A Belated Comment — Did You Hear the Latest About the Cause of Municipal Bankruptcies?

Sorry it took us so long to write this post, but we have been on the road for a while. Even so, we gained a new insight into matters of causation after reading an op-ed piece by Bill Fulton, former Mayor of Ventura, that ran in the the Los Angeles Times on October 1, 2012, at p. A11 (William Fulton, The Banruptcy-Sprawl Connection). If you haven’t read it, drop what you are doing and do — it will broaden the horizons of your understanding of municipal finances and explain to you that it wasn’t municipal profligacy, but sprawl — yes, sprawl — that was the cause of municipal bankrupties. We didn’t know that. We still don’t.

Mr. Fulton explains that what has been causing urban bankruptcies in California wasn’t municipal profligacy, or overly generous public employee compensation,  including generous, unfunded pensions (though Fulton does concede that those “are a huge problem” but offers no solution to it). And it wasn’t the waste of public funds on “pork” whose real purpose was to placate local politicians and special-interest groups by spending tons of federal (and state) aid money on all sorts of chimerical projects. And it wasn’t urban redevelopment that diverted tons of money from local tax revenues into the pockets of redevelopers. And it wasn’t municipal waste like for example the $170,000,000 Los Angeles “Intercontinental” Airport in Palmdale that never got off the ground, or the $200,000,000-plus  “Belmont Learning Center” in Los Angeles, that was thoughtlessly built on top of a former oil field and couldn’t be used for its intended purpose because of seeping methane. Or the North Hollywood redevelopment project that swallowed over $117,000,000 without producing any of the promised new studios, but succeded in inspiring such fury among the local population that the redevelopment agency had to move its offices to a more secure building. Etc., etc.. There is more.  But ignoring all that, Fulton says that the real cause of municipal bankrupties has been — ta, da! — sprawl. And Proposition 13, of course, which is the source of all municipal evil in the Golden State.

If only those suburban homes weren’t so far apart, says Fulton, they would be easier to reach by infrastructure, and to get to by police cars, ambulances and fire engines, and it would be ever so much cheaper to run a city that way, don’t you see. Of course, that “huge problem” of excessive unfunded pensions would still be with us, but hey man, says Fulton, we could handle that if it weren’t for that awful Proposition 13, an argument that translates into plumping for a municipal ability to double or triple property taxes ad infinitum — which is what motivated the pro-Proposition 13 voters to begin wit.

Speaking of which, we should say a word about that, being old enough to remember these things. Proposition 13 was the result of local taxing authorities running amok with tax raises. The legislature ignored the homeowners’ complaints, and the so-called “Watson initiative” (named after the then Los Angeles County tax assessor who understood that skyrocketing taxes were storing up political dynamite, so he tried to limit them)  failed at the polls. Local politicians took that to be a carte blanche to tax and spend some more. But it didn’t work out. Along came a pissed-off demagogue named Howard Jarvis and he inspired Californians to go to the polls and pass Proposition 13 limiting property taxes. Thus, vox populi was heard from. But instead of heeding it, and reining in spending  which is what the voters intended, local politicos went whining to Sacramento and persuaded the state legislature to make up the Proposition 13 decrease in local revenues with state funds, so the spending game could continue. At least it continued until the state ran out of money too. The rest is history.

Of course, Fulton does not indicate how that despised “sprawl” came about. But if you are old enough to remember the post-World War II period, you know that expansion of suburbia was one of those ideas whose time had come,  and, more important, the result of an explicit government policy that was promoted and financed by a host of government laws and gimmicks that made suburban living better and cheaper, and tax- sheltered to boot. In the mid-1950s you could buy a nice little two-bedroom house for $10-12,000 with total payments around $70 per month, that appreciated faster than the total of payments.  What a deal! Who could resist it?

The explosive growth of suburbia was also encouraged by the consistently chosen and fiercely defended life style of wealthy Americans who co-opted local land use regulators and enlisted them in creating and protecting expensive and exclusive, large-lot suburban homes which became the habitat of choice of wealthy suburbanites adhering to the NIMBY philosophy. Two Presidential Commissions on Housing came to the conclusion that this was the cause of excessive housing cost and profligate consumption of suburban land for large homes.

And don’t forget the courts. U.S. Supreme Court Justice William O. Douglas captured the essence of that world view when he noted approvingly in Belle Terre v. Boraas, 416 U.S. 1, 9 (1974) that suburban low densty was a desirable habitat: a “quiet place where yards are wide, people few, and motor vehicles restricted;” these  “are legitimate guidelines in a land-use project addressed to family needs,” and as such properly subject to imposition via local regulations.  (In other words, it’s nice to be able to live in the sort of place where God would live if He could only afford it.)

But this isn’t news. Back in 1924, Federal Judge David C. Westenhaver who presided over the trial of the first zoning case, concluded that “[i]n the last analysis, the result to be accomplished [by zoning] is to classfy the population and to segregate them according to their income or situation in life.” Ambler Realty v. Village of Euclid, 297 F.307 (N.D. Ohio 1924), rev’d. 272 U.S. 365 (1926). And folks like President Herbert Hoover and New Dealer Rexford Tugwell (who was in charge of FDR’s greenbelt policy), were all in favor of displacing urban populations, moving them to the suburbs, and converting their erstwhile urban habitats into parks. No, we are not making this up. You can read about it in Jane Jacobs’ classic book, The Death and Life of American Cities.

And it didn’t take the middle class long to figure out that what was good for folks of quality was good for them too, particularly after World War II when the GI Bill produced a large, new, college-educated middle class population, eager to assume the lifestyle and trappings of the middle class, not the least of which was a middle class suburban single-family home. They got a taste of homeownership with all those Levittown-inspired, two-bedroom, no money down suburban homes, and decided that this was good stuff, and that moving into bigger, more upscale suburban homes would be even better. 

In other words, sprawling suburbs became residential areas of choice, financed by Uncle Sam through federal mortgage loan guarantees and favorable tax treatment. In time suburban living became favored by local land-use regulators ever-ready to cater to the perceived needs and wants of their constituencies, with the courts lending a hand by approving just about all land-use regulations, no matter how extreme. Bottom line: Sprawl would not have been possible without government support. That is how sprawl became the favored and aspired-to mode of suburban American living, and any local officials who would try to restrain this constituency by compelling it to live a Fultonesque lifestyle of high density housing, would quickly find themselves voted out of office.

For those of our readers who are interested in exploring this topic further, we recomment a book by Prof. Bernard Frieden of MIT, entitled The Environmental Protection Hustle (1995), and the classic, insightful and witty The Zoning Game (1966), by Richard F. Babcock, the late dean of the American land-use bar, as well as Chapter 6 (Capitalizing on Land Use Regulation: Evidence From California) in Prof. William  A. Fischel’s book Regulatory Takings: Law, Economics and Politics (1995) at pp. 218-252, which demonstrates irrefutably how a high degree of land-use regulation inspired the skyrocketing California housing prices.

Space limitations prevent further exploration of the factors involved in the mass migration of urban populations into the suburbs following World War II, that was encouraged and subsidized by the government every step of the way. You could say that Uncle Sam bribed your Mom and Dad to get out of the declining, increasingly racially divided, violent, crime-ridden and riot-torn cities, and settle in the suburbs where the living was generally more pleasant, access to city jobs was provided by federally-funded roads,  the schools were better and safer, students were safe from forced busing, and a family home quickly became an appreciating asset — at least until other government policies (like the Community Reinvestment Act and its reckless implementation by greedy bankers and reckless borrowers) inflated the “bubble” to its bursting point.

And speaking of those federally funded highways, our Prophet-Without-Honor award goes to Detroit’s Mayor Jeffries who in 1944, in testifying to Congress, worried out loud that those federally-financed highways would not only make it easier for folks to come into the city, but would also make it easier for them to leave the city and settle in the suburbs, with predictably disastrous demographic and economic consequences — which is exactly what happened, particularly but by no means exclusively in Detroit.

Bottom line: sprawl was the direct consequence of government policies, administered by the government which made ownership of suburban homes — the bigger, the better — a lucrative part of the American birthright. Until the bubble popped, that is, and people discovered the hard way that grandma was right: you should only buy things you can afford, which includes homes as well as everything else, and if you are in the money lending business you should only lend it to people who can pay it back.

This post was last edited on October 19, 2012.