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By Douglas Moran

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.