Sam Altman’s Misunderstanding of Urban Issues
Sam Altman may run the most successful Silicon Valley incubator, but he can’t disrupt urban politics. Mr. Altman has identified a number of problems facing our cities, specifically Californian cities, and wants to try to solve those problems. I applaud his goals, there are serious issues facing our cities that need to be addressed, but he’s showing a complete lack of understanding of the underlying causes of those issues.
The biggest issue Mr. Altman has identified is the ongoing housing affordability crisis that most large cities around the world are faced with right now, none more so than his hometown of San Francisco. Other urban concerns he would like to address are the role of citizen participation in local government, ensuring resident happiness, the role of vehicles and transit in the city and between cities, and ensuring cities evolve as needs change.
As head of Y Combinator, he started a research project looking into how existing cities can be transformed and new cities be built to address the issues he’s concerned about. I applied for one of their research jobs, but instead of going with somebody like me who has considerable experience in urban planning, development, and politics, they went with somebody whose experience includes making internet memes. So far, no actual work product has been released from this research effort, but going into it, the plan sounded more like creating a green field city rather than transforming our existing cities into something that work for existing and future residents.
Now, Mr. Altman has started a new effort he’s calling United Slate, which seeks to support candidates for political office in California that want to focus on these same urban issues, as well as possibly pushing for one of three statewide initiatives to help solve these issues. This new effort illustrates an evolution in Mr. Altman’s understanding of the underlying problem, he now understands the problem is political and not technological. This is an encouraging sign that he is listening and open to feedback, but his efforts are still missing the mark.
Supporting Candidates
United Slate plans to support a new cohort of California politicians that are focused on these urban issues. As somebody who is running for Anaheim City Council, I applied to be one of the candidates that United Slate promotes. Through their online postings and in an introductory phone call with them, I’ve come to understand that they don’t yet understand the nature of the political problem they are facing.
One thing they told me was that they are looking at supporting candidates for statewide and national office. They are interested in candidates for Congress, Governor, and Attorney General, not in local city council races (i.e. not me). This betrays a misunderstanding of both the urban issues they care about, and the necessary process politicians go through to be effective in higher office.
Most issues facing cities are solvable at the city level. Even regional issues are often addressed by boards that are made up of local officials, such as the Orange County Transportation Authority Board, which is made up of members of the Orange County Board of Supervisors and representatives from local cities council. While state and Federal policy clearly has an impact on our cities, nothing beats a concentrated focus on the issues Mr. Altman cares about from local politicians.
Beyond that, most politicians learn how to effectively work with government staff and their fellow legislators as they go from local boards and commissions to local elected office to higher office. It’s a skillset that is hard to acquire any way than through doing, and many politicians that try to jump directly to higher office aren’t effective because they don’t possess this unique skillset. The only exception is if a politician is the child or spouse of a politician. California Assemblymember Ian Calderon is a good example, his dad was a member of the Assembly and State Senator, so Ian was able to be effective in office since he has learned at his father’s elbow while growing up, without going through the typical learning process in local government.
The focus on candidates for higher office is both a missed opportunity and a way to ensure failure from the start. It is essential to address global problems locally, because we cannot address local problems globally.
United State Initiatives
United Slate has proposed three possible state initiatives to help address the urban issues Mr. Altman cares about: by-right development; foreign investor tax; and stopping high-speed rail. These proposed initiatives show an incomplete understanding of the dynamics that are spawning the current problems in our cities. Furthermore, these solutions assume that the dynamics in the Bay Area are present throughout the state and beyond, which isn’t the case.
By-Right Development
It wasn’t until I was on the phone with the guys from United Slate that I finally understood this issue. By-right development is something a lot of the Bay Area YIMBYs talk about, and legislation by State Senator Scott Wiener is making its way through the legislature to address by-right development (SB 35). The problem is, a lack of by-right development isn’t present in most parts of the state, just in the Bay Area.
By-right development means that a developer can build a new building without a discretionary approval as long as it meets the city’s zoning and development standards. By-right development means that as long as a piece of land is designated for multi-family, and the proposed building has the appropriate setbacks and parking and all of the other standards set forth by the city, then a developer can build an apartment building without further review. This is how it has worked in every city that I’ve ever done development in Southern California, but this is not the way things are done in much of Northern California, especially the Bay Area.
In the Bay Area, every development must come before the Planning Commission and City Council for approval, whether it meets the standards or not. This gives cities incredible latitude to deny new development projects, which has a direct impact on the housing market by limiting housing supply. This is why the housing affordability crisis is worse in the Bay Area than anywhere else, but there is still a housing affordability crisis throughout the state that forcing by-right development won’t fix. Simply put, the lack of by-right development is not what’s causing the housing affordability crisis, it’s only exacerbating the crisis in the Bay Area.
The truth is that most cities don’t have enough land designated for new housing to address their housing needs. California cities have no incentive to designate land for residential development. Due to the state’s property tax laws, residential development loses cities money over the long term. The cost of providing services to homes costs more than the homes generate in property tax revenue. Because of this, cities try to encourage retail and hotel development more than anything so they can benefit from the sales and transient occupancy taxes.
State law does requires cities to include a Housing Element as part of each city’s General Plan that shows how the city allows for enough housing to meet their needs, but it does not ensure that the designated sites are economically feasible using the city’s existing development standards. There are two issues that stem from this, that by-right development doesn’t address, but electing the right local leaders does.
First, even in places where by-right development is allowed, most new developments still need to go through Planning Commission and City Council. Many new developments require a change in a parcel’s land use designation and zoning, as well as approval of some type of map to create new lots or adjust lot lines, and most new developments require some type of variance from existing development standards. These are approvals that happen at the local level and cannot be preempted by state law. We need local elected leaders who want to see new development in their community, and who are willing to make the case to their constituents that new development is a good thing.
The second issue that impacts the feasibility of new development is local development standards, which are the purview of local planning commissions and cities council. Local development standards include things like setbacks, parking requirements, minimum unit size, minimum lot size, and maximum building height. Each of these standards that reduce unit yield and increase development costs makes fewer parcels feasible for development. There needs to be a balance between ensuring new developments create a community worth living in and ensuring that enough housing is built, but these are only decisions that can be made at the local level by local elected leaders.
Focusing on forcing cities to allow by-right development for projects that meet the city’s development standards and zoning will help mitigate the housing affordability crisis in some parts of California, but it does nothing to address the underlying issues that affect the state as a whole. The only way to fix California’s housing crisis is to rethink how cities fund their services and to elect local leaders who support new residential development.
Foreign Investor Tax
The second proposed initiative that United Slate has proposed is a tax on foreign investors in California real estate. The fundamental issue here is that we’ve commoditized our housing stock. Houses have become a financial investment vehicle instead of just shelter. We think of our homes as part of our assets, and they make up a huge portion of most household’s wealth. Because we think of our houses in dollar terms, instead of as their inherent value as shelter, we’ve distorted their value. This has lead investors to purchase houses as a way to store and gain dollar value, regardless of their value as shelter. This is the result of the very wealthy having so much money they can’t find enough good places to get a reasonable return on their investments, they’re flooding the stock market which has lead to all-time highs, they’ve driven down the yield on the bond markets, they’re holding untold sums of cash, and they’re buying real estate, which drives up housing costs.
A foreign investor tax makes it more expensive for foreign investors to buy real estate in California, and therefore drives down their yields. The hope is that with less wealth chasing returns in the California real estate market that housing costs will come down. The City of Vancouver recently instituted a foreign investor tax, which has lead their housing market to cool considerably. A foreign investor tax will work to reduce the demand for housing as a financial vehicle, which will reduce housing costs. However, a foreign investor tax does nothing to address the existing demand for housing as shelter in California. In fact, it will reduce the supply of new housing, making the long-term housing affordability crisis worse.
Many new, large scale developments in California are being funded with foreign wealth. Developments like LA Live, and large parts of Anaheim’s Platinum Triangle, are funded through foreign wealth funds. If these investments are taxed in California, it will lead to an increase in the cost of funding development reduction in the number of new housing units built.
A foreign investor tax will help cool California’s housing market in the short-term, but will exacerbate the housing affordability crisis in the long run. A foreign investor tax is a workable idea that needs to be carefully constructed to avoid those long-term negative externalities but would still do nothing to increase the housing supply to address the remaining demand for housing as shelter.
High Speed Rail and Local Transit
The third and final proposed initiative by United Slate is to cancel California’s high speed rail project and redirect those funds into local transit projects. high speed rail is a critical component of any robust rail network throughout California. Local transit systems don’t suffer from a lack of funds, they suffer from from being misallocated to less efficient modes of transportation, which happens at the local level. Furthermore, it is simply not possible to reallocate funds designated for high speed rail to local transit agencies. If high speed rail is cancelled, those funds simply wouldn’t be spent in California.
High speed rail and local transit systems should not be viewed as an either/or proposition. Both high speed rail and local transit systems will work better if they have each other. High speed rail requires robust local transit systems around the high speed rail terminals so people can use the high speed trains without having to resort to using a car at either end of their journey. At the same time, high speed rail increases the value of local transit networks if it interconnects them and allows for a rail journey between major metropolitan regions of California. A good analogy for technical folks is to think of local transit networks as intranets, and linking them together with high speed rail is akin to creating the Internet. There is a lot more value from that exponential increase in nodes and connections on the network than from those individual smaller networks.
High speed rail is also critical if we want to address California’s carbon emissions. It is much easier to electrify high speed rail than it is to electrify the regional airline fleet. There are countless daily flights between Southern and Northern California which can be largely replaced by high speed rail. This is one major way to reduce California’s carbon emissions from transportation sources.
Not only will local transit systems benefit from being connected through high speed rail, they don’t need to money that’s being spent on high speed rail. Right now, California spends significant money on transportation infrastructure. Unfortunately we are spending that money on the wrong types of infrastructure, namely infrastructure for single occupancy automobiles. We’re spending billions of dollars on expanding our roads and freeways to make marginal improvements on their carrying capacity. This is being done at both the state and local level, and this money could be put to much better use building out multi-modal infrastructure designed for cars, transit, cyclists, and pedestrians. This again, is largely something that needs to be addressed at the local and regional level, not the state and Federal level.
Finally, it’s simply not possible to move money from high speed rail to local transit systems. Most of the money for high speed rail is from proceeds of a bond issued by California specifically for the high speed rail project, and from Federal funds for the project. Those Federal funds are specifically for high speed rail projects, and require matching funds from the State. If California’s high speed rail project was cancelled, those funds would either go to another high speed rail project, or more likely simply be removed from the Federal budget. Additionally, the bonds issued by California for high speed rail are required to be used for that project, and the investors that purchased those bonds would likely not allow those funds to be used on other projects even if an initiative was passed to allow it. A statewide initiative can enable California can issue additional bonds for local transit projects, but a better solution is for local transit agencies to issue bonds just as Los Angeles’ Metro system has done to build out its regional passenger rail system. But again, this requires local elected leaders and not state or Federal action.
Sam Altman clearly cares about the myriad of issues facing California cities, and is looking for disruptive solutions to these problems. While he has clearly shown progress in his understanding of the issues, he still isn’t proposing solutions that address the underlying issues that cause the problems he wants to address. He is seeking top-down solutions to problems that occur through complex, messy interactions of politics and policy. These are problems that can only be solved through similarly complex and messy, bottom-up solutions. These solutions are best handled in each community at the local level, by local leaders who care to address these problems.
I am hopeful that Mr. Altman continues to listen and evolve his understanding of the issues facing our communities. He has the resources and ambition to truly improve our communities and fix some of these systemic issues. But to do so, he must put his resources in the right place, and thus far he doesn’t seem to be doing that.
[Note: This part of a larger look at how local communities can address global issues related to climate change,housing affordability, the local economy, the fiscal solvency of cities, and public health.]
