Coyote Blog

One of the problems with making predictions about bad public policy is that sometimes you have to wait 20-30 years until after the policy was passed to see all the negative consequences play out, by which time people have forgotten about the initial policy changes that caused all the disruption.

But I got to skip those 30 years in San Francisco.  I never really paid that much attention to the city until I read a book called "Season of the Witch" written by a progressive about life in San Francisco in the 60's and 70's.  As I wrote previously:

What struck me most were the policies these folks on the Progressive Left had on housing.  They had three simultaneous policy goals:

1. Limit San Francisco from building upward (taller).  San Francisco is a bit like Manhattan in that the really desirable part where everyone wants to live is pretty small.  There was (and I suppose still is) a desire by landowners to build taller buildings, to house more people on the same bit of  valuable land.  Progressives (along with many others across the political spectrum) were fighting to have the city prevent this increased density as a threat to San Francisco's "character".
2. Reduce population density in existing buildings.  Progressive reformers were seeking to get rid of crazy-crowded rooming houses like those in Chinatown
3. Control and cap rents.  This was the "next thing" that Harvey Milk, for example, was working on just before he was shot -- bringing rent controls to San Francisco.

My first thought was to wonder how a person could hold these three goals in mind without recognizing the inevitable consequences, but I guess it's that cognitive dissonance that keeps socialism alive.   But it should not be hard to figure out what the outcome should be of combining: a) some of the most desirable real estate in the country with b) an effective cap on density and thus capacity and c) caps on rents.  Rental housing is going to be shifted to privately owned units (coops and condos) and prices of those are going to skyrocket.  You are going to end up with real estate only the rich can afford to purchases and a shortage of rental properties at any price.  Those people with grandfathered controlled rents will be stuck there, without any mobility.

Since reading the book, I have paid attention to stories on the rental market in San Francisco.  In short, it is just as screwed up as would have expected 40 years ago when both density and rent caps were put in place.

As San Francisco's housing crisis continues to pit long-term residents against the recent influx of affluent tech employees, Airbnb and other short-term rentals have become a source of tension. Today San Francisco Mayor Ed Lee and Supervisor Mark Farrell hoped to ease some of that tension by introducing reforms to the city's short-term rental laws that put a 120 day yearly cap on all short-term rentals. The package of amendments also introduced the creation of a new Office of Short-Term Rental Administration and Enforcement for the city staff to "coordinate in the administration and aggressive enforcement of the law."

Airbnb and other short-term rental services have come under fire in San Francisco because they take rental units off an already limited housing market. The current law caps short-term rentals at 90 days when the host is not present. If the host is present -- for example a room rental in an occupied home -- there is no yearly cap. Today's amendment package sets caps for both types of rentals. Mayor Lee said in a statement, "this legislation will help keep our City more affordable for homesharers, preserve rental housing for San Franciscans, protect neighborhood character and streamline permitting and enforcement under a fair set of regulations."

This is from a tech site that has developed a reputation, at least with me, for being astoundingly ignorant of even basic economics, so one has to make some guesses at what is going on here.  For example, it seems odd to say that renting a space on a short term lease rather than long-term somehow takes rental units off the market.  They are still being rented, are they not?  How could one describe them as being taken off the market?

My guess at what is going on here is that short-term rentals are likely exempt from some of the most onerous portions of San Francisco tenant law.   Likely, renting short-term allows one to bypass rent controls and charge more.  It also likely gives one some relief from the city and the state's horrendous tenant protections that make it virtually impossible to evict a tenant.  You lease to someone in SF, and you are stuck with them for life like a shark with a remora on his back, even if that tenant refuses to pay rent for years or constantly trashes the apartment.

San Francisco has created a system where they are absolutely guaranteed to have a shortage of rental properties.  Rather than address those laws that create the problem, politicians put their whole effort -- creating brand new agencies, no less -- to stop entrepreneurs from circumventing the madness and trying to provide housing.

Postscript:  The war against wealthy tech workers in SF is in full swing.  What SF would really like to do, I think, is close its borders and institute immigration controls to keep these folks out.  I know there are many parts of the world, including unfortunately our country, that work to keep poor uneducated immigrants seeking opportunity out.  But has there ever been a time or place in history where a particular place worked so hard to keep out rich educated immigrants seeking only to spend their money?

One of the mistakes people make in economic analysis, IMO, is that they sometimes miss non-monetary benefits.  A great example is how labor law and the minimum wage is structured -- there are many benefits of a having job to a young, unskilled, unemployed person.  That job may teach valuable industry-related skills and will almost certainly help teach some basic life skills (like how to show up on time every day and how to work with others in an organization toward shared goals).  For my kids when they were 15 or 16, these non-monetary benefits dominated, and I would have been happy if they worked for free in exchange for such skills.  That used to be the whole point of unpaid internships, until the government started essentially banning them.  Unfortunately, the government considers only money in computing the minimum wage, and ignores all these non-monetary benefits.

Mark Perry had what I think is another good example a while back, quoting from the Priceonomics blog:

If you want to dine at State Bird Provisions, you’ll have to get in line. The small restaurant, winner of the James Beard Award for Best New Restaurant (2013) and a Michelin Star, only accepts a few reservations that are snapped up as soon as they are released — at midnight, sixty days in advance. So nearly every day, people line up on Fillmore Street in San Francisco an hour or more before State Bird’s 5:30pm opening time to score a table.

It may seem silly to line up for State Bird Provisions in a city full of renowned restaurants and good food. But as anyone who has eaten brunch in the city knows, San Franciscans view long restaurant lines as social proof more than as a deterrent. Besides, State Bird offers determined diners a relative bargain. While its offerings are not cheap — even without indulging on wine, bills can reach $50 per person — State Bird’s prices are more modest than almost any other local Michelin Star restaurant.

This makes State Bird something of an economic mystery.If economists owned popular restaurants like State Bird, they would take one look at the long lines and raise prices.After all, the overwhelming demand is pretty clear. Or at the very least, given how reservations disappear like Coachella tickets, they would start charging for them. In fact, since restaurants do not do this, a number of startups in San Francisco and New York City have started to sell reservations to users, often by reserving tables and scalping them.

In contrast to the executives who run large restaurant chains, the restaurateurs behind celebrated restaurants and local favorites are often chefs first rather than professional managers. This raises the question: Are restaurants like State Bird Provisions, which seems to resist simple economic analysis, the exception or the norm? And if they are the norm, is that because it is somehow self-defeating to raise prices even at booming restaurants? Or are chef proprietors a unique breed in the business world, immune to supply and demand and content to leave money on the table?

I believe that many of these high-end chefs are not driven entirely by money.  Their personal reward system also depends a lot on prestige and recognition.  Making a good profit in a restaurant gets you no recognition in the the circles where chef's crave it.  Name the three most profitable restaurants in town -- you have no idea, do you?  What get's these chef's recognition is being the hot place to dine that is so in demand it is impossible to get a table.  So one makes the restaurant a little too small and keeps the prices a little too low and one trades a bit of money for something that is more valuable:  prestige.

One can see this same effect among, say, US Senators.  In our current corporate, crony state, US Senators can expect a huge spike in income once they leave Congress, getting paid by some large corporation lobbying firm.  The economically rational decision, then, if one were only interested in money, would be to serve just one term, then leave and make some bank.   But you never see that.  Senators stay and stay, even when it is an enormous hassle to do so.  They are essentially collecting and spending millions every election to keep their income low.  Why?  One big reason is prestige.

Going back to the restaurant example, let's consider a famous chef who pretty clearly does care about money:  Wolfgang Puck.  I have never seen this written, but here is what I observe to be Puck's approach.  He creates a small restaurant and lavishes it with a lot of his personal attention.  These restaurants do not have much seating and become the hot places to dine, leading to long lines and difficult reservations.  The difficulty of getting a table generates an elite buzz around the restaurant.  After some time, Puck will buy a huge new location nearby with many times more seating.  He formula-izes his recipes so he no longer has to be involved, and then shifts the operation onto auto-pilot in the new large location.  Perhaps he even franchises it.  The new location cranks out a bunch of money, while he moves on to create a new elite concept.  He also leverages the original buzz in his personal brand, which is applied to all kinds of other items.  In a sense, he is banking prestige in the early venture and then monetizing it later.