The CASA Housing Compact - Part II - The socialist system that made American great, but won't work in CA
To fully understand why we seem unable to tackle so many major challenges these days, such as affordable housing, a living wage, maintaining vital infrastructure, having cost effective healthcare, halting environmental degradation, and to understand why half-cocked ideas like the CASA Housing Compact are suddenly springing up around the country, it's helpful to look at history.
The 1950s are often idealized as a time of greatness. As the story goes, the 50s was a time that was all about hard work and individual effort and free markets. This is all true and at the same time a complete myth. What is true is that life in general was much more affordable.
A middle class family of four could live on the earnings of one head of household, who could be a craftsman or salaried salesman, and own a home in a decent neighborhood, own a new Chevy Impala sedan and take a two week vacation every year.
How was that possible?
The nostalgia surrounding the accomplishments of the 1950s obscures some glaring truths. One of these is that the 1950s were in fact, one of the most socialistic times we’ve ever seen in America, and it included the most onerous personal income tax system of all time. From the late 1940s through the early 1970s, the federal income tax rate on earnings over $1 million was about 90 percent. Think about that, 90 percent. It’s pretty hard to have a lot of income and wealth disparity or become a 20-something tech billionaire in that kind of tax environment.
So, you may ask, where did all that money go and who benefited from the biggest exercise in wealth redistribution ever undertaken in our country?
The answer is everyone.
Those federal tax revenues helped build public school systems, libraries, public colleges, our interstate highway and aviation systems. It subsidized building bridges and tunnels and water and sewer projects, public transportation and subway systems, the telecommunications backbone and power grid, and endless other public and private infrastructure projects. Those tax revenues and the promotion of easy credit, sent 7.8 million World War II veterans to college and provided low cost loans and federal guarantees to tens of millions of new home buyers, and it built millions of units of affordable public housing.
The well-balanced growth in personal wages and consumption and personal borrowing during the 1950s through the mid-1960s, has never been repeated. With wages rising commensurate with consumption appetites, made possible by easy credit, high taxes on the biggest earners, massive government subsidy, programs such as FHA loan guarantees, and the social safety net put in place in the late 1930s, the country saw accelerating growth and rapidly rising wages that was non-inflationary.
But again, contrary to myth, the 1940s, 50s and 60s in America, witnessed the greatest socialist policy experiment and the greatest redistribution of wealth in the modern era anywhere in the democratic world. And it created a more egalitarian society than the country had ever known.
This was all boosted by the massive new government programs and agencies that came out of the Great Depression, such as the FHA, Social Security and jobs programs like the Works Progress Administration (WPA).
Right about now CASA believers are probably saying, yes, we
need to do that same thing today. They're saying that this proves that
more state and regional government, more big agencies, and more taxes are all needed to fix
our housing "crisis."
But they would be dead wrong!
Why? Because the achievements of the 1950s could never have been accomplished on the backs of taxpayers at the local, regional or state level, and they still can’t be today, because states don’t print currency nor do they control interest rates, monetary policy, international trade policy, or federal tax law, which gives the federal government an unrivaled ability to steer the economy.
When it comes to systemic socio-economic change, yes, size matters.
It doesn't matter that we are the fifth largest economy in the world, because without the tools of a sovereign country we're grasping at straws that will eventually drive out people, investment,and ultimately tax revenues. But there are even more important reasons why these 20th century solutions will not work today, even nationally.
The world has fundamentally and irrevocably changed.
The birth of consumerism
This brings us to another glaring truth about the economic successes of the 1950s, which ironically, is that in addition to high taxes on higher incomes, the success was equally the result of the federal government promoting massive amounts of private credit and consumer debt. This was only possible because unlike today in the late 1940s and 1950s, the amount of personal debt in the country was virtually nil. And corporate debt, which today is off the charts, was minimal.
These are the most fundamental reasons why we cannot employ the same 1950s policies today to achieve the same results, particularly with regard to corporations, the middle class and our state and local governments, who are already drowning in debt and unfunded liabilities.
In addition, in the 50s and 60s, we were still mostly dealing with our domestic economic system and monetary system. The United States was the epicenter of banking and trade. Today, we are just another player on a much larger global stage, competing for investment capital, return on investment, jobs and trade advantages.
The 20th century / CASA "raise taxes and expand government and spend without limit" world no longer exists.
Today, government is generally an inefficient mess and consumer debt is enormous and is showing signs of collapsing upon itself... again. Today we are burdened with hundreds of fees and extra charges to do just about anything (banking, property purchase and improvement, credit, loans, healthcare, travel, utility costs, insurance, etc.). This barely existed in the 1950s, when gas station attendants would fill up your tank and clean your windshield at no charge.
Before the 1950s, people avoided debt like a plague, partially because many blamed debt for worsening the Great Depression, credit was scarce and expensive, and it just wasn't part of our culture. And at that time we did not have an economy that was primarily consumption driven. There were no credit cards or no-money-down car loans. The so-called "lay-away" plan (buying on payments) had just been invented. And the whole economy worked differently.
The truth is that, "planned obsolescence" and "consumerism" and "easy credit" were all invented and promoted by the federal government in the 50s.The government worked very hard to encourage people to take on debt.
It makes you kind of wonder what regrets they might have if they came back today and saw what's become of their grand scheme.
So how did we get to where we are today?
The short answer is that the policies of the 1950s worked well for a while, but inevitably began to unravel, when people couldn't pay their debts and runaway inflation in the 1970s destroyed their savings. This led to the interest rate shocks of the early 1980s, which put a damper on things temporarily. But the new "debt is good" culture was now entrenched in the American ethos, and it marched onward right up until the Savings & Loan Crisis of the mid-1980s, wrought havoc on the financial system.
Ironically, however, since then, instead of examining the pitfalls of too much leverage in the system (aka, junk bonds), we’ve basically quadrupled down on debt and credit and leverage to live off our past "investments" as a nation (working, saving, being productive) and the benefits of past successes.
As the dust was settling from the "too big to fail" banking debacles, debt went from being a bad thing to being a corporate survival technique (bailouts) and we collectively decided that not only was a dollar borrowed better than a dollar earned, but borrowing a dollar that you had no idea how to ever pay back was even better!
So right about now you may be saying, this is interesting, but what does it have to do with me, living today in the San Francisco Bay Area.
The answer is it has everything to do with it and our affordability problems. As the old worn-out phrase says, those who fail to learn from history... you know the rest.
It is the reason that so many are so desperate that they are clinging to self-defeating, antiquated, and inefficient proposals like the CASA Housing Compact, which I discussed in Part I.
The CASA proposal takes an extremely limited, even purposefully ignorant view of economics, the mechanics of markets, and the history of housing affordability, and how credit cycles work. Programs like CASA may be well-intended, but they simply cannot succeed, because there is nothing about our current situation that is anything like the 1950s.
Why we no longer build affordable housing
There are only two times in modern history that this country has built significant amounts of affordable housing or workforce housing.
The first was at the end of the 19th century when corporations built company towns like Pullman, Illinois. These towns provided everything: housing, schools, libraries, parks, healthcare, etc. The only problem was if you lost your job, you and your family were out on the street. We are seeing a version of this reprized today in the new campus plans by Google and Facebook
In the late 1930s and again after World War II in the 1940s, America began building millions of units of low income housing across the country. Marin’s own Golden Gate Village is an example of this effort.
Most of that housing was the result of federal funding programs, not local or regional or state funding. Only the federal government had and still has the resources and the tax base to redistribute wealth on such a broad scale. This is key to understanding of why we are no longer building significant quantities of affordable housing.
Without federal government subsidy combined with the federal government’s unique ability to manipulate monetary policy, tax policy and interest rates, it is impossible to build significant amounts of affordable housing for those in need in the places it is most needed, because private capital simply cannot and will not do it.
Federally funded public housing and project-based subsidy (e.g., Section 8) flourished from the 1930s until 1969, when newly elected President Nixon declared that the federal government would henceforth stop actually building housing. And it never built another unit again: it just provided financing under an ever-changing set of policies designed to provide stimulus to private developers and states and cities.
This was followed a decade later by a second seminal policy change, when Ronald Reagan’s administration decided that complete privatization of affordable housing development was best. This led to the creation of Section 8 Vouchers (vs. project based subsidy), private lender co-insurance of housing development loans, and the Low Income Housing Tax Credit (LIHTC).
These policy changes are fundamental to our current affordable housing challenges and their long ranging impacts are underestimated by the CASA crowd.
In reality, the voucher system, co-insurance, and the LIHTC and other Reagan Era programs to incentivize affordable housing development were pretty good ideas. But they were never really executed beyond their original concept and have faltered badly or been eliminated as time has passed, without anything to replace them.
To provide some perspective on that, consider that when the LIHTC was created in 1986, the federal funding allocation was approximately $6.8 billion. At that time the house I lived in in Denver, Colorado was appraised at $81,000 (2,400 sf, brick, oak floors, etc.). Today the LIHTC subsidy is approximately $8.2 billion. Meanwhile, that house in Denver is now appraised over $900,000. So, do the math.
The LIHTC should now be about $75 billion just to have kept up with inflation. But in most California markets and other major cities, where housing price inflation is much greater than in Denver, we would need to see more than $90 billion to keep pace.
Another lesson we need to remember is that there were good reasons why the federal government stopped building public housing. They sucked at it. The reality is that the private sector, if properly motivated and rewarded, can build more affordable housing faster, cheaper and better than the government ever can... but not the way the CASA Housing Compact is going about it.
Having personally worked on thousands of units of Section 8 housing in my career, I can say with certainty that the entire process of working with government programs, from design to financing to bidding, is buried in paperwork and littered with ridiculous requirements that probably add 20% to the cost per square foot of the same structures the private market can build.
But on the other hand, you can't just sidestep all those programs and requirements and turn the "market" loose on the world, without targeted financial, tax and monetary policies in place, or things are sure to run amok. And you can't just remove zoning or create unaccountable mega-agencies to dole out funds and favors and expect good results. In fact, as I will discuss in Part III of this series, the whole premise that we do not have enough multi-family zoning in suburban communities is a myth.
The trend is not our friend
Implementing the CASA Housing Compact’s punitive tax and fee scheme in the SF Bay Area, at this time, will only make matters worse and housing less affordable, even in the best of circumstances. And it's no secret that we’re not living in a time that could be described as the best of circumstances.
One can't just keep taxing California's already over-taxed local, regional and state population and expect positive economic results, particularly when the major economic forces involved are no longer controllable at the local, regional or state level. Californians are already the highest taxed population in the country (combined income, sales, property, business, etc.).
Yes, the CASA scheme might initially result in some short-term success stories, here and there, but overall, the negative impacts will far outweigh the positives, and the economic losses will far outweigh the gains. The socioeconomic health of a community is not gauged by how many buildings it builds.
Again, we need to keep in mind that in the 21st century, financially fluid, global economy, investment has no loyalty to state lines or political agendas. The private sector will invest in cities that are thriving and provide strong public services, not cities that bury them in unreasonable state mandates and unaccountable agencies trying to control who wins and who loses. That will work for the few who have political influence, but fail everyone else, and mostly those paying the bills.
CASA proponents will dislike hearing all this. They want to attack these kinds of sobering facts and complain that we "have to do something now." And I would agree with that emotion but not on the proposed solutions I've seen so far.
The wealth disparity chasm in the U.S. that is impacting affordability is across the board, not just confined to housing costs. We are in the midst of a very serious personal income crisis.
The majority of Americans are not doing much better since the collapse of 2008 and the average American family isn’t earning much more in inflation adjusted dollars, than they did in 1980… many are earning less. It’s little wonder that our economy is failing to sustain a durable, broad-based recovery even after 10 years of historically low interest rates.
Wage growth has lagged the costs of basic necessities: food, shelter, healthcare, insurance, education... you name. In our new “a la carte” economy, everything is subject to fees, from bank account balance minimums to airline leg room. Let's face it, it’s getting very expensive to live a normal life.
While CASA asks individuals and cities to do more, personal credit card defaults are rising again after falling for several years. Housing starts and housing sales numbers are falling. Corporate capital investment is falling around the world. Mortgage interest rates are again wobbling, because mortgage applications are falling (weak demand).
The yield curve is flat to close to inverting (not a good sign for future growth or tax revenues). Automobile sales appears to have topped out and are falling since 2017. Another major off-ledger "loan" crisis bigger than the derivatives crisis in 2008, is brewing in the corporate debt markets. Even the perpetually optimistic stock market has recently figured out that the “Trump Trade” is over and we have entered another long and painful period of repricing (hopefully sideways, but heart-in-your-throat drops are not out of the question).
And all of this is happening when we’re told the economy is “strong.”
This also means that once again our government’s unfunded pension and benefits liabilities are rising rapidly, because the projected investment returns of CalPERS, insurance companies and our state government itself remain wildly optimistic.
Some of this is the work of the normal “credit cycle,” which is explained well by investment titan, Ray Dalio, in this video, but there’s more to it than that. When it comes to housing development, reliable indicators suggest that the “market” and for profit builders are not in the position to save anyone. And finally, let's keep in mind our population is aging, so the tax base is shrinking.
So why are CASA and Senator Wiener's wild legislative schemes betting the ranch on that?
If I am correct that tax and spend and expand government is no longer a viable option to create affordable housing, we’re going to have to look elsewhere for solutions.
Perhaps, we have to look at things in a new way and start to see the conventional wisdom’s negatives as opportunities.
Bob Silvestri is the founder and president of Community Venture Partners, a 501(c)(3) nonprofit community organization funded only by individuals in Marin and the San Francisco Bay Area.