In recent years, a contradiction has unfolded in San Francisco. On the one hand, the city continues to practice progressive economic policies. But rather than helping its poor and middle-class—as such policies are advertised as doing—these groups in San Francisco have become more unequal, downwardly mobile, and altogether priced-out. This raises the question of whether the policies themselves are contributing to the problem.
First, though, it's worth noting the magnitude of the city's inequality, which is problematic not so much because the rich have gotten richer, but because everyone else has gotten poorer. This was determined by a Brookings Institution paper earlier this year which found that between 2007-2012, San Francisco trailed only Atlanta as the nation's most unequal city, with the top 5 percent of households earning average incomes nearly 17 times higher than the bottom 20 percent. During this period, inequality grew far more quickly in San Francisco than in any other U.S. city, with incomes for those top households increasing by nearly $28,000 to $353,576, and incomes for the bottom 20 percent decreasing by over $4,000 down to $21,313. But other brackets were hit also, as incomes declined for the bottom 80 percent of households, meaning those making up to $161,000. The study validated media narratives about how gentrifying San Francisco had become exclusive to the rich at everyone else's expense.
A lot of the reason for this shift is because of the tech industry's emergence. Once confined to the southern part of the region, Silicon Valley's imprint expanded across the city throughout the 2000s, and is now a mainstream cultural force. Not only have businesses like Twitter opened offices downtown, but once-working-class areas like the Mission provide housing and start-up space for industry workers, causing an influx of new wealth and neighborhood disruption.
But the city's progressive tendencies seem only to have worsened this shift, with an over-reaching government that offers inadequate—or plain wrongheaded—solutions to problems.
This is most evident in the way that it has handled housing. San Francisco now has one of the nation's most expensive markets, with median home prices at $1 million. Numerous explanations have surfaced for what caused the spike, ranging from the area's growing population and wealth, to its land constraints. But the spike can also be explained by regulations that discourage new housing. For example, lots within the city's downtown, where infrastructure is already in place to handle added population, are held to severe height restrictions, and this is even more the case in outlying neighborhoods. The structures that are built endure robust approval processes that can take years, and require millions in lobbying—creating expenses that get passed down onto customers. The developers of the proposed Washington 8 condo project on the downtown waterfront, for example, waited eight years and spent $2 million on campaigning only to have their project rejected.
The political establishment's response has been to impose anti-market forces onto the housing that does exist, under the impression that this will keep prices down. Three-quarters of San Francisco's units are rent-controlled because of a law that requires this for buildings constructed before 1979. Mainstream economists have long believed that such laws are counterproductive, because they encourage price spiking of market rate units, and under-maintenance or abandonment of the regulated ones. This has been the case in San Francisco: Along with laws that make evicting bad tenants difficult, rent control has prevented landlords from collecting the necessary fees for upkeep. As a result, they have left vacant an estimated 10,600 units, or 5 percent of citywide housing stock.
San Francisco's labor laws, also designed to help the poor, seem similarly counterproductive. In 2003, the city mandated a minimum wage of $8.50 per hour, with future increases tied to inflation. Later laws forced large businesses to also provide health care and paid sick leave. This has brought baseline hourly wages to roughly $13.12, with proposals to increase it to $15. But it's unclear whether the existing measure has been beneficial, or merely offset itself by raising living costs. A University of California, Berkeley, study showed that the law led to higher prices at restaurants, and it stands to reason that other low-wage industries were similarly affected, thereby causing inflation, but not necessarily any newly-created wealth. Indeed, in the decade since the law took effect, San Francisco's Consumer Price Index increased faster than any other Bay Area county. According to a Governing Magazine cost-of-living calculation, the purchasing power of $1 in San Francisco is 40 percent less than in cities like Houston and New Orleans.
Another thing jacking up prices is high taxes. San Francisco ranks ninth-highest out of 107 major cities in sales tax rates, with a combined state, county, and local rate of 9.5 percent. Although state laws have limited property tax rates to about the national average, San Francisco has a complex arrangement of business fees and taxes that can reach .65 percent of gross receipts. Residents also pay a flat income tax of 1.5 percent, in addition to a California income tax rate that can reach 13.3 percent, the nation's highest.
These taxes pay for government services that, in another ode to progressivism, are famously inefficient because of monopolistic union control. The San Francisco Municipal Transportation Agency and Bay Area Rapid Transit, the two main public transportation agencies, have some of the nation's highest-paid transit workers, although the former has dismal performance ratings, and both have gone on strike in the last 13 months. Other government unions have defeated ballot initiatives to reform an expensive public pension system that is crippling the city's ability to provide services.
But perhaps the ultimate mark of a progressive city is that it relies on the government, rather than private industry, to micromanage economic outcomes. In San Francisco, this has produced a regulatory and administrative style that favors certain businesses—and demographics—over others. The creation of something called PDR zoning allowed the city to impose costly fines on white-collar start-ups for using office space that it wanted available for "light industrial" craftsmen, who are presumably more authentic to the nouveau riche. The city-run cab industry, meanwhile, has long crowded out new drivers, and private options like Uber, in order to protect existing medallion holders. Other disruptive urban innovations, such as food carts, micro-housing, and Airbnb, tremble under hawkish government oversight while large tech companies have received millions in tax breaks to locate in neighborhoods that were already revitalizing.
These policies do not seem to have hurt San Francisco's growth, thanks to engrained advantages like a good climate, interesting culture, and proximity to educated workers. But those studying the causes of inequality should note the uneven nature of the city's growth: While overall population has boomed since 2007, middle-class population has declined, and the share of poor households moving to the suburbs has increased, suggesting that the next step after income loss has been exile. Progressive economic policies—or at least the way they are applied in San Francisco, without apparent knowledge of government bureaucracy's pitfalls—have contributed to the trend. Those policies have caused higher taxes and living costs, poor services, regulatory barriers to entry, and a loss of economic freedom. This creates a system that the rich can endure, and sometimes exploit to their benefit, but that poorer people cannot abide, helping to explain San Francisco's further plunge into stark class division.