Episode 34: Every social problem is a demand side problem

A long-delayed part 2

Dear readers,

First, I want to issue a big apology to my paid subscribers; I fell off the wagon with campaign stuff in the last month before the primary, and I’m only now getting back on. BUT, I’ve got some big stuff planned now and I expect to be writing a lot more in the coming months. I really appreciate you and having your support!!

Now, we left off in episode 33 discussing this article, an article which argued forcefully that the housing affordability problem in California is exclusively a supply-side issue. Recall that the author’s prescription for places like Santa Cruz, or El Granada, where I live, is:

“The solution is housing, towers everywhere, that radically transforms the character of the city.”

For the moment, we will set aside issues like:

• Such towers almost always end up as rental units, which consign people to a lifetime of renting and therefore never building any generational wealth, which is one of the core issues one needs to address from a policy perspective if, in fact, one actually cares about “equity”.

• Such towers dramatically increase the population in an area, which means that area has to have access to the water, the power, the telecom, and the physical infrastructure to support that increased population. Coastal California is notably deficient in all these things even given the population it has today. Example: Montara, which is a couple miles up the road, clocked in as having the worst cell phone coverage of any city or town in the entire country.

• Residential housing of any type is a “loss leader” for local government; that is, what you get in taxes is insufficient to cover the cost of providing the required physical infrastructure (even inadequate amounts of it), or services like fire, police, and schooling. Governments make up the difference with taxes on businesses, so if you’re going to build tons of towers, you better also have a plan for dramatically increasing the number of businesses. Mom and pop businesses don’t cut it, by the way- you need bigger businesses than that. Example: down the road in Half Moon Bay, 20% of the city’s entire annual budget comes from taxes on just the Ritz Carlton hotel in town. 

• It’s not clear why the author’s vision of what a city should look like should somehow matter more than the vision of the people who actually live there. Why the desires of people who don’t live in an area should matter more than the desires of the people who do is something that is never addressed.

But let’s set all of that aside and just evaluate the claim on its own terms: is the problem simply a problem on the supply side?

The first clue comes halfway in the piece:

“San Francisco is a giant, 40 year long failure when it comes to providing housing and that is very unique. So are other highly desired coastal cities like Berkeley and Santa Cruz, too.”

Did you catch that descriptor? “Highly desired”. Yes, many, many people desire to live on California’s coast. A short while later, he quotes Tim Redmond, a pretty far left resident of San Francisco, who says:

“That’s not about the Yimbys and supply-side economics, it’s about what the housing market is always about, which is demand. When I arrived in San Francisco in 1981, there were almost no homeless people.”

Our author completely ignores the rightness of the first of those two sentences to (correctly) point out the wrongness of the second sentence. Sure, there have been homeless people in San Francisco for a long, long time. But Redmond is fundamentally correct to say that the housing market is about demand as much as it is about supply. In fact, earlier in the piece our author noted:

“They’re unable to contend with the fact that socially progressive but very exclusionary regions with lots of demand but little supply in dwellings causes severe homelessness.”

At the beginning of this piece I put that famous picture which some folks look at and see a beautiful woman looking away, while others see an old woman straight out of Grimm’s fairy tales. Our author explicitly acknowledges in multiple places that demand outstrips supply, and then concludes from that fact that supply is therefore the problem, even though, as with the picture of the two women, two people can look at the same thing and come to opposite conclusions, in this case that the demand is the problem.

As I pointed out in Episode 33, if towers everywhere actually solved the housing affordability problem, then Manhattan wouldn’t be facing exactly the same housing affordability problems that Santa Cruz does. Yet that is exactly what’s happened. The problem is that every 23-year-old with a computer science degree, which our author, by the way, happens to be, feels they need to live in the same few cities. Those cities come in two types: the first includes cities like San Francisco, New York, and Los Angeles. The second includes cities like Austin, Houston, and Atlanta. Our author speaks glowingly in his piece of Austin, Houston, and Atlanta, and the progress they have made building housing.

Do you know what Austin, Houston, and Atlanta all have in common? They are big, flat cities surrounded by lots of flat land that gives them plenty of room to expand. I visit each of them at least once a year, because I married into a north Georgia family, I spend every Thanksgiving with my sister in Houston, and I visit my brother in Austin. And in all 3 cases, it is astonishing to observe how fast those cities are expanding outward.

Do you know what you definitely cannot do in San Francisco? Expand outward! Stick your hand out right now and make a “thumbs up”. Look at your thumbnail. That’s San Francisco, and all that empty space surrounding your thumbnail is ocean. In the last 75 years, the population of the greater San Francisco metro area has grown from 1.8 million to 3.3 million people. That’s good work! San Francisco is a basket case of a city in a lot of ways, but the residents there have done their part to take in more people.

Similarly, a quick look at the NOAA website shows that in a state of 38 million people, California’s coastal counties have absorbed 26.8 million of them. Two thirds of the state’s entire population lives on or near the coast! Coastal counties have done their part to absorb people. 

So what’s the solution to the affordability problem? It’s to take note of what cities like Austin have been able to do, and then take advantage of what California does have, which is lots of undeveloped flat land in the interior of the state. I (and others) have proposed a “Housing Opportunity Area” (HOA) that would be a no zoning area in the interior. Here’s how it works:

With no zoning, people can build what they want on the land, and the only requirement would be that any development has to factor into its cost structure the marginal cost of the physical infrastructure required to support it (water/sewer lines, power lines, etc). What the state government should do is then encourage businesses to move out there with incentives, build another UC campus or two out there, have them specialize in some of the cutting-edge tech areas (green energy, AI, nanomaterials, robotics, etc), and then some of the housing demand that today is being forced into the Bay Area would divert to the HOA, which would take the price pressure off the Bay Area, and would get California really growing again. There’s so much that’s useful that the state could be doing to really address the affordability problem, but instead it’s just focused on forcing housing down the throats of communities, whether they want it or not. 

Maybe I could make my peace with that if it had any chance of working, but the existence of Manhattan, which is still unaffordable, proves that it won’t. So as much as I appreciate the irony of seeing the progressive left bearhug the idea of supply-side solutions to problems, I’ll be opposing supply-side solutions to housing affordability most, if not all, of the time. 

Postscript

I titled this piece “every social problem is a demand side problem.” “Every” is probably too strong a word, but housing affordability is hardly the only one. Drugs? That’s a demand-side problem: no matter how many poppy fields you spray, or planeloads of heroin you intercept, or low-level drug dealers you incarcerate, as long as Americans demand drugs, someone somewhere will figure out how to supply them. Prostitution? Doesn’t matter how many pimps you bust or how many prostitutes you take off the street; as long as people out there are demanding that particular service, someone will figure out a way to provide it. 

We have spent an ungodly amount of time and money as a country fighting demand-side problems with supply-side solutions, and until we get serious about the demand side, these problems aren’t going to go away or even improve materially. But demand-side work is harder to do, harder to see, and harder to accomplish politically. So our political class pretty much always takes the easy way out. It will take sustained effort from regular folks like you to change that dynamic.