Bubbles, rising rents, and the politicians who fuel them

|
(138)

After neither Mayor Ed Lee nor Sup. Jane Kim were willing to return my calls to discuss the implications of their economic development policies that favor big commercial landlords and tech companies – which I wrote about in this week's cover story – it was ironic to listen to their rhetorical concerns over local small businesses being hit with rising rents this week.

After all, rising commercial rents are a direct result of their Twitter/mid-Market payroll tax exclusion and other pro-landlord giveaways, just as City Economist Ted Egan told them a year ago when they were adopting it. Yet during the mayoral question time at Tuesday's Board of Supervisors meeting, Kim sang the praises of small businesses, rued the fact that “we are seeing more and more of these small businesses being forced out by the rising cost of rent,” and asked Lee what can be done.

In his answer, Lee spoke around the issue, using the chance to plug economic development programs that could actually exacerbate the problem, and offering vague platitudes. “Neighborhood begins to flourish when we make sure that the individual businesses grow along with them,” he said.

Now, this is a complex problem, to be sure. But that's exactly why the simplistic solutions that these and other city officials are pursuing – and unwilling to defend against reasonable criticisms – are so maddening. I would urge them to read my long article and the dozens of comments that people have made so far, and to engage in more open and honest dialogue about how to solve these tricky issues. My sources made some very good and interesting points, more than I could work into even that long article, so here's a bit more of what they had to say:

Why does economist Peter Donohue think city officials are unwilling to engage in more complex discussions of economic development and its impacts on city government: “These people don't give a shit about public equity and finances.”

Some just have a simplistic view that all economic growth is good and will help the city, he said, calling it “a glorified version of trickle down economics.” And many fiscal conservatives and other boosters of business tax cuts, he said, are actively hostile to the public sector and want it to shrink.

Donohue is dismissive of Lee's relentless boosterism on behalf of the wealthy interests who sponsored his election campaign, saying “he carries their water, that's just what he does.” But he's disappointed that even on the Board of Supervisors, “there doesn't seem to be much of a desire at the board level to ask these questions.”

He said that many public business subsidies can take 50 to 75 years for the city to recoup its investments, leaving the city stuck with rising budget deficits until then. Donohue said politicians don't ask these questions for a few reasons. He said that many are lawyers who simply don't have a good understanding of business or economics. And because most will only serve in city office for four to eight years, they don't have an incentive to consider the long-term implications to the city of their decisions.

“To have a 21st Century city, you have a 21st Century way to finance it,” Donohue said, arguing that the city instead operates on 19th Century funding models, simply accepting the crumbs of capitalism through low business taxes and no means of tapping the actual wealth that is created in the city. “Those forms of wealth aren't being touched.”

Donohue said the Tenderloin and mid-Market areas are the way they are not because of neglect or market forces, but as a matter of public policy. That's where the city decided to house its poorest residents under contracts with SRO hotels in the area and by allowing property owners to keep buildings vacant and blighted (which Egan recommended addressing through a tax on landlords that keep properties vacant, which Kim said she'd sponsor a year ago but never did).

“Certain parts of town are left to go fallow, or to even be destroyed,” Donohue said, so that investors can buy up the cheap properties and work with selected politicians to increase the value of those investments.

“It's really about remaking the city and transforming who lives in San Francisco,” said Chris Daly, Kim's predecessor on the Board of Supervisors and the current political director of SEIU Local 1021.

In the latest Harper's Magazine cover story, writer Barry Lynn praises markets and their democraticizing impact, calling them one of the basic foundations of the American political and economic systems. But he said modern American capitalism undermines basic market principles, which assume buyers and sellers are roughly equal in number and power.

“And so our new masters administer us in America today. They use their great nation-spanning and world-spanning corporations to isolate us as individuals, and then to pit us against our neighbors. They capture and hide away the information that until recently spilled from our open market,” he wrote.

“Even the most conservative economists don't like the idea of subsidizing businesses because they think it's a distortion of the market,” Donohue said.

Marc Salomon, a computer programmer and progressive activist, notes that the city has far more jobs than people. Yet rather than focus on attracting jobs to fit the skills of local residents, he said the city's housing and economic development policies are geared to attracting outsiders, thus driving up rents and other costs for the locals.

“That's the job market they're catering to, and the housing they're building for. That's their program,” Salomon said. “They're just ruthless 1 percenters who are trying to change the language and change the dynamics.”

Salomon draws the distinction between whether this is a bubble or a boom, and he said there are strong indicators it's the former. Just as the federal repeal of the Glass-Steagall Act banking regulations cleared the way for the housing bubble and subsequent economic collapse, he noted that last year's repeal by the city of taxing stock options – a law that was created less than 10 years ago so the city could benefit from growth in the tech sector – made San Francisco more attractive to speculators seeking short-term profits.

“You know you're in a bubble when they start repealing anti-bubble laws,” he said. “These people are rapacious and voracious.”

Or, more charitably, perhaps we have public officials in San Francisco who are failing to understand just how quickly and dramatically the economic system is changing, how much power the big economic players are accruing, and how that impacts the public sector, small businesses, and low-to-middle-income residents.

“Things are going to be changing very fast,” economist Tapan Munroe said. “The political, legal, economic, and social systems are all having a hard time catching up to the pace of technological change.”

Comments

You are expressing sympathy for businesses that have to pay higher rent.

But then you attribute the higher rents to the fact that businesses are doing really well.

So which is it? Are businesses suffering? Or are they doing well?

While if your real complaint is that the businesses that you happen to favor are doing badly while the ones you don't like are doing well, then what are we to make of that? The business landscape always changes, and companies flourish and die all the time.

Given the choice, wouldn't we all prefer a good economy to a bad one? and in a good economy, rents go up because demand goes up. 'Twas ever so.

Posted by Greg on Feb. 17, 2012 @ 12:29 pm

No, the success of small businesses isn't what is driving up rents, it is the influx of large corporations awash in venture capital -- and the large commercial landlords anticipating their arrival -- that is doing so. The choice between a good economy and bad one is overly simplistic to the point of ridiculousness, and that's the problem in this city. As I wrote, these are complex issues, but if we're really a city that values local small businesses and a diverse population, then we need to get past this bumper sticker mentality and have a real conversation. Large corporations understand how to wield their market power in ways that stifle competition and undermine the public sector, so we need to develop a better understanding of the dynamics at play in a city as appealing as San Francisco.

Posted by steven on Feb. 17, 2012 @ 12:56 pm

Large corporations have spent the past several decades honing economics talking points disguised as 'conventional wisdom," designed to obfuscate the real economics in play and further consolidate political power behind their extractive agenda.

The language surrounding sound economics needs to be reclaimed from the corporate funded endowed chairs at the elite universities, its propagandistic varnish removed, and substantive discussions where ideas rise and fall on their economic merits not the wealth backing them, on the evidence, rather than the religiousity must take place.

This is nothing short of challenging economic sharia.

Posted by marcos on Feb. 17, 2012 @ 1:18 pm

Why do you want the government to try and pick winners and losers rather than let the consumer do that through their purchasing power and ability to choose freely who they do business with?

Posted by Guest on Feb. 17, 2012 @ 1:42 pm

As if tax cuts for big business isn't the government trying to pick winners and losers.

Posted by Guest on Feb. 17, 2012 @ 1:48 pm

Your categorisation is incorrect.

Posted by Guest on Feb. 17, 2012 @ 2:38 pm

'scuse me?

"Tax break incentive to keep Twitter in San Francisco "

http://www.sfexaminer.com/local/2011/03/twitter-tax-break-takes-stage

Posted by Guest on Feb. 17, 2012 @ 2:55 pm

enjoy the same tax break. It wasn't for Twitter only.

Posted by Guest on Feb. 17, 2012 @ 3:40 pm

The Carl's Jr on Broadway and Columbus and the KFC on Valencia are long gone, due to their continued shittyness I assume. Those would be rare example's though, far too often the peasants will make the wrong choices and eat at chains and shop at 7-11. The citizen's need progressives to decree these things for us so that they can live in the way they deem fit for all of us.

Posted by matlock on Feb. 17, 2012 @ 1:58 pm

Because capitalism is not always good in terms of long term effects.

Basically what you're saying is that since Wal-Mart (or McDonalds or Starbucks or ...) can over power all other businesses due only to their size rather than what they provide a community (in all senses of the word), then govt - which we must remember is the PEOPLE'S representatives while Wal-Mart is NOT- shouldn't be able to do squat.

Sorry but we live in a democracy where the people rule - which they do thru their govt. Yes Virginia, Ronnie Raygun was peddling crap when he propagandized that govt was the enemy. What he was really peddling was democracy is bad because it can put limits on the likes of Wal-Mart and the Koch brothers. Just like what you're doing apparently.

Posted by Guest on Feb. 19, 2012 @ 2:12 am

but raising rent does.

The money tree out back just needs to be picked again for some of these businesses it seems.

Posted by matlock on Feb. 17, 2012 @ 1:06 pm

I read your article, and you have some valid points. However, I am going to respectfully disagree in you're blaming of local small business. The actual true issue is several large local businesses. What has actually happened quietly and for quite awhile now is approximately 8-10 residential apartment management companies have slowly convinced the majority of privately owned apartment building owners to allow them to manage their complexes and buildings for them. We all know who they are: SF Rents, City Rents, Urban Rents, Massip, and the other big apartment management companies in sf. Well, what this has done is allow approximately 10+ companies to set and dictate rental prices for apartments city wide. These companies in turn artificially inflate the prices and move in requeirements to unreasonable levels. They can get away with it, as long as all the other 10 or so management companies are doing the same thing. Get it? Artificial demand. It's not illegal unl the d o it all in cahoots with each other. Moreover, it's not price fixing or a true monopoly as there's still enough of non-controlled buildings (in theory). However, these management companies control 50-100+ apartment buildings each throughout sf. Mean whule it gets harder and harder to find owners whom still run their own buildings, the management companies only true market competitors. Therefore, these management companies jack up the prices, and jerk their tenants around. Not all big management companies do this. However, enough of them do, so as to create a situation where the City has to subsidize housing theougjh section 8 or whatever other programs. Therefore, our sales taxes go up, ticket maids run 24 7, as the city scrambles for more money. In a proper macro or micro economics model the fact my beer and smokes cost more is to help out these jerk management conpanies who said my credit wasn't good enough f them. You're a paid reporter. The real story is how many if these large management companies are there, how many buildings do they control, and what is the mean prices they charge. I bet the numbers would blow your mind.

Posted by Joel D on Feb. 25, 2012 @ 9:36 pm

Expensive big fish are pricing out affordable little fish.

Posted by marcos on Feb. 17, 2012 @ 12:44 pm

You equate larger business to "bad" and smaller business to "good".

But successful small businesses become big. At what point then do they morph from being good to being evil?

Posted by Guest on Feb. 17, 2012 @ 1:40 pm

Most businesses are not successful. Most successful businesses do not grow exponentially. Most businesses that do survive go on for some time at a steady stat. Those are the businesses that employ the most people and return the most good to communities.

Posted by marcos on Feb. 17, 2012 @ 2:34 pm

returns the most good to communities?

I think we are making progress here.

Posted by Guest on Feb. 17, 2012 @ 2:40 pm

The point is not that businesses are growing or that they are growing very large. The point is that speculative finance capital has few outlets for profitable investment at this point in time due the after-effects of the last bubble, the housing bubble. San Francisco and NYC are the hot spots in a sea of cold. Thus the disproportionate weight of the need to profitably invest are fueling bubbles in both locations. NYC's economy is more diverse, the city is much larger and has more room to accommodate these impacts and can thus absorb the impacts better than San Francisco can.

Real Estate and now tech own elections in San Francisco because they out-compete other minor contenders, namely residents. Some may argue free speech, but I'd argue that time, place and manner restrictions preclude some using amplification that overwhelms everyone else's speech. This will continue until tech can be outsourced as has proven the pattern. Real Estate is always site specific. It was through the growth of finance capital over the past 30 years and their chipping away at laws that regulated them by pouring their relatively huge amounts of profits into lobbying and purchasing government decisions, known as rent seeking, that this came to be.

What is amazing here is that the entire point of classical Adam Smith economics was to eradicate rent seeking because it led to poor, non-competitive economic outcomes as it reduced the need for firms to compete on the merits if they could just buy government decisions that permanently tilted the field in their favor. Today's "free market capitalists" are nothing of the sort, Adam Smith would spin in his grave.

That someone like me is arguing that Adam Smith is progressive when compared to the economic sharia being enforced on us via rent seekers should prove the point in and of itself. Hell, by the numbers, Ronald Reagan is progressive when compared to Barack Obama.

Posted by marcos on Feb. 17, 2012 @ 2:52 pm

So rents can never be too high or too low. They are always correct.

Places like SF and NYC attract knowledge workers who typically generate the most wealth and get paid the most. Both are also water-bound and so real estate will always be expensive.

But NYC mitigates the problem by going high-rise. SF has too many NIMBY'ists and too many anti-business and ant-growth advocates to adopt the same solution.

You want lower rents? Easy. Build.

Posted by Guest on Feb. 17, 2012 @ 3:43 pm

Of course this is the difference between a business owned and run by people vs a biz owned by a public corporation (where the owners don't run it - they just want to profit from increased profits).

Because when the owners are public sharesholders and not local, several things are happening.

First the profits are not staying local so money is bleeding from the area. That's why cities where all the businesses are chains stay poor because the $ is constantly being taken from those cities and put to where the stockholders are (and the heads of the corporation).

Second, the non-local owners don't care about the community since they don't live there. So they don't care about the condition of the schools or the parks or the elderly or crime.

Third, it makes it almost impossible for local non-public businesses to compete due to the massive advantages of the public co's they are competing with.

I could go on but that more than answers your question.

Posted by Guest on Feb. 19, 2012 @ 2:21 am

Bravo.

Posted by Guest on Feb. 17, 2012 @ 1:08 pm

I have a better idea Greg. Lets stop subsidizing multi-millioniares with hugh payroll tax breaks. This article is the best one yet about what is happening. We have to better articulate what we already intuitively understand is happening in SF right now.

Unfortunately, more and more it seems Greece has the inevitable answer...

http://www.guardian.co.uk/commentisfree/2012/feb/17/greece-protest-faile...

"Greece shows us how to protest against a failed system"

Posted by Guest on Feb. 17, 2012 @ 1:15 pm

I agree. END the HUGH payroll tax break. Hugh has got to go

Posted by Greg on Feb. 17, 2012 @ 1:33 pm

I blame my spell checker.

Posted by Guest on Feb. 17, 2012 @ 1:50 pm

A totally corrupt system that can't pay it debts?

Posted by Guest on Feb. 17, 2012 @ 1:41 pm

"A totally corrupt system that can't pay it debts?"

(For a second thought you were talking about SF). No Greece is the poster child for how citizens should react to such a system.

http://www.baycitizen.org/housing/story/sf-audit-finds-irregularities-99...

"SF Audit Finds Irregularities in 99 Percent of Foreclosures"

Posted by Guest on Feb. 17, 2012 @ 2:04 pm

prosperity and happiness.

Tell you what - why don't you relocate to Greece since you think it's so great there?

Posted by Guest on Feb. 17, 2012 @ 2:41 pm

Sends a message....

Posted by Guest on Feb. 17, 2012 @ 2:53 pm

Who would invest in Greece right now?

Posted by Guest on Feb. 17, 2012 @ 3:44 pm

Ummmmm......the same people who invest in Iceland?

http://www.marketwatch.com/story/icelands-debt-comes-in-from-the-cold-20...

- Iceland’s debt comes in from the cold -

"Fitch Ratings on Friday raised its credit rating on Iceland to BBB- from BB+. The move marks the passage of Iceland’s debt from junk back to investment grade...."

Posted by Guest on Feb. 17, 2012 @ 4:08 pm

- Why Iceland Should Be in the News But Is Not -

http://bellacaledonia.org.uk/2011/08/25/why-iceland-shold-be-in-the-news...

"The belief that citizens had to pay for the mistakes of a financial monopoly, that an entire nation must be taxed to pay off private debts was shattered, transforming the relationship between citizens and their political institutions and eventually driving Iceland’s leaders to the side of their constituents. The Head of State, Olafur Ragnar Grimsson, refused to ratify the law that would have made Iceland’s citizens responsible for its bankers’ debts, and accepted calls for a referendum.

Of course the international community only increased the pressure on Iceland. Great Britain and Holland threatened dire reprisals that would isolate the country. As Icelanders went to vote, foreign bankers threatened to block any aid from the IMF. The British government threatened to freeze Icelander savings and checking accounts. As Grimsson said: “We were told that if we refused the international community’s conditions, we would become the Cuba of the North. But if we had accepted, we would have become the Haiti of the North.” (How many times have I written that when Cubans see the dire state of their neighbor, Haiti, they count themselves lucky.)

In the March 2010 referendum, 93% voted against repayment of the debt. .....

.....In the March 2010 referendum, 93% voted against repayment of the debt. The IMF immediately froze its loan. But the revolution (though not televised in the United States), would not be intimidated. With the support of a furious citizenry, the government launched civil and penal investigations into those responsible for the financial crisis. Interpol put out an international arrest warrant for the ex-president of Kaupthing, Sigurdur Einarsson, as the other bankers implicated in the crash fled the country."

Posted by Guest on Feb. 17, 2012 @ 4:20 pm

defualting on its debt. But do you really think that everybody can get away with that?

Neither Iceland nor Greece is a model we should follow. As Americans, we should lead.

Posted by Guest on Feb. 17, 2012 @ 4:35 pm

To answer your question, the same people who invest in Iceland.....

Posted by Guest on Feb. 17, 2012 @ 4:56 pm

are looking for examples to follow. The massive, structural and unsustainable deficits at all levels of US government can only be worked out by enduring huge amounts of pain and suffering.

You can have less of that earlier or more of it later, but the day of reckoning can only be deferred for so long.

Posted by Guest on Feb. 17, 2012 @ 5:12 pm

Argentina didn't begin to recover until it told the IMF where to go....

Posted by Guest on Feb. 17, 2012 @ 8:38 pm
Posted by Guest on Feb. 18, 2012 @ 8:26 am

There is no such thing as unsustainable public debts in a country that has monetary sovereignty and which holds debt denominated in its own currency, idiot.

Posted by marcos on Feb. 17, 2012 @ 8:53 pm

If foreigners abandon your currency because you have debased it and/or defaulted on your debts, then you're going to have real problems.

Posted by Guest on Feb. 18, 2012 @ 8:25 am

The best thing that could happen to the US, Americans and the dollar is for a credit crisis to end the role of the dollar as the reserve currency. The second best thing would be to end the stranglehold of the primary dealers. Faking like the US fictional debt is real only forestalls the inevitable. Austerity only hastens the delegitimatuon of the financial economic regime.

Posted by marcos on Feb. 19, 2012 @ 8:31 am

The only place the US can now lead is off a cliff.

Posted by marcos on Feb. 17, 2012 @ 5:12 pm

A small, fringe, peripheral nation like Iceland or Greece can be propped up if deemed necessary.

The US is "too big to fail" in thatw ay and, anyway, has zero goodwill out there. So we are just going to have to take the pain and grief that is ahead of us. When it's all over, tens of thousands of overpaid public sector workers will be on the scrapheap.

Posted by Guest on Feb. 17, 2012 @ 5:33 pm

Austerity will shrink the US economy so that failure is the only option.

Posted by marcos on Feb. 18, 2012 @ 7:22 am

The rich will always find a way of adapting and flourishing.

We Americans crave money too much to ever stage a revolution. And we're too lazy.

Posted by Guest on Feb. 18, 2012 @ 8:39 am

Libertarian capitalism is like Stalinism, more of a religion than an economic theory, both decadent after being advanced by a self-selected vanguard fighting a scorched earth war, and neither having a demonstrated a successful record of achieving its goals and both failing for the same reason: might look good on paper, but incompatible with human nature.

Austerity has never pulled a nation out of economic contraction.

Posted by marcos on Feb. 18, 2012 @ 8:20 am

isn't about your alleged "austerity" at all.

Posted by Guest on Feb. 18, 2012 @ 8:40 am

Not my austerity, idiot. the same financial Stalinism that urges job creation all costs imposes austerity too. we need jobs that employ unemployed San franciscans and that pay taxes. Anything else does more harm than good.

Posted by marcos on Feb. 19, 2012 @ 8:35 am

Look at Mitt Romney's taxrate for an example of what I'm talking about. What's his tax rate? 14% or something like that? The guy's making hundreds of millions and he's paying hardly anything, % wise, because some rich folks convinced (bribed via campaign contributions) govt legislators to change the rules on investment income.

If anything, guys like Romney (and many others) should be paying higher than normal tax rates because they aren't working to receive that money. Then the higher taxes could be funneled into paying for kids to go to school and get an education and learn how to increase the wealth.

That you're bending over backwards to protect the extreme rich while dumping on public sector workers says everything about where you're coming from.

Are their abuses in public sector workers? Sure, mostly in what cops and fire-fighters are paid but there's many public sector workers beyond those two classes who have a great education and are using that education to improve society (engineers, nurses, doctors, administrators, building inspectors, teachers, etc).

In the 1950s, the highest tax rate was 90% yet somehow the world didn't end for the richest folks - in fact, financially they were doing better than everybody else. It's the fact that they own all the media in this country that they can fool voters into following their "let's make govt work for rich people" philosophy by using propaganda, very effective propaganda.

A big problem with democracy is that the propaganda scientists have become very adept at what they do and with unlimited funds due to the Supreme Court's corruption-inviting Citizens United decision, the amount of very effective propaganda unsuspecting voters are subject to is enormous and it works as the 2010 elections showed.

INCREASE THE TAXES ON THE RICH!!!

There I said it and lots more people need to say it.

Posted by Guest on Feb. 19, 2012 @ 2:04 am

No. Prosecuting financial fraud is the true path to prosperity and happiness. Rioting and burning is plan B.

Posted by Guest on Feb. 17, 2012 @ 2:57 pm

Why work when you can riot, right?

Posted by Guest on Feb. 17, 2012 @ 7:50 pm

didn't say anything.

The failed system is Greece's own fault.

Posted by matlock on Feb. 17, 2012 @ 1:47 pm

So true Matlock video is so much more direct...

http://www.youtube.com/watch?feature=player_embedded&v=y_YywqYTDIQ

"Greece is in chaos right now with hundreds of thousands rioting, 17 banks are on fire and the police are arresting other police who have defected."

Posted by Guest on Feb. 17, 2012 @ 2:08 pm

Post new comment

The content of this field is kept private and will not be shown publicly.