History of a plot: Part 3, Code words for ‘those people’

April 16, 2014 | Affordable Housing, Atlantic Yards, community groups, Corruption, Development, Housing, Income mixing, Manhattan, New York, NIMBYism, Non-Profits, Politics, poverty concentration, Public housing, Sheldon Silver, William Rapfogel, Zoning | No comments 260 views

[Continued from yesterday's Part 2 and the preceding Part 1.]

By: David A. Smith

In order to have a plot, you have to have a conflict; something bad has to happen.

– Mike Judge.

As we saw in Part 1 and Part 2, The Lower East Side of Manhattan was a crucible of the changes sweeping American cities during the 1960s. 

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A protest (over a police shooting of 15-year-old James Powell): Harlem, 1964

With the slow collapse of the industrial-manufacturing city model, and nothing rising in its place, America experienced frightening and incomprehensible urban riots starting with the Harlem Riot of 1964:

On Thursday, July 16, 1964, James Powell was shot and killed by Lieutenant Thomas Gilligan. The second bullet of three, considered lethal, killed the 15-year-old African American in front of his friends and about a dozen other witnesses. The incident immediately rallied about 300 students from a nearby school who were informed by the principal.

This incident set off six consecutive nights of rioting that affected the New York City neighborhoods of Harlem and Bedford-Stuyvesant. In total, 4,000 New Yorkers participated in the riots which led to attacks on the New York City Police Department, vandalism, and looting in stores.

At the end of the conflict, reports counted one dead rioter, 118 injured, and 465 arrested. It is said that the Harlem Race Riot of 1964 is the precipitating event for riots in July and August in cities such as Philadelphia, Pennsylvania; Rochester, New York; Chicago, Illinois; Jersey City, New Jersey; Paterson, New Jersey; and Elizabeth, New Jersey

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That became a riot: Harlem, 1964

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The morning after

The 1960s riots led, among other things, to the creation of HUD’s new affordable housing production programs. 

Sources used in this post

New York Times (March 23, 2014): the story damning Mr. Rapfogel and Mr. Silver

New York Times (September 25, 2013; green font): Mr. Rapfogel’s indictment

New York Times (September 17, 2013; blue font): Announcement of development

New York Times Letter to the Editor, November 29, 1989; red font); Local opposition

To its residents, Cooperative City must have seemed a Jewish enclave of reason in an America apparently going mad, as the world had gone mad twice already in the century.

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Two nice Jewish mothers for a nice Jewish girl from Delancey

Cooperative Village was surrounded by more than 14,000 units of public housing to the north, east and south.

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Co-operative Village (B, C, and D) surrounded:

To the south is NYCHA’s Vladeck Houses, to the north is NYCHA’s Baruch Houses

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The Lower Weast Side, looking east at the Williamsburg Bridge:

Vladeck Houses in the foreground

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Baruch Houses, otherwise known as ‘the projects’

Those buildings were full of less prosperous African-Americans and more recent Hispanic arrivals.

In the Sixties, ‘affordable housing’ meant public housing, public housing meant blacks and Puerto Ricans, and that meant ghettos and crime, and the Lower East Side Jews wanted no part of that.

Mr. Silver and Mr. Rapfogel steadfastly opposed any mention of affordable housing, which would have altered the demographics of the neighborhood and put Mr. Silver’s political base in question.

They might also have opposed losing the area’s Jewish identity, or the neighborhood’s middle-class character.  With elected officials, the voters’ wishes, good public policy, and their own power base all become ineluctably fused.

sheldon_silver_side_eye

You got a problem with that?

“They’re the reason that this site has been empty for 50 years,” said Edward Delgado, known as Tito, who was a teenager when the city cleared the blocks and his family was evicted. He has been advocating for affordable homes at the site in the decades since.

Are they?  Are these the two self-interested individual who singlehandedly blocked development? 

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Do I look anti-development?  Mr. Rapfogel in 2009

The major tussle was, and for the next four decades would remain, how much affordable housing?  And underneath those words, the tussle was about what kind of people, and which people, would live in the neighborhood.  From the beginning, the new development’s residential composition was a code for political power coupled with neighborhood character and identity.

From the perspective of Grand Street’s Jewish leaders, any development with affordable housing that replaced the cleared tenements would tilt the balance of the entire neighborhood.

Mr. Silver and Mr. Rapfogel fought that possibility, chiefly through a community group called United Jewish Council of the East Side. Mr. Rapfogel’s father, Hyman, was a co-founder and Judy Rapfogel was on its board of directors in the 1970s. Mr. Silver was the group’s lawyer and headed one of its housing corporations.

They were friends from the neighborhood, and in their view their neighborhood was threatened, and with it their society, and they banded together.

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“Silver has appropriated $868,000 in discretionary funds to the Met Council since 2006.”

In the early 1970s, the city built a 360-unit housing project on a corner of the site. But that project wound up the subject of a court dispute when Jews were given many of the apartments. And the fate of rest of the site was still deadlocked.

By December 1977, Mr. Silver was still serving as United Jewish Council’s lawyer. He wrote to members of the departing administration of Mayor Abraham D. Beame about a plan he and the group had submitted years earlier for a “mini shopping center” on the Spura site. In drawings, it resembled a massive airplane hangar. It included no housing, but the group said it would create needed jobs.

In the late Seventies, with New York City having barely escaped municipal bankruptcy and the information/ financial revolution not yet taking hold in the revitalization of urban cores, a jobs-creating retail complex might well have been an excellent idea.  (For one thing, it may have anticipated the current policy fancy of eliminating ‘food deserts’.)

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Retail anchors a neighborhood too, doesn’t it?

Ed Koch, campaigning in Bay Ridge, Brooklyn, 1978

 “I would very much appreciate meeting with you or members of your staff in order to set up a program of incentive to get this plan off the ground,” Mr. Silver wrote. “It has been quite some time since the proposal was submitted and, to date, there has been no action.”

Mr. Koch took office weeks later. He hired Mr. Rapfogel, then 23 [Almost exactly my age – Ed.], as a spokesman at a city agency. Mr. Silver was pleased. He was sure Mr. Rapfogel would be “a capable spokesman in such a sensitive area of your administration,” he wrote to Mr. Koch.

They were buddies from the neighborhood, though Mr. Silver and Mr. Koch are both many years older than Mr. Rapfogel.

Soon after, United Jewish Council began pushing its friends in the administration to support the “international mall” plan, and its handpicked developer, Howard Blitman, arguing that the neighborhood was “clearly saturated” with public housing.

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Al Smith Houses, Lower East Side

While there can be little doubt the neighborhood did have plenty of public housing (Baruch Houses contains 2,193 apartments and 5,400 residents, while Vladeck has 1,523 and is home to 2,800 people), affordable housing is quite a different animal – private non-governmental ownership (subject to government regulation), generally better property management, and higher levels of average resident incomes.  Even in the 1970s that distinction was visible and relevant, though perhaps not to Messrs. Silver, Rapfogel, and others.

Eventually, the Koch administration selected the Chinatown Planning Council to build a 156-unit building for seniors on a lot near the main site. United Jewish Council, working with the Bialystoker Synagogue, was awarded 124 senior units in a different project nearby.

Through the late Seventies and into the early Eighties, ‘affordable housing’ continued to be a political flashpoint.

Three years later, in April 1980, another proposal that included low-income housing was considered by the city’s Board of Estimate. It was opposed by Mr. Silver and United Jewish Council, according to records and former city officials.

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Jay Goldin was opposed

Mr. LoCicero, the political adviser to Mr. Koch, said Mr. Silver made his opposition clear and won the support of Harrison (Jay) Goldin, then the city comptroller, who had a crucial vote on the board and coveted the Grand Street Jewish vote for future elections.

Though the Times  is laboring mightily to make Mr. Silver and Mr. Rapfogel into puppeteers with powers to command others, at issue under all the politics is an ongoing feud over what type of development should occur, and if residential is to be part of that development, what type of residential and for whom (both ethnicity and income level).

“Shelly said: ‘Are you crazy? We’ve got enough low income housing,’ ” Mr. LoCicero recalled. “He aligned himself with Jay Goldin at the Board of Estimate, and they beat us.”

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Former Koch political advisors Peter Aschkenasy (left) and John LoCicero (right)

[Continued tomorrow in Part 4.]


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History of a plot: Part 2, Crossing Delancey

April 15, 2014 | Affordable Housing, Atlantic Yards, community groups, Corruption, Development, Housing, Income mixing, Lower East Side, Manhattan, New York City, Non-Profits, Politics, poverty concentration, Public housing, Sheldon Silver, William Rapfogel, Zoning | No comments 636 views

[Continued from yesterday's Part 1.]

By: David A. Smith

The beginning of a plot is the prompting of desire.

Christopher Lehmann-Haupt

Yesterday’s Part 1 introduced us to William Rapfogel, protege of both Sheldon Silver (Assemblyman from the Lower East Side, and long-serving Speaker of the New York Assembly) and Ed Koch (mayor from 1978 through 1989, preceded by Beame, succeeded by Dinkins), and a parcel that became known as the Seward Park Urban Renewal Area (SPURA), “the largest tract of undeveloped City-owned land in Manhattan south of 96th Street.”  Is the Times telling the story of a conspirators’ plot, or just a real estate plot?

ed_koch_taylor_concert_1979

How’m I doing?  Ed Koch at a James Taylor outdoor concert, 1979

Back in 1967, that wasn’t supposed to happen; SPURA was to be redeveloped swiftly.  But politics and the changing city intervened.

Sources used in this post

New York Times (March 23, 2014): the story damning Mr. Rapfogel and Mr. Silver

New York Times (September 25, 2013; green font): Mr. Rapfogel’s indictment

New York Times (September 17, 2013; blue font): Announcement of development

New York Times Letter to the Editor, November 29, 1989; red font); Local opposition

1967′s slum clearance can be seen as urban redevelopment; it could also be seen as a mild form of ethnic cleansing, removing ‘those people’ from our neighborhood.

Now, nearly 50 years later, the land is still a fallow stretch of weed- and rat-ridden parking lots, though in the waning days of the Bloomberg administration, the city announced that the land would finally be developed into a complex called Essex Crossing, to include retail markets, restaurants, office and cultural space.  And new apartments.

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The SPURA site in October, 2012

In the late sixties, few thought the cities had much future – and it is to the credit of Mayor Koch, elected in 1969, that his effervescence perfectly captured what New Yorkers wished for their city.  So in 1967, ‘affordable housing’ meant public housing, and public housing meant blacks and Hispanics, and they were those people.

Mr. Silver has long characterized his role in plans for the site, known as the Seward Park Urban Renewal Area, or Spura, as limited to insisting that all groups have a voice in the outcome, not promoting a specific plan or developer.

spura_map

SPURA-ious development?

The undeveloped squares of the Lower East Side

But an extensive review of the archives of four mayors and more than two dozen interviews show Mr. Silver and Mr. Rapfogel diligently working behind the scenes to promote specific plans and favored developers. Mr. Rapfogel made clear that the goal was to maintain the area’s Jewish identity, seemingly at the expense of other communities.

I love that understated ‘seemingly’.

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New York’s Lower East Side, circa 1920

Mr. Silver and Mr. Rapfogel were born in the neighborhood to Jewish parents. Mr. Silver, 70, grew up in a tenement on Henry Street.

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Delancey Street from Essex to Ludlow, circa 1943

In 1943, when Mr. Silver was born, the Lower East Side’s population was this:

1943 Statistics
Total population – 234,934 (larger than Omaha, Nebraska, at the time)
Native white – 124,234
Foreign-born white – 100,566
Negro – 1,800
Other races – 8,334
High-end rent (families) – 53
Low-end rent – 50,505

Two out of every five residents of the Lower East Side were born in a foreign country – and this before the great wave of post-WW2 refugees who flooded into New York City.  The Lower East Side was part of the authentic American melting pot.

melting_pot_zangwill

A play first staged in 1908: The Melting Pot, by Israel Zangwill:

America is God’s Crucible, the great Melting-Pot

Where all the races of Europe are melting and reforming…

Germans and Frenchmen, Irishmen and Englishmen, Jews and Russians –

into the Crucible with you all!

God is making the American

His father owned a neighborhood hardware business. Mr. Rapfogel’s father was a clerk for city government.

When they were boys, the blocks along Grand Street teemed with Jewish peddlers and dozens of small synagogues.

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The Lower East Side, summer, 1937

Unions were building 12 apartment buildings in the neighborhood to house 4,500 families, mostly garment workers. Known as Cooperative Village, the apartments would anchor a new Jewish middle class.

The historical description is quite striking:

Recognizing the need for additional housing a memorandum from Abraham Kazan and the United Housing Foundation was written on May 19, 1950, which proposed an extension of the recently completed Hillman Houses.

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Campaigning to save the world, and save the Jews: Sidney Hillman

We cannot forget that this Jewish housing initiative arose in the years immediately after World War II, when the Nazi holocaust was made vivid in people’s lives by the Nuremberg trials, and the world’s collective guilt was at its strongest.

The East River Housing Corporation was incorporated on November 28, 1950. The International Ladies’ Garment Workers’ Union, headed by David Dubinsky, was invited by the United Housing Foundation to become the financial sponsor of the new cooperative which the union agreed to after reassurances that the mortgage loan would be insured by the Federal Housing and Home Finance Agency. The Edward A. Filene Good Will Fund provided financial support for the initial planning stages.

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A clock two hundred yards from my office

East River Houses was also the first project in NYC to qualify for slum clearance funds under Title I of the [1949] Federal Housing Act.  

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When today we hear ‘slum clearance’ and think ‘involuntary displacement’, we do a huge disservice to those grappling with the emergent post-automotive city.  Bob Moses wasn’t all wrong.

Under the provisions of Title I the Federal government paid two-thirds and the city government one-third of the write-down value of the land acquired for the development. The land was acquired by the city by condemnation [A form of eminent domain – Ed.] at a price of $5,900,680. On the same day the East River Housing Corporation purchased the land at public auction for a price of $1,049,240.

Thirteen acres of slums, south of Lewis Street to the FDR Drive and fanning out from the Williamsburg Bridge to Cherry Street were cleared to make way for the East River Housing site.

The first of the four apartment buildings completed -two are 21 stories tall and two are 20 stories – were dedicated on October 22, 1955.

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The East River Cooperative

These were the tallest reinforced concrete apartment structures in the United States at the time of their construction. The development provided 1,672 units with the average rental of $17.00 a room per month.

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Commercial area in East River Cooperative, 1956

Applications for membership in the cooperative were first received on August 22, 1952. If there was ever any doubt that moderate income families were in desperate need for decent housing, it was dispelled by the long lines of people stretching for blocks, who were waiting to fill out applications for apartments which would not be completed for many years. Nearly five thousand applications were received for 1,672 apartments.

Cooperative Village became a haven for refugees, from the Nazis, from Europe, and from the rest of New York City.

It was the quaint urban hamlet that served as the home of Bubbie in the movie “Crossing Delancey.” But it was also an island apart.

And the times they were a-changing – and the Lower East Side with them.

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Not your mother’s Jewish neighborhood any more:

Orchard and Delancey Street, 1970s

[Continued tomorrow in Part 3.]


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History of a plot: Part 1, The sixties

April 14, 2014 | Affordable Housing, Atlantic Yards, community groups, Corruption, Development, Housing, Income mixing, Lower East Side, Manhattan, New York City, NIMBYism, Non-Profits, Politics, Poverty, poverty concentration, Public housing, Sheldon Silver, William Rapfogel, Zoning | No comments 263 views

Storytelling is about two things; it’s about character and plot.

– George Lucas.

By: David A. Smith

They grew up in the same circles, and they came of age politically together.  For almost four decades, they did favors for one another, because that is what friends do.  Eventually, one of them, the youngest, the protege, went bad.

ed_koch_guitarist

The power, my friends, is voting in the booths

The power is voting in the booths

Along the way, did they stymie development for their own reasons?  Instead of just being friends and political allies, were they conspirators?

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Friends or conspirators?  William Rapfogel (left) and Sheldon Silver (right)

If you judged by the headline from this New York Times (March 23, 2014), you’d think so:

They Kept a Lower East Side Lot Vacant for Decades

When I read the headline and the opening paragraphs, I too thought this was a story of political capture and power corrupting.  (And I might have liked that, as Mr. Silver had been a steadfast defender of New York City’s indefensible rent control and rent stabilization.)  But writing this multi-part post changed my mind, especially as I kept adducing evidence from the story of four and a half decades of dramatic change in our conceptions of cities, neighborhoods, affordable housing, and community involvement (a slippery phrase) in deciding what can be built and where.

married_happy

Does marriage cause happiness?

[I think the Times pulled a classic rhetorical trick: post hoc ergo propter hoc.  "This happened after that, therefore that caused this."   The Times’ event sequence and selection makes Messrs. Silver and Rapfogel culprits and co-conspirators wielding vast power whose mechanisms are unseen and inexplicable.  Ed.]

Nearly four decades ago, a new assemblyman named Sheldon Silver and his young protege escorted Edward I. Koch, then a mayoral candidate, through the Orthodox Jewish enclave on Manhattan’s Lower East Side where the two had both grown up.

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Young Jewish politicians from Lower Manhattan:

Sheldon Silver, Edward I. Koch and William E. Rapfogel in 1977

It was the first day of Rosh Hashana, 1977, and Mr. Koch and his opponent, Mario M. Cuomo, had agreed not to campaign, even as they were locked in a frantic runoff for the Democratic nomination.

They were part of the boomer generation that was supplanting the depression-generation political aristocracy:

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Then-mayor Abraham Beame, 1977

The air of religious observance provided cover for Mr. Koch to walk along Grand Street with his two new friends, shaking the hands of influential rabbis and throwing bread into the East River, part of the ritual casting off of sins.

Six days later, Mr. Koch carried the Jewish vote and won the primary. His team long remained grateful for the guided tour by Mr. Silver and the protege, William E. Rapfogel, then a recent college graduate who ran his own Jewish newspaper.

“They helped us big time in the runoff,” recalled John LoCicero, Mr. Koch’s chief political adviser. “It revved up the Jewish vote for Koch against Cuomo.”

As they rose, they did favors for one another, because that is what old buddies do.  And they wanted their old neighborhood to remain as they nostalgically remembered it must have been, an ethnic neighborhood for people like them in a huge city that was an ocean of people not like them.

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A vacant lot along Delancey Street, circa 1980.

The long-ago walk was the first public display of an alliance that became central to the lives and careers of both Mr. Rapfogel and Mr. Silver. They worked together across the decades while climbing parallel ladders: Mr. Silver to Assembly speaker and Mr. Rapfogel to leadership of the Metropolitan Council on Jewish Poverty, a large, publicly financed charity.

They were friends, and they stayed friends.  Along the way, they combined forces to keep part of the old neighborhood undeveloped, because what could be developed was not what they wanted.  Over the decades, at least one of them went very, very bad.

Their long affiliation came to an abrupt end last year when Mr. Rapfogel, 59, was arrested and charged in a scheme that had allegedly looted more than $7 million in kickbacks from Met Council’s insurance broker over the years. He is due back in court in April.

rapfogel_arraigned

Look contrite; be contrite?

But more interesting and relevant for our story is how their commonality and overlap of interests served to kill development on a site in their old neighborhood, and how that story shows the changing nature of American cities, of American urban development, and of the role elected and unelected officials who wield political power can accelerate, or more often prevent, the city’s development and even its organic growth. 

The redevelopment of the area had eluded Mayors John V. Lindsay, Edward I. Koch and Rudolph W. Giuliani, as well as Mr. Bloomberg in 2003.

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A savior for 1965?  John Lindsay, mayor of New York when Essex Crossing was razed

As cities become more interdependent (a consequence of them becoming more dense, and more technological), development of any parcel of land becomes a more convoluted process, and that makes it both more protracted and more political – all likely to the city’s detriment.

A primary focus of their alliance had been a struggle to preserve the Jewish identity of the neighborhood they delivered for Mr. Koch all those years ago.

And that raises the second story: who owns a neighborhood?  If the first story is about evolving ethnic politics, the second story is about evolving views of urban affordable housing.

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The North End, before Boston starting doing infill

Over the course of three hundred years, for instance, Boston’s North End has been a puritan enclave, the posh neighborhood of American revolutionary patriots –

OLYMPUS DIGITAL CAMERA

– a dense slum where Irish battled protestant Yankees (1860s) –

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Prince Street, North End, probably 1880s, where the Boston Draft Riots began

– a Jewish landing spot (1890s) –

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Salem Street, North End of Boston, 1891

, and most recently a Little Italy and home of Boston’s Italian mafia

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Italian-Americans celebrating the Fisherman’s Feast

Who owns a neighborhood?  Four and a half decades ago, these young Jewish politicians were certain they knew.

Their battleground was some 20 barren acres along the southern side of Delancey Street, where, in 1967, the city leveled blocks of rundown apartment buildings.

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The Essex Delancey parcel today (from space)

As the above photo shows, the parcel has a tremendous location: adjacent to Delancey Street, scarcely steps from two subway stations (on the F, J, and M lines), in the heart of the Lower East Side.  Today it’s a gold mine waiting to be dug up and developed: in 1967, by contrast, it was an imploding slum … or so it was seen by the political powers that be.

More than 1,800 low-income families, largely Puerto Rican, were sent packing and promised a chance to return to new apartments someday.

nyt_they_kept_a_lower_east_side_parking_lots_140321

More than 1,800 low-income families, mostly Puerto Rican, were promised a chance to move into new apartments in the Lower East Side lot, after a 1967 clearance. But plans were blocked over the years, with affordable housing the usual sticking point.

This was the heyday of eminent domain for slum clearance and economic development, and as I’ve recently posted, Puerto Rico has long been America’s Caliban, with New York City being by far the largest recipient of Puerto Rican immigrants.

This story also shows how, over the course of a half century, a similar evolution has occurred in affordable housing: in what we envision it to be, its symbolic meaning, its meaning as a political code word, and its place in the twenty-first-century city.

lower_east_side_nyt_1967

A neighborhood in transition” New residents and hippies replacing immigrants”

[Continued tomorrow in Part 2.]


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Cosh and carry: Part 2, Money for the Einsteinian political economy

April 10, 2014 | Banking, Bitcoin, cash, Crime, Economics, informality, Markets, Regulation, robbery, Taxation | No comments 431 views

[Continued from yesterday's Part 1.]

By: David A. Smith

Yesterday’s post, using as source material two articles, one from the Economist (April 5, 2014), the other from the Wall Street Journal (March 27, 2014; green font), both commenting on a new paper published by the National Bureau of Economic Research, established that the rise of electronic money (credit cards and electronic transfers) corresponded with, and likely contributed significantly to, a drop in interpersonal violent crime (burglary, assault, and larceny).

mugging_on_cam

Not much point if his walleyt has no cash in it

Neither the paper’s authors nor the journalists, themselves all citizens of the highly electronic and connected formal world, flagged any of the downsides of electronic money or the upside of cash – and that’s understandable given their perspective, as the drawbacks of cash become significant only when cash is used in transactions between people who do not know each other and who are unlikely ever to see each other again. 

Slums are different, because though they are economically rational, they are not the formal world.  In slums, everybody knows everybody, people’s physical mobility is limited (everybody goes home at night to the slum), and there will be a form of alternate power hierarchy (even if criminal and extortive) and a means of conflict resolution and subsequent recourse. 

Mafia neighborhoods in Boston like the North End were reputed to be very safe for tourists because the mob didn’t want any street crime to attract police presence to the area.

A few decades back, when I was doing investor asset management for the affordable housing properties our company has syndicated, the elderly living on pensions had to go to the bank to deposit their social security or pension checks; and their way home was fraught with peril the closer they got to their apartments, because the teenage sons of other resources could plot their path and then lie in wait (often in stairwells adjacent to the elevators). 

strother_down_the_mountain

Nobody is going to rob us, going down the mountain

We don’t have any money, going down the mountain

When we start going up the mountain, then you can sweat

For that matter, in the 1800s traders in Tennessee, walking home from New Orleans after having sold goods they floated down the Tennessee and Mississippi Rivers, were always at risk of being waylaid on the Natchez Trace, because they were known to have cash and known to follow a fixed route.

natchez_trace_sunken

Worn down by thousands upon thousands of walkers

“Cash is critical in stimulating street crime because of its liquidity and anonymity.”

’Street crime’ is a negative externality of the informal economy (what I called the set of Anonymous Activities referenced above).

“This role in street crimes has long been speculated — but the puzzle has not been solved,” Erdal Tekin, an economist at Georgia State University and one of the paper’s authors, said in an interview.

erdal_tekin

Not Tekin for a fool: the puzzle has not been solved”

At this point, let’s stipulate to the authors’ conclusion – emergence of electronic money as a principal medium of exchange reduces interpersonal violent crime, especially in formal societies with good governance where its efficacy is high and the external costs of compliance and use are low.

Thus the NBER study is like Newtonian classical mechanics – applicable in the common case familiar to economist, namely the formal world (and a world, it should be noted, where government is benevolent, efficient, and obviously of value to citizens).  Within that Newtonian economic universe, the NBER study’s findings are compelling. 

dad_considering

The wider world, with informal economies and imperfect governments, is like Einsteinian mechanics that apply more broadly, with Newtonian mechanics a subcase when a certain element – in this case, the net economic benefit of informality – is set to zero.

good_guys_bad_guys

Make sure you know who’s who

In slums, however, the government is present only as an external force, often one that applies regulations and taxes, both of which are costs imposed on economic activity, and gives the slum dwellers far less in municipal benefits than they receive in those taxes and regulatory impositions. 

How does electronic money compare with physical cash from the perspective of market participants?

Upside of electronic money

1. No larceny (breaking and entering homes, say)

2. No robbery (theft via violence)

3. Automatic receipts and proof of payment

4. Intermediary stop-loss protection (credit cards, banks)

5. Globally accessible

6. Instantly transferable

These upside features are incredibly powerful, and have facilitated a revolution in global commerce.  At AHI, for instance, we work with clients around the world, from Abu Dhabi to Haiti to Mongolia, and we work with individual consultants who need to be paid in all those places.  From my desk, I can wire them money with certainty it will get to them, and they can collect it without risk.  That is simply extraordinary and a convenience so great I cannot imagine how we would have done business without it.

While the removal of cash may benefit poorer neighborhoods, which are disproportionately affected by street crime, replacing cash with debit cards and other electronic forms of money might bring in another set of complications.

upside_downside

You pays your money and you takes your choice

Electronic money has its downsides too:

Downside of electronic money

1. Requires reliable access to high-speed broadband

Neither the authors nor the journalists remarked on this presumption, because to them, living deep in the formal world, ubiquitous reliable instantaneous internet connectivity is a given.  If you’re poor, not on the Web, lack a laptop (or even a reliable cell phone), or have no credit cards and possibly no bank account, these are significant barriers to entering the system.  And each of those physical goods that you need to enter the electronic information network are themselves subject to theft, larceny, and robbery.  Cash has none of those entry barriers.

2. Regulatory requirements

3. Inescapability of taxation

4. Post-closing warranty/ liability risk

5. Theft by hacking

Electronic payments are already falling prey to sophisticated types of crime, carried out on an unprecedented scale. Just a few months ago, a data hack at Target Corp. captured headlines after millions of debit and credit cards were compromised.

6. Intermediaries part of the tax or legal liability chain (FIRPTA, FCPA, AML)

This last point bears mentioning.  Electronic money flowing through a bank, for example, exposes the bank to money laundering charges, and the settlements have run into the billions.  It has led to the rise of global accountability among formal banking institutions – which is a good thing – and as a result, the adverse selection of corrupt or criminal activities into anonymous forms of electronic transfer.

Indeed, there are now virtual ways to make transactions without a paper trail.

                                                                                                                                       

Fears of the downside of electronic money explain the rise of Bitcoins, a form of high-tech hawala about which I have not posted (though instinctively I profoundly distrust the mechanism, as it relies on both the encryption and the honesty of the encryptors). 

hawala_example

A network that uses people and cash

Before there was electronic technology (before the invention of global banks and interbank wires, basically 1950 or later), as an alternative to cash merchants and bankers invented non-cash forms of international credit: bills of exchange in the seafaring nations, hawala in Muslim countries.  But cash persisted as the principal medium of exchange, and in the emerging world it still is, because it’s the ideal medium of exchange for a purely informal economy.

bitcoin_upside

And what if Bitcoin equals the value of crime?

When it comes to crime risk, Bitcoin eliminates the interpersonal violent forms but magnifies the non-violent ones (fraud, embezzlement, defalcation) – and it does so at the price of forfeiting any of the formal world’s regulatory and enforcement mechanisms, leading to unfathomable messes like this:

Hackers Hit Mt. Gox Exchange’s CEO, Claim To Publish Evidence Of Fraud

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The Bitcoin community has been angrily pressing for details on what the Bitcoin exchange Mt. Gox has described as a massive hacker attack that stole hundreds of millions of dollars’ worth of its users’ bitcoins and left the company bankrupt. Mt. Gox’s staff isn’t talking. So another group of hackers say they’ve broken into the company’s servers to provide answers of their own.

On Sunday, hackers took over the Reddit account and personal blog of Mark Karpeles, Mt. Gox’s CEO, to post an angry screed alleging that the exchange he ran had actually kept at least some of the bitcoins that the company had said were stolen from users. The hackers also posted a 716 megabyte file to Karpeles’ personal website that they said comprised stolen data from Mt. Gox’s servers. A screenshot posted by Mt. Gox’s hackers, seeming to show administrative access to the company’s database of trades.

Update: Users on Reddit are warning that the hackers’ files may contain malware designed to steal bitcoins. Other Reddit users have confirmed that they found their own account history in the data, indicating that it’s not fake. But for security reasons, I don’t recommend anyone download the collection of hacked files.

We have come full circle: from an entirely physical form of symbolic anonymous money (cash) to an entirely metaphysical (pure information, so pure it’s encrypted) form of symbolic anonymous money. 

Bitcoin_accepted_here

Yes, but where is ‘here’?

Thus Bitcoin is a whistling teakettle against an overly intrusive, tax-predatory, corrupt state, and I predict it will wax and wane as an ongoing litmus test of people’s confidence (or lack thereof) in their governments (or lack thereof). It won’t be a post-national medium of exchange because international enforcement will never formalize without permanently accountable nation-states.  In the meantime, it’s an ongoing referendum on trust in formal mechanisms of government … just like cash.

You pays your money and you takes your choice.  – Huckleberry Finn

huck_thinking_it_over

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Cosh and carry: Part 1, Money in the Newtonian political economy

April 10, 2014 | Banking, Bitcoin, cash, Crime, Economics, informality, Markets, Regulation, robbery, Taxation | No comments 358 views

By: David A. Smith

If you’re like most readers of this blog, in your wallet you carry both cash and credit cards – and over the years, your use of cash has dropped as your use of credit cards has risen, because they’re quicker and easier (swipe and go), self-replenishing (no more searching for an ATM), and offer fringe benefits via awards programs.  While doing so, you may well have been fighting violent crime, at least according to the statistics in a new paper published by the National Bureau of Economic Research and reported in the Economist (April 5, 2014), andWall Street Journal (March 27, 2014; green font):

Less coin to purloin

A cashless economy leads to a safer society

bank_robbers

Professions going out of favor?  Bank tellers and bank robbers

While the authors’ statistics and their interpretation are compelling, they were looking through the lens of a developed nation, and the Economist and Wall Street Journal stories overlook the other side of cash – its importance in the informal economy.

Criminals’ need for cash motivates much predatory street crime. A new paper from the National Bureau of Economic Research asks whether this might work in reverse: if cash motivates crime, could the absence of cash reduce crime?

The definition implicitly used by paper’s authors is ‘interpersonal violent crime’ – and as we’ll see, this is an understandable but enormously significant lacuna in their analysis and its applicability.

“Cash”, wrote Marcus Felson, an eminent American criminologist, “is the mother’s milk of crime.”

As we’ll see in just a moment, this is an economist’s oversimplification based on the ’clean room’ case of a formal economy, largely valid in the US and other developed nations, but of declining relevance as one moves into the wider world of tolerated and encouraged informality.

marcus_felson

I routinely commit crimes that I think I can get away with … don’t you?

Evidently Professor Felson originated the ‘routine activity theory’ of crime, and I must say that it makes sense:

Routine_activity_theory_crime

A likely offender, a suitable target, and the absence of a capable guardian

The paper looks at county-level crime data in Missouri from 1990 to 2011, a period when crime dropped markedly all over the rich world.

Already we have a key point of significance – for some reason, over the last twenty years [interpersonal violent] crime has declined all over the rich world, so it’s logical to ask what those countries have in common. 

economist_crime_drop

What’s the cause?

The sharp decline in crime since the 1990s has led to a rash of theories to explain it: ageing populations, higher incarceration and immigration rates, less exposure to lead paint, better police tactics as well as vastly improved security of both products (such as improved circuitry in cars that impedes hot-wiring) and places (security cameras and bulletproof partitions once protected only banks, but today they are standard in American corner liquor stores).

Out of these possibilities, the authors chose to study one possible change lever:

During this time Missouri, like the rest of America, changed the way it delivered its welfare and food-stamp benefits. Instead of paper cheques states now use a debit-card system known as Electronic Benefit Transfer (EBT).

ebt_liquor_store

Alcohol is food too, isn’t it?

EBT is subject to potential massive fraud in its own right, including likely expatriation of welfare benefits via remittances to relatives in emerging countries – but that’s definitely another story, for another time.

Missouri introduced EBT cards in eight phases over 12 months. This gradual shift allowed the authors to analyze not just differences in crime rates before and after the introduction of EBT, but also how those differences compared with changes during the same period in counties that had not implemented it.

Indeed, this is a tailor-made set of comparables for testing the hypothesis.

They found that electronic payments led to a drop of 9.8% in the overall crime rate and caused the rates of burglary, assault and larceny to fall by 7.9%, 12.5% and 9.6%, respectively. [Note: Interpersonal violent crimes – Ed.]

The researchers also sought to eliminate other causes as possibilities:

eliminated_impossible

The researchers ran a number of tests to rule out other explanations for the decline. To make sure aggressive law-enforcement strategies weren’t behind the drop, they examined arrest rates and found fewer arrests in counties that were using debit cards (as would be expected if crime levels decreased). They also found that the program didn’t cause spillover effects in neighboring counties, meaning offenders didn’t just pick up and move to where the cash was.

The science looks good to me: control for overall crime levels (no change), control for change in policing (no change in implied rate of arrests relative to crimes), isolate the dependent variable (interpersonal violent crime), test for statistical variance.

The findings suggest, according to Volkan Topalli, one of the authors, that “for people in densely populated urban neighborhoods, the less cash they have and the more their transactions are digitized, the less attractive criminal targets they make.”

Volkan Topalli

Topalli concludes that people without cash are less likely robbery targets

Though it may seem common sense that people who are not carrying cash will be robbed less, confirmation in statistics is a much better form of evidence.

Mr Topalli’s paper suggests that the shift from cash to cards—since 1990 debit-card transactions have risen 27-fold, whereas cash volume has grown by just 4% a year—may also have contributed to the decline in crime. It’s hard to rip and run, after all, without something to rip.

Later in this post I will stand the theory on its head, using its own typology and applying it beyond the NBER study’s boundaries, to the informal economy, and then back to the formal but imperfectly governed economy. 

As electronic forms of payment have gained popularity, the proportion of financial transactions involving cash has declined — a trend that has coincidentally overlapped with what is known as the great American crime decline. Furthermore, criminologists and economists have long linked cash with certain kinds of street crimes, noting that dollar bills are easy to hide and reuse.

Consider the upside and downside of cash as a medium of exchange:

Upside of using cash

1. Value can be realized independent of banks

2. Anonymous—two strangers can transact in cash (and often do, especially in the Anonymous Activities)

3. Has no economic fingerprints – therefore suitable for ‘laundering money’

4. No taxes collected or collectible on the transaction

anonymous_activities

Whole families of activity encompassed in a single concept

prostitutes

Yes, we take cash

 

drug_deal

Yes, that’s cash changing hands


Downside of cash

1. Can be counterfeited

2. Risk of robbery in transit

3. No recourse post-transaction (if the vendor gets away, you have nothing)

new_york_mugging_1857

Welcome to New York! 1857

These features of cash are inherent in its being a physical medium of exchange – the same features apply to gold or diamonds. 


Its appeal to criminals is clear.  [Not just criminals – Ed.] Unlike cars or paintings, cash can be concealed immediately after being pinched. It has no security features to prevent its being easily and anonymously spent on legal or illegal goods. Unlike nearly any other object that can be stolen, it needs no fence.

Thus the NBER study is like Newtonian classical mechanics – applicable in the common case familiar to economist, namely the formal world (and a world, it should be noted, where government is benevolent, efficient, and obviously of value to citizens).  Within that Newtonian economic universe, the NBER study’s findings are compelling. 

cash_drugs_guns

The products of a cash economy: cash, drugs, guns … and arrests

In slums, however, the pros and cons are differently balanced.

[Continued tomorrow in  Part 2]

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