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Mad Magazine
California Dreaming?
A flaw in California’s approach to affordable housing is that our housing legislation is written as if “affordability” challenges exist in a vacuum. Politicians and real estate lobbyists pontificate about doing one’s “fair share” and place blame for housing shortages on environmental laws and other arguments unsupported by evidence. But, housing unaffordability is not just a California problem. It's a consequence of an overall, cost of living problem on a national scale.
Recognizing that is critical to making informed decisions.
Certainly, California is an expensive place to live and work. We have the highest cumulative tax rate in the country (combined state income taxes, property taxes, sales taxes, and fees for services) and we have the highest percentage of regressive taxation.[1] We’re always on the “most expensive places to live in” list--although if one compares average incomes to average home prices, we’re not even in the top 20.
That said, Fortune Magazine recently noted,
“Year-over-year home prices in the Los Angeles metro area were up 15.2% in 2021, while prices in Southern California overall went up 15.4%, according to a report by Norada Real Estate Investments. Shockingly, almost half of America’s “million-dollar cities,” where the average price of a home is at least $1 million, are in California, according to a Zillow study published today. The Los Angeles metro area has 57 million-dollar cities, and the state of California has 44% of all million-dollar cities nationwide.”
This actually wouldn’t necessarily make California an unaffordable place to live if incomes were rising as fast as housing prices, tax burdens, and the general cost of living, but they’re not.
Meanwhile, California politicians are too complacent and our state’s biggest corporations are far too profitable to care about a potential economic tsunami in the making.
The more things change...
More and more each day, California reminds me of New York City in the early 1970s, just before the “Big Apple” faced the precipice of the “Big Collapse.” Crime rates and homelessness were rising, public services were deteriorating, taxes and fees were high, the City had the highest unemployment rate in the country (for a major city), and businesses and young families were fed up and leaving in droves.
Politicians at the time failed to understand how the combination of these factors weighed on the working class and “affordability” in general. They remained overly confident that the city was invincible.
By 1975, New York City couldn’t pay its bills and was facing financial default.
California politicians are making some of the same mistakes, right now. The events unfolding on the national and international stage are unprecedented. The monumental challenges presented by global climate change combined with the aftermath of a once-in-a-hundred-year pandemic are now being followed up by Russia's unforgivable war and unspeakable atrocities in Ukraine that stand to permanently change the political calculus we’ve depended on for the last 70 years. This combined with ongoing global supply chain dysfunction has thrown us into an inflationary cycle not seen in 50 years.
At a minimum, all this demands that government immediately get a firm grip on its priorities, its outlook for revenues and expenses, and careful examination of how it spends its money. At present, I see no evidence California is doing any of these things.
Media pundits assure us that all is well. We’re told daily that “the consumer is in great shape” and “the economy is strong” and as recently as a week ago we were being told that “recession is not in the cards.” And though it’s true that the U.S. remains the tent pole of the global economy in good times or bad, and that California has one of the strongest economies in the country, the fissures in these arguments are widening.
Dissecting the data
The consumer is in great shape: Across the spectrum, rising wages are not keeping up with surging inflation or increases in taxes and fees (which are based on percentages of values). A report by Capital One recently found that
“26% of consumers were unable to pay at least one bill in January, and 62% of respondents have reduced their discretionary spending because of inflation. The national average raise was 4.5% in 2021, the biggest [wage] hike in years but nowhere near enough to keep pace with rising prices.
Maybe inflation will suddenly subside, but if the drivers of current inflationary trends remain in place (supply chain disruptions, increasing global financial sanctions, and barriers to global trade) there is little hope in the short term that this wage-to-cost-of-living ratio will improve. It also doesn’t help matters that official government assessments of the rising cost of living fail to accurately reflect the real picture. As I noted in “The Big Con,” inflation-adjusted earnings have failed to keep up with the real cost of living since the 1980s.
The economy is strong: The boom in financial markets since the March 2020 lows, something economists point at to justify their assessment of the economy’s strength, is also questionable. The 2021 surge in asset values was been primarily the result of massive fiscal stimulus and monetary accommodation. As that is winding down, our prosperity appears to be more tenuous.
Consider these two charts. The first shows the inflation-adjusted, “real” gains in the markets over the past 22 years. The second shows the overall market valuations in relation to the “mean” over the past 120 years.
What is interesting about the first chart is the apparently explosive move in the markets in the past two decades, and the NASDAQ market, in particular, has been far less than the public's perception about how much money they've made. As the chart shows, after the crash of 2000, it took 18 years for the NASDAQ index to break even on an inflation-adjusted basis. And it's conceivable that the averages will lose as much as half that gain from the peak, before the recent declines find a floor. At the same time, market valuations (shown in the 2nd chart) remain close to unprecedented extremes.
So, how likely is it that current levels of high valuation will continue to be the case? And if markets head into a protracted downturn, what will be the socioeconomic impacts? Trickle down economics has the nasty habit of leaving the most vulnerable people behind on the way up and hurting those same people the most on the way down.
As both charts show, the upward trend in markets and asset valuations has reversed since January 1st of this year. So, the odds that the market's overall upward trajectory will continue are growing dimmer, considering the headwinds we’re now facing. Perhaps, this is all just a short term correction and the worst doesn't come to pass, but is California prepared to deal with the consequences of falling markets for a protracted period of time? That equates to falling tax revenues from capital gains on stock sales--a significant contributor to our state’s wealth over the past decades.
According to the New York Times, California’s “taxes on stock-based gains are the highest of any state, and its largest revenue source is personal income taxes.”
Recession is not in the cards: As recently as two weeks ago this was pretty much the consensus of US economists. But late last week that began to change. On Friday, Marketwatch reported that
“Goldman Sachs slashed its economic forecasts to account for the continuing geopolitical conflict, which has driven up prices for energy and food and is straining global supply chains. The U.S. economy is now likely to grow at a 0.5% rate in the first quarter and 1.5% in the second.”
Goldman Sachs and others are now suddenly saying that growth in the U.S. is approaching “stall” speed and that the price of oil could rise to as much as $175 a barrel.
In this scenario, states like California are at a distinct disadvantage because of the high costs of taxes, fees, and regulatory obstacles to running a profitable business (and keeping people employed). And at the same time, California’s unfunded pension obligations are becoming more imbalanced every year and overly reliant on wildly optimistic rates of return that don’t appear to be remotely realistic based on the stock charts, above.
GDP growth of 0.5% comes perilously close to the textbook definition of a recession. And it would be coming at a time when the Federal Reserve is not just “out of bullets” to reverse a slowdown, but is in the process of raising rates, by necessity, to slow inflation down as much as possible.
So, what if the war in Ukraine proves to be even more intractable than imaginable and the recent international sanctions affecting supply chains, commodities, and global banking stay in place for years? I don't mean to be an alarmist but is our consumption-driven economy prepared for that? Is California prepared for that?
We’re in uncharted waters.
Coming full circle, we need to consider how these trends could impact the average working family in California. In these times, it would be wise to ensure that our state and local governments spend our tax dollars as wisely and as cost-effectively as possible. If social equity and overall affordability are our goals, we also need to reconsider the disconnect between the economics of the public employee sector and the private employment sector.
Why this matters
As it stands, our state and local governments continue to treat taxpayers like a bottomless well of revenues. Ballot measures for school and infrastructure and sales taxes for public transportation and services are never-ending, while every one of the housing laws passed in the last decade promotes maximum growth and development, but offloads all the costs for roads, schools, and public services onto the backs of local taxpayers.
Last week, I examined the economics of homeless housing development, just one example of how government agencies, particularly in Marin County, operate with a mindset that is completely divorced from the financial realities facing ordinary taxpayers in their everyday lives: who are constantly ensuring they are getting the best price for the goods and services they purchase.
In times like these, we simply can’t risk having our local politicians spend like drunken sailors, regardless of the issues being addressed.
As another example, consider that Californians pay the highest prices in the country for gasoline, primarily due to our having the highest gasoline sales tax. According to a recent article in the Mercury News, “California gas prices are $1.32 higher than the national average.”
But, sales taxes are the most regressive form of taxation because they disproportionately impact the working poor, many of whom need their cars and trucks to make a living. So, how can economics based on regressive taxes ever improve overall cost of living affordability for those most in need of help? And this is not just limited to gasoline taxes. Many California cities have the highest sales tax rates in the country.
Meanwhile, the compensation system for public employees continues to operate in an entirely separate universe from the taxpayers who foot the bill. Public employees live in a world of guaranteed pensions and benefits, pay raises tied to inflation escalators, and they enjoy almost bulletproof job security, unheard of in the private sector where employees are constantly judged by their productivity and job performance. Sometimes it seems like the only way a public employee can lose their job is if they commit a crime, and even then it’s questionable if they’re an elected official.
If we really want to address our affordability challenges, it's time to hold our state and local government more accountable for how they spend taxpayer funds. We all hope for the best when we look to the future. The problem is our state seems ill-prepared for any other outcome.
[1] Taxes that put a disproportionate burden on those with the least ability to pay; e.g., gas taxes, sales taxes, etc.
Bob Silvestri is a Marin County resident, the Editor of the Marin Post, and the founder and president of Community Venture Partners, a 501(c)(3) nonprofit community organization funded by individuals and nonprofit donors. Please consider DONATING TO THE MARIN POST AND CVP to enable us to continue to work on behalf of California residents.