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Trading Lessons

One Year After: Freddie Gray and ‘Structural Statism’

Politics / US Politics Apr 26, 2016 - 06:36 PM GMT

By: Mike_Whitney

Politics

When Freddie Gray was born in 1989, Baltimore hosted 787,000 residents and 445,000 jobs. By the time his fatal injuries in police custody provoked riots last April, the city’s population had fallen by one fifth, to 623,000, and its job base had shrunk by one quarter, to 334,000.

Little wonder that throughout his life, Mr. Gray had never been legally employed. Nevertheless, friends and family considered him “a good provider,” according to The Baltimore Sun.


This was because he worked in the drug trade, which filled his city’s economic vacuum. An average day on the corner can yield take-home pay ten times that available in the low-skill warehousing or service jobs sometimes available to high-school dropouts like Gray.

The catch, of course, is that such rewards carry two great risks. The lesser of these is regular involvement with the justice system. Gray was arrested 18 times and served three years behind bars in his tragically brief life.

Far more dangerous is how competition works in illegal markets. When selling contraband, one does not pursue market share by advertising high quality or low prices. Sales are increased by acquiring territory from rivals, often violently.

For Baltimore’s drug cartels, the post-riot disequilibrium provided an opportunity for market expansion. Inevitably, each strategic assassination produced reprisals and collateral damage.

As a result, 2015 saw the highest homicide rate in Baltimore’s history, at 55 per 100,000 residents — over 13 times New York’s rate. This horrific suffering was concentrated in the African-American community: 93% of victims were black, of which 95% were male and 65% aged 18 to 34.

In Freddie Gray’s demographic, then, the homicide rate was 450 per 100,000 — higher than the peak U.S. combat death rates recorded in the wars in Iraq and Afghanistan.

The prevailing narrative is that all this is a by-product of structural racism and exemplifies a society “built on plunder” (according to the celebrated black radical Ta-Nehisi Coates). This is a myth.

It is not that racism doesn’t exist but rather that it is relatively constant. When explaining variations in economic and social outcomes, constants have little power.

It’s the application of destructive public policies that explain why neighborhoods like Gray’s Sandtown-Winchester are deprived. If one had to put a label on this malignant force, it might be structural statism: an addiction to market-unfriendly governmental approaches to every problem.

The federal government encourages this addiction. Its partial subsidies for a vast array of entitlements and so-called urban renewal programs induce dependency and leverage the expansion of bureaucracies in Baltimore and elsewhere.

The damaging effects of the statist compulsion are best seen in housing policy. Shortly after the 1937 passage of the Wagner-Steagall Act — premised on the notion that government landlords would serve poor and working-class tenants better than private ones — Baltimore established its Housing Authority. At the end of WWII, the city had built ten projects. By 1980, it would have 30 more.

The resulting intracity diaspora destroyed vast amounts of social capital. The neighborhoods that were leveled to access urban renewal subsidies may not have been pretty, but their residents had accumulated valuable but invisible capital — relationship networks, commercial contacts, and bonds of trust — that government planners simply ignored.

And if that weren’t bad enough, those placed in projects often found City Hall to be a slumlord. Baltimore recently paid $8 million to tenants alleging that Housing Authority workers demanded sex before making needed repairs. Federal audits have been consistently critical over the years, citing deteriorated public properties and administrative inefficiency that often resulted in high vacancy rates and unspent Section 8 voucher monies.

But most critically, this and other renewal programs opened a budgetary vein. Initially, federal housing loans covering 90% of construction costs were irresistible, but Uncle Sam later paid only one third of operating costs. Tenants and the city were supposed to cover the rest. But revenue shrank as subsidized, poor tenants crowded out working-class rent-payers, while costs soared.

In consequence, Baltimore raised its property tax 19 times between 1950 and 1975, and wrecked its economy. Each rate hike imposed capital losses on home and business owners. Predictably, they fled — not plunderers, but plundered. Repeated financial crises, job losses and social dysfunction followed.

Over time, city leaders understood that their tax policy was toxic to investors. Rather than pursue broad-based relief, however, they handed out special breaks to well-connected developers who focused their efforts on the waterfront, far from Mr. Gray’s neighborhood.

Now, at the anniversary of his death and as Baltimore’s primary election approaches, there is much talk that the city is about to chart a new course.

But course changes long have been advertised and seldom delivered. There is no meaningful political competition in cities like Baltimore, which has not elected a Republican mayor since 1963. Among the platoon of Democrats vying to fill the leadership vacuum, the platforms are as different as Tweedledum from Tweedledee — and predictably statist.

The city recently cadged hundreds of millions of dollars in aid from the state for new social-service programs and slum clearance projects. Officials have also pledged a $535 million tax subsidy to a billionaire for yet another waterfront development — its latest attempt to attract new capital without cutting taxes for the little guy. Most troubling, the City Council is advancing legislation to wrest budgetary power from the mayor, which will diminish Baltimore’s already-feeble fiscal discipline.

Post-“unrest” Baltimore seems less interested in effective reform than in more extravagant statism: new programs, projects and pork. We are doubling down on a failed strategy, hoping for different results.

By Steve H. Hanke and Stephen J.K. Walters

www.cato.org/people/hanke.html

Twitter: @Steve_Hanke

Steve H. Hanke is a Professor of Applied Economics and Co-Director of the Institute for Applied Economics, Global Health, and the Study of Business Enterprise at The Johns Hopkins University in Baltimore. Prof. Hanke is also a Senior Fellow at the Cato Institute in Washington, D.C.; a Distinguished Professor at the Universitas Pelita Harapan in Jakarta, Indonesia; a Senior Advisor at the Renmin University of China’s International Monetary Research Institute in Beijing; a Special Counselor to the Center for Financial Stability in New York; a member of the National Bank of Kuwait’s International Advisory Board (chaired by Sir John Major); a member of the Financial Advisory Council of the United Arab Emirates; and a contributing editor at Globe Asia Magazine.

Copyright © 2016 Steve H. Hanke - 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.

Steve H. Hanke Archive

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