Seattle Meets Economic Reality

The city of Seattle passed a law that would require large corporations that do business inside the city to pay a head tax for all employees, hoping to raise tens of millions of dollars in extra revenue for pet projects. What they found is that, surprise, surprise, business owners and managers don’t like being shaken down by politicians, even if said politicians say they have good intentions.

The city council voted this week to repeal the measure they passed just weeks ago by unanimous vote. It was opposed by businesses that would have to pay the tax and labor unions that feared the loss of jobs in the city. They were right to fear job losses. Amazon.com, which employs 47,000 in the city, halted plans for the construction of new facilities there and is rethinking the potential lease of another city high rise building.

The money from the tax was to be used for ostensibly good causes, for homeless services and to build what they call affordable housing. The homeless situation has gotten worse in recent years as new, higher paying jobs at employers such as Amazon have attracted more, higher-earning people to the city. That significantly increased the demand for housing, which, in turn, increased the price of housing, basic economics.

In a normal economic setting, an increase in the price of a good or service would serve to attract additional investment, to increase the supply to match, and to drive prices back down. Seattle is not a normal economic setting. It is one of the most heavily regulated cities for land use. A University of Washington study from ten years ago estimated that those regulations have increased prices by $200,000, even back then. As with other cities, the affordability of land and housing in a local area is a function of how much the local government artificially restricts its availability.

Another economic principle is that, as the price of something increases, the quantity demanded decreases. The increased cost of employing people decreases the number of employees demanded, with Amazon being the prime example, though not the only one in this case. Though Amazon has not indicated it will move out of the city, it is looking at other areas for its expansion.

Many in Seattle are angry with Amazon, with the ironic twist that they say the company is extorting from the city with its threat to direct employment away from there, while at the same time blaming Amazon and other large employers for increasing homelessness by increasing the employment that puts the pressure on housing.

There are two alternatives to the housing shortage with its resulting high prices. They can decrease demand for housing by driving away employers and their employees, which some people seem to approve of, or they can increase the supply by deregulating, especially in outlying areas, and allowing more private building of housing to accommodate the demand. As with most things Seattle, it appears like they believe that only government central planners are capable of solving this and other problems.

One of the big obstacles they will face is that, because they have already caused so much price inflation in housing, present owners are going to resist efforts to bring prices down. Others will resist because, to them, maintaining the esthetic appeal of the area is more important than making housing affordable. The question that Seattle residents must answer is whether they want to accommodate more employment by allowing significantly expanded private investment in housing or drive employment away by making government more expensive and burdensome. Either way, economic principles don’t yield to good intentions. The results will come from the actions taken, not from good intentions.

Dan McLaughlin is the author of “Compassion and Truth-Why Good Intentions Don’t Equal Good Results.” Follow him at daniel-mclaughlin.com.

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