Inequality in San Francisco Haunts Democrats

San Francisco, CA, USAAs San Francisco’s sharp inequality draws national attention this election year, California Democrats have begun to question how to explain their role in fostering — and reversing — the trend.

The gulf between the progressive city’s richest and poorest, and the emptying space between the two, has come to haunt Democrats worried that their almost unfettered control over state and municipal politics has left promises unfulfilled and little plan for change in the future. “During all my years in Asia I constantly grappled with the perniciousness of poverty,” Thomas Fuller wrote in a dispatch for the New York Times Sunday Review. “Yet somehow I was unprepared for the scale and severity of homelessness in San Francisco. The juxtaposition of the silent whir of sleek Tesla electric vehicles, with the outbursts of the mentally ill on the sidewalks. Destitution clashing with high technology. Well-dressed tourists sharing the pavement with vaguely human forms inside cardboard boxes. I’m confounded how to explain to my two children why a wealthy society allows its most vulnerable citizens to languish on the streets.”

A city in the hot seat

Liberals have recently raised the alarm about inequality in other elite blue-state cities. “Boston is the headquarters for two industries that are steadily bankrupting middle America: big learning and big medicine, both of them imposing costs that everyone else is basically required to pay and which increase at a far more rapid pace than wages or inflation,” as Thomas Frank recently observed. “A thousand dollars a pill, 30 grand a semester: the debts that are gradually choking the life out of people where you live are what has made this city so very rich. Perhaps it makes sense, then, that another category in which Massachusetts ranks highly is inequality.”

But with California’s rising generation of leaders drawn so heavily from San Francisco elites like Gavin Newsom and Kamala Harris, the leading candidates for governor and U.S. senator respectively, critics have suggested that the city’s dominant political ethos is even more determinative of the near future than its prevailing technological worldview. “San Francisco and the Bay Area have long been committed to values which embrace inclusivity and counterculture. To see these values fraying so publicly adds insult to injury for a region once defined by its progressive social fabric,” Frederick Quo suggested this summer at Quartz, warning “San Francisco has become one huge metaphor for economic inequality” across the country. “In the face of resentment it is human to want revenge,” he warned. “But regressive policies such as heavily taxing technology companies or real estate developers are unlikely to shift the balance.”

West coast anxieties

The sense that San Francisco has painted itself into a kind of policy corner has played into growing perceptions among Golden Staters that residents are facing a painful, threatening squeeze, despite the state’s significant aggregate economic turnaround from the bad old days of the financial crisis when Sacramento issued IOUs. In a recent CALSPEAKS poll, “seven out of 10 respondents believe the number of people living in poverty is a “major” problem,” KQED News reported. “There was wide agreement, regardless of race, political affiliation, income level or age. Two-thirds of Californians also believe income inequality is a major problem. (The cost of health care was another top concern, considered a problem by 70 percent of respondents.)”

For a time, it appeared that Democrats were turning the corner on inequality anxieties by focusing on raising minimum wages nationwide, starting with big cities — an approach that courted big controversy in California but ultimately largely succeeded. “In the last few years, as concerns have grown about economic inequality, proposals for a higher minimum wage have enjoyed remarkable success, thanks in part to an energetic campaign for a $15 minimum wage led by fast-food workers and backed by organized labor,” NBC News recalled. “New York, California and Washington, D.C., have all passed laws to raise their minimum to $15 an hour within the next eight years.” But as KQED noted, in the new CALSPEAKS survey, just “one-third of those polled ‘strongly favor’ the state’s recent $15/hour minimum wage bump approved,” while only 26 percent “somewhat” favored it — a majority, but one still uncertain about the best way to right what they see as the state’s stubborn economic wrongs.

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Jerry Brown signs $15 minimum wage in California

As reported by the Sacramento Bee:

Gov. Jerry Brown, casting a living wage as a moral imperative while questioning its economic rationale, signed legislation Monday raising California’s mandatory minimum to $15 an hour by 2022, acting within hours of a similar bill signing in New York.

The bill’s enactment comes one week after Brown, Democratic lawmakers and labor leaders announced an agreement on the wage increase, averting a brawl on the November ballot.

In adopting the measure, California joined New York as the first states in the nation to enact a plan to raise their statewide minimums to $15. New York Gov. Andrew Cuomo signed his state’s legislation and was cheered by labor unions at a rally moments before Brown spoke in California.

Brown, a fiscal moderate, had previously expressed reservations about a wage increase. But amid growing concern about income inequality …

Why The Middle Class Can’t Afford A House rising cost of housing is one of the greatest burdens on the American middle class. So why hasn’t it become a key issue in the presidential primaries?

There’s little argument that inequality, and the depressed prospects for the middle class, will be a dominant issue this year’s election. Yet the most powerful force shaping this reality—the rising cost of housing—has barely emerged as political issue.

As demonstrated in a recent report (PDF) from Chapman University’s Center for Demographics and Policy, housing now takes the largest share of family costs, while expenditures on food, apparel, and transportation have dropped or stayed about the same. In 2015, the rise in housing costs essentially swallowed savings gains made elsewhere, notably, savings on the cost of energy. The real estate consultancy Zillow predicts housing inflation will only worsen this year.

Driven in part by potential buyers being forced into the apartment market, rents have risen to a point that they now compose the largest share of income in modern U.S. history. Since 1990, renters’ income has been stagnant, while inflation-adjusted rents have soared 14.7 percent. Given the large shortfall in housing production—down not only since the 2007 recession but also by almost a quarter between 2011 and 2015—the trend toward ever higher prices and greater levels of unaffordability seems all but inevitable.

The connection between growing inequality and rising property prices is fairly direct. Thomas Piketty, the French economist, recently described the extent to which inequality in 20 nations has ramped up in recent decades, erasing the hard-earned progress of previous years in the earlier part of the 20th century. After examining Piketty’s groundbreaking research, Matthew Rognlie of MIT concluded (PDF) that much of the observed inequality is from redistribution of housing wealth away from the middle class.

Rognlie concluded that much of this was due to land regulation, and suggested the need to expand the housing supply and reexamine the land-use regulation that he associates with the loss of middle-class wealth. Yet in much of the country, housing has become so expensive as to cap upward mobility, forcing many people to give up on buying a house and driving many—particularly young families—to leave high-priced coastal regions for less expensive, usually less regulated markets in the country’s interior.

The Rise of the Exclusionary Region

The regions with the deepest declines in housing affordability, notes William Fischel, an economist at Dartmouth College, tend to employ stringent land-use regulations, a notion recently seconded by Jason Furman, chairman of President Obama’s Council of Economic Advisors. In 1970, for example, housing costs adjusted for income were similar in coastal California and the rest of the country. Today house prices in places like San Francisco and Los Angeles are three or more times higher, when adjusted for income, than most other metropolitan areas. For most new buyers, such areas are becoming what Fischel calls “exclusionary regions” for all but the most well-heeled new buyers.

The biggest impact from regulation has been to diminish the supply of housing, particularly single-family homes. In a recent examination of permits across the nation from 2011 to 2014 for Forbes, we found that California regions lag well behind the national average in terms of new housing production, both multi-family and single family. Houston and Dallas-Fort Worth, areas with less draconian regulations, have issued three times as many permits per capita last year. Overall California’s rate of new permits is 2.2 per 1000 while across the Lone Star state the rate was nearly three times higher.

In the “exclusionary regions” along both coasts, high land prices have made it all but impossible to build much of anything except luxury units. In Manhattan this has taken the form of high-rise towers that have been gobbled by the rich, including many foreigners, but this new construction has done little to make New York affordable for most residents. Between 2010 and 2015, Gotham rents increased 50 percent, while incomes for renters between ages 25 and 44 grew by just 8 percent.

Making of Two Americas

Real estate inflation is redefining American politics and could eventually transform the nature of our society. In the dense, increasingly “kiddie-free zones” around our Central Business Districts (CBDs), according to 2011 Census figures, children between ages 5 and 14 constituted about 7 percent of the population, less than half the level seen in newer suburbs and exurbs. The common habitués of these high-cost, high-density urban areas—singles and childless couples—have emerged, according to Democratic pollster Stan Greenberg, as key elements of the progressive coalition.

The bluer the city, generally, the fewer the children. For example, the highest percentage of U.S. women over age 40 without children—a remarkable 70 percent—can be found in Washington, D.C. In Manhattan, singles make up half of all households. In some central neighborhoods of major metropolitan areas such as New York, San Francisco, and Seattle, less than 10 percent of the population is made up of children under 18.Perhaps the ultimate primary example of the new child-free city is San Francisco, home now to 80,000 more dogs than children, and where the percentage of children has dropped 40 percent since 1970.

In contrast, familial America clusters largely in newer suburbs and exurbs, and increasingly in the lower-cost cities in the South, the Intermountain West, and especially in Texas. Overall—and contrary to the bold predictions of many urbanists—suburban areas are once again, after a brief slowdown, growing faster than the urban cores.

America remains a suburban nation. Overall, 44 million Americans live in the core cities of America’s 51 major metropolitan areas, while nearly 122 million Americans live in the suburbs. And this does not include the more than half of the core city population that live in districts, particularly in the Sunbelt, that are functionally suburban or exurban, with low density and high automobile use.

The Geography of Inequality

Inequality may be a big issue among urban pundits, but, ironically, inequality is consistently more pronounced in larger, denser cities, including New York, Los Angeles, and San Francisco. Manhattan, the densest and most influential urban environment in North America, exhibits the most profound level of inequality and the most bifurcated class structure in the U.S. If it were a country, New York City overall would have the 15th-highest inequality level of 134 countries, according to James Parrott of the Fiscal Policy Institute, landing between Chile and Honduras.

In our core cities in particular, we are seeing something reminiscent of the Victorian era, when a huge proportion of workers labored in the servile class. Social historian Pamela Cox has explained that in 1901 one in four people, mostly women, were domestic servants. But is this—the world portrayed in shows such as Downton Abbey and Upstairs Downstairs—the social norm we wish most to promote?

In contrast, research by the University of Washington’s Richard Morrill shows that suburban areas tend to have “generally less inequality” than the denser areas. For example, in California, Riverside-San Bernardino is far less unequal than Los Angeles, and Sacramento less so than San Francisco. Within the 51 metropolitan areas with more than 1 million in population, notes demographer Wendell Cox, suburban areas were less unequal (measured by the Gini coefficient) than the core cities in 46 cases. And overall the poverty rate for cities is close to 20 percent, almost twice that of suburban areas.

The differential of housing cost accounts for much of this disparity. High housing prices tend to stunt upward mobility, particularly for minorities. One reason: The house remains the last great asset of the middle class. Homes represent only 9.4 percent of the wealth of the top 1 percent, but 30 percent for those in the upper 20 percent and, for the 60 percent of the population in the middle, roughly 60 percent. The decline in property ownership threatens to turn much of the middle class into a class of rental serfs, effectively wiping out the social gains of the past half-century.

The Geographic Shift

High housing prices are also rapidly remaking America’s regional geography. Even areas with strong economies but ultra-high prices are not attracting new domestic migrants. One reason is soaring rents: According to Zillow, for workers between 22 and 34, rent costs claim upwards of 45 percent of income in Los Angeles, San Francisco, New York, and Miami compared to less than 30 percent of income in cities like Dallas and Houston. The costs of purchasing a house are even more lopsided: In Los Angeles and the Bay Area, a monthly mortgage takes, on average, close to 40 percent of income, compared to 15 percent nationally.

This is leading to a renewed shift even among educated millennials to such lower-cost regions as Atlanta, Orlando, New Orleans, Houston, Dallas-Fort Worth, Pittsburgh, Columbus, and even Cleveland. As millennials enter their 30s and seek to buy houses, these changes are likely to accelerate.

Millennials may be staying in the city longer than previous generations, but their long-term aspirations remain fixed on buying a single-family house. This trend will accelerate in the next few years, suggests economist Jed Kolko, as the peak of the millennial population turns 30. Faced with a huge student debt load, a weaker job market, and often high housing prices, millennials face tougher challenges than some previous generations, but retain remarkably similar aspirations.

Bringing Back Levittown

Clearly America needs a new approach to housing. Democrats may enjoy their strongest base in the cities, but many of their young constituents likely will end up in the suburbs, or will continue to move to smaller, less reflexively progressive cities. Finding ways to make suburbs more sustainable, both environmentally and for families, will have more long-term appeal than trying to eliminate their preferred way of life.

Some attempts to force developers to build low-income units have, if anything, worsened the situation by discouraging new production while actually boosting prices for the vast majority. In some cases, as in New York City, the forced construction of low-income units in otherwise market-rate buildings has resulted in such absurdities as the so-called “poor door,” through which low-income residents, who are denied most of the amenities offered to wealthier residents, must enter.

Republicans too may need to change their tune. As suburbs become more multi-cultural, and dominated by millennials, the GOP will have to embrace some of the environmental and social priorities of the new residents. They also have to realize that middle-class homeowners do not always share the same interests as Wall Street investors. Under the current regulatory regime, slavish adherence to the ambitions of big investors could undermine the dispersed ownership culture, replacing it with one primarily rental-based, even in single-family homes. Essentially this could transform large areas, including suburbs, into far less socially stable areas, particularly for families.

One potential solution would be to draw on the successful policies enacted after World War II. At that time, the nation suffered a severe housing crisis as servicemen returned from the war. The solution combined governmental activism—through such things as the GI Bill and mortgage interest deductions—with less regulatory control over development. The result was a massive expansion of the country’s housing stock, and a dramatic increase in the level of homeownership.

Bringing back the Levittown approach would require jettisoning ideological baggage that now accompanies the contemporary discussion about housing. Libertarians tend to favor loosened regulations—something welcome indeed—but seem to have less than passionate interest in addressing the housing interests of working- and middle-class Americans. As we saw in the late ’40s, at least some government support for affordable housing is critical to expanding ownership.

But increasingly the worst influence on housing stems from the proclivities of contemporary progressivism. Whereas earlier Democratic presidents, from Roosevelt and Truman to Johnson and Clinton, strongly supported suburban single-family growth, contemporary progressives display an almost cultish bias toward the very dense, urban environment. The fact that perhaps at most 10 to 20 percent of Americans prefer this option almost guarantees that this approach would be unacceptable to the vast majority.

How we deal with the housing crisis will shape our future, and will largely determine what kind of nation we will become. Although some developers outside the coastal areas are trying to revive smaller “starter homes,” at least in more reasonably priced markets, this may prove all but impossible to accomplish in “exclusionary regions” unless there is serious change.

Following our current path, we can expect our society—particularly in deep blue states—to move ever more toward a kind of feudalism where only a few own property while everyone else devolves into rent serfs. The middle class will have little chance to acquire any assets for their retirement and increasingly few will choose to have children. Imagine, then, a high-tech Middle Ages with vast chasms between the upper classes and the poor, with growing dependence—even among what once would have been middle-class households—on handouts to pay rent. Imagine too, over time, Japanese-style depopulation and an ever more rapidly aging society.

Yet none of this is necessary. This is not a small country with limited land and meager prospects. A bold new approach to housing, including the reform of out of control regulations, could restore the fading American dream for tens of millions of families. It would provide the basis for a greater spread of assets and perhaps a less divided — and less angry — country. Rather than waste their time on symbolic issues or serving their financial overlords, candidates in both parties need to address policies that are now undermining the very basis of middle-class democracy.

This piece originally appeared at The Daily Beast.

Cross-posted at New Geography.

Fed’s monetary policies stoke income inequality

MoneyIncome inequality has been in the public consciousness recently, causing policymakers to redouble our efforts to remediate poverty and preserve what is left of the middle class. But aside from a small group of contrarian economists, few people, and most certainly few policymakers, have been willing to discuss the primary cause of income inequality in the last generation.

When Congress created our central bank, the Federal Reserve, its missions were to be a “banker’s bank,” a lender of last resort for banks whose deposits were overextended or loans oversubscribed, and to hold enough gold in reserve to meet the needs of the nation during economic panics. Those functions are how it got its now somewhat deceptive name, which implies that the Federal Reserve is a place where money is stored “in reserve.”

In modern times the Federal Reserve’s primary undertaking has been tinkering with interest rates, to fulfill its modernized mandates of controlling inflation and assuring full employment. It hasn’t done a great job at either, and has created a damaging wealth disparity that will affect our nation for generations.

American wealth disparity now exceeds the vast chasm of the Gilded Age, immediately before the Great Depression. Income inequality in the U.S. is so extensive that our own CIA compares us to such kleptocracies as Cameroon and Russia. A short, 10-minute drive through Los Angeles exposes this disparity, in our own backyard. California of the future runs the risk of devolving into Marie Antoinette’s France, where the oblivious rich ostentatiously display their fortunes, while scores of commoners look on with a mix of envy and rage.

The Federal Reserve plays the predominant role in this condition. In the last decade, it has created trillions of dollars and kept interest rates epochally low. “Printing” money invariably leads to inflation somewhere, and for a long time, the Fed’s actions drove up the cost of everything from food to gasoline. To avoid runaway inflation, our nation had to change. The last domino before runaway inflation is wage inflation. To keep up with the rising cost of goods, wages must increase too. But this has not happened. The average family today makes about as much as they did in 1980.

This is because the system — Congress, corporations, and covetous world leaders — instead reacted with globalization, i.e., free-trade agreements and a complete liberalization of trade and tariff policies that took jobs like manufacturing, previously done by well-paid Americans, to sweatshops overseas. Many American families can no longer afford the things we want, from air conditioners to iPhones, unless they are made overseas with $5-a-day labor.

But the Federal Reserve’s biggest contribution to wealth disparity, and the one that will take generations to change, is the effect of its money-printing policies on asset prices. The newly created money cascading down Wall Street must be invested somewhere.

The property and stock-market bubbles, which the Federal Reserve now acknowledges it created, have benefited the gentry, because the rich own far more property and stocks than the poor. When those assets geometrically expand in value but wages stagnate, the result is tremendous wealth disparity. Yet when the Fed-created bubbles contract, the middle-class wage earners foot the bailout bill.

Are there small-scale solutions available to policymakers? Sure. For example, I support raising the minimum wage. But many of these efforts amount to using a squirt bottle to extinguish a three-alarm fire. They are not enough. Raising someone’s pay from $25,000 a year to $29,000 every 10 years will not foster a more egalitarian society if easy-money policies continue to expand geometrically the vast fortunes of the fantastically rich.

The people who created our nation explicitly prohibited royalty, and warned that vast concentrations of wealth could make our nation like the tumultuous societies many Americans tried to escape. Lawmakers at every level of government — and citizens, alike — should question the monetary policies of the unelected Fed bureaucrats. I fear that their far-reaching decisions are enshrining an inequality in our society that no legislation at the federal, state or local level can ameliorate.

Assemblyman Mike Gatto, D-Burbank, represents the 43rd District.

Originally published by the Los Angeles Daily News

Apple Inc.’s Success Highlights Both Trends and Anomalies

Apple Inc. continues to lead California’s high-tech economy — with no end in sight for now. The earnings it rang up for the last quarter of 2014, a record for any company, were based on selling 74.5 million iPhones worldwide.

That’s a harbinger for the rest of the state, Esmael Adibi told; he’s the director of the A. Gary Anderson Center for Economic Research at Chapman University. “The economic growth is in that area,” he said. “This is the growth of social media at Apple, Facebook, Google, Yahoo and other companies. It’s design and research in Northern California.”

But not even Northern California can contain all the tech. The Playa Vista area of Los Angeles also is burgeoning with new developments.

The Los Angeles Times reported that in January, “Yahoo Inc. is moving its Santa Monica operations to Playa Vista, joining the droves of major tech companies that have opened offices in the booming Westside neighborhood.

“The Sunnyvale, Calif., Internet company signed a long-term lease for about 130,000 square feet at the new Collective campus in Playa Vista. The move will bring at least 400 jobs from its current location, with space to accommodate growth.”

And Google Inc. “has spent nearly $120 million on 12 vacant acres next to a historic hangar where aviator Howard Hughes built his famous ‘Spruce Goose’ airplane in the Playa Vista neighborhood near Marina del Rey.

“Google is also expected to lease the Hughes hangar built in 1943. The 319,000-square-foot building … could be home to as many as 6,000 well-paid, highly educated workers.”


Adibi said this is a major difference from the high-tech economy of decades past, which centered on manufacturing. But that sector has declined as aerospace jobs have moved to other states. And as Apple and other companies moved manufacturing mostly overseas.

Apple ended its California manufacturing when it closed its Fremont plant in 1993. Now most Apple devices read, “Designed by Apple in California. Assembled in China.”

Adibi said California’s factory employment dropped to 334,000 in 2014 from 664,000 in 1990. Most factory jobs are for the middle-class workers of the type who built the state, especially Los Angeles and its surrounding communities. Jobs include skilled work, such as for engineers; accountants and managers; and unskilled work for those on the assembly lines.

By contrast, the new tech jobs largely are for the “digerati,” the high-IQ, well paid workforce of the information economy.

New economy

The changeover to the new economy, which Apple’s phenomenal recent growth underscores, brings up the worm in the apple, as it were: the worry economists have over income inequality, which is something politicians are taking up.

The New York Times reported today on President Obama’s new budget proposal, a 10-year plan that “stabilizes the federal deficit but does not seek balance, instead focusing on policies to address income inequality as he adds nearly $6 trillion to the debt.”

A U.S. Census Bureau report found that, from 2012 to 2013, California was one of 15 states to see income inequality increase.

And a new study by the Economic Policy Institute found income growth in California from 1979 to 2012 rose 190 percent for the top 1 percent of income earners — but declined 6 percent for everybody else.

Such inequalities inevitably bring calls for higher taxes on the wealthy. But taxes for higher-income earners in California already have risen, with the top state income tax rate currently set at 13.3 percent, compared to 9.3 percent as recently as 2004 — a 43 percent increase.

California’s economic future is bifurcated by its gleaming high-tech companies climbing to ever-higher success — as the rest of the economy struggles and falls behind.

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