Eight ‘Easy’ (Keynesian) Steps for Fixing the LA Economy

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CORRUPTION WATCH-Now that we’re all beset upon by the new Tweeter-in-Chief, we have to take seriously the Power of the Ignoranti. While Donald Trump makes his wisdom or lack thereof visible for all to see, most of America is smugly unaware of that of which they are unaware. That’s just in the nature of being unaware. 

Over ninety-nine percent of Americans do not know that John Maynard Keynes was murdered. That does not disturb them because they don’t even know who Keynes is, or rather, was. It would be more accurate to say that Keynesianism was murdered by the 1999 repeal of the Glass-Steagall Act. Again, that does not disturb the public because they don’t know who or what Glass-Steagall was either. 

The Danger of Not Understanding the Laws of Economics. 

The problem with vast ignorance is that Ignorance Kills. Los Angeles City Hall is a Temple to Crimogenics due to the fact that Angelenos are suffering from fatal doses of Ignoranitus Economicus. See my June 26, 2016 article in CityWatch. In brief, we know nothing about the laws of economics. The rest of America similarly suffers ever since Bill Clinton, Wall Street, and Congress joined together to kill off Keynesian economics with the repeal of Glass-Steagall in 1999, the legitimizing of criminal Credit Default Swaps and allowing Wall Street to evade the 1936 Commodities Exchange Act. 

Since Hollywood is the land of re-runs, sequels, and remakes, it is fitting that this remake of Keynesian Economics comes from La La Land.

The Price System - The Bedrock of All Economic Systems. 

John Maynard Keynes, as well as Adam Smith and Friedrich Hayek, found the need to protect the Price System to be axiomatic – and what honest person wouldn’t? The Price System involves the billions of individual decisions made each day by billions of people about what to buy and what to sell and for how much. Adam Smith referred to this as the Invisible Hand which many people misunderstood to mean God. No, God does not set prices. People set the prices. 

The first domestic function of any and all governments is to protect the Price System so that the prices we pay for things and services are based upon their actual values. No frauds and no manipulation can be allowed to taint the Price System. No economy can function properly when people do not know what things are worth. 

If I buy a Mercedes SL and all I get is a shell with a 1970's Pinto interior, I feel cheated. Fraud destroys the Price System. People need to know what they will get for their money. Likewise, if I buy a real Mercedes and give the guy counterfeit money which the government then confiscates, the guy is cheated. If I buy a home for $900,000, but it is worth only $390,000, I have been cheated. 

It bears repeating: The first priority of any government is to guarantee that the Price System reflects the actual value of everything. 

Los Angeles Has Corrupted the Price System for Housing. 

The Price System for housing in Los Angeles has been destroyed by massive corruptionism. 

Everywhere people are talking and writing about Los Angeles’ high housing prices with no knowledge why our housing prices are so much higher than elsewhere. It is not due to increased demand for housing. Since our modest population increase comes from our birth rate rather than people moving to LA, the demand for housing is either stagnate or dropping. In fact, LA has a net exodus. The Family Millennials in particular are leaving. Babies do not rent new apartments, but every person who leaves LA for Austin Texas leaves a vacancy. 

The City Intentionally Spreads False Information about Housing. 

Because of constant disinformation from City Hall, people falsely believe that the demand for housing is increasing. A shortage does not mean an increased demand. Because our mayor, Eric Garcetti, has destroyed over 22,000 rent-controlled units, there has been a dramatic drop in supply. A reduction in supply means the same number of people are bidding against fewer units and that forces up prices. 

In fact, the unlawful eviction of poor people – something at which judges like LA Superior Court Judge Deborah Christian excel, raises the average rent. As soon as the old tenant has been unlawfully evicted, then the landlord raises the rent. There has been no increase in demand – only an unlawful eviction. 

Los Angeles’ poor people are involved in a different housing market than the middle and upper middle classes. The long-term financial health of a city, including its ability to provide for the poor, depends on a vibrant middle class. When massive fraud and financial manipulations from a corrupt city hall artificially raise all housing prices, the middle class moves away from LA. 

As Keynesian economics shows, material misinformation in the housing market can cause the entire economy to crash. Of course, we do not need Keynes to verify this fact since Corruptionism in housing is what crashed the economy in 2008. Nonetheless, there have been no reforms and similar distortions in the Price System for the housing market are killing Los Angeles.

How LA’s Temple to Crimogenics Drives up Housing Costs. 

Residential housing should be based on its value as Living Space. Once zoning is destroyed, residential housing in Los Angeles is not based on its value for raising a family. About 80% of the nation’s population prefers a detached home with a yard for their families. Thus, any city which adopts the New Urbanism, with its war on the single family home, is telling 80% of the new middle class that it is not wanted. 

“Corruptionism,” which has infested Los Angeles City Hall since at least 2001 when Eric Garcetti was first elected councilmember for District 13, has destroyed the Price System for residential housing. Because any developer can buy or bribe whatever zoning he wants, the value of homes then becomes their Speculative Value. 

Housing Prices should be Based on the Value as Living Space and not on the Value of Speculative Redevelopment. 

California and Los Angeles have laws which intentionally destroy the Price System for residential properties. One of them is allowing Granny Flats. Any developer can buy a house and turn it into a commercial enterprise by building a second house in the backyard and then renting out both houses. Then, he buys another house in a single family area and builds another Granny Flat and rents out both houses. It may take a few years, but eventually an owner-occupied single family neighborhood becomes an area of multi-family renters with absentee landlords. 

Into this deteriorated and demoralized neighborhood comes a developer. He buys or pays bribes to get an up-zoning to a 4-plex; another developer then buys or bribes to get an up-zoning to multi-family apartments along, say along Magnolia. Now there’s a 4-story apartment overlooking a single family neighborhood. 

The Key to Los Angeles’s High Residential Prices is: Residential properties cost an arm and a leg because their prices are set by the lands’ Speculative Value and not by its value as Living Space. 

To aggravate matters, home buyers know that the day after they buy their dream home for three times its actual worth, a series of Granny Flats can be constructed or a gaggle of “single family homes” will be build next door because the developer chanted the magic words: “Small Lot Subdivision.” Small Lot Subdivision means the developer can build six or more small homes on one lot with eight inches between them next to your newly purchased single family home. The eight inches between these de facto apartments allows them to be fictitiously treated as if they were detached homes and not apartments or condos in a neighborhood of single family homes. 

Keynes Opposes a Stimulus as the Business Cycle Moves into the Boom Phase. 

People think that Keynes says to spend money to stimulate the economy. This belief is false. Just because a doctor prescribes chemotherapy to treat cancer does not mean he prescribes it for pneumonia. When an economy suffers from a decimated Price System and it is entering the Boom Phase of the business cycle, Keynes does not recommend a stimulus. Yet, that is exactly what the Garcetti Administration is doing. There is probably no greater fiscal error than dumping billions of tax dollars into an economy whose Price System is wracked with fraud. 

Keynesian Steps to Fix Los Angeles’s Economy: 

1. Down-zoning. The Los Angeles Basin needs to de-densify. Thus, the Basin needs drastic down-zoning. This need is particularly strong in Hollywood. No more offices should be constructed on Bunker Hill or elsewhere in DTLA. 

2. Get rid of Granny Flats. They are a dagger into the Price System for Los Angeles residential housing. 

3. Get rid of AB 1818. This is a foolish state law. Los Angeles should down-zone everything as much as possible so that when a developer tries to up-zone density by 35%, he will be at a livable level for Los Angeles. 

4. Abolish all Small Lot Subdivisions. 

5. Modify the Anti-Mansionization ordinance so that larger homes can be constructed and older homes can be upgraded, but only in strict compliance with the nature of quality of the neighborhood. I would call them quasi-HPOZs. The “palaces” that loom over their neighbors’ homes and yards are unacceptable and unnecessary. 

6. End the vote trading pact at City Hall since it is criminal under Penal Code § 86. No city should be governed by a feudal criminal conspiracy no matter how much Judge Richard Fruins loves the idea. 

7. Never allow any CRA or EIFD type district for any reason. Simply put, they are vehicles to steal money from City Hall and give it to billionaires. 

8. Prohibition on City investing in any private project. Although Eric Garcetti loves the Chinese model where the government is the developer, that arrangement is verboten under Keynes. The City should never invest in a private project. It destroys the relationship between the marginal efficiency of capital and the rate of interest. This only results in bad projects being constructed and money being misdirected away from better uses.

 

(Richard Lee Abrams is a Los Angeles attorney. He can be reached at: [email protected]. Abrams views are his own and do not necessarily reflect the views of CityWatch.) Edited for CityWatch by Linda Abrams.