From the February 2006 Newsletter:

Government largess and the Law of Unintended Consequences
By Ted Loewenberg

    San Francisco imposed Rent Control in 1979 because of the general feeling that the economy was out of control and that something had to be done. The outrage of one landlord “gold plating” his build- ing with resulting huge rent increases made a prima facie case for government intervention. Rampant inflation peaked in 1981 at about 12%. Interest rates for home loans were climbing toward their peak of 18%. Companies transferred employees to the West and the South, leaving behind the Rust Belt and 4% mortgages. Oil prices had just doubled again after the second OPEC oil embargo of 1978, and hit record levels not matched until 2005. The deepest recession since the Depression gripped the nation in the early 1980s, with consumer confidence at all-time lows. The government had to do something to help out working people. In San Francisco, one answer was a temporary cap on rent increases.

    Temporary relief turned into permanent restrictions in an effort to “safeguard tenants from excessive rent increases and, at the same time, assure landlords fair and adequate rents consistent with Federal Anti-Inflation Guidelines.” The Rent Ordinance rent limitation section (Sec. 37.3), has been modified no less than 17 times since 1979, while the factors that led to rent control vanished long ago. A generation later, an According to the 2001 housing study, 30% of SF households in rent-controlled units earned over $80,000 a year, while only 30% were “low income.” A great example of the Law of Unintended Consequences: a generation later, the very people who were supposed to be helped most in fact make up less than one-third of the government’s beneficiaries.

    This is what happens when the city spends other people’s money to accomplish a social engineering objective. It mostly misses the target. Not content with its record of under-achievement, the city implemented another program to deal with the “housing crisis.” What crisis? The distinct lack of new construction suppressed by the Rent Ordinance that drains money from property owners. In the 1990’s, developers were mandated to provide a percentage of affordable units for middle class buyers. The costs of those set-aside units were to come from profits gained by building other higher-priced housing, i.e., a special tax was levied on developers to pay for the Supervisor’s desire to build “affordable housing.” As Joe Cobb pointed out in his November, 2005 SPOSF News article, such programs do not produce the desired results. That has not stopped certain Supervisors from now demanding an even greater private contribution to funding this government program. Like rent control, the consequence will be that still fewer units will be built.

    Recently, a Supervisor proposed that private pockets pay for another government program. Small businesses are being asked to fund employee health care insurance because the Supervisors think it is government’s role to provide health care. When the law imposes such requirements, voters never have to deal with the funding issues. If this government largess were paid for from the General Fund, the voters could support politicians who are committed to the voters’ spending priorities. As with rent control and inclusionary housing, this proposal shields the politicians from the unintended consequences of their actions.

    Politicians’ actions are the real issues. City government budgets should fund programs devised by elected officials so that all the priorities of all the residents can be properly balanced. When the real costs of rent control, affordable housing or even private-sector health care are not on the table, responsible oversight disappears, opening the door for unintended consequences.

    The natural result of spending other people’s money is that the programs don’t succeed. Instead, unpredicted results abound, creating still more problems without solving the particular issue. That is why rent control led to small property landlords fleeing the rental business, for lack of sustaining revenue. That is why inclusionary housing is failing to develop the needed middle class housing. It is why mandates for paying for employee health insurance in small businesses will result in a loss of jobs rather than more insured workers.

    When placed end to end, all of these programs define a negative slope, one which makes the City less affordable and less hospitable for families while reducing employment opportunities for everyone. We all suffer as we are pushed down a slippery slope on the grease of the government’s largess. All that some Supervisors can say is, “Wheeee!”

Ted Loewenberg

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