There’s big money in charity: Part 2, Few would thrive

March 26, 2015 | Boston, Charities, Competition, Governance, Housing, Impact, MEEs, NGOs, Nonprofits, Overhead, Speculation, Theory, US News | No comments 88 views

By: David A. Smith

[Continued from yesterday’s Part 1.]

It was finally decided that since I was a budding historian it would be nice if I made a historic record of the first shipment of Food for Peace from the time that it left Baltimore with appropriate fanfare to when it entered the bellies of those whose hearts and minds it surely would win to Democracy’s side. I suppose everyone was still a bit naive back in 1961.

– Ross Thomas, If You Can’t Be Good (1973)


A Charity Defense Council billboard along the Southeast Expressway.

In yesterday’s Part 1, using as its seed capital an unwitting diptych of Boston Globe articles, one extolling the importance of charities spending enough on themselves to be robust and aggressive in fundraising, the other ever-so-gently chastising other charities for possibly over-rewarding their executives, we met successful self-promoter Dan Pallotta, who shows his genius for naming things in his choice of advocacy organization: the Charity Defense Council, implying that charities need a defense, and that a wise council of the elders came together to defend them.


Middle-Earth philanthropy stands on the brink of destruction

Sources referenced in this post

The Boston Globe (January 15, 2015; black font)

The Boston Globe (January 25, 2015; pastel blue font)

Other AHI posts on non-profits’ economics and governance

Vicarage at the church of football (December 14, 2007; brick red font)

The wrong way to be a Global-South non-profit (3 parts, April 11, 2011; navy blue font)

The battle of charities’ taxation (4 parts, May 9-12, 2011; brown font)

What’s fair in non-profits’ property taxes? (4 parts, March 5, 2012; Purple font)

No business for amateur philanthropists (3 parts, November 19, 2012; forest green font)

The price of charity (5 parts, April 29, 2013; Caramel font)


Ah, but is this a problem of reality, or of perception?

But if 70% of Americans think charities waste money (Mr. Pallotta’s citation, not mine), is that a problem of Americans’ perception, or one of reality?


Call if the stupidity of the American donor if you like

2B. What is their ‘business’ or ‘program activity’?

Non-profit is a tax designation, it’s not a business model.

– Wise advice provided to me multiple times over the course of building AHI

Any business enterprise has five essential functions:

The business enterprise simplified

Five essential functions

1. Business development and contracting.  The activity of obtaining business to do.  This is true even of non-profits that give things away for free; you still have counterparties and even if they pay no cash, they have to value what you are providing them, and they should be called customers.

2. Line work.  Doing the organization’s work with customers – products, services, and direct customer support.

3. Staff support for line work.  Assuring that those doing the line work have the tools and systems they need to do the work; information technology (IT); of these, IT

4. Management, administration, and governance.  Deciding what the organization will do, assuring that it is done and properly documented and tracked, and making sure the organization follows applicable rules, other people’s or its own.

5. R&D.  A business that doesn’t keep exploring and experimenting soon stagnates, after it stagnates it declines,

What is left after these five functions are paid for – that is, all revenues minus all of the foregoing costs – represents the organization’s operating profit or loss (usually more properly called ‘cash flow’).

While governance and compensation are challenging issues even in for-profits, for non-profits they are doubly so, because in non-profits the customer (who chooses the service or product, uses it, and benefits from it) is not necessarily the principal payer for the service (whom we may call the ‘benefactor’).  For non-profits, if customers cannot pay the marginal cost, then impact is entirely dependent on increasing the total number of benefactors – and that means ‘fundraising’ or ‘getting people to give you money’ is often a core activity, the essential part of business development and contracting.

Even if those are the functions, how do they translate into people and salaries?  How is the people’s time allocated, both by activity and by classification?

Charity watchdog groups have historically said nonprofits should spend no more than about one-third of their budgets on overhead, and ideally below one-quarter, and use the rest for charitable programs and services.

It’s by no means apparent how to think about these issues, but here’s a way definitely not to think about them, and that would be by law or regulation:

There is no legal limit on how much nonprofits can spend on fund-raising and administrative costs, which typically include legal services, accounting, and office management

2C. Is management ‘overhead’ or ‘program activity’?

All right – then where does the CEO sit?  At AHI, which is tiny in people (but mighty in impact!), as Founder/ CEO I’m in all five of those functions, so how should we allocate my cost?


Ah, but what are you worth?

[Full and personal disclosure: AHI does not pay me.  I donate all of my time to it.  So in AHI’s case my ‘cost’ is lost-opportunity, not out of pocket. – Ed.]

Management, like goal-scoring in soccer, looks easy and quick when done by experts.


Launched full-tilt, headed home: van Persie’s amazing goal


Floating over the keeper’s head


It looked easy when Robbie did it

Management is essential, and curiously, it can be understood only by doing it.  It can take a lot of time or just a little time.  It draws from all your experience and nobody ever gets it 100% right.  Whatever you decided yesterday, there will be something new to decide today … and whatever it is that you have to decide won’t be quite like whatever you decided yesterday or even three decades ago.  And its value correlates only imperfectly with its cost.

Is it overhead or program activity?  Darned if I know.

3. Non-profits compete … and the most-in-demand talent is usually paid the most

In the non-profit realm, we all talk about collaboration, but the reality is that we compete:

  • For donor funding/ contract dollars.
  • For customers/ beneficiaries, and projects they can succeed upon.
  • For capable, motivated, and knowledgeable executives and staff.

 (At AHI, we bend over backwards not to compete gratuitously – my longstanding motto is “All fly balls are caught; no outfielders run into other outfielders.”  Even with that, some things drop and some are just collissions.)


Avoid this …


… and this too

Competition is fantastic when harnessed; it’s fantastic when all the players are fairly successful.  But when there are more players than there is business to do, more operating costs than visible grant possibilities, more entities losing money than those making it, competition turns more ruthless.

And for big non-profits, there is never enough market share, because there is always more competition.

3A. Pure fundraisers are paid as if they were commission salespeople

Fundraising is sales, and the commodity being sold is ego-boost: ego boosted by virtue, by wallet size, by worthiness of the cause, by visibility (there’s a reason university and hospital buildings have names carved into them), and by personalized, sustained flattery.  It may be ignoble, but it’s human, it works, and those who can do it are paid big bucks:

Pallotta rails against the [parsimonious] mindset and is an evangelist in his belief that if charities increase overhead spending, especially on executive compensation and fund-raising, they could bring in more money to do more charitable work.

After all, he said, few for-profit ventures would thrive, let alone survive, without ongoing internal investments.

Ah, but is fundraising R&D or investment in plant or facility?  I think not.  It’s investment in expected receivables. 


We promise we’ll think of good uses for it

[Continued tomorrow in Part 3.]


There’s big money in charity: Part 1, Not corporate chieftains?

March 25, 2015 | Boston, Charities, Competition, Governance, Housing, Impact, MEEs, NGOs, Nonprofits, Overhead, Speculation, Theory, US News | No comments 138 views

By: David A. Smith

[I wrote a report about how] some Madison Avenue sharpies ripped off the Office of Economic Opportunity. That one I entitled, “Poverty is Where the Money’s At.”

– Ross Thomas, If You Can’t Be Good (1973)

Profit is normally the premium one pays for competence, but are all profits equal? 


Malcolm Rogers, outgoing director of the Museum of Fine Arts, received a $60,096 annual housing allowance, according to the museum’s latest tax filing. It was part of a total compensation package worth $906,897.

Are all uses of profit equal?

Sources referenced in this post

The Boston Globe (January 15, 2015; black font)

The Boston Globe (January 25, 2015; pastel blue font)

Other AHI posts on non-profits’ economics and governance

Vicarage at the church of football (December 14, 2007; brick red font)

The wrong way to be a Global-South non-profit (3 parts, April 11, 2011; navy blue font)

The battle of charities’ taxation (4 parts, May 9-12, 2011; brown font)

What’s fair in non-profits’ property taxes? (4 parts, March 5, 2012; Purple font)

No business for amateur philanthropists (3 parts, November 19, 2012; forest green font)

The price of charity (5 parts, April 29, 2013; Caramel font)

To judge by human society, the answer is No, some profits are better than others, when they are earned by non-profits, or in the loftier term that they themselves prefer, ‘not-for-profit organizations’ – but does that aspirational self-chosen status and its implied altruism give them a free pass on their operations?


I’m a non-profit, let me through!

It’s conventional wisdom in the world of charitable giving: Good nonprofits spend as little as possible on overhead. Donor dollars, the thinking goes, are best spent on a nonprofit’s charitable mission, not on administration and fund-raising

To Dan Pallotta, that’s ludicrous.


I condemn conventional non-profit thinking


In that case, I condemn the money-grubbing non-profits

As the head of a rebellious Cambridge nonprofit called the Charity Defense Council, Pallotta has insisted for years that nonprofits should adopt a more corporate model of doing business.


Some non-profits spend money on me so I can get you to spend money on programs

That includes spending more on themselves, an expense traditionally viewed by donors and watchdog groups as wasteful.

Aside from ‘waste’ being a normative concept (like greed, it’s something others do and we condemn because we never do it), there are non-profits and non-profits – and that makes everything fairly complicated.

1. A non-profit is a business stapled to a beggar

Nearly all the non-profits in my experience are in some way or another mission entrepreneurial entities; they produce products and services, which they make available to the public either free or at lower prices than pure economics would require them to charge. 

And unlike Mee’s that grew out of a profitable activity and discovered purpose along the way, non-profits started with the mission and invented the enterprise as a form of sustainable and scalable delivery.  But the intangible infrastructure of an expanding organization costs money, so nearly all non-profits have their begging bowl out all the time.


We’re just trying to sustain our business model

“We’re trying to educate people on the notion that maybe the question they’ve been asking all along is the wrong question,” said Pallotta, who contends that nonprofits could do even more charitable work if they spent more on overhead.

Ah, could they do more, because could they raise more? 

“These organizations have no idea how much money they’re leaving on the table by restricting their fund-raising budgets,” said Pallotta, who also makes his pro-overhead argument in his books “Uncharitable” and “Charity Case” and in a widely watched TED Talk.


Or has the organization inverted its priorities, where their essential activity isn’t relieving the world’s ill but fundraising?  For those non-profits where it is, is the ‘product’ that they are selling actual results … or simply the ability to feel good about oneself for having provided a gift to someone less fortunate than oneself? 


I gave money, and I feeeel good!

I knew that I would!

2. Non-profit business come in multiple types with multiple revenue profiles.

Non-profits come in almost as many types as do people, with as many different target customers, theories of impact, financial profiles, endowments, and revenue sources as people have.  And some of them are anything but poor:


More valuable than Jordan or Latvia top ten endowments (as of 2009)


Some downs, some ups, but more money coming in all the while

The executives on the receiving end of these benefits are not corporate chieftains.

Actually, they are corporate chieftains – just chieftains of non-profits.

Instead, they run some of the Boston area’s most prominent nonprofit arts and cultural institutions.

In putting together its compensation-investigation story, the Globe articles conspicuously omitted any of the big-business non-profits, like hospitals and universities, which are the real money machines.


Reaping a billion a year in donations: Harvard’s fundraising

At the Museum of Science, for instance, president Ioannis Miaoulis earned $509,265 in the year ended June 2013, and his compensation included money to pay for his two children to attend Tufts University, according to a disclosure deep in the museum’s annual tax filing.

As we’ll see, that particular item is less questionable than it looks.


“There’s a good reason for the children’s college payments”

2A. Types

When we think of ‘non-profit’, these run an enormous gamut, from the tiniest and most clueless to the largest and most imperial.  Among them are:

Community-based non-profits.  Many of these are community organizations, started by people motivated to do something good in their locality.  Their staff is often volunteer, part-time, underpaid, or all three; their professionalism waxes and wanes; they are often one executive-director elopement away from insolvency – and however effective they may be, they are at least adorable.  Often they stumble into real estate development, and some of them become boutique affordable housing developers.

Distribution non-profits.  These entities give something away to deserving customers who seek it out.  Among other things, Planned Parenthood of Massachusetts offers free anonymous reproductive health telephone counseling.  The Pine Street Inn houses the chronically homeless.  Heifer International gives poor people cows.


The real deal: CARE, Berlin, 1949

Donation-magnet non-profits.  Some non-profits are so well known that they are magnets for donations, especially when disaster strikes.  CARE began in 1945 as the Cooperative for American Remittances to Europe; the American Red Cross, Habitat for Humanity International, all have fantastic brands whose capitalized value runs into the billions, and who are the immediate recipients of millions and more of donations whenever a disaster strikes anywhere in the world.


A great brand

Patron’s-legacy non-profits.  Many are the patrons who established foundations; a previous century’s robber barons become the current century’s philanthropists: Ford, Rockefeller, MacArthur, Kellogg are giving way to Omidyar, Soros, and Gates.  These entities are in the business of giving out money to others who in turn will make impact with that money.

Political non-profits.  Quite a few think-tanks with a political bent have decided they are best served by donning the mantle of charity, the better to receive donations in addition to grant-for-task and other forms of direct consulting, among them Brookings, Cato, the Center for American Progress, and Heritage.

Ralph Alswang Photographer 202-487-5025

We’re altruistic opposed to those who oppose progress

Imperial non-profits. For some non-profits, real estate is core to their mission.  So churches own tax-exempt property (some of which they want to close, sell, or close and then sell), universities are always in acquisitive modes (often clashing or sparring with the cities in which they are located), and hospitals are cathedrals of medicine seeking always to grow larger and more technological.  These entities are conglomerates that own multi-billion-dollar asset portfolios, and are always looking to pick up new property adjacent to their main footprint, and to remove it from the tax rolls even if via a PILOT agreement.


And all tax-exempt

Even this superficial and doubtless incomplete listing shows that non-profits come in many different shapes and sizes, and most importantly for our purposes, with many different approaches to the eternal question: how do we keep paying for the things we need to do?


Can’t talk now, I’m off to save the world

[Continued tomorrow in Part 2.]

Month in review, February 2015: Part 2, From Yes to No to Maybe

March 24, 2015 | Architecture, Brutalism, Golf, Greece, Grexit, Month in review, Paul Rudolph, Rent control, San Francisco, Sovereign bankruptcy, Speculation, Theory | No comments 114 views

By: David A. Smith

[Continued from yesterday’s Part 1.]

Though committees, as we saw yesterday, have grave difficulty approving and acting upon anything, the same groups can swiftly reach a consensus to oppose anything, or even better, endorsing its regulatory variation, Pay me not to oppose you, as Everett casino developer no doubt expected, as explored in Public nuisance value:


Lawyers are standing by

No one, least of all the Massachusetts Gaming Commission, could have been surprised when the City of Boston sued the commission; the newsworthy thing would have been not to sue, as implied if not directly reported by the Boston Globe (January 5, 2015) and the Boston Herald (January 6, 2015; Pastel blue font):

Thomas C. Frongillo, an attorney hired by Boston in its casino battle, called the land sale an “illegal contract” used by the sellers to “perpetrate a fraud.”

Because litigators generally cannot be sued for argumentative statements they make in filings, even if those statements might otherwise be libelous, let us not conclude that Mr. Frongillo personally believes the claims being made; he is merely arguing them before the court.

Much of Walsh’s lawsuit recounts the complicated history of Wynn’s deal to buy the 33-acre Everett property on which the company intends to build.

Yes, the land sellers may have been crooks, and as I detailed at length there could have been hanky-panky in their acquisition of the land, which is often a convenient place to bury the evidentiary trail of kickbacks and payoffs. Instead, the pre-closing history works against the theory Mr. Frongillo is seeking to conjure:

Wynn, in response, slashed the purchase price for the land from $75 million to a market rate price of $35 million, based on an appraisal of the property, to deny any undisclosed stakeholders a premium for selling to a wealthy casino company.  The gambling commission approved the plan at the time, after its investigators found no evidence Wynn Resorts was part of the alleged deception.

Commission lawyers will review the suit and the state will craft a response.

Translation: We knew this was coming whatever we did.  Knock yourself out.


The first rule about fight club is you never talk about fight club

February began as January ended, with a fantasy of urban spring, in the form of Golf and the romance of pre-urbanized society: Part 6, The idiot and the child:

Golf’s bigger problem is the rise of richer cities.  When the suburbs are richer than the cities, golf flourishes, because there is plenty of residential space accessible via car.  But when the polarity reverses, and the cities gain people (and money, and clout) at the expense of the suburbs, golf fares poorly. 

America has flirted with urban games; platform tennis, a compacted form of tennis in a cage, has never gained adherents beyond a small coterie of dedicated Manhattanites.


A basketball court with ten players allots each 1% of an acre apiece; it’s eight times as land-efficient as even soccer, and twenty-five times more land-efficient than baseball.  (Baseball thrives in the urban environment because baseball stadia easily hold 45,000 people at a time, and that brings the land-use economics way up.) 

Golf is 278 times less land-efficient than basketball.

For urban golf – and for America’s suburbs that are becoming more dense – land-use inefficiency will be an economic death knell.

I finished the month with an extended review of a Brutalist building that, despite never being successful in its intended purpose, has survived for nearly 45 years and even now it being verbosely defended by those who don’t have to life in it, work in it, or use it, as I countersank in great detail in Form forces function: Part 1, Who owns the design?, Part 2, Who decides how a building is used?, Part 3, Who decides when to reconfigure or upgrade?, Part 4, Who sets the building-code rules?, Part 5, Who says buildings have to work inside?, Part 6, Who chose the concrete, anyway?, Part 7, Who can be a hero?,

Economics aside, many say the Rudolph building simply has never belonged in Goshen and never will.

“Gravity aside, my designs would work fantastically well,” quoth the conceptual architect.


Designed for living?

Under Mr. Kaufman’s plan, the government building designed by Rudolph and owned by Orange County, would be turned into a center for artists, exhibitions and community meetings.

Even so, it would still be a public building, and the Americans with Disabilities Act would apply.

The cost-saving argument is further ironic given this fact, which I unearthed late in writing this post:

Practically, what made Brutalism so prevalent was its cost. Poured-in-place concrete structures were cheap.

As for the idea that people will travel to Goshen to see a Brutalist building as tourism, and spend big money while in town, how many people go to Yale for the purpose of seeing that art museum?  A hundred a year?

and Part 8, Who will bet real money on its future?

The architectural advocates are always overruled but never contradicted, so this post is intended to serve as a prototype for hundreds of similar Brutalist buildings, bad but beloved, that should all disappear unless they have unique and peculiar circumstances – a big grant benefactor, for instance – who can justify them without reference to economic practicalities.

But to help those artists keep one foot in the borough, he has promised that a gallery in Bushwick will show work by artists who live and work in the Goshen complex. Clever marketing!

I think Mr. Kaufman’s projected economic use is a pipe dream … but then, he wouldn’t be risking anything by pursuing it, as he asked the county to give him the land, give him the building (for no cash), let him design the new building (for a tidy fee)

In the autumn of Charles Gwathmey’s life controversy beleaguered the architect, and his design [widely panned by architectural critics] for the addition to Paul Rudolph’s New Haven masterpiece, the Art & Architecture Building at Yale.


Paul Rudolph’s New Haven masterpiece, the Art & Architecture Building at Yale, Gwathmey’s addition neither denies or embraces the existing building.  [Whatever that means – Ed.]

There’s a syncopated flow to the building. The concrete facade, its corduroy pattern bush-hammered by hand, looks quarried from some immense rock. Almost miraculous, the restoration vindicates Rudolph.

Does it?  Or does it prove that bad design can be cured only with non-economic money?

Around the same time DesignLab dropped out, the legislature decided it might sell the building outright. Kaufman’s was one of two proposals. The other bidder, Pike Development Corporation, offered to buy the building, renovate it according to the Clark Patterson Lee plan, and then lease it back to the county. An architectural disaster.

Universities can afford to sustain art for art’s sake.  County governments have to follow the economics.


It’s brutal, but is it art?

Here’s to an imminent spring.


Month in review, February 2015: Part 1, Global to personal

March 23, 2015 | Architecture, Brutalism, Golf, Greece, Grexit, Month in review, Paul Rudolph, Rent control, San Francisco, Sovereign bankruptcy, Speculation, Theory | No comments 112 views

By: David A. Smith

Among housing’s many fascinations for me is that it connects the most global issues (like money and currency) with the most local ones (such as where to buy a condo or co-op), and in February these two were linked more than usual. 


Global forces can land anywhere

In February, the ornery Greeks elected a populist, Alex Tspiras of Syriza, and his confrontational finance minister, Yanis Varoufakis, who went around European capital asking loudly, Just WHO has a problem here?:


Sealing it with a handshake? Syriza are on a charm offensive across the Eurozone

Judging by these photos, Mr. Varoufakis is also extremely shrewd, because he knows not that he has Aces, but that the other side has a handful of deuces.  He’s dressed like an unemployed university professor.  His countenance is serene; his handshakes are target-based’ they find the other hand and zero in on it for a firm clasp with a swing of his whole arm, where he will have the momentum and the other hand must brace to meet it.  Look in particular at the photo which opens this post: that’s Jeroen Dijsselbloem, the prissy Dutch economist with no people skills who from his comfy chair perch in the ECB had been laying down austerity conditions under which Greece has suffered in Prospero’s Europe. 

Presented with Mr. Varoufakis’ outstretched hand, Mr. Dijsselbloem is not only avoiding it, he’s avoiding eye contact, holding his closed brief in his right hand, and using his left hand to keep his jacket closed.  He has just shouted I am a wimp in body language, and Mr. Varoufakis knows this.

The Eurocrats have been bluffing, and Mr. Varoufakis and Syriza aren’t calling, they’re raising. 

Ahead of crunch talks with his German counterpart, Greece’s new ‘rock-star’ minister says he has already opened talks about a debt deal with the IMF

The Eurozone, you see, owns all of Greece’s debt. 


Who owns Greek debt?

They got themselves into this mess by squeezing out and screwing over the private banks, a perfectly good betrayal gone to waste. 

Afterword: As reported in the Economist (February 16, 2015; brown font), the Eurozone’s leaders found yet another way to kick the can down the road:


Let’s defer deciding!

Late in the evening on February 20th the finance ministers of the Eurogroup reached an agreement with Greece’s government to extend the struggling economy’s bail-out, which was scheduled to expire on February 28th. The reported deal, which would release another €7.2 billion in aid to Greece provided the country meets certain (as yet unclear) conditions, may provide some respite

From the global we get swiftly to the local, as with so many countries going backwards politically, socially, or economically, the world’s wealthy are discreetly moving their money and valuables out of their home countries and into Live-in safety-deposit boxes:

Assume, just for the moment, that you are wealthy, successful, globally mobile native of an emerging-world country.  You’re one of the world’s entrepreneurial elite, active in business or politics, mobile intellectually and physically – and yet you have a problem that’s keeping you up nights.

Maybe you’re an Argentinian terrified of President Cristina Kirschner’s economic kamikaze strategy, which may be heading toward default;


I’m so mad I could just expropriate something

A Russian oligarch who notices what happens to Russian oligarchs who cross Vladimir Putin.


Alexander Litvinenko, dying of polonium poisoning

He named Vladimir Putin as his killer

A Venezuelan who can’t buy anything with bolivars;


Lining up to buy toilet paper and diapers, Caracas, January 21, 2015

A Chinese who can’t breathe your city’s air;


Tiananmen Square, November, 2013

The figures are a reflection of the massive proportion (25%) of co-op and condo apartments in New York City that are not used as primary residences – many, by millionaire foreigners. 

‘Twenty-four percent of co-op and condo apartments citywide are not the primary residence of their owners,’ George V. Sweeting, the deputy director of the budget office, told the newspaper.

A pied-a-terre is a place you visit infrequently but regularly; an investment property is one you plan not to live in; a bolt hole is a place you have prepared against sudden unfortunate eventualities; and a foreign property is an excellent way to remit money out of your dodgy country into a fiscally safer one, or one with a better quality of life.

Issues at the personal level lead naturally to the metropolitan.  For property to work as a capital investment, however, the owner must have control over its occupancy and use, and that is something San Francisco’s rent control advocates seek persistently to undermine, as reported in The antidote to majoritarianism: Part 1, On its face fails both tests, and Part 2, There are outer limits

Essential to democracy is the protection of minority rights against the majoritarian impulse to rewrite the rules by increments, and as property rights are human rights, they must be protected by an entity or branch of government that stands apart from changing majoritarian impulses, as reported from the San Francisco Chronicle (October 22, 2014), and the legal decision itself (filed October 21, 2014; umber font):

[San Francisco’s] measure “requires property owners to pay a ransom simply to stop being landlords and use their own property,” [said one of the winning lawyers].  “Property owners didn’t cause the affordable housing crisis. The public should address it, not put it on the backs of property owners.”


I’m claiming this property

As the decision phrased it:

The property owner’s decision to repossess a unit did not cause the rent differential gap to which the tenant is now exposed. Two variables, neither of which is attributable to the property owner, give rise to the rent gap differential.  One variable is the market rate.

The other is the San Francisco ‘controlled rent,’ which as previously referenced is below market, and dropping even further below market.

The limited supply–and correspondingly high price–of rental units in San Francisco is, on the City’s own evidence, caused by entrenched market forces and structural decisions made by the City long ago in the management of its housing stock.

While the judge is diplomatic here, he means that San Francisco has (a) choked off new supply (via ‘sunset zoning’ that makes essential vertical development all-but-impossible, (b) imposed costs and delays in any new development, dis-incentivized owners and made) and thus imposed the housing shortage on itself, and (c) made vacancy economically better than occupancy, resulting in 30,000+ rental apartments held off the market by those who realize that it’s a fool’s business to be a landlord.

San Francisco’s gradually self-constricting land-use policies are a special case of a phenomenon often more commonly found in public bodies (which are elected, and therefore committees of members who have self-interest at heart), The Law of Committee-Action Tardiness:


The committee meeting is starting shortly!

A committee’s car would have no windshield but instead six rear-view mirrors, and nowhere is this more apparent than when dealing with the ultimate in speedy OODA loops, capital markets:

Capital controls are back in the spotlight, this time on Europe’s northern flanks. To the east, many expect Russia, battered by oil’s plunge, to impose limits on currency conversions to halt the rouble’s fall. To the west, Iceland, at last turning the corner after a painful financial crisis, is planning to ease restrictions that have stopped cash from leaving the island since 2008.


That the pros and cons of capital controls can be calmly discussed is progress. Until a couple of years ago, they were the bastard children of economic policy. Guardians of the established order refused to acknowledge their usefulness.

Personally, I think they’re useless in the intermediate run (succumbing to the Law of Economic Pressure, as in Chinese investors looking for places to expatriate their capital), usually destructive in the short run – but I Am Not An Economist:

But used they were, particularly in emerging markets. Then, in 2012, the once-unthinkable happened: the International Monetary Fund bestowed its blessing on them “under certain circumstances”.


Circumstances like when we think it’s a good idea

The IMF, let us not forget, may be run by economists, but it is controlled by politicians, appointed by their elected heads of state, and as such the IMF is for our purposes a committee.  That’s not true of the Federal Reserve, which is normally controlled by its chairman who is independent of the President, nor the European Central Bank, who is likewise controlled by its president.  That those gentlemen may be wrong in their actions is quite possible, but they can be both decisive and timely, and it’s striking that the 2008 banking-system-rescue coup, and the 2012 Euro-defense, were both bold decisions made not by committees but by individuals.

Most committees love to fudge, because that gives them wiggle room to decide each situation ‘case by case’ (meaning possibly according to which way the political winds may be blowing).


There is but one rule: Make me look good

The emerging consensus is that well-designed capital controls should be targeted and limited, such as taxes on short-term foreign borrowing or minimum “stay” requirements for foreign direct investment (FDI).  

In that formulation one can hear the sounds of screeching breaks being futilely applied to runaway political trains: an ‘emerging consensus’ of economists to target and limit activity (x) isn’t binding on committees and (y) merely kicks down the road the cans entitled ‘target’ and ‘limits’. 


We’ve decided to decide when we know what decision we’ll like then

[Continued tomorrow in Part 2.]

Ten years a blogger: Part 10, Affordability and government

March 20, 2015 | Blogs, Capital markets, Cities, Essential posts, Evolution, Finance, Global news, Government, Holmes on housing, Mobile homes, Money, Slums, Theory, US News, Value chain | No comments 217 views

[Continued from yesterday’s Part 9 and the preceding Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, Part 7, and Part 8.]

By: David A. Smith

Section 10. Affordable housing and the essential role of government

Because sustainable urban affordable housing always costs money, it arises only when a benefactor is willing to make that happen.  Occasionally the benefactor is the private, for-profit owner; sometimes it can be a philanthropy or charity (such as almshouses), but most commonly the benefactor is government, because only government has the resources at scale, and only government can use eminent domain for economic development or affordable housing development.


Beware the wrecking ball?

The need for government resources, coupled with government’s general inability to be an effective owner/ manager/ doer (an indubitable reality that at some point I should prove via essay), means that the best affordable housing is created through properly structured public-private partnerships (PPPs) or government incentivized financing programs; I’ve explored the nearly infinite variety of these in many posts, including this Top-25 post (June 11, 2009), Development done right in Jamaica? Part 1, the gates of exclusion:


Allow Jamaican columnist and developer/ architect Carlton Cunningham the voice of pride that shines through his mid-April column in The Gleaner as he describes his successful housing development:


Building hope through housing


Jamaican housing is stratified. Uptown erects gated communities while downtown erects settlements at the gates. Some settlers provide valuable services to the gated, while others, marginalised by lack of skills and, motivated by a “we-are-poor-because-you-are-rich” perception, seek to destroy the gate and the gated.


Both gated and settlers are trapped, ultimate fighters, locked at the wrist in a death duel. The trap is called underdevelopment. Its most visible members are donmanship in the settlements and private security behind the gates, disfigured progeny of corrupt ancestry.


Protesting donmanship in Kingston, Jamaica


If you haven’t heard of donmanship (I hadn’t), here’s a Gleaner extract from 2002:


Donmanship gone a school. There is growing terrorist extortion in schools. Other students are being forced by the student dons to pay taxes for right of passage and presence or the victims dare not turn up at school. Like in the protection rackets on the streets, fear of reprisal shelters the extortion from exposure.


I’ve previously posted about how childhood poverty damages your mind, and perpetuates a cycle of poverty, how slums are slums are houses of crime , and how some people are a slum’s winners.


A few weeks ago, a grieving family had to bury their bright, ambitious, peace-keeping daughter who was stabbed to death at school while trying to pacify a fight. Whole armouries of weapons are seized in some institutions and there have been arrests of students for guns and ammunition. The police could profitably open a special statistical category for school-related crimes including an increasing number of murder cases.



A slum in Kingston, Jamaica


Poverty and lack of education tie to crime, via drugs:


There is ganja at Munro – and everywhere else. There is booze (as The Sunday Gleaner has recently documented), and there is every other kind of drug readily available. Not only is there widespread use but students are peddlers on campus.


Though government can be essential it can also be unhelpful, as shown in this Top-25 post (January 2, 2012), Can you say ‘Pruitt-Igoe’ in Chinese? Part 1, what they’re doing wrong:


Pruitt-Igoe in St. Louis, when initially completed circa 1955

Affordable housing is hard enough to create when the goal is solely that of economically and socially healthy communities – but when production is undertaken to create construction and keep a supply-driven economy humming, the odds of delivering successful communities drop even further.  Unfortunately, if one believes the evidence gathered in this Wall Street Journal (December 31, 2011) article, that’s where China’s real estate interests are leading their country, into a comprehensive affordable housing mistake:



A dormitory community 25 miles from downtown Chongqing


One of the biggest public-housing projects in history will help determine whether China can remake its real-estate sector fast enough to prevent its economy from flaming out.


China has already overbuilt the conventional residential sector out of an unholy trinity of central-government cheap money, profit-chasing state-owned developers bent on completions, and local governments that book profits on land upzoning even if the homes sit unsold. 


China is in the midst of a crash program to build 36 million subsidized apartments by the end of 2015—enough units to house the entire population of Germany.


Mix in questionable data made less reliable by self-interested self-reporting and you have a formula for a headlong rush into the ribbon-cutting trap – counting completions as successes even though that is the opening of use, not its ending, and even counting starts as successes even before they are built.



If you build it, will they pay?


The goal is twofold:


[1] To head off social unrest by ensuring decent places to live for low-wage workers, but also

[2] To cushion an expected fall in high-end construction—the result of policies to tame property speculation—by ramping up construction at the low end: so-called social housing.


Of these goals, the former is honorable and worthy – and difficult.  Housing civilizes people, and civilized societies create affordable housing.  The second, however, is a recipe for disaster, because when one rushes pell-mell into production for the sake of a widgets count, the result will be bad housing that is an urban millstone for decades. 



Maybe you shouldn’t have built that


One of China’s most ambitious social-housing efforts is under way in the southwestern metropolis of Chongqing.


China appears to be making many of the classic mistakes that the US, UK and others made decades ago, and from which we are only now extricating ourselves:


Pruitt-Igoe demolition, 1972 or 1974


Fore u can rebuild u got 2 destroy!

Though badly designed and built housing sometimes must go somewhere to die, it’s better to think positively, as in this Top-25 post (November 29, 2010), A sustainable subsidy: Part 2, privatizing development aid:

As referenced in an interesting New York Times blog post by Tina Rosenberg, Africa has too little corporate infrastructure to attract the large-scale indulgence-buyers.  Deploying carbon credits productively in Africa requires building a network to get it to poor people, either a geographically dispersed rural grid of a demographically complex urban one.


Giving people an alternative to boiling water in order to purify it will reduce greenhouse gas emissions in countries where trees are scarce. Boiling water is harmful for many reasons:


1.     Burning coal produces greenhouse gases, and certain ways of burning wood can, too.

2.     The indoor pollution created by burning wood or coal is a prime cause of respiratory disease.

3.     The constant need for wood is deforesting poor countries.

4.     Women who are already spending hours collecting water must spend additional hours collecting firewood as well.



How much of the world cooks


If the carbon-credit indulgence markets are transmogrified into economic development markets, the planet wins.  Personally, I care very little about carbon reduction but a very great deal about poverty reduction – and even if ecology is your prime mover, getting people out of poverty faster has to be a better way to reduce emissions than paying for smokestack innovations from countries whose economies are already booming.


From the standpoint of the carbon credit markets, however, the key point is that boiling water will eventually create demand for fossil fuel, as many areas are running out of trees. So for many reasons, finding a usable alternative to boiling is good for people and good for the earth.


Probably true, but within reason, what does it matter?  The effect is to privatize development aid into Africa, which is where it needs to do – with sustainable ongoing business models.


The product has a bigger cousin called the LifeStraw Family. You hang it on your wall, pour dirty water in the top, open the tap and clean water comes out the bottom. No power or replacement parts are required.



Interpose it between your cachement and your lips: result, safety


Unlike the personal unit, which is mainly a rural innovation, the LifeStraw Family has urban applicability – it can be used in slums.


Each unit cleans about 18,000 liters of water – enough for a family for three years.


The market cost of the unit averages out at a penny per ten liters of water purified.


Though these innovations are almost exclusively rural, not urban, they illustrate how markets can be harnessed.  Install one as part of a low-cost $300 house, fix it in place so that it is hard to steal, and you’re really onto something.



From a napkin to a slum?  The original $300 House vision.

[Continued next week in Part 11.]