UC Berkeley and American Stagnation

How a Lawsuit Against UC Berkeley Represents the Scarcity Mindset Driving America's Stagnation

The views expressed in this blog are entirely my own and do not necessarily represent the views of the Bureau of Labor Statistics or the United States Government.

On February 15th, tens of thousands of applicants to UC Berkeley received a disquieting email from the dean of undergraduate admissions. The University was embroiled in a lawsuit—and losing. Without a successful Hail Mary intervention from the California Supreme Court, the school would have to issue an additional 5,100 rejection letters in order to trim enrollment. But to tell that story, I have to first tell another story.

Recently, there has been a lot of digital ink spilled about ideas relating to breaking American stagnation—what the Atlantic’s Derek Thompson calls “an Abundance Agenda.” Much of what I write about in this newsletter concerns similar ideas about how America's monetary, fiscal, policy, and economic institutions can improve real economic outcomes for real people. But I would like to take a moment here to acknowledge that my worldview, and the worldview of a large chunk of people with “abundance agenda” style ideas, is borne of the material conditions of my generation.

I was 10 years old during the 2008 financial crisis, and all of my formative and educational years were spent in its wake. The people of my generation have never known an America at full employment. They have never seen homeownership become more affordable. They have never seen economic inequality decrease. To the generation entering the workforce in 2007 it felt like the rug was pulled out from under them. To my generation, it never felt like the rug was there to begin with. A lot of “abundance agenda” writing is defined by reckoning with the rug and trying to bring it back.

One piece of writing that has stuck with me is Noah Smith's “America's Scarcity Mindset.” Noah's main thesis is that without broad based economic growth Americans have become fixated on protecting their assets; in other words, with the pie growing slower everyone is focusing on safeguarding their slice. Homeowning Americans oppose new construction that could threaten their property values, highly-educated Americans oppose admissions expansions that could hurt the value of their degrees, business owners oppose the entrance of new competitors that could hurt their bottom lines. Americans’ faith in their neighbors is falling, and our institutions are suffering because of it.

The situation in Berkeley is not just a court decision gone wrong, it is emblematic of decades-long trends that have weakened the American economy and American people. The legal and economic institutions within Berkeley, and indeed throughout California and the US, have slowly become calcified around protecting the values and assets of a select group of wealthy locals at extreme cost to broader society. Longtime homeowners in California are shielded from property taxes and personally benefit from an acute housing shortage that increases their home values. That housing shortage made Berkeley—and indeed nearly all of California—extremely expensive to people who were not longtime homeowners. UC Berkeley, a premier public university at the heart of the country’s largest innovation center, struggles to provide housing security to all its students. When it does attempt to build new housing for students and faculty, it is stymied by lawsuits from neighborhood groups who weaponize environmental law in order to block projects with environmental benefits. The next consequence is that undergraduate students are denied admission by court order in order to maintain a student shortage in line with the housing shortage. This is a story of American stagnation.

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Shut Out

And the story starts in 1978 with Proposition 13. Voters upset with high levels of taxation used California’s unique ballot proposition system to get a statewide referendum on a massive anti-tax law. Proposition 13 first required a 2/3 majority in the state legislature but—critically—also capped California’s property tax rate at 1% and limited the annual increase in a property’s assessment value to 2% (or inflation, whichever was lower). It is this reassessment cap that proved most crucial—if a home’s value increased by 10% in a year, the assessment value could only increase by 2% (until the property was sold or transferred). Properties that doubled or tripled in value over the course of decades could see their property tax burden increase by a comparatively meagre amount, allowing the homeowner to pocket the difference. Over time the gap can get incredibly large—currently, a $9 million mansion in Presidio Heights pays the same property taxes as a $300,000 home in Richmond. This incentivized homeowners to block as much new housing as possible since if their home values increased they could pocket all the capital gains while paying none of the taxes.

In 1978, the effects were not yet immediate. California was still an economic powerhouse and a hub for substantial migration from both foreign countries and the rest of the United States. San Francisco and Los Angeles were massive, growing industry and population centers. San Francisco in particular was on its way to becoming arguably the world’s most important agglomeration centers—firms in the nascent computer and technology business were clustering around the world class research universities in the Bay Area, and San Francisco was rapidly becoming a superstar city. With the tech cluster came high paying jobs and massive economic benefits, but no new construction.

The Bay Area already had relatively low homebuilding rates and relatively high rents before Proposition 13—a legacy of racial segregation, hyper-devolved local government, and byzantine planning laws. The tech boom of the 1990s exacerbated the crisis by turning San Francisco into the center of a multi-trillion dollar global economic revolution. Pre-existing property owners had every incentive to block new construction, as building apartments to house the legions of software engineers moving to the city would lower the property values of their homes. Residential construction has remained at paltry levels throughout the last three decades despite an unprecedented growth in office space and worker incomes. The nouveau riche at the top of the tech sector shoulder the property tax burden when they bought their homes, and an acute shortage of housing would support the home equity of residents lucky enough to buy their homes decades ago.

All the while, nominal rents skyrocketed throughout the Bay Area—doubling from 1990 to 2010 and increasing another 50% in the last decade alone. San Francisco went from being a somewhat expensive city to arguably the most expensive city in the world, and those unfortunate enough to not make the ludicrous sums necessary to afford rent in the city would simply need to move out.

UC Berkeley was a casualty of its own success in a similar way. The school became a crown jewel in the University of California (UC) system and an engine of economic mobility for its graduates. The region was one of opportunity, attracting students with an interest in joining the burgeoning tech economy or its associated economic surplus. However, the UC system was getting less and less state support due to the difficulty in raising tax revenues, leading the university to consistently raise tuition to cover student costs. Critically, residents in Berkeley itself consistently opposed the construction of new housing necessary for the growing student and worker demand, leading to massive rent increases for Berkeley students. The local governmental institutions with the most authority over UC Berkeley functionally had no incentive to support the students—a population with limited to no political influence within the city—and massive incentive to support wealthier homeowners—a population that wields incredible influence in local elections.

Homeowners weren’t just working through local governments—they were working through the legal system too. California has a wealth of state and local laws that allow affected residents to bring construction proposals to court on a variety of grounds. The most important law for this story is the California Environmental Quality Act (CEQA)—a 1970s law that required state and local agencies to analyze and mitigate the environmental impacts of proposed projects. This was part of a successful push for greater air and water quality in a then-polluted state, but over time CEQA sprawled into an onerous burden for all public proposals. Since residents only used the law in one direction—for more environmental review and less construction—eventually precedence and judicial review leaned towards increasing the delays, reviews, blockages, and obstructions for projects. Planning agencies and local governments always erred on the side of avoiding litigation, requiring evermore expansive environmental reviews and denying evermore projects. Nowadays CEQA is used against bike lanes, public transportation, hospital expansions, and homeless shelters—with 85% of lawsuits coming from non-environmental groups.

CEQA was the law deployed against UC Berkeley in the most recent lawsuit. In 2018 a local Berkeley neighborhood group sued the University of California Regents and the UC Berkeley campus for enrolling more students than specified under a 2005 development plan without a subsequent environmental impact review. The neighborhood group was victorious in the first lawsuit, getting the courts to agree that enrollment itself constituted a environmental impact that needed to be mitigated. In 2019 the city of Berkeley and the neighborhood group sued again arguing that the environmental impact review for a new residential, parking, and student housing project was insufficient. After the success of the first lawsuit they argued that UC Berkeley needed to provide a separate environmental impact review for future planned enrollment growth. The courts overturned the original review for the new project on those grounds and froze enrollment at 2020 levels for the time being. Since 2020 was an unusually low enrollment year due to the pandemic, the courts have essentially locked thousands of students out of a UC Berkeley education barring intervention from the California Supreme Court.

The New Needs Friends

What’s happening in California is a microcosm, and slightly extreme case, of what is happening throughout much of America. Local politics are centered around enforcing housing scarcity to the benefit of homeowners. Overregulation and excessive litigation burden economic output. America has systematically undershot long run GDP and employment growth. Public institutions are paralyzed by the myriad of interest groups pulling them different directions. And the results in California are representative of the results in much of America: an economy that sacrifices growth for exclusion, that draws battle lines in a fight over a pie that’s no longer growing. Driven by a scarcity mindset, well-to-do California residents have chosen to erect walls around some of the best places in the world just to ensure that their financial assets and quality of life not be squandered by the presence of outsiders. California’s population is shrinking not because of its economic failure, but because it chooses not to accommodate everyone in its economic successes.

America’s institutions lean conservative—not “Republican”, but small-c conservative. They are deliberately designed to check the will of the majority, to privilege the local over the national, and to cool the rate of political progress. We are among a few nations with a bicameral legislatures and separately elected executives, ensuring that only bills with extremely broad political consensus can get passed. We are among an even tinier group of nations that allocates political representation to geographies—through the Senate, through local government, and through many state senates—further broadening the required political consensus for change. My generation has only lived in an era where the conservative nature of many institutions has run unchallenged.

However, the new needs friends—namely institutions that push for progress, advocate for broad economic interests over concentrated benefits, and accelerate the pace of economic and political change. America has precious few of these institutions left, perhaps only a few well-run state governments and effective federal agencies. Pushing our nation’s institutions to become more progressive and fight for shared abundance is essential for our future economic success.