and SB 1069 will effectively double the housing density in these neighborhoods, violating the expectations of everyone living there who relied on the zoning rules that were in effect when they bought their homes.

If zoning laws in existing suburbs were relaxed at the same time as zoning restrictions were lifted on the urban periphery, the impact of these new rules might be mitigated. But every policy California’s elite and enlightened geniuses come up with is designed to maintain “urban containment.” And to add to the disruption these laws will inflict on quiet neighborhoods, California’s cities – starting with Los Angeles – are providing subsidies to homeowners to build these homes, then encouraging them to rent the properties to low income families wherein the government will pay the rent via Section 8 vouchers.

This is an expensive, utopian scheme that oozes with compassion but is fraught with problems. Doubling the density of suburbs is already problematic. But doubling the density of suburbs by subsidizing the settlement of people on government assistance into every backyard, invites social friction. It is forcible integration of people who, for whatever reason, require government assistance to support themselves, into communities of taxpayers, who, by and large, are working extra hard to pay the mortgages on overpriced homes in order to provide their children with safe neighborhoods.

As usual, when it comes to enlightening the public, neither the media, nor the urban planning experts in academia, ever offer much beyond pro-densification propaganda. A glowing New York Times article, entitled “A Novel Solution for the Homeless: House Them in Backyards,” raves about this entire scheme, already being tried in Los Angeles, Portland and Seattle. The article includes a quote from Vinit Mukhija, a professor of urban planning at UCLA, who says: “The value [of subsidized accessory dwelling units] goes beyond that, though, because it is finally somewhat of a departure of the purity of single-family housing in the region. It’s a good step to change what people here really consider a dogma of private housing.”

The “dogma of private housing.” That epitomizes California’s elitist hostility towards ordinary families owning detached homes with spacious yards.

The incentives created by such a project are perverse. California’s elite has made homes unaffordable. Then, to the people who sacrificed so much to buy these homes despite their punitively high prices, the government offers them subsidies and Section 8 payments, if they are willing subdivide their lots and turn over half their property to people supported by the government. Inevitably, many financially struggling homeowners will be forced to accept this cruel bargain if they want to keep their homes.

Finally, just like in 2008, there will eventually be another economic downturn, when many distressed homeowners will be forced to sell their properties. And when that happens, just like in 2008, investment banking speculators will move in and buy homes by the thousands. This next time, however, these institutional investors will be salivating at the prospect of collecting government subsidies so they can operate two rental units on a single piece of property.

Demolishing Homes to Build High Rises Near Transit Stations

Another way California’s elites – many of whom live in gated communities with homeowner covenants prohibiting nasty things like accessory dwelling units in backyards – propose to solve California’s housing crisis is to force demolition of single family dwellings in the vicinity of mass transit stations. They support this mass destruction of vintage neighborhoods in order to make room for high density apartments and condominiums up to five stories in height. While an attempt in 2018 to enact this draconian solution was beaten back, California’s coercive utopian lawmakers will bring it back in 2019. Some form of this law is likely to pass.

There’s nothing wrong with gradually increasing the population density in the core of large cities. That is a natural and organic process. But it is the job of legislators and local officials to moderate that process, protecting established neighborhoods. Instead, again, the policy consensus in California is to cram ten million new residents into existing urban areas.

Government Subsidized Homeless Shelters on some of the Most Expensive Real Estate on Earth

Perhaps the most misguided housing policies coming out of California concern the homeless. Despite years of bloviating by the compassionate elite, almost no good data is available on homeless populations, much less any good policies. Press coverage of the homeless centers on the family unit; small children, parents forced out of their home by high rents. These are gut wrenching stories. But accompanying the legitimate cases of families or individuals coping with undeserved hardship, there are the willfully indigent, along with criminals, drug dealers, sexual predators and perverts. Again, the City of Los Angeles offers a striking example of bad policy.

In Venice Beach, which is within Los Angeles city limits, along one of the most expensive, touristy stretches of coastline in the world, there are now permanent homeless encampments. To address the challenge, Los Angeles city officials are fast-tracking the permit process to build a homeless shelter on 3.2 acres of vacant city-owned property less than 500 feet from the beach. This property, nestled in the heart of Venice’s upscale residential and retail neighborhoods, if commercially developed, would be worth well over $200 million. Imagine what could be done with that much money if the goal was to truly help the homeless. And by the way, the proposed shelter will be a so-called “wet” shelter, meaning that drugs and alcohol will not be permitted inside the shelter, but intoxicated homeless individuals will be allowed inside. Go in, get a bed, go out, shoot up, come back in.

That a solution so scandalously inefficient could even be considered by the do-gooders running City Hall in Los Angeles offers additional insights into the minds of California’s progressive elite. Solving the homeless crisis isn’t their goal here. Rather the intent is to create additional government-owned properties, hire additional government bureaucrats, while preening in front of television cameras and pretending to solve a problem. Should the Venice Beach property be developed as currently proposed, well connected construction contractors will rake in government funds, so eventually “up to 100” homeless people will find shelter. Meanwhile, thousands will remain outdoors.

California’s housing is unaffordable because of restrictive laws such as CEQAAB 32SB 375, and countless others at both the state and local level. At the same time, California’s political elites are are inviting in the world’s poor en masse to come and live here. An estimated 2.6 million illegal aliens currently live in California. But the rhetorically unassailable compassion expressed by these sanctuary policies does nothing to alleviate hardship in the nations where these refugees originate, because for every thousand who arrive, millions are left behind.

The result? While California’s visionary rulers engineer a shortage of housing supplies, their welcoming sanctuary policies engineer a burgeoning housing demand. This is the deeply flawed agenda they have implemented in California and are actively exporting to the rest of America.

The biggest lie of all is the compassionate overlay that informs every housing solution California’s elite promote. Because their solutions, however viable they may be politically, will not work. They defy basic economic sense. They create additional drain on public funds while doing nothing to alleviate the high prices that are caused by scarcity. They are sustained by an impossible assumption, that urban densification, and all the destruction that densification will bring, will in itself be sufficient to restore a supply and demand equilibrium for housing. And they reject the obvious solution, suburban expansion to complement higher densities in the urban cores, based on environmentalist objections that are overwrought. In practice, the solutions being implemented to resolve California’s housing crisis are not compassionate. They are cruel.

Eventually, enough Californians are going to realize they’ve been conned. They will recognize that government subsidized densification is financially unsustainable and ruinous to their way of life. They will support politicians who are willing to stand up to environmentalist litigators, government unions, and the left-wing oligarchy that profits from scarcity. Hopefully that will happen before it’s too late.

Democratic California’s Cautionary Tale

Democrat DonkeyIt’s become fashionable among certain conservatives, libertarians, and assorted free-market types to claim that Republicans are no better than Democrats. Both parties, according to the disenchanted, have lost their way. Both parties are controlled by establishment cronies, who support big government of one sort or another.

But conservatives who are disillusioned with Republicans need to remember just how much is at stake if Democrats take over. To indulge in understatement, California offers a cautionary tale.

In the name of saving the planet, and helping the poor, Democrats win votes in California. Assisting these Democrats is the most powerful coalition of leftist oligarchs in the history of the world. But the planet is not better off and California’s poor get poorer. How can this be?

Absolute Power Corrupts Absolutely

Since at least 2006 — the year Governor Arnold Schwarzenegger, a moderate Republican, totally capitulated to the Democratic establishment — Democrats have exercised absolute power in California. Their ongoing agenda, much of which has already been implemented, offers insight into just how different Democrats are from Republicans — even those watered down Republicans who struggle to earn votes from true conservatives.

California’s Democrats, in pursuit of environmentalist perfection, have legislated artificial scarcity of everything necessary to civilized life: land, housing, electricity, gasoline, water, transportation, and quality education — you name it. California has the most expensive homes, the highest utility prices, the worst roads, and failing schools. Behind the high-minded environmentalist rhetoric stand oligarchs who profit from scarcity; established corporations, public utilities, large landowners, and “green” entrepreneurs.

It’s no exaggeration to say California is a left-wing, Democrat-ruled oligarchy. If anyone thinks they aren’t poised to take over the rest of the United States, think again. California is merely the epicenter of an uncontained nationwide leftist oligarchy that now controls nearly all traditional media, online media, social media, academia, and the entertainment industry. It has also co-opted most major corporations and government bureaucracies, and draws additional support from powerful government unions as well as most private sector unions.

All of this elitist support is self-serving. All of it is hypocritical. All of it is deeply cynical, and utterly indifferent to working Americans.

California’s Proposition 10 offers an excellent example of how Democrats think. This deeply flawed state ballot initiative addresses the high cost of housing in California by authorizing cities and counties to impose rent control on all rental units, right down to the second homes that middle-class Californians may own in order to earn supplemental income. The negative consequences of a measure like Prop. 10 are obvious not only to anyone with a basic understanding of economics but also to anyone with plain common sense.

If Prop. 10 passes, what few incentives remain for investors and developers to build new housing in California would be further undermined. Who would want to invest in new apartment construction if the rental income from those apartments could be frozen by the whims of populist Democrats as they exert their influence on the local city councils? And what landlord would want to invest to maintain or upgrade their rental properties, if the rental income they can recover on their investment is frozen via rent control? And what renter will move into more appropriate housing as their life circumstances change, if moving means losing the favored low rent they currently enjoy?

Not one Republican supports California’s Prop. 10, but plenty of Democrats do, including the notorious U.S. Rep. Maxine Waters, U.S. Senate candidate Kevin de León, and Los Angeles mayor and future presidential contender Eric Garcetti. And behind these Democrats, also endorsing Prop. 10, are California’s all powerful public sector unions, including the California Teachers Association, the California Nurses AssociationAFSCME California, and SEIU California. And, of course, the California Democratic Party.

Prop. 10 is an example of how Democrats are making California’s housing shortage worse instead of better, but it’s not the only one. Also appearing on California’s statewide ballot next month are Prop. 1, which would borrow $4 billion to build “affordable housing,” and, Prop. 2, which would use state tax revenues to build more government-run homeless shelters. It is possible, if not likely, that every one of these propositions will pass.

Scandalous Inefficiency, Unassailable “Compassion”

Democrat “solutions” to the housing crisis aren’t limited to the state ballot, however. In Venice Beach, California, along one of the most expensive, touristy stretches of coastline in the world, are now permanent homeless encampments. To address the challenge, Los Angeles city officials are proposing to build a homeless shelter on 3.2 acres of vacant city-owned property less than 500 feet from the beach. This property, nestled in the heart of Venice’s upscale residential and retail neighborhoods, if commercially developed, would be worth well over $200 million. Imagine what could be done with that much money.

That a solution so scandalously inefficient could even be considered by the Democrats running City Hall in Los Angeles offers additional insights into the Democrat mind. Solving the homeless crisis really isn’t their goal here. Rather the intent is to create additional government-owned properties, hire additional government bureaucrats, while pretending to solve a problem. Should the Venice Beach property be developed as currently proposed, well connected construction contractors will rake in government funds, so eventually a few hundred homeless people will find shelter. Meanwhile, tens of thousands will remain outdoors.

Democrats, and not Republicans, made California’s housing unaffordable by passing restrictive laws such as CEQAAB 32SB 375, and countless others at both the state and local level. At the same time, it is Democrats, and not Republicans, who are inviting in the world’s poor en masse to come and live there. An estimated 2.6 million illegal aliens currently live in California. But the rhetorically unassailable compassion exhibited by these Democrats does nothing to alleviate hardship in the nations where these refugees originate, because for every thousand who arrive, millions are left behind.

The result? While California’s Democrats, and not Republicans, engineer a shortage of housing supplies, their welcoming sanctuary policies engineer a burgeoning housing demand. This is the deeply flawed, misanthropic vision Democrats have for America. Democratic power is rooted in wishful thinking by the naïve, and by the savvy because of epic greed. Republicans, no matter how tepid their convictions may be, would never have done to California what these Democrats have done. And it’s not even close.

When conservatives and libertarians think about where to cast their vote, they should look west to California, and think very hard about whether or not they want to live in a nation ruled by Democrats.

This article originally appeared on the website American Greatness.