“You can’t build a society on artificially inflated asset values, because that accelerates the class division. Immigrants know that even if they work in a low-paying job in a hotel in Houston the chances they can save and buy a house are infinitely better than in California. If you want to have an asset based economy then accept we’re going to have feudalism because the price of entry is just too high.”
– Joel Kotkin, CPPC Interview, January 4, 2014

What Kotkin is referring to is the result of decades of increasing legislative restrictions on cost-effective land and energy development, combined with Federal Reserve policies designed to minimize the cost of borrowing. In the first case, prices for land and energy, the building blocks of a healthy economy, are artificially inflated through constraints on supply. In the second, the supply of borrowed money is artificially increased via ultra-low interest rates.

This so-called “asset economy” might also be called a “bubble economy,” because it cannot be sustained indefinitely. For a while, inflated values of real estate, privately owned natural resources and business inventories provide collateral for additional borrowing at low interest rates, which puts even more money into circulation, bidding the price of assets up even further. Meanwhile, environmentalist legislation of increasing severity continues to restrict supplies of land and energy, driving prices of marketable land and energy higher still. And the bubble grows.

This is the real reason California is unaffordable for working families. Anywhere within 100 miles of the California coast, homes “priced to sell” at $400,000, cost more than six times California’s median household income of $61,400. Thanks to their inflated price, these homes will come with a hefty property tax bill – including local assessments – of over $5,000 per year, and if they were built anytime in the last 20 years or so, there’s a good chance you can tack another several thousand per year of “Mello Roos” assessments – property taxes by any other name.

Who benefits from the asset economy? The answer may surprise you.

The obvious beneficiary of inflated asset values is the proverbial Wall Street crowd. Every time the closing bell rings on an uptick, the trading minions in lower Manhattan clink their martini glasses and bellow with predatory glee. We get that.

Who else benefits from the asset economy? Consider this statement, courtesy of the SEIU, found on their “Fact Check on Public Employees’ Pensions” website page:

“Are taxpayers the ones who foot the bill for public workers’ pensions?

In a word, no. The modest amount the average public worker takes home is covered largely through investment returns–not the emptying of taxpayers’ pockets.”

This quote, “investment returns,” lies at the crux of the disagreement over both the financial sustainability of public sector pensions, and whether or not they constitute an unfair burden on taxpayers. Because in this low-interest rate economy, where the prime lending rate is 3.25% and the30 year fixed rate mortgage is 4.25%, public employee pension funds are investing all over the world, essentially loaning money at 7.5% interest.

You heard that right. They are loaning money at 7.25% interest. Because the only real difference between an investment and a loan is when investments don’t return the expected rate to the investor, the “borrower” doesn’t have to pay the money back.

One primary reason pension funds have the expectation they can earn 7.5% interest per year is because they are placing more and more of their investments with private equity firms and hedge funds, whose charter is to beat the market – at great risk. Most of the rest of their funds are invested in publicly traded equities or real estate assets – i.e., profitable corporations and corporate holdings whose values currently appreciate at unsustainable rates, thanks to ultra-low interest rates and artificial constraints on supplies in markets where they have monopolistic power.

And in one very important sense, pension funds may be explicitly considered lenders, not investors, because if they fail to earn 7.5% per year on their investments, they have the power to increase the required contributions from the government employers of their beneficiaries. The taxpayers, you see, guarantee those 7.5% annual returns.

It would be hilarious if it weren’t so dangerously prolonging an honest reckoning – the ability of public sector union spokespersons to demonize pension reformers as “tools of Wall Street.” Because it is their pension funds who pour more money into Wall Street than any other financial special interest, and who carry the unique power to cover their losses on the backs of taxpayers. Equally significant, but far more subtle, is that these pension funds depend on artificially high costs of living, through artificially appreciating asset values, to ensure their high returns and continued precarious solvency, also on the backs of working people.

Ed Ring is the executive director of the California Public Policy Center