The Redevelopment Voodoo Is in the Governance

There are good reasons for wanting to change how California does redevelopment. The one offered by Dan Walters in his February 6 column is not among them.

Walters divides the economy into two pieces. One is the real economy—manufacturing, mining, movies, agriculture, construction, etc.—the realm of producers. The other is the realm of “consumerism”—retail, health care, government—that lives off the fruits of the real economy. “Redevelopment agencies basically subsidize consumer activities – shopping centers, auto malls, restaurants, sports arenas, hotels and the like,” he writes.

Walters’ neat division is vulnerable on two scores. First, redevelopment agencies do, in fact, play on the “real” side of the economy, supporting development of industrial and commercial projects and construction of housing, as they will surely point out. Second, contrary to Walters, the part of the economy he writes off as “consumerism” can and does contribute to economic growth and higher living standards. You can bet the letter to the editor is already being written.

Take the example of tourism. According to the California Chamber of Commerce, “[t]ourism is California’s third largest employer and fifth largest contributor to the gross state product.” The United States runs a trade surplus in tourism, bringing in more visitor dollars than American travelers spend aboard. One fifth of those international visitors come to California. International tourism alone is about as important to the California economy as all of agriculture.

Because there are real jobs and growth potential in the service and retail sectors, the issue on redevelopment is not whether it promotes “consumerist” projects. A redevelopment project that improved old transportation infrastructure to make it easier and less expensive for more foreign visitors to get to prime tourist destinations could very well create jobs in the state. The issue is whether a particular redevelopment project will increase the productivity of California businesses and workers by enough to justify the investment of tax dollars. Does the benefit exceed what economists call the opportunity cost?

Today, California’s redevelopment system is wasting money because it discourages local governments and their citizens from conducting that kind of cost-benefit analysis. Redevelopment agencies are spending other people’s money. Because they have no skin in the game, they have little reason to worry about whether they are getting a real return on the investment, or just moving jobs and economic activity from one California neighborhood to another, as they so often do. If someone else is sucker enough to give you money, why think hard about the best way to use it?

That’s what Governor Brown is proposing to change by putting the spending and taxing decision on redevelopment projects in the same hands. The voodoo here is not in the economics, but in the governance.