ECOS meets financing (2/15/17)

ECOS Meets Financing

by Mark Dempsey (speaking for myself, not on behalf of Citizen’s Climate Lobby)

The February meeting of the ECOS’ Transportation, Air Quality, and Climate Change (TAQCC) committee heard a presentation from Jeff Spenser of the Sacramento Transportation Authority (STA). He described why the recently proposed Measure B to fund transit and roads was unsuccessful. He explained the misconceptions of the public, and said that those backing the losing Measure appear ready to try again, unfortunately, without much interest in public outreach...again. Spenser repeatedly suggested people contact their City Council person or Supervisor if they wanted to have some input about what was proposed for funding in the next ballot measure.

One of the meeting’s attendees said Spenser’s suggestion to contact their local representatives was answered when she actually did that by a local representative who suggested that the attendee contact STA directly. So the STA representative says to contact City Council and City Council says to contact STA. Sort of “ask your father...ask your mother” writ large. Nice, eh? The message, deciphered by another attendee: They aren’t all that interested in your input.

It may be the very definition of insanity to repeat what didn’t work before, but that’s what it looks like is going to happen with “Son of Measure B.” On the plus side, Spenser was eager to offer charrettes about transportation funding as part of the process. I suggested some similar procedures (facilitators, and/or what amounts to a grand jury getting educated and making recommendations about such projects).

In my experience, simply soliciting public input is much less sensible than charrettes, facilitated discussion or pseudo-grand juries, and since a lot of public comment is uninformed, and frankly nutty. In one planning meeting I heard from a Carmichael woman who wanted transportation planners to build a subway from somewhere near her house to somewhere near her work. This would work if the fare were $100,000 a trip, but not otherwise. Just FYI, such heavy rail projects are typically ten times more expensive than light rail, which is roughly ten times more costly than bus rapid transit. You need the densities of the Bay Area to make heavy rail really viable. Carmichael doesn’t qualify.

...which prompts a question to ask about one frequently mentioned transit project: Why not tenth-as-expensive bus to the airport instead of the proposed light rail? (One possibility: the whole  region’s transit would have to support early and late airport arrivals...not cheap!) But we must study it! Also: Is light rail a stalking horse for more floodplain development in North Natomas? Who knows?

Not much else was discussed at the TAQCC meeting, but in the midst of what followed the STA presentation, John Deeter asked for suggestions about alternative ways to finance transit, besides a (regressive) sales tax increase. I spoke up. What follows clarifies and expands on what I said.

The Planning-and-Paying-for-it Problem

First, what we’re really discussing here is how to do intelligent planning based on real costs and consequences. Despite the bad name it gets (“only Commies believe in central planning!”), a modern economy needs planning. There’s a widespread sentiment that the “invisible hand” of the market automatically takes care of any needed forethought, but that is just not true. Now, primarily private banks and the military are doing planning, and with results that suit their agenda(s). Could auto-intensive sprawl also feed the same banks who finance auto dealers? And is that pope fellow still Catholic?

Unfortunately, the word “primarily” is really an understatement, not an exaggeration. See here for a description of the designed-to-fail local land-use planning that solicits public input, and its abominable treatment of public sentiment (it’s an old editorial. but it still applies). One Australian planner says “You Yanks don’t consult the wisdom of democracy; you enable mobs.” Unfortunately, that’s all too true.

Speaking as a person who was in the real estate business for years and spent several of those years on a County Planning Advisory Council, I say we could discard the region’s entire land use “planning” apparatus without harming anything. Houston Texas did just that, and between regulations imposing street standards and minimum lot sizes, has produced a city virtually indistinguishable from Sacramento in every significant respect. Houston has no planning department at all. So...the market plans! … Just kidding. Even Houston requires regulations for streets and lot sizes, and constructive planning for sustainable outcomes requires more than that. Read the above-linked editorial for details.

I’m not the only one who feels modern land-use planning is useless. Jane Jacobs says “The pseudoscience of [land-use] planning seems almost neurotic in its determination to imitate empiric failure and ignore empiric success....to put it bluntly, [sprawl planners] are all in the same stage of elaborately learned superstition as medical science was early in the [19th] century, when physicians put their faith in bloodletting.” (from The Life and Death of the Great American City)

Meanwhile, with many admirable efforts from its members, ECOS has soldiered on for the decades since I’ve been contributing to the organization and attending meetings. Has local planning improved, or has ECOS called it out as “elaborately learned superstition”? No. Is the default work product of our local planning process mostly ecologically sustainable, transit-friendly development? No; it's far and away mostly sprawl.

So ECOS has been pushing this stone up the hill, and it’s rolled back down to the bottom every time it reaches the top with a few small victories along the way, but no game-changing transformation for several decades worth of effort. The biggest new thing in local planning is that, like CalTrans, the locals have decided to adopt “Complete Street” standards--something ECOS may have endorsed, but did not initiate.

I talked to ECOS’ former executive director, Graham Brownstein, about this and he reminded me that ECOS has performed a valuable service, sending letters of protest to various local agencies, even ones who don’t welcome public input. Those letters are the basis of successful CEQA lawsuits, and with such suits, ECOS has stopped some truly awful development, so I don’t want to discount the work and effort of ECOS and its members. On the contrary, I’m grateful that ECOS persisted in this thankless task, but would like it to do even better.

Meanwhile, I suggested to Graham that planning-by-lawsuit is problematic at best. Not only that, the process for the unprosecuted bad development hasn’t changed significantly. The default “planning”  process still  diffuses public protests, produces profits for land speculation and builds more sprawl...and not much else. Even now, with 20 years worth of vacant infill land undeveloped in the region, land speculators are proposing even more outlying, greenfield development (the opposite of infill) to extend North Natomas development northward, and to develop the land south of 50 near Folsom (where there’s no water, but who cares? It’s profitable!). It’s not sustainable!

So how about trying something different? It may just be a different stone on a different hill, but what ECOS has been doing amounts to settling for small victories in a process that needs to change dramatically. (And Darrell Steinberg’s SB 375 and expiring entitlements are nothingburgers, too.)

If the current process were not bad enough, even when developers actually build the Transit-Oriented Development essential to improve air quality and climate, banks can sabotage the result. Phil Angiledes' Laguna West was designed and approved according to Peter Calthorpe’s Transit Oriented Development (TOD) standards. Unfortunately, viable transit and pedestrian-accessible mixed-use shops require enough riders and shoppers within a walk of them. When builders were building out Laguna West, rather than build the designed densities, the banks would not offer apartment / condo financing...so now Laguna West is a slightly more pedestrian-friendly version of sprawl with lower than designed density, and less-than viable neighborhood commerce and transit. Remember, in architecture, it's not Frank Lloyd Wright’s dictum: "Form follows function," it's "Form follows finance."

The Public Banking Solution

Since, ultimately, banks dictate what gets built, what would happen if banks actually served the public interest rather than the profit of sprawl merchants, a favored few land speculators, auto dealers and other plutocrats? Something better, perhaps…?

Public banks have been around in the U.S. for a long time. FDR used the Reconstruction Finance Corporation to fund the first Bay Bridge and the Tennessee Valley Authority. Incidentally, Eisenhower ended the RFC, so the second Bay Bridge was underwritten by private lending from Goldman Sachs.

Unfortunately, most of us are unfamiliar with how banks actually work, and completely clueless when it comes to public banking and the creation of currency. For the big picture, read “Let’s Stop Pretending We’re Insolvent.”

Also, just to reassure you, the ideas expressed in that editorial and the following come not from my fevered imagination, but from a school of economics called “Modern Money Theory” (MMT). It includes some of the few economists who actually predicted the Great Recess, and is respectable enough that  Senator Bernie Sanders hired MMT economist Stephanie Kelton to be an advisor to the minority on the Senate budget committee. (Here’s a 35-page MMT document if you want a more comprehensive look at it.)

The TAQCC meeting’s discussion following Spenser’s presentation centered around strategies to better fund transit, and guide the kinds of land use that supports it. Transit is squarely in TAQCC’s wheelhouse, but somehow discussions about the funding options are not (or so says John Deeter, to me).

That’s odd since profit (i.e. money) motivates most of the ecologically damaging land speculation and unsustainable development in the region. On top of that, nearly half of the cost of large public projects like purchasing electric buses is the financing. In my not-so-humble opinion, ignoring funding options costs ECOS insights, credibility and a potential avenue to get its way.

We’re all familiar with the excuse for third-rate transit, or really any below par asset in the public realm: “Hey, we can’t pay for [whatever it is]! We’re out of dollars!” And people tend to accept such excuses because they’re familiar with the experience of being in a household that has to tighten its belt. However,  there’s a fundamental difference between currency creators (government, banks) and currency users (households) that makes such thinking really counter-factual.

I’ll add that the ultimate shared good in the public realm is what we call “the environment.” If only private interests can finance public improvements, then private profit, not public good, is what sets the agenda, and dictates what’s build. With (risk-averse) profit seeking in the driver’s seat, we’ll continue to get pretty much what we’ve got now. Following the dictates of profit, rather than sustainability, also exacerbates the already enormous current inequality in income and asset distribution in the U.S.A.

As a consequence,  the plutocrats get to command a disproportionate amount of the economy’s products (because they’ve got the money). And because too much money is not ever enough, they also tend to lobby to privatize public goods (roads, schools, etc.) and even arrange for the public realm to be under-funded so they can clamor for even more privatizing and financializing such public assets (sell off the parks, drill for oil on federal land, etc.) so they can profit even more. One example: Federal funding for higher education has declined 55% since 1972. Ever wonder why tuition keeps rising, and student loans grow ever larger?

The destination for this trend is a population full of debt peons, and an environment that is really just a series of rent-extracting toll booths. This is where austerity leads. A tiny sliver of the population desires that destination, too.

State and local governments are typically currency users, as opposed to the fiscally unconstrained currency creators at the federal level. However, even state and local governments can create currency too, if they have a bank. For a more in-depth discussion of public banking, I recommend Ellen Brown’s book The Public Bank Solution: From Austerity to Prosperity. For something shorter try her “How to Cut the Cost of Infrastructure in Half”... or just keep reading what follows.

How the Banks do it: Fractional Reserve Lending

Most people believe banks lend the money on deposit, but that’s not true. Banks practice “fractional reserve lending,” a custom that began with medieval goldsmiths. Since the goldsmiths had the safes, they would store people’s gold, issuing receipts for what they had on deposit. For convenience, depositors would use the receipts as money. It didn’t take too long before clever goldsmiths discovered they could make loans, and issue more receipts than they had gold. That practice still persists today as fractional reserve lending.

Today, banks use dollar deposits from the public, or reserves borrowed from each other or borrowed from the U.S. central bank (The Federal Reserve, or “The Fed”) instead of gold, but the principle is the same: like those medieval goldsmiths, banks create the money they lend without touching what they have on deposit. One current estimate of the proportion of money created by banks: 97% of the money supply.

The good news is that many modern nations also have something the goldsmiths didn’t have: deposit insurance that promises to repay depositors if everyone demands their deposits back all at once. When that occurs, it's called a “run on the bank”--an unfortunate side effect of fractional reserve lending. Beyond deposit insurance, if a bank is “too big to fail,” the Fed will simply create more money to bail it out. According to the Fed’s own audit, it pushed $16 - $29 trillion out the door in the few months after Lehman Brothers filed bankruptcy.

Modern banks create money by creating checking accounts for the loans they make (“loans create deposits” is the saying). They type an account balance in a computer to do that.

So...if a someone borrows to buy a house, the bank’s bookkeeping makes sure the amount in the borrower’s checking account (which is the bank’s liability) exactly equals the amount of the borrower’s mortgage (which is the bank’s asset). That balance is required by another medieval invention: double-entry bookkeeping. Notice that reserves do not appear at any point in that transaction.

If the house seller deposits the proceeds of sale in the same bank, then reserves don’t appear in that transaction, either. The bank debits the mortgagee’s checking account and credits the seller’s account, moving and balancing electronic entries in their “scorekeeping” software.

When buyer and seller patronize different banks, the Fed steps in to settle the score between total accounts in those different banks and ensures both banks have “adequate” reserves. If a bank doesn’t have adequate reserves it can always borrow from the Fed in unlimited amounts. The current Fed Funds Rate is 0.75% (per year!). That’s the bank’s borrowing cost. Among other things, what this means is that in the unlikely event that a public bank had to borrow all the money it lent, it could still make a quarter percent gross profit by charging as little as one percent per annum for the loan.

As I’ve said before, public banking is not a novelty; other nations use it extensively, but the financial sector in the U.S. does not want competition, so you will seldom hear it mentioned, and even the “liberal” Jerry Brown vetoed funding to study how to create a California state bank. As I said in the ECOS meeting, such a state bank (like they have in North Dakota) would eliminate the need for Brown’s multi-billion-dollar "prudent reserves" for California’s budgetary emergencies; it could offer the state a line of credit secured by future tax collections. Currently, those "prudent reserves" come out of the budgets for schools, the indigent and the elderly. All of that is unnecessary.

So...I wouldn’t suggest the process of getting public financing for the transit or land-use infrastructure ECOS wants would be easy. Nevertheless, until the public controls money creation, money will continue to be our master not our servant, and we’ll continue to get second-rate infrastructure with the excuse that we’re out of dollars, in a way that inures to the profit of the plutocrats…. Something roughly like settling for some bizarre outcome in a sporting event because the scorekeeper supposedly ran out of points. If that sounds crazy, well, that’s because it is crazy.

Just as vultures want animals to die, for some small portion of the population, the austerity of “we’re out of dollars” is a desired outcome. Those are the opponents of what I’d describe here, AKA “vulture capitalists.”

Incidentally, one other common popular narrative says government spending in the U.S. is “big.” But the U.S. has a large country and large economy. Look at Wikipedia’s ranking of government spending as a percentage of GDP, and you’ll see the U.S. ranks 46th in the world, between Argentina and Luxembourg. Subtract 11% of that U.S. spending to make its military spending something realistic for an average first world nation (and still more than double what China spends on its military), and U.S. government spending ranks between Bhutan and Namibia. (Notice that you can sort the columns in that Wikipedia article by clicking on the headers in the comparison table.)

No wonder our infrastructure is starting to look like we live in a third world country! Think of how Flint Michigan is starting to resemble Namibia. That “big government” meme is another lie that serves the vulture plutocrats.

Some Potential Projects

Public banking could fund many potential projects promoting sustainability that are not currently possible with private financing’s requirements. Public financing would both enable innovation, and be cheaper too. After all, half of these projects’ costs are typically financing costs. So...reducing the financing cost of RT’s proposed purchase of electric buses would be in line with ECOS’ mission.

Another example: Public banks could finance projects to make suburbs more transit-friendly. Suburban shopping centers seldom include housing. Private banks won’t lend to make a second or third story of apartments on top of Safeway. If a public bank funded such developments, the private sector would likely imitate their success, too. Oddly enough, we’re also short of affordable housing.

Are “lifestyle centers” (shopping centers that include housing) successful, and even profitable? From Wikipedia: “Lifestyle centers typically require less land and may generate higher revenue margins, generating close to 500 dollars per square foot, compared to an average of 330 dollars per square foot for a traditional mall.” Mogavero Notestine even has a proposal to make Sunrise Mall into a Citrus Heights town center by integrating housing into this shopping center. Note: Counting on the private sector to innovate like this is at least a long-odds bet. (See this TED talk for the details.)

Incidentally, a California Infrastructure Bank does exist, it just can’t fund much. The Bay Bridge revamp was too big for its underwriting standards (so Goldman Sachs underwrote that project). I’ve talked to the bank’s director about another potential public bank project: providing housing for the homeless. The region spends an estimated $40 million basically on police and emergency room costs related to the homeless (says Jeff Harris). Talk to any homeless advocate and they’ll say we could save 50% - 80% of those costs by simply housing homeless people, providing them with transitional counseling (called “Housing First”). Salt Lake and other cities have already done this with such savings, so the concept is not just theoretical.

Unfortunately the costs of Housing First are front-loaded, arriving before the savings, but such situations are why loans were invented. A loan would help even out the expenses, saving more than double what funded the quarter-billion-dollar Kings’ stadium subsidy (again: underwritten by Goldman Sachs).

However, according to the California Infrastructure Bank’s director, financing money-saving homeless projects remains taboo for their underwriting. He complained that they can’t even fund solar panel projects based on utility savings; they need to see revenue before they’ll lend.

I’d suggest that the Infrastructure bank’s board who configures their underwriting standards are unclear on the concept of public banking, or are sabotaging its potential to serve the privatizing plutocrats rather than the public.

FYI, solar panels cost roughly half what they did even five years ago, and yield an estimated 17% return on investment for residential installations, according to SMUD’s calculations...but that’s not enough to persuade the infrastructure bank’s board to change its underwriting standards.

Unfortunately, like many democratic institutions, public banking is also vulnerable to sabotage.

Conclusion

Public banking offers an alternative method of financing both transportation and land-use improvements.  … and yet this solution is not one I’ve never heard about from ECOS, any other environmental group. Despite the dismal record of public institutions and their indifference to public input, such an alternative might even be successful too, but we’ll never know if no one brings it up.

In my humble opinion, unless the public starts to grasp the levers of power implicit in such money creation, the current oligarchy that runs public policy in the region will continue to plead “We’d love to do [whatever it is], but we’re out of money….” In other words "There is no alternative to austerity." As I’ve demonstrated above, that's an excuse which simply doesn’t hold water.