The Growth Brokers

How slow growth came to southern California…and who pays and who profits?


If the marketplace responds to the price signals of supply and demand, then behold the following mystery: at the end of 1988, the median price of a home in California had soared to $172,000—more than twice the national median. Only one in five California households earns sufficient income to afford this home, and tales are rampant of moderately priced housing developments selling out in a few hours, often after buyers camp out several nights at the sales office.

In the face of these stratospheric prices, the basic intuition you develop in Econ 101 would lead you to expect suppliers to build more new houses, especially affordable houses. Yet housing starts in California are expected to decline sharply in 1989, from 230,000 units in 1988 to less than 200,000. That would make the third straight annual drop.

The simple truth is that there is a drastic housing shortage—a shortage deliberately created by the increasingly severe obstacles to growth imposed by all levels of government. The panoply of zoning restrictions, environmental reviews, building fees (exceeding $20,000 per home on the average in many places), and other planning regulations has come to act as a hidden tax on homebuyers and as a penalty for prosperity. Meanwhile, the source of these penalties—the slow-growth movement—has been rapidly gaining strength.

The debate over growth in California takes place in an eerie, almost Kafkaesque, context. The slow-growth movement has enjoyed remarkable success because it attracts virtually no principled opposition. Not a single politician or builder will speak out in favor of growth or criticize the movement. If you do mention property rights, as I have on many occasions, you will be greeted with embarrassed or bizarre expressions, as if to suggest that you really must learn better public manners.

Local governments are retreating under pressure from slow-growthers; meanwhile, the potential opposition of the building community is being muted by the subtle changes in the market that growth restrictions create. The slow-growth movement has hit upon a strategy that is so brilliant and so successful that few recognize or understand it. It has a found a way to lose elections and still get what it wants.

Slow-growth policies have long been in effect in many parts of the state, especially in the liberal-leaning San Francisco Bay area, but 1988 was the first time the slow-growth movement targeted the large, prosperous, and generally conservative regions of Southern California. Slow-growth initiatives qualified for the ballot in Orange, San Diego, and Riverside counties. Growth became the dominant, and often the only, issue in many city council and county supervisor races.

Most initiatives would have established numerical limits on building permits. The Riverside County measure, for instance, called for the population to grow no faster in the county than in the state as a whole. Of course, since freedom of movement remains a basic American right and the government doesn't regulate the number of kids people can have, population can't be limited directly. But reducing the number of buildings, particularly houses, that serve new residents can have the same effect; the shortage of houses pushes prices up, making an area less attractive to new residents. Since Riverside County is growing twice as fast as the state, the initiative would have cut by half the number of building permits granted. It would also have required an additional 10 percent reduction if traffic congestion did not improve.

By contrast, the Orange County initiative wouldn't have imposed numerical limits. Instead, the 10,000-word measure would have tied permission to build to a host of very specific local conditions, the most prominent of which had to do with traffic flows. Such conditions would have made new construction next to impossible. The initiative also called on the county to require local companies to draw at least half their employees from Orange County residents. In this, the preeminent bastion of conservative votes (and money) in California, a January 1988 poll found 80 percent in favor of the slow-growth initiative on the June ballot.

With their backs against the wall, major developers funded multimillion-dollar campaigns against these initiatives. They managed narrowly to defeat the Orange County measure by convincing voters that it would make traffic congestion even worse. Builders scored victories by even larger margins in the November election in Riverside and San Diego counties.

As 1988 ended, builders were feeling rather chipper, believing that they had turned the tide against the slow-growth movement. But the electoral victories merely concealed the fact that the slow-growth rout continues as rapidly as ever, a fact that only the slow-growthers seem to understand.

"The initiative wasn't an end in itself but a tool to bring about better growth management, and that is happening," said Bill Havert of the Sierra Club, undaunted by the defeat of the Riverside County measure, which he'd coauthored. Irvine Mayor Larry Agran, an ally of former '60s radical-turned-state assemblyman Tom Hayden, adds: "Even when you lose, you can come out winning on some important issues."

The left envisions the slow-growth movement as a means to regain the advantage in California politics—their answer to Proposition 13 and the tax revolt that propelled conservatives to power a decade ago. Havert stated in a February 1989 speech at a conference attended chiefly by developers that the goal of the slow-growth movement is "to replace the market economy with the moral economy."

Agran, Havert, and other antigrowth activists are pleased in spite of the losses at the polls. They have dramatically slowed construction without enacting numerical limits to new development into law. The threat of a grassroots rebellion has scared the politicians, allowing the mere controversy over the initiatives to impose de facto limits on growth. Throughout California, even in areas that faced only the threat of an initiative, new obstacles to residential and commercial growth have risen. Governments have levied new building fees and added new hurdles and reviews to the planning process. Most importantly, frightened city councils and county supervisors have refused to approve new development at all.

In San Bernardino County, which faced no initiative, a Growth Management Task Force of politicians, builders, and slow-growth activists has proposed new building fees—as much as $10,000 per new house—on top of the fees already in place. And various cities in Orange County have moved to adopt the terms of the defeated slow-growth initiative.

In other words, builders think they won in 1988, but in truth they won a small round of battles while losing the war. Slow-growth initiatives are chiefly a diversionary tactic, designed to capitalize on strong public sentiment against growth and traffic congestion to put pressure on local government.

California has grown from 20 million people in 1970 to 28 million today—a 40 percent jump in less than two decades. Population is projected to grow to 40 million by 2010, about the same rate of increase. Even at that size, however, California's major urban areas will still have a lower population density than most European cities, or even most of the urban areas on the eastern seaboard of the United States. To limit growth effectively, California would have to be prepared to expel current or future residents. Radical activists such as Havert, who has written extensively on the evils of any population growth, might very well like to see such steps.

But most Californians aren't opposed to growth per se. Rather, they are upset about a specific aspect of growth: traffic. On most major freeways, the number of cars during peak hours has doubled or more than doubled in the 1980s.

The chief cause of the calamitous congestion gripping the state, however, is not growth itself but bad government at the state level. Put simply, California stopped building roads 10 years ago, as a deliberate policy of Gov. Jerry Brown, whose vision it was to wean Californians from their automobiles.

It was among the most dramatic transformations of government policy in America. In the mid-1960s, California devoted 16 percent of the state budget to roadbuilding, constructing more than 100 miles of new freeways every year. Today, the state spends less than 6 percent of the budget for roads, and most of that money goes for maintenance. It shows no sign of getting back into the roadbuilding business, or of considering market alternatives, such as toll roads or peak-hour road pricing. Roadbuilding may cease entirely in 1990 because of a shortage of money.

It now takes as long to plan and build a freeway in California as it does to build a nuclear power plant, and for exactly the same reason—a shockingly long bureaucratic planning process. Like nuclear power plants, freeways are becoming prohibitively expensive to build in California—as much as $125 million a mile in some urban areas. Jerry Brown did his work well.

The appalling traffic situation and the resulting slow-growth ferment have caught the fancy of politicians. But what they propose as a remedy is more bad government. State Sen. Marian Bergeson (R–Newport Beach) has convened a Senate Select Committee on Planning for California's Growth, and this committee and other interested legislators have introduced at least 52 bills pertaining to growth management, regional planning, affordable housing, and transportation. Unlike most measures in California's fiercely partisan politics, the bills enjoy support from both Democrats and Republicans.

Although they differ in their particulars, the bills share one characteristic: they increase state-level involvement in what were formerly local decisions. Most would require local governments to conduct more reviews and submit to the state more reports on the implications of their land-use policies.

The bill that is perhaps most illustrative of what's really going on is Bergeson's SB 969, which would reorganize the Southern California Association of Governments, better known by its lovely acronym SCAG. SCAG has hitherto been an informal, voluntary association of government officials from cities and counties in the greater Los Angeles area. SCAG's chief purpose seems to be holding conferences and producing reports about obvious trends, including traffic congestion, air pollution, and the "jobs-housing imbalance." Its central insight is that traffic congestion would be greatly alleviated if more people lived closer to their jobs (really).

Bergeson's SB 969 would transform SCAG into an official government body, with powers of appropriation and some discretionary authority to veto counties' planning decisions. The bill stops short of giving SCAG full veto power over city land-use decisions, but the general direction is clear. The object is to establish the principle of "regional government"—the mantra of the civic illuminati of California. Last fall, for instance, the Los Angeles 2000 Committee, composed of many of the most eminent business and academic leaders in the Los Angeles area, released a 100-page report whose recommendations included the establishment of at least three regional government organizations for Southern California.

None of the state-level proposals provides any money for new roads and other facilities. Instead, they proceed from the premise that "better planning" can make up for the failure of government to devote sufficient resources to basic needs. And the bottom line of "better planning" will be still more delays and new costs to get anything built.

What's really on the mind of slow-growthers is to create a state planning agency, with broad powers to regulate the local economy—something like the California Coastal Commission, which is known for its sweeping and unchecked power to control land use along the coast. SCAG, for starters, proposes to "reallocate" more than 250,000 new jobs and 125,000 new houses in Southern California. It would pressure local governments in "job rich" areas like Orange County to hinder commercial development and those in "housing rich" areas like San Bernardino County to limit housing construction. But SCAG's plans fail to consider that employers will move closer to their employees and new businesses will spring up near housing developments—as, indeed, is already occurring. By manipulating building patterns without regard for spontaneous adjustments arising from individual decisions, such central planning threatens to undermine those adjustments and may, in fact, actually make matters worse.

You would think that the building industry would be in an uproar about all of this, but it is not. Here the genius of the slow-growth movement reveals itself. Ask builders about the increasing delays and difficulty in getting a building permit, and most will cite the "three rules of building." Rule number one: build. Rule number two: build at the lowest possible cost. Rule number three: if rule number one and rule number two come into conflict, rule number one takes precedence.

The lengthy and burdensome planning process, exacerbated by constant pressure from the slow-growth movement, implicitly offers builders an attractive, and corrupting, deal: You, the builder, agree to abide by the orders of the planning bureaucracy and fork over hefty building fees (which you pass along to the buyer anyway) for a myriad of purposes. In return, your profit will be guaranteed—increased, even—because of the market constriction this system creates.

Check the list of the 200 largest residential builders in California, published each March in the Los Angeles Times. Two things about this list stand out. First, of the 200 largest builders of single-family homes, apartments, and condominiums, 121 had zero unsold units in inventory at the end of 1988; another 32 had fewer than 10 unsold units. Not surprisingly, nearly all of the 200 enjoyed a significant increase in revenue in 1988, and most expect another big jump in 1989.

Second, you see almost no new companies over the last few years. You would expect both of these circumstances in a market regulated effectively to discourage new competition. Only the large and well-established builders can withstand the rigors of the planning process, but those who can, reap enormous profits.

"The smaller developer is simply not going to have the financial staying power to deal with committee meetings and environmental reviews and so on," says Richard Weinstein, dean of UCLA's Graduate School of Architecture and Urban Planning and a member of the L.A. 2000 Committee. "In the past, lots of people have been able to make money in real estate. I think fewer and fewer will make more and more in the future." As a result, says this ardent proponent of regional planning, "the housing problem is only going to get worse—much worse—before it gets better."

A few builders will admit that they don't publicly criticize the planning process because they are afraid the planners will delay or derail their building permits. This is bad enough, but the Faustian bargain described above is even more insidious, because it has fully compromised a crucial sector of the economy. It is common now to hear builders publicly express sympathy for "managed growth," and they routinely make large campaign contributions to slow-growth politicians.

Builders today behave increasingly like any other special-interest group whose advantage is dependent on government favor and who then must "play the game" in exchange for assured profits. Further evidence of this trend is the vast expansion of planning firms that advise builders on how to obtain the necessary political permission to build—and act as lobbyists and negotiators on their behalf. There is even a new breed of "developer," who never builds a single building but whose profit comes from buying land, securing political permission to build, then selling lots to builders. The profit margin for such developers runs about twice that of the builders.

A candid survey of the debate over growth and planning in California recalls Tocqueville's description of democratic despotism: "It covers the surface of society with a network of small complicated rules, minute and uniform, through which the most original minds and the most energetic characters cannot penetrate.…The will of man is not shattered, but softened, bent, and guided; men are seldom forced to act, but they are constantly restrained from acting. Such a power does not destroy, but it prevents existence; it does not tyrannize, but it compresses, enervates, extinguishes, and stupefies the people, till each nation is reduced to nothing better than a flock of timid and industrious animals, of which the government is the shepherd."

Next time you hear advocates of "managed growth" talk about "quality of life," you'll know what they mean.

Frequent REASON contributor Steven Hayward is director of the Claremont Institute's Golden State Project.