Let's Start A Pool On How California Will Do Over The Next Five Years

Froma  Harrop, writing today at RealClearPolitics, issues a confident prediction that California will succeed with its latest round of progressive policies.  Well, anything is possible.  Ms Harrop's article has a good list of several of the latest initiatives.  They include:

• The tax-raising Proposition 30, passed last November by the voters, that raised the sales tax by a quarter point and also created new income tax brackets of 10.3%, 11.3%, 12.3% and 13.3% on income over $250,000, $300,000, $500,000 and $1,000,000 respectively.
  
• Intentional efforts to increase the price of electricity through a California-only cap and trade system and also though a so-called "renewables mandate," passed in 2011, that requires California utilities to get 33% of their electricity from renewable sources by 2020.
  
• The high speed rail project, backed again by California voters who approved a referendum in 2008 to issue close to $10 billion in bonds.
  

All I would advise is, don't let yourself be taken in when the results over the next year or so from these policies don't appear to be all that negative.  First of all, the tax increases were retroactive back to January 1, 2012.  So the entire first year's revenue increase will come without an opportunity for anyone to avoid it by restructuring income or moving away.   But in the meantime, nearby states like Nevada and Washington, not to mention major competitors like Texas and Florida, have no income tax at all.  My bet is that people will notice, but the migration will be very gradual.

On the renewable energy front, California issued a report in August 2012 claiming to have already reached a milestone of 20% of electricity from non-nuclear renewables.  I admit that I am extremely skeptical of this assertion, but I'll assume it's true for the moment.  What is also true is that other than hydro, the main renewables (wind, solar) suffer from intermittency (solar doesn't work at night, or wind when it's calm).  Because of that, renewables become more and more costly as they provide a higher and higher percentage of the electricity.  Getting to higher levels requires more and more duplicate back-up generation capacity.  But it will be a while before we see how far they can push this.

Over in the high speed rail department, the $10 billion bond issue came at a time when the total cost was projected at about $35 billion.  In 2011 the projection suddenly went to $65 billion.  They seem to expecting that the Federal taxpayers will pick up most of that.

They do have very nice weather in most of California.  They also have a massive amount of oil and gas in "frackable" formations within their boundaries, but my bet is that the greens will prevent that from being developed.

I'm certainly not predicting an imminent collapse for California.  The consequence of making yourself way out of line in taxes and costs is not rapid collapse, but slow relative decline.  As I have pointed out many times, when New York got itself almost 20% out of line in top income tax rate with its immediate neighbors New Jersey and Connecticut from the late 60s to the late 70s, the relative decline speeded up dramatically, and New York City lost some 12% of its population in the 70s.  California is not that out of line, and Nevada is not nearly as close to the major California cities as northern New Jersey and southwestern Connecticut are to New York.  It will take quite a while for the decline to become significant.  But over five years, and even more so over ten, I don't see how they avoid it.

Gov. Cuomo's Latest Plan To Buy Out Sandy Victims

I know I keep coming back and back to this topic, but the latest from Governor Cuomo confirms all my worst fears about upcoming Hurricane Sandy giveaways.  Thomas Kaplan has the story in yesterday's New York Times.

With both houses of Congress having passed the $51 billion Sandy relief bill, Cuomo aides met with Federal officials in Washington on Friday to present plans for use of some large part of that money for "buyouts" of people whose homes were damaged.

For the 10,000 or so homes in the 100-year flood plain that were substantially damaged by Hurricane Sandy, Mr. Cuomo would offer owners the pre-storm full market value of their houses. Homeowners who chose to relocate within their home county would receive a 5 percent bonus above the market value, as part of a government effort to encourage them to stay nearby. State officials said they were planning for the possibility that 10 to 15 percent of those eligible would take the buyout.

Residents of more vulnerable areas would receive a further enticement: they would be allowed to sell their homes even if the homes suffered little, or possibly even no, damage from the hurricane, and the state would pay them an additional 10 percent bonus, above market value, to sweeten the deal.

In a few dozen blocks located in areas of extreme risk, the state would offer another 10 percent bonus if every homeowner on the block agreed to sell. Local officials would be expected to determine how best to use the new open space, though they would not be allowed to build on it.

Or, to put it in simple terms, if you didn't buy the flood insurance you get a far, far better deal than if you did buy the insurance.  For those who don't know, all the Federal flood insurance you can buy for a 1 - 4 family house is $250,000 for the house and $100,000 for contents; and the premium for that is $3289 per year if you are in Zone A.  Well, forget that, you suckers who bought flood insurance, now we're going to pay full pre-flood value of the house plus up to 20% for those who didn't bother to buy the insurance.

And by the way, what is that about "a few dozen blocks located in areas of extreme risk."  As far as I know, the entire run of the barrier islands is an "area of extreme risk."  New York has 100+ miles of them and New Jersey has another 100+ miles of them, and the rest of the East Coast and Florida and Texas have hundreds and hundreds of more miles of them.

The article suggests that Cuomo says this won't cost all that much because most people will want to rebuild and won't take the buyouts.  Well, maybe this time, but once the word of such a program gets out sooner or later every house on the whole coast of the United States is going to get bought out.  I just wonder if any of our governing geniuses understand how impossible this is.  Cuomo gets to look like a sugar daddy to the beleaguered Staten Islanders for a few moments, and next time around the taxpayers have to buy out the mega-billionaires in East Hampton or Palm Beach.

Meanwhile, suppose your house just burns down.  As of today, we still have that old-fashioned rule that you either buy insurance, in which case you get whatever it pays, or you don't, in which case tough luck.  And the poor souls in Toledo or Topeka whose houses burn down aren't playing heads-I-win-tails-you-lose with the taxpayers looking to live the good life on the beach for a few years and then get bought out at a premium when the flood comes.  The press should be all over Cuomo with the mindlessness of this.  Are they?  Well, here is the lead editorial from this morning's New York Post.  "We'll have to see the details, but the governor's plan strikes us as an excellent way to save lives and dollars."  And the Post is usually at least somewhat sensible on issues of government spending.  Is there no hope?

Remembering Mayor Ed Koch

Much in the news these past couple of days on the passing of our larger-than-life former mayor, Ed Koch.   Koch was a man of great energy and enthusiasm, always in good humor and good spirits.  He took the helm of the City at about its lowest point (1978), and left it far better off twelve years later.  But what about an objective assessment of how much credit we can give Koch for the improvement in the City since the 70s?

Koch had one huge achievement as mayor, which is that he got the City budget under control by dramatic cuts in spending.  The number of City employees shrank by close to 100,000 in his first term.  By 1980, that number was down to about 200,000 total.  It then gradually crept back up until it was back to about 250,000 when he left office.  Here is a graph post-1980.  (The number today is around 280,000.)  Koch did not meaningfully lower City taxes, but he also did not meaningfully increase them, which is a great achievement compared to his predecessors.

There were two major issues that needed tackling during Koch's tenure and that he did not tackle:  public safety and welfare.  Crime did not meaningfully decline.  Here is a chart of number of murders in New York City over the years.  The number was 1504 in 1978 and 1905 in 1989.  (In 2012 it was 414.)  Welfare recipients numbered well over 1,000,000 throughout his tenure.  (NYC had 343,000 welfare recipients by 2011 according to this NYT article.)

In the 1980s when Koch was mayor, the real estate market in New York took off, and the population of the City, which had shrunk by almost a million during the 70s, started a rapid recovery.  Koch certainly deserves some credit for the rebound, for showing that the budget could be tamed.  But I would give far more credit to something else that was not in Koch's control:  the lowering of the New York State top income tax rate from almost 15% to about 8%.  Main credit for that goes to Koch's contemporary, Governor Hugh Carey, who served from 1975 to 1982.  Also, don't forget the huge assist added by New Jersey, which had no income tax at all before 1976, and was eating New York's lunch.  Their top rate started at 2% in 1976, but once they had it it just went up and up.  Today, their top rate is almost 9%.  Today, nobody moves to New Jersey to save on taxes.  

One other major (and unappreciated) factor in the revival of New York City has been the (painfully slow) phase out of rent regulation.  Again, that came well after Koch, and at the initiative of the State government (mainly Governor George Pataki), not the City.

You Can't Come Out Ahead Buying Lunch Insurance

On the front page of yesterday's New York Times, Robert Pear has another of his many long articles on the back and forth over the HHS regulations requiring all insurance policies under Obamacare to pay for birth control.

If you get your news on this subject from the New York Times, seemingly the big and only issue is how to deal with the objections of religious organizations who assert that they are being forced against their principles to pay for something they find objectionable on religious grounds.   The latest is that on Friday the government came up with a new proposal for a  "complicated arrangement " whereby the insurers would have to pay for the contraceptives and the government would give them a kick-back in the form of some kind of credit, and it would all be so opaque that nobody would be able to follow the money.  Needless to say, spokesmen for the religious groups were not satisfied. 

I don't mean to make light of the religious freedom issue, which I think is important.  But in all this discussion of the contraception mandate, not just in the New York Times, I can find almost no mention of an issue I think is at least as important, namely the preposterous idea that it makes sense to buy "insurance" for this kind of thing.  By "this kind of thing," I mean an ongoing, low-level expenditure that is expected and planned for. 

In the voluntary world, we buy insurance for the unexpected loss or destruction of valuable assets, such as destruction of your house by a fire or of your car by an accident.  Does anybody buy insurance against the cost of eating lunch every day?  Nobody ever really thinks much about it, but if you do give it a few moments' thought, you quickly realize that the reason there is no insurance market for such a thing is that you couldn't possibly come out ahead.  The premium would be the amount you were going to spend anyway, plus a mark-up for the profit of the insurance company.  Not to mention that some of the people with lunch insurance would immediately take advantage of the situation to go out and have steaks every day, and that would promptly get figured into your premium.  Before long, we'd all be broke.   

There is no sense in which third party payment of ongoing, expected and planned expenditures is "insurance."  It is just a particularly poorly designed form of income transfer.  If you're going to do an income transfer and just hand out the cash, at least you know how much cash you are going to hand out.  If you are going to do an income transfer and give people carte blanche to buy whatever kind of birth control (or lunch, or whatever) they want, you can be sure that they will buy the most expensive options and that the cost will zoom out of control.

Apparently this "free" birth control thing was a material part of our president's very successful campaign to get the backing of young and single women for his re-election.  Well, young women, now that you've bought into the income transfer state, here's your deal:  you get "free" birth control (worth maybe a couple of hundred dollars a year) and in return you get to pay (1) additional health care premiums that will go up by the cost of the most expensive birth control plus some profit for the insurance companies, plus (2) you pay for totally free health care for those over 65 (which will not still be around when you are that age), plus (3) you get to have a hopelessly indebted Federal government which will have had a massive retrenchment before you reach the age of getting the real benefits.  How many of you are able to figure out that you are big, big losers in this trade?

What Is It About "Affordable Housing"?

An article from the Manhattan Institute's City Journal a couple of days ago illustrates the difficulty of being a Republican candidate for mayor in New York City.  A church in East New York (a low income neighborhood in northeast Brooklyn) held a mayoral debate dedicated to housing policy.  Six candidates for mayor showed up -- Democrats Quinn, Liu, Thompson and de Blasio, and Republicans Lhota and Allon.  The Democrats are either current or former city officeholders (respectively current Speaker of City Counsel, current Comptroller, former Comptroller, and current Public Advocate).  Lhota is a former Giuliani deputy and recent MTA head, and thought to have an actual shot at the office.  Allon is a private citizen in the publishing business.  As reported by Nicole Gelinas of the Manhattan Institute:

The hosts and the questioners accepted as fact that New York faces an affordable-housing crisis and that it’s the city’s job to fix it. Everyone who spoke wanted the city to build or “preserve” city-controlled housing—whether private, rent-regulated buildings or public units.

How about Lhota?  Well, it seems that he just kept his mouth shut.

Lhota showed that he is not politically naive. Politicians must pick their battles. Falling on his sword over public housing inside a church surrounded by public housing would have disqualified him on grounds of political incompetence.

The virtues of subsidized housing are such an accepted part of the local orthodoxy that you can't even question them in polite company.  At least the article by Ms. Gelinas shows that I am not completely alone in New York pointing out the insanity of spending public money on subsidized housing; there are at least two of us.  (Howard Husock would be a third.  That leaves only 7,999,997 on the other side!)  This just seems to be one of those issues on which rational thought is impossible.  

Even if you completely accept the idea that it is the government's job to cure all inequality by taxing and spending, public housing has to be the most expensive possible way to help the smallest number of people.  Indeed, even the word "help" is dubious here, because subsidized housing functions as a poverty trap for the people who manage to get in.  No one ever leaves -- the turnover rate in New York low income public housing is barely over 3% per year, for an average stay of over 30 years.  By contrast, the national turnover rate in all rental housing is about 35%, or an average stay in one place of only about three years.  Because you are subsidized, you have a powerful incentive to stay; it's a whole different way of life from the private housing world.  And because nobody ever leaves, very few people can get in.  Despite decades of massive building in New York (about 170,000 low income apartments) we have ended up with a small class of the permanently dependent and waiting lists stretching beyond a decade for everyone else.  Does anyone remember the old Soviet Union, where 70 years of socialized efforts to build nearly "free" housing ended with 25 year waiting lists for tiny apartments?  It's the same thing.  Meanwhile, the accounting hides the extent of the huge subsidies to a small number of people -- nobody accounts for the lost property taxes, or the opportunity cost of subsidized financing, or the deferred maintenance that will have to be made up some day.  And finally, the residents come under powerful incentives to minimize their income, or at least to minimize any income that the overseers can observe, because if you have substantial reported income they'll increase your rent or even throw you out.  If you are a rational actor, probably your best option is to become a drug dealer; second best option is to put together a package of non-cash government handouts (food stamps, Medicaid, school lunches, etc.)  In short, there is no more destructive public policy than public housing.  So of course, it has near universal support here in the trendy precincts of Manhattan. 

Well, actually there is something even crazier than subsidized low income housing, and that is subsidized "affordable" middle income housing.  In a world of limited resources, how can it possibly make sense to hand out subsidies to those who aren't even poor, even while the poor persist?  Of course, subsidized "affordable" middle income housing suffers from essentially all the same problems as the low income housing, starting with the fact that nobody leaves, and therefore only a tiny number of people get in on the boondoggle and have to be subsidized for their entire lives even though by definition they are not poor.  

A basic key to the enterprise is to make the subsidies totally opaque so that no one can possibly figure out how much this is costing per beneficiary.  The latest game is the so-called 80/20 program, whereby a developer agrees to make 20% of the units in his development "affordable" and return he gets to use tax-exempt bonds to finance his project.  Try to figure out who's paying how much for that one!  Of course, it's exactly this kind of diversion of supply that makes the remaining private housing in Manhattan so scarce and expensive, but it's difficult to perceive and impossible to quantify. 

And thus we have the phenomenon of the City Council Zoning and Franchise Committee meeting on Tuesday to vote on a developer's proposal to build one of these 80/20 buildings on West 57th Street, and the local city councilperson, Gail Brewer, opposing it on the ground of not enough "affordable" units and also she wants the "affordable" units to be permanent as opposed to the affordability having an expiration date.  Crain's New York Business has the story.  

"The issue is real affordable housing," Jesse Bodine, a spokesman for Ms. Brewer said. . . .  "They always say no, no, no, no, no to permanent affordability to the end, and the community won't stand for it."

So that's it:  It is absolutely imperative for a small number of not poor people to get a lifetime entitlement to subsidies while at least an equal number of unknown and unseen people by definition get priced out of the neighborhood.  Anything else, and the community won't stand for it!  Well, this is the West Side of Manhattan.

Can We At Least Get Rid Of Federal Flood Insurance?

One of the main places where I differ with the Manhattan Conventional Ignorance is on the concept that the Federal government has the ability (and therefore the obligation) to take all the downside risk out of life by acting as the infinite insurer of all major risks.  Most people know that the Federal government provides insurance against old age in the form of annuities for all (Social Security), and against medical expenses in old age (Medicare), and for the poor (Medicaid).  Fewer know about other massive government  interventions into the world of insurance, including insuring nearly all home mortgages (Fannie, Freddie, FHA), all private pensions (PBGC), risks from terrorism (TRIA), risks of loss of crops, and on and on.   How do intelligent people convince themselves that it is possible for this level of risk-bearing to persist for a long period without creating its own disaster?

Out of them all, my pet peeve is the National Flood Insurance Program (NFIP), the one that pays when your house on the barrier island gets washed away in a hurricane.  The program was originally created in the 1960s, when the idea of the government as infinite insurer of everything was just taking hold.  The program was supposed to be self-sustaining, but of course that's not how the government works.  In the 90s, when I owned a house on the barrier island, I got into an argument with the president of the Fire Island Association, with him claiming that the program always had and always would make money off the ocean-area people, and me saying that it was just a matter of time until the Big One put the program tens of billions of dollars "under water."  Guess who was right.

The original "Big One" was Katrina in 2005.  The NFIP promptly ran out of money and "had" to be bailed out, to the tune of $20 billion of borrowing authority from the Treasury.  They promptly blew through $18 billion of that.  Then came Sandy, and they just got another $7 billion a few weeks ago.  And so it goes.

But could it be?  An article in the current issue of Business Insurance says that proposals are circulating in Congress to privatize the flood insurance business.  The Chairman of the House Financial Services Committee, Jeb Hensarling (R, TX) actually seems to be hostile to this thing, and is quoted as calling it "ineffective, inefficient and indisputably costly to hard-working American taxpayers."  But of course, there is no mention of anyone in the Democrat-controlled Senate taking any kind of a skeptical look.  And for every industry player quoted in the article as thinking that privatization would be a good idea, another is quoted pointing out problems and risks.  My favorite is this quote from Nathaniel Wienecke, an executive of the Property Casualty Insurers Association of America:  "[T]he cost would be significantly higher because the industry would have to charge rates that were actuarially sound."  Imagine that!

Back in my Fire Island days, I did some back-of-the-envelope calculations of what kind of rates it would take to make a real business out of barrier-island flood insurance.  Based on a hurricane taking out a town or two every 30 - 50 years I figured that rates would need to be about 2 - 3 times the then-current Federal rates, except for the ocean front houses.  For the ocean front houses, the rates would need to be at least 10 times the Federal rates.  Why?  Because the ocean front houses are greatly at risk not just from major tropical storms and hurricanes, but also from run-of-the-mill nor'easters that come around most every year.  During the eight years we owned a house on Fire Island, there was no major tropical storm or hurricane, but about a third of the ocean front houses (and no non-ocean-front houses) were taken by the ocean.

Oh, I hadn't mentioned that the NFIP saves its hugest subsidies for the richest of the rich, the ocean front homeowners?  I hope you are not surprised.

Current status is that the program has no reserves at all and is about $27 billion in the hole to the Treasury from Katrina and Sandy, with no real prospect of ever paying that back.  Meanwhile, Katrina mostly missed the most valuable parts of New Orleans (Downtown, French Quarter, Garden District), and Sandy was a bare minimum category 1 hurricane.  The next one could be far, far worse.  Next time you are in South Florida, check out the build-up on the barrier islands from about Palm Beach to Miami.  A good category 5 strike right there could easily be a $100 billion event, maybe $200 billion.  Not a dollar of that is included in any debt or deficit projections you will see.

The biggest problem with privatizing the flood insurance program, or even increasing the rates, is that lots more people would then just go uninsured and figure that when the hurricane comes they can buffalo the government into paying them off in a "disaster relief" bill.  My solution is that the government should go around to every corner within the coastal flood zones and put up signs in huge print saying:  THIS AREA NOT ELIGIBLE FOR FEDERAL DISASTER RELIEF IN THE EVENT OF OCEAN FLOODING.  Of course, that kind of plan doesn't offer good prospects for vote-buying for the likes of Schumer.  So for now, I'm not holding out much hope.