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Bankrupt Los Angeles, Harbinger for America

Interest-Rates / US Debt Aug 10, 2011 - 01:28 AM GMT

By: Douglas_French

Interest-Rates

Best Financial Markets Analysis ArticleIn a piece for the Wall Street Journal, Joel Kotkin tells of the demise of Los Angeles. No, you won't see Snake Plissken or Rick Deckard racing through the City of Angels just yet. But the city's political machine is doing all it can "to leave behind a dense, government-dominated, bankrupt, dysfunctional, Athens by the Pacific," explains Kotkin.


The fact that government is visibly destroying L.A. is especially ironic, given that government policy made the southern California metropolis what it is — a sprawling sea of tract homes laced with ribbons of concrete highways — providing hope for a better life in the sunshine on the sunset coast.

Los Angeles was once a sleepy Mexican pueblo, Kotkin points out in his book The City: A Global History, but business leaders like railroad magnate Henry Huntington imagined L.A. to be "destined to become the most important city in this country, if not the world."

The Pueblo de Los Angeles was founded in 1781 by Felipe de Neve where the Los Angeles river emerges from the foothills.

The water (which would soon be heavily subsidized) allowed for irrigation, and soon citrus groves and fields replaced the dusty cattle ranches. After agriculture came oil discoveries, and as Robert Fishman points out in Bourgeois Utopias: The Rise and Fall of Suburbia, the first of many land booms happened in the 1880s. "From the first, the great migration to Los Angles was a migration of prosperity," writes Fishman, "of people with capital and skills seeking a more comfortable life."

Not all observers are as charitable as Fishman. In fact, most writers view Southern California with contempt. Frank Lloyd Wright once remarked, "It is as if you tipped the U.S. up, so that all the commonplace people slid down to Southern California."

In an article entitled "Paradise" for The American Mercury, James M. Cain wrote what H.L. Mencken judged "the first really good article on California that has ever been done."

In "Paradise," Cain marvels at the division of labor in the car business — repair and otherwise. "As you might expect, there is a great skill in everything that pertains to the automobile, that extends much further than the roads it runs on." At the same time, Cain complained, "you will not strike one place where you can get a really distinguished meal." He especially disliked the locally served oysters. "If you can imagine a blend of fish, seaweed, copper, and pot-washings, all smelling like low tide on a mud-flat, you will have a faint notion of what an Olympia oyster is like."

"The whole place is overrun with nutty religions," wrote Cain, but he was impressed with the sobriety of the L.A. Chamber of Commerce for realizing that the business climate must be promoted, not just the meteorological one.

Cain's final point about Los Angeles was that everyone living there believed "that some sort of destiny awaits the place." The United States no longer had a destiny according to Cain.

In the beginning, its destiny was to reduce a continent, and that destiny, as long as it lasted, made everything hum; transformed the most shiftless bacon-and-beaner into a pioneer, placed epic frame around our wars, gave the most trivial episode the stature of history. But the continent has been reduced, alas, so that destiny has blown up.

Businessmen flocked to L.A. and most of the California coast. Although ostensibly in the railroad business, Henry Huntington was first and foremost in the real-estate business, buying up as many orange groves and vegetable fields as he could. And while the city attracted the burgeoning film and oil industries, as Fishman explains, "The biggest industry, however, was the business of growth itself: land speculation and house building based on the great expectations of the future."

In Los Angeles Realtor, California Real Estate Commissioner Stephen Bornson wrote in 1931, "I see California as a deluxe subdivision — a hundred million acre project." And FDR's housing agenda gave Bornson's vision a massive boost. The Home Owner's Loan Corporation created 90 percent loan-to-value, long-term mortgages in 1933, and a year later the Federal Housing Administration (FHA) was born. FHA would standardize the home-building business from subdivision conception and design, to the appraisal requirements needed for loan approval for the final home buyer, along with every step in between. Builders could even draw on FHA mortgage guarantees for working capital.

The FHA "allowed the subdivider to look beyond the rapid turnover of lots and make a longer-term commitment to both subdividing the land and building the houses on it," writes Fishman. The government program allowed for economies of scale and speed. The standard California ranch house was born and duplicated over and over.

What once were orchards could now be complete subdivisions of nearly identical houses within months. As Fishman notes, "Using this method in the late 1930s, a single developer in the City of Bell was able to build and sell 236 houses in twenty months." By the 1930s, single-family residences accounted for 93 percent of the city's residential buildings.

From the 1940s onward, L.A. was transformed from 900 square miles of agricultural land to vast swaths of suburban tract homes with 500 miles of freeways.

The defense and aerospace industries flocked to Los Angeles during World War II and the city became home to the nation's largest port. Over time an "entrepreneurial class of immigrants — Middle Eastern, Korean, Chinese, Latino — launched new businesses in everything from textiles and ethnic food to computers," writes Kotkin in the WSJ.

Now, however, former labor organizer Antonio Villaraigosa is the city's mayor and "has little understanding of private-sector economic development beyond well-connected real-estate interests whom he has courted and which have supported him," Kotkin explains.

The mayor has visions of public infrastructure boondoggles dancing in his head: a downtown football stadium, a downtown entertainment complex, and a $40 billion subway to the sea.

The former labor organizer must not realize that Los Angeles's downtown business district employs a tiny fraction of the area's workforce. "Los Angeles demonstrated to the world a new model of urban growth — dispersed, multi-centered, and largely suburbanized," Kotkin writes.

So while the mayor wants to use government largesse to ramp up superfluous downtown projects for his friends in construction and development, Villaraigosa's other friends, the environmentalists, are strangling businesses with more regulations to curb emissions. And of course the mayor is working to expand the union presence on the docks at the expense of small entrepreneurs.

The unemployment rate for Los Angeles County was officially 12.4 percent in June, after peaking a year ago at 13.4 percent. However, the worst is likely not over. As Kotkin explains, the Panama Canal is planning to widen and there are plenty of ports on the eastern seaboard looking for business. Also, the Golden State's renewable-energy mandates are estimated to increase energy costs by 20–25 percent. Californians already pay 53 percent more than the national average.

And the taxman is especially brutal in California, with a top rate of 10.3 percent, which kicks in at a $1 million in earnings. Sure, not many are pulling down that much, but the second highest rate, 9.3 percent, applies to those making $46,766 and above. The state's minimum wage is $8 an hour, 75 cents above the federal rate. And restaurant employers may not use tips earned as credit toward this obligation as is the case in many states. California employers are required to pay "exempt" employees double the state minimum, putting these employees in the 6 percent tax bracket.

"As California goes, so goes the nation," goes the old saw. As bad as Los Angeles has it, the city is only just ahead of the rest of the country. California voters want to have their cake and eat it too. Back in 2003, Todd S. Purdum wrote for the New York Times,

Californians — like the rest of the country, only maybe a little bit more so — want it all, all the time: lower taxes and smaller classrooms; tighter pollution controls and bigger S.U.V.'s; cheap labor and fresh produce but tighter limits on immigration and provision of social services.

Economics professor Clifford F. Thies found that left-liberal cities "tend to have higher unemployment, more murders and shrinking populations, and weakly tend to have higher overall crime." These cities and their citizens are only kept alive, and their politicians kept in power, with transfer payments from state and federal governments.

What once was believed to be a city of destiny (paradise on earth) is being destroyed by government looting; and now its saviors, the state of California and the federal government, have been looted as well.

Cain decided to stay, back in 1933. "The climate suits me fine," he wrote. But who can afford the sunshine now?

Douglas French is president of the Mises Institute and author of Early Speculative Bubbles & Increases in the Money Supply. He received his masters degree in economics from the University of Nevada, Las Vegas, under Murray Rothbard with Professor Hans-Hermann Hoppe serving on his thesis committee. See his tribute to Murray Rothbard. Send him mail. See Doug French's article archives. Comment on the blog.

© 2011 Copyright Ludwig von Mises - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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