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By Douglas Moran

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About this blog: Real power doesn't reside with those who make the final decision, but with those who decide what qualifies as the viable choices. I stumbled across this insight as a teenager (in the 1960s). As a grad student, I belonged to an org...  (More)

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Development policy: "The Market" and regulation

Uploaded: Jun 20, 2017
Neo-liberal, Libertarian, Ayn Rand-ian, Progressive. Mr. X seemed to shift seamlessly and sincerely between these philosophies. He believed that the future envisioned by him and people like him was inevitable, and that people were increasingly becoming "woke" to it. He believed that businesses would support this vision--out of self-interest (the genius of markets)--and thus regulations were not just unnecessary but impeding progress and thus needed to be eliminated. Or at least, that is what I heard him to say.

This was part of an informal discussion after a Cupertino Town Hall meeting on housing, and was about a controversial development project there (Vallco). What made this discussion notable was how long the various participants were willing to engage in trying to inform, understand and persuade each other. Because I had no knowledge of the project itself, much less a dog in the fight, I could easily focus on the dynamics of the discussion. And I don't know who Mr X was, or any of his organizational affiliations. He was probably in his late 20s or early 30s.

Don't worry that I am going to try to explain those four philosophies. It would take much too much to describe the fuzziness of their positions, the many variants, the overlaps, the linkages... Rather I am using it as a motivating example for the unspoken parts of similar discussions here in Palo Alto--you often get only tiny indications of what other parties believe and, in order to make a reasonable response, you are forced to make inferences to fill in the very large gaps. Four basic rules:

- It is very natural--and often beneficial--to do some anticipation of what others are going to say. But don't let anticipation interfere with listening to what others are actually saying.

- As a speaker, you are licensing the audience to make reasonable inferences from what you say, and you are responsible for anticipating false inferences and need to include information that helps the audience avoid them.

- As a speaker, if you know so little about the topic as to not be able to reasonably anticipate how you might be misunderstood, you are an impediment to the discussion and shouldn't be wasting the audience's time with your uninformed opinions.(foot#1) Instead you should be listening and asking questions.

- If you take a combative position based upon ignorance and you get swatted down, don't act surprised or indignant--you gambled and lost. Don't double-down. Yes, I know that this goes against Internet culture.

In the motivating example, Mr. X started out arguing that Cupertino should pursue more public-private partnerships, but as he talked, it became clear that his notion of a partnership was for the City to facilitate the developer's decisions, including shifting costs from the developer to the public. When pushed to justify the cost shifts, he cited numerous benefits to the city from the project. Other participants then pointed out to him that not only were these benefits not part of the proposed project, but that the developer had rejected the City's attempt to have them included. Mr. X flatly rejected this as wrong, but could offer no evidence to back his position. My suspicion was that he knew nothing about the details of the project because throughout the discussion he not only failed to address details, but displayed no interest in the details. My assessment was that for him ideology/dogma trumped facts.

Why did I think that Mr. X was an adherent of the four philosophies mentioned? Because they have different ideas about the role of "The Market"--the agglomeration of private enterprise--and the role of government (regulations...). At various times, he made arguments that were distinctive of each of the four. My assessment that he didn't understand the incompatibilities because he seemed to have a shallow understanding of economics. However, those arguments are ones that I commonly hear from many others engaged in the same advocacy.

----"The Market"----

The concept of "The Market" that you commonly hear in political discussions is a rough, first approximation that is found in the first part of an introductory class in Economics--it is useful for introducing other basic concepts. However, nothing vaguely similar can be found "in the wild" (reality). It uses multiple invalid assumptions such as:

- A level playing field: All participants have equal access to information, equal access to the markets (no favoritism, side deals, front-running, high-speed trading, thresholds...) materials, suppliers, service providers..., etc.

- Supply is elastic: If the demand for widgets increases, the supply is easily met by the widget factories adding overtime, another shift, additional production line, ... There are no resource limits such as land, materials, labor supply, capital, travel time, ...

- No barriers to entry by new competitors: No monopolies (natural or artificial), no "Economic Moats" ...

- No transaction costs.

Another example of trivial, unreal economics is the argument that assumes that change occurs only along a single dimension/variable. I wrote about this in a much earlier blog "The Law of Supply and XXXXXX" (2014-06-10). A panelist during the above-mentioned Cupertino Town Hall meeting make the same mistake. San Jose City Councilmember "Chappie" Jones (Bachelor's Economics UC Davis, MBA UC Berkeley) gave an interesting and well-prepared summary of San Jose's situation (that comment @48:58), but then, after talking about the expected continuing and substantial increase in demand, he said "Econ 101 is that if you increase the supply, it’s going to decrease the cost" (@55:14). Other panelists challenged the fallacy (panelist Goldman recommended searching for "Urban Economics").(foot#2)

If you are going to advocate for The Market playing a significant role in producing changes, your explanation should involve a realistic, sophisticated model of how markets actually work.

----Regulatory Approaches----

Many do not have any guiding philosophy about regulations. Instead it is often the raw politics of self-interest: "A regulation that protects me from you is good; one that protects you from me is bad", "One that benefits me by transferring costs to you is good; ...". Libertarians make an attempt at this--"does not harm others"--but it is so vague as to be meaningless. For example, take the issue of management of shared resources which is commonly known by its classic example: The Tragedy of the Commons. My experience with presenting Libertarians with variations of this issue produces very different answers, and explanations. My variations are:

1. A city decides to dump raw sewage into a river, thereby saving itself the costs of building and operating a sewage treatment plant, but inflicting costs on those downstream who now have increased costs of water treatment plus are denied normal uses of the river (which is now an open sewer). This is one of the classic examples of a negative Externality.

2. A person buys a cattle ranch in an arid region and decides that he can make more money farming, but to do this, the necessary irrigation will require all the water from the river flowing through his property. This deprives the ranches downstream of the water they need for their operation, whether it be directly from the river or from groundwater recharged from the river.

3. Instead of a surface river, the shared resource is a groundwater aquifer. The property owner's decision to take an excessive share of that water results in his neighbors having to drill deeper wells (very expensive), if not having to find new locations where the groundwater is still within reach of drilling, or even having their businesses destroyed.

The Libertarianism attitude toward regulation is important because it heavily influenced the Neo-liberalism that took over the Democratic Party in the 1990s. It has outsized influence locally because of its adherents among the tech elite.

For some, it is a sincere political belief about society. For others, it represents their personal attitudes toward interactions with other individuals. Then there are those for whom Libertarianism seem little more than a rationalization for opposing regulations meant to protect others from being exploited by them. Uber is a current prominent example.(foot#3)
Reminder: There is a long running argument about whether Libertarianism's acceptance--in practice--of predatory behavior is a flaw or a feature. That and similar discussion of general philosophies is off-topic here. The topic here is knowing enough about what others believe to understand their arguments.

Be aware that the public justification for a particular regulation is often a simplistic account of the politics. The Federal Meat Inspection Act of 1907 is an example from the early days of regulation. History books commonly presented this as an early instance of consumer protection, motivated by the book "The Jungle" by muckraking journalist Upton Sinclair. However, it had strong support from many meat-packers. Huh? Shouldn't they have been opposed to regulation? There was a precursor: Many export markets were closed to the US meat-packers because there were too many companies that had been shipping tainted meat. To open up those markets, trust needed to be established, and so the large meat-packers pushed for regulations requiring government inspection / certification.

A similar situation existed inside the US, except that there weren't well defined boundaries. The costs of getting tainted meat from a supplier were sickness or death for the consumer, and loss or destruction of business for the retail butcher and other intermediates. Consequently, establishing trusted suppliers was important and often expensive. This in turn created a very inefficient market: surpluses in one area were not easily transferred to others because of lack of pre-existing trusted relationships. Similarly for local shortages. These regulations reduced the need to trust individual suppliers by transferring most of the issue of trust to the federal government. According to the economic history I learned, this resulted in a more competitive and more efficient market for meat.

Now, the twist you should have expected from me: Mad Cow Disease (BSE) in the US. In 2003, Japan, which was importing $1.4B of US beef, placed a ban on those imports because of inadequate regulations and inadequate enforcement by USDA. One producer (Creekstone Farms) wanted to do voluntary testing so that it could export, but it was prohibited from doing so by the USDA, which was under pressure from other meat-packers. The argument was that it would creating pressure for all meat packers to do the testing, and thereby increase costs to US consumers, contrary to the USDA assessment that its enhanced standards would be adequate and that testing was therefore unnecessary. Aside: Subsequent absence of reported occurrences of Mad Cow Disease indicate that the USDA was correct about its standards, but whether the prohibition was appropriate is open to debate.

Note: Examples of abusive use of regulations are not an argument against the principles behind regulations. For example, a regulation that protects a politically connected company is not proof that other regulations can't benefit the overall market. (Aside: I am dismayed that I feel the need to provide such a reminder.)

Note: Overly complex regulations are a result of the politics of the US judicial system: Because of repeated instances of judges accepting forced, even bizarre, interpretations of the regulation, the lawyers writing the rules try to anticipate such misinterpretations in the drafting of the rules, thereby making them complex. Plus, complexity is lawyers being lawyers. Plus the effect of "Too many cooks spoil the broth."

----Psychological/religious underpinnings----

Part of the doctrine of various religions is that wealth and power represent God's favor rewarding righteousness. This is routinely stretched beyond people of accomplishment and proven integrity. Good fortune (luck) is also God's favor. Those whose sole "accomplishment" was to be born to wealth and power are deemed worthy because of "good blood". You may speculate that such religions were shaped by the powerful and wealthy to legitimize their circumstances, that appears to be only part of the explanation. There seems to basic human psychology underlying this: Believing that wealth and power is simply chance, and thus undeserved, could impede creation of larger societies.

This bias results in the wealthy being ascribed skills they do not possess. The Rome Republic was an example of this. Wealth got you into the Senate. Strong political skills, such as oratory, could get you elected Consul. Being Consul carried with it being the top general in actual battles, with occasional disastrous results (example, Battle of Cannae). Similarly there is a long history in the US of belief that a successful businessman would naturally be successful in a variety of political positions, despite a similarly long history of contradicting this. Theodore Roosevelt (US President, 1901-1909) said "It tires me to talk to rich men. You expect a man of millions, the head of a great industry, to be a man worth hearing; but as a rule they don't know anything outside their own business." Then there are the failed businessmen that were great leaders (for example, US Presidents Ulysses S. Grant and Harry Truman).

People who have these beliefs rarely mention them explicitly in discussions--often the only indication is in what they refuse to consider. For them, "Might makes right" is not a cynicism, but the natural order. They present the same sort of problem as people with strongly held ideological beliefs about specific policy issues.

----Some local examples----

In the recent discussions of Accessory Dwelling Units (ADUs = "granny cottages" + ...), the current Council majority was largely dismissive of well-reasoned arguments about the need to provide neighbors with various protections from the negative impacts of ADUs.

Councilmember Adrian Fine is the most visible of the "We can trust businesses to do the right thing" on Council. At the PAN Forum during the campaign, one of the questions was about Airbnb. Fine's response included "...figure out how big the problem is, and then work with Airbnb. They're 35 miles up 101. Right. We need to bring them down here and make sure they know that there are quality of life issues that Palo Altans want to address."(foot#4) Excuse me. At that time, Airbnb was in an intense multi-year fight against cities such as San Francisco, Los Angeles, and New York. These cities had found that the substantial majority of the rentals listed on Airbnb were illegal, and that Airbnb was facilitating the reduction of the housing supply in those cities, thereby harming the cities and their residents. Analysis of NYC data by activists claimed that Airbnb was manipulating the data to understate its harm.(foot#5)(foot#6) The notion that Airbnb would willingly work cooperatively with Palo Alto was hope/ideology over experience.

Adrian Fine provided another good example of trusting developers to do what he thought was the right thing for the city and region. As part of the Comprehensive Plan Update process, he advocated "removing" the 50-foot height limit on buildings for the whole city, for having "tall buildings", and coupled this with providing more office space for new companies. Yet, during the campaign, he said that he only wanted slightly taller buildings in only a few locations--transit centers--and to have lots of housing. He was outraged to be criticized for wanting to open the door to very different outcomes despite not having advocated measures to limit such very predictable situations.


Different philosophies about the role of markets and of regulations are to be expected. However, problems arise when people don't seem willing to accept that there are other legitimate perspectives. Worse when people treat their beliefs as facts or inevitabilities. Lack of self-awareness about one's own assumptions impedes productive discussion. "When you can see two sides of an issue, you are only beginning to understand it" (unknown).

1. Uninformed opinions:
A recent example of this in this blog was a commenter who rejected the principle of zoning--the right of the large community to control the impacts of individual property owners--and then objected to the consequences of his position when the situation was reversed and and it was he who would be suffering the impacts of a neighbor.

2. Town Hall meeting: Full title: "Better Cupertino First Town Hall Forum on Sensible Growth"
Held on 2017-04-23, hosted by a resident group Better Cupertino and the Silicon Valley Chinese Association Foundation.
The panelists were council members from Cupertino (Steven Scharf), Palo Alto (Lydia Kou), San Jose (Charles "Chappie" Jones), and Sunnyvale (Michael Goldman).

3. Uber:
Many financial analysis have pointed out that Uber is following an old game plan of pricing below costs in order to eliminate competitors, after which they would have a monopoly and could jack up prices. Yes, the US has laws against this, but enforcement is lacking, especially when a company characterizes itself as a technology company.
Plus it has tried to get around regulations intended to protect the workforce from exploitation and abuse.

4. Fine and Airbnb:
My blog "Council Candidate Forums" (2016-10-18) provides an index into the videos of the three forums, and some of my thoughts on the most notable responses.

5. Claim that Airbnb manipulated data: "Report Says Airbnb Fudged Data To Hide Illegal Hosts" - NBC News, 2016-02-12.

6. Airbnb settlement: Airbnb did subsequent settle with San Francisco:
"Airbnb, HomeAway settle SF suit, agrees to register all local hosts" - SFGate, 2017-05-01.

An abbreviated index by topic and chronologically is available.

----Boilerplate on Commenting----
The Guidelines for comments on this blog are different from those on Town Square Forums. I am attempting to foster more civility and substantive comments by deleting violations of the guidelines.

I am particularly strict about misrepresenting what others have said (me or other commenters). If I judge your comment as likely to provoke a response of "That is not what was said", do not be surprised to have it deleted. My primary goal is to avoid unnecessary and undesirable back-and-forth, but such misrepresentations also indicate that the author is unwilling/unable to participate in a meaningful, respectful conversation on the topic.

If you behave like a Troll, do not waste your time protesting when you get treated like one.
What is it worth to you?


Posted by mauricio, a resident of Embarcadero Oaks/Leland,
on Jun 20, 2017 at 11:14 am

Adrian Fine exemplifies the strategy of PAF and their ambassadors on the CC. Convince the public that developers are benign and would do the right thing if we just allow them to develop. Pretend, while trying to get elected, that you are actually not for what many voters are suspecting you are for, then start pushing for what you claimed you are not for with a vengeance once you are elected.

Why in the world would anyone think that once elected, Adrian Fine would not push for hype-development and substantial relaxing of height limits?

Posted by Online Name, a resident of Embarcadero Oaks/Leland,
on Jun 20, 2017 at 12:05 pm

Perhaps Mr. Fine can defend the Trump Administration's recent appointment of Rev. Fallwell to HEAD the effort to reform all US education.

Mr. Fine is the poster boy for PAF which increasingly blatantly ignores the concerns of residents, See PAF's recent announcement on how PAF, Stanford, PA Chamber of Commerce etc. plan to "improve" 101 and the Rail Transit Corridor for poor frustrated COMMUTERS. No mention of residents or tourists or those trying to get to evening events 35 miles away.Web Link

I stumbled across an interesting article on 21st Century Victorians that seems apt for this discussion.
Web Link

Posted by resident, a resident of Charleston Meadows,
on Jun 20, 2017 at 1:19 pm

Looks like some groups are getting ahead of them selves. I read Mr. Roadshow in the SJM where people write-in to find out when the state is going to fix specific street locations. All of the fixes are budgeted out over the long haul on the state's schedule. And all of the major fixes are state wide, then location wide.

To my knowledge PAF does not represent the City of Palo Alto - we have a specific employed person and department for that. I would request that PAF, PA C of C and Stanford provide clarifications and points of contact for what ever it is they are proposing. We pay people to be representatives for the city. If they are not doing their job then suggest that they be replaced with someone else.

Otherwise it is not appreciated that groups impose themselves on what I thought was a hierarchy of responsibility for the city and general location. Those designated people then work with the surrounding cities within existing committees who are appointed to review problem areas. It does not work when groups decide to impose themselves into a situation and then designate themselves to be in charge.

Posted by Gale Johnson, a resident of Adobe-Meadow,
on Jun 21, 2017 at 12:05 pm

I admit to being fooled by sitting council members whose campaign rhetoric never matched their on the job rhetoric. I voted for some of them.

On the ADU issue: I opposed it for many reasons which I've stated online before. Now it is in force. So, how's it going? I'm awaiting the first quarterly report that was promised. How many building permits have been applied for and how many were approved since the passage of the ordinance? Who applied and what was their motive for it? Only zealots of the idea, that it would have a significant impact on solving the housing problem in PA, really believed that would happen, and some of them thought that would extend to include affordable housing.

Even my good friend, Cory Wolbach, who was a leader in the ADU effort, admitted it wouldn't have much impact on our housing problem. But the flag and banner wavers at CC meetings, the zealots, thought it would, and they had so many sad and convincing stories to tell. How many of them have followed thru with their plans and applications for permits?

Posted by Westerner, a resident of another community,
on Jun 21, 2017 at 8:58 pm

"...the necessary irrigation will require all the water from the river flowing through his property. This deprives the ranches downstream of the water they need for their operation..."

In reality, this is an example of codified non-regulation. In contrast to the eastern US, where the rancher could legally do this at will under the prevailing doctrine of riparian rights, the doctrine of prior appropriation operating in the western US permits such a water snatch only if the rancher can prove the owner of his/her property was taking that amount of water before neighbors with conflicting water demands began taking water from that river. With that proof, the rancher's entitlement is absolute, rain or drought. Without it, it's dessicationville. Lifetime employment for water rights lawyers there.

Considering that US arid lands are in the west, you might want to use another narrative.

Posted by Douglas Moran, a Palo Alto Online blogger,
on Jun 22, 2017 at 12:37 am

Douglas Moran is a registered user.

RE: "Westerner"

The scenario sequence was not about what the law is, but rather what the law should be relative to the person's political philosophy.

Posted by Asher Waldfogel, a resident of Old Palo Alto,
on Jun 22, 2017 at 2:34 pm

Asher Waldfogel is a registered user.

There's getting your ideology straight. There's also getting your facts straight.

The goal of the colleagues' memo that kicked off the ADU work was to create affordable housing. That's a term with a legal definition based off the County's median household income of $93,854 (in 2014). The factual question is, “Will ADUs create housing priced between $700 and $2800 per month?"

Assuming an ADU is financed with a line of credit secured by your house (you probably can't secure an ADU against a separate mortgage) and there's some increase in your tax base, the question is, “What can you build in the Bay Area for $300K, $200K or $100K?" to hit median, low or very low affordability targets.

There's been a lot of advocacy over small and very small units, but less analysis about whether small units are cheaper to build. The short answer is, “Not as cheap as you think." If 1000 square feet costs $400K to develop, then 500 square feet won't cost $200K. It'll cost more like $350K. Why? Because the small unit still has a kitchen and a bathroom. It still has windows and doors. It still has a furnace and a hot water heater. It still needs site work, an entry path and a concrete foundation. It still needs electric service and water and sewer lines. It still needs a building permit and inspection. It still needs subcontracting to multiple trades and site coordination.

If it's mathematically impossible to create affordable housing with ADUs, then what will we get from loosening ADU rules? We'll get uses like home office, spare bedroom for family or possibly caregiver. These are all good and useful purposes, but there's no emergency reason to relax normal parking and setback rules to accommodate these uses. The other use that pencils out pretty quickly is short-term rentals like AirBnB. These are technically illegal, but not well enforced. A “junior ADU" may be cheaper to develop with a shared bath and a kitchenette, but there are still unanswered questions about cost and more importantly: if you're inviting a tenant to live inside your house, do fair housing laws apply?

After state law changed it made sense to update the local ordinance to follow state law. It did not make sense to go beyond state law without some analysis on whether ADUs can meet local policy goals. I published development cost analysis to my colleagues on the PTC in March of 2016 that I checked with local architects and builders. If anyone can show us verifiable lower construction costs in Palo Alto, please share them with us. I'd be thrilled if ADU builders agree to run their projects with open finances so we can all see what everything actually costs. I'm really curious if prefab approaches save time or money, and if so how much. Absent local construction cost information, we got ADU rules that may or may not advance the stated goals.

Posted by Online Name, a resident of Embarcadero Oaks/Leland,
on Jun 22, 2017 at 4:20 pm

There's no reason to expect the ADUs to be affordable housing since 1) there's no rent control or other controls on how much can be charged, 2) there's no occupancy limit for the ADUs so there's nothing to prevent someone from stacking and packing lots of people in an ADUs charging each person what the market will bear, and 3) Construction costs in PA average $1,000 per sq foot, not $400.

I agree that it made no sense for PA to RUSH so quickly to go beyond state law, esp. since PA is way more densely populated than most of the state for which the law was intended EXCEPT to benefit developer cronies and to try to boost document tax revenues by causing more people aka residents to leave.

Also, note the ADU assessment CAN be based on the PRESUMED rental income even if they stay empty and/or are used for other purposes and/or rental income varies year-by-year.

Posted by Westerner, a resident of another community,
on Jun 25, 2017 at 4:01 pm

"The scenario sequence was not about what the law is, but rather what the law should be relative to the person's political philosophy."

Granting that, have you noticed than all the comments after mine offer analyses tending against ADUs; none discusses what the law should be relative to the person's political philosophy? Just asking.

[[Blogger: The scenario sequence was only a part of the blog. The ADU comments are addressing another part of the blog -- simplistic models of "The Market"]]

Posted by Westerner, a resident of another community,
on Jun 26, 2017 at 7:02 pm

"The scenario sequence was only a part of the blog. The ADU comments are addressing another part of the blog -- simplistic models of "The Market" "

All right. I'll get some Dramamine and read it again.

Posted by margaret heath, a resident of College Terrace,
on Jul 7, 2017 at 1:46 pm

If a developer can build a multi million dollar house and then exceed the allowable square footage by adding a small cottage, that makes the property more valuable, and if both are done at the same time the extra cost is more than recouped with a higher profit margin. Whereas this is a significant expense for an existing homeowner to build. So perhaps the way this decision to rewrite the staff recommendation (which only included the new state mandates) on the fly during the council meeting by the pro-development majority was less about affordable housing and more about rewarding developers with added profit.

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