No, California Isn’t Doomed

No, California Isn’t Doomed 1

California has been struggling. It has stumbled through the Covid-19 pandemic and recession, afflicted by wildfires, an epidemic of homelessness and stratospheric housing prices. Last year it experienced its first population decline in records going back to 1900. Its latest mess was a costly and unsuccessful campaign to recall Gov. Gavin Newsom.

The state’s problems are real. Nevertheless, there are positive signs. The first step toward fixing problems is recognizing them, and on that score, Californians have grown increasingly aware of what’s wrong. California is also blessed with abundant resources that enable it to fix problems that would be daunting for less endowed states.

Housing is a good example. Prices are crazy: On Sept. 16, the California Association of Realtors announced that the median sale price in the state in August was $827,940, up 17 percent from a year earlier. Only 23 percent of California households could afford to buy a median-priced home in the second quarter, down from one-third a year earlier, the association announced in August.

To make ends meet, many Californians scrimp and save and commute long distances from exurbs; others give up and move to cheaper states. Employers struggle to lure out-of-state recruits. Homeowners can swap one high-priced house for another, but renters can’t buy starter homes because they have no housing equity to use for a down payment. And California’s epidemic of homelessness can be traced in part to a lack of affordable housing.

The upside is that almost everyone in California understands that building more housing is essential. More homes are being built in Houston, Dallas, Fort Worth and Austin combined than in the entire state of California, says Dan Dunmoyer, president and chief executive of the California Building Industry Association.

One of Newsom’s first acts after surviving the recall attempt was to sign three bills to increase housing supply. Senate Bill No. 8 extends a 2019 law that accelerates approval of housing projects. Senate Bill No. 9 allows homeowners to build up to three additional housing units on their land. And Senate Bill No. 10 allows environmental review to be sped up for multiunit projects near transit hubs or in urban developments. Those are the latest of dozens of housing bills signed by Newsom and his predecessor, Jerry Brown.

The California Environmental Quality Act, signed into law in 1970 by Ronald Reagan, who was then the governor, is valuable on the whole but enables people to use environmental pretexts to resist housing developments in their neighborhoods that they could not as easily oppose otherwise. There’s widespread agreement that this needs to change.

Progress, though, is halting. The pace of issuance of permits for housing construction in California is slower now than in 1975, according to data compiled by the state’s Department of Finance and the U.S. Census Bureau. Environmentalists fight efforts to circumscribe the environmental quality act, worrying that legitimate environmental concerns about new projects will be neglected. And local elected officials continue to push back against efforts to increase density, which they perceive as reducing the value of existing homes. In Palo Alto, the headquarters of Hewlett-Packard and Tesla, Mayor Tom DuBois expressed opposition to Senate Bill No. 10, writing that “such legislation echoes more of Russia than of California.”

Up against such forces, Dunmoyer, the president of the building industry association, told me that he’s impressed by the “courage” shown by Newsom and the California State Legislature in enacting senate bills 8, 9 and 10. But, he added, “This is a marathon, and we’re still in the first quarter of the marathon race.”

Other problems in California should be fixable with effort and good will. As I wrote in my Sept. 8 newsletter, the state’s water shortages could be alleviated by diverting a little water from agriculture to other purposes. Farms account for only 0.8 percent of the state’s gross domestic product but more than 80 percent of the water used by people (that is, not counting water that stays in streams, deltas and so on).

Homelessness is caused partly by a lack of housing, but also by inadequate treatment of people experiencing mental illness and drug addiction. Many conservatives argue that the state has focused too much on low-income housing as the solution to homelessness. “Focus on treatment first rather than housing first,” says Wayne Winegarden, senior fellow in business and economics at the right-of-center Pacific Research Institute for Public Policy. “Otherwise all we’re doing is taking the problem from the street to the hotel room.”

Chris Hoene, executive director of the left-of-center California Budget and Policy Center, disagrees with Winegarden, and calls for more spending on Homekey, the state’s program for housing the homeless. Social services should be “wrapped around,” or integrated with, a home, Hoene says. It’s unfortunate, he says, that “people on different sides of strategies pit the potential solutions against each other.”

One advantage that California has in dealing with these and other challenges — fixing K-12 education, lowering the tax burden on families and businesses and so on — is that the state’s finances have improved. The state raised taxes and trimmed spending to brace for the Covid-19 recession, but tax revenues came in unexpectedly high because higher-income workers kept working and the financial markets did well, generating taxable capital gains. The $100 billion California Comeback Plan, which Newsom signed in July, is a Christmas tree of Democratic priorities, including stimulus checks for two out of every three Californians, renter assistance, housing for the homeless, tax relief and grants to small businesses, universal pre-K, college savings accounts for low-income students and investments in infrastructure and wildfire resilience.

I bounced this optimistic line of thought off Joel Kotkin, a professor at Chapman University in Orange, Calif., who is an expert on cities. He was more pessimistic. “The way our economy is structured, there’s an incredible amount of wealth being minted for a small number of people,” he said. “We have the worst overcrowding. The schools are terrible and they’re going to get worse.” He added, “Used to be a young, ambitious person went to California. I don’t think that’s happening anymore.”

It’s hard to argue with a veteran observer of California like Kotkin, who began writing about Silicon Valley in 1975. On the other hand, the bearishness can be overdone. Matthew A. Winkler, editor in chief emeritus of Bloomberg News, observed earlier this year that people love to declare California “doomed.” It ain’t.

How you describe a bill depends upon what you are talking about. If you are concerned about too much fiscal stimulus, then taking note of the tax increases and spending cuts makes sense. If you are concerned with the size of government, taking note of spending cuts makes sense, but it does not make sense to reduce the size of the bill by the amount of the tax increases. Same way with a Republican tax cut. If they cut taxes by $1.5 trillion and fully offset it with $1.5 trillion in spending cuts, that is a $1.5 trillion tax cut and that is how it should be described. Only offsetting tax increases should be taken into account.

Paul Pecorino

Tuscaloosa, Ala.

The writer is a professor of economics at the University of Alabama.

“According to Wittgenstein’s ruler: Unless you have confidence in the ruler’s reliability, if you use a ruler to measure a table you may also be using the table to measure the ruler. The less you trust the ruler’s reliability, the more information you are getting about the ruler and the less about the table.”

— Nassim Nicholas Taleb, “Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets” (2004)

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