[Continued from yesterday’s Part 5 and the preceding Part 1, Part 2, Part 3 and Part 4.]
By: David A. Smith
As we’ve seen in previous parts of this post, if Chongqing’s ongoing experiment in urban economic democratization is not reversed or stopped – and as reported in a solid article in Economist (March 26, 2016), there’s no sign of a political stop or even a Beijing-directed slowdown – then either it will stop at the municipality’s borders or the ideas will float down the Yangtze into other municipalities and political circles. In his prison cell Mr. Bo may be silenced, but his ideas and policies have escaped containment.
In fact, more than winning just in Chongqing, the urban-reform triad may be forcing Beijing’s hand:
[Yang Jirui] says the [Chongqing] government may only be able to achieve [its 40 million m² production target] by encouraging private developers to do the building, and by offering to subsidize the rents of poorer tenants.
Private developers – actual public-private partnership (PPP)? Perhaps actual competition?
FDR at the dedication of Terrace Village, Pittsburgh, October 11, 1940
One change brings another change, and that change brings yet another. Seldom are sweeping reforms fully repealed, and even when they are, as in U S Supreme Court’s 1935 invalidation as Unconstitutional of several key new Deal programs (the Agricultural Adjustment Act and the National Industrial Relations Act), by then Heraclitus’s politics had change the dynamics so that even repeal did not annul the change in ideas.
So it was with another Roosevelt invention, public housing, which though it lasted longer and was never repealed needed a comprehensive makeover by another imperial-minded US president. Back in 1965-68 Lyndon Johnson, the second great revolutionary of Federal housing policy, abandoned public housing, the pure-government delivery mechanism of the first great housing revolutionary, Franklin D. Roosevelt, for precisely the reasons Yang Jirui references: the federal government couldn’t afford the outlays for both a War on Poverty (of which housing was a centerpiece) and a War in Vietnam.
We’ll start by making it s cabinet branch called Housing and Urban Development
So in 1968 Johnson shifted in three ways:
1. Private regulated ownership supplanted direct government. Public housing new production funding was redirected into Section 221d3 and Section 236, with private owners receiving long-term government loans at the government’s borrowing rate.
2. Interest top-up subsidy supplanted concessionary financing. Under Section 221d3, a program begun under President John F. Kennedy, the government lent money at 3%, which by Johnson’s time was well below the Treasury borrowing cost, and the original issue discount was costing HUD big sums. Johnson moved the mortgages to 7.0%, and provided a monthly interest reduction payment (IRP) to close the gap, thus spreading the obligation out over the forty-year loan term.
3. Demand-side income subsidy replaced annual lump sum owner funding. Households below stipulated income levels received a monthly subsidy (called variously rent supplement, rental assistance, Section 8, and in later years Housing Choice Vouchers) to bring their rent-paying power up to the regulated targets while holding the resident’s share at 30% of household income.
Politically, it worked – Johnson got his funding. More importantly for Chongqing, once production shifted into competitive PPP ode, it gained new political allies, a much faster political OODA loop, and to fast-forward half a century, most of the entire complex and competitive ecosystem of US affordable housing developers and financiers, for-profit and non-profit.
AHI posts on China’s urbanization and capital
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April 27, 2007: Chinese property rights: the shot heard ‘round the world?
July 28, 2010: Little Chinese nested shoeboxes, the ‘ant tribes’ of urban men
August 23, 2010: Gleefully running up the debts, 2 parts, SOEs and development
October 28, 2011: A little learning is a dangerous thing, 2 parts, hukou and schools
May 2, 2012: Old before rich? 2 parts, China’s gray wave
July 29, 2012: I’m shocked, shocked, kickbacks in property development
August 23, 2012: China’s cities and housing: “Nothing outside China matters”
August 25, 2012: China’s cities and housing: “Imperial economy is successful society”
August 26, 2012: Suburb stuffing, 2 parts, new ghost high-rise towns
September 17, 2012: China’s cities and housing: “Between observation and doctrine, report doctrine”
November 14, 2012: Not nice places to live, 2 parts, the shortage of girls
July 22, 2013: China’s runaway money train, 4 parts, out-of-control monetary policy
December 16, 2013: Formula for an instant slum, 5 parts, supply-side urbanization
September 19, 2014: Where the money goes, people will follow, 3 parts, expatriating
February 1, 2016: Yuan to buy American housing?, 4 parts, Chinese buying US assets
March 8, 2016: The fall of China Mae, 3 parts, the likelihood of major overleverage
The cat, in other words, is out of the bag, and by the time Beijing realizes this, it may be too late.
Don’t untie me, bro
G. Beijing is still nervous, but that may not matter
Officials in Beijing remain nervous of big land reform.
And so they should. Aside from losing control over land use, once you give people autonomy over property, they never willingly surrender it. And in a social-media world, once they have it in Chongqing, can Shanghai and Nanjing and Beijing be that far behind?
Recently, there has been a bit of belated encouragement from on high. In January the finance minister, Lou Jiwei said other places could try out dipiao trading.
Aside from its other benefits, federalism – autonomy for sub-sovereign levels of government – encourages experimentation, which allows the observant herd of state policy makers to adapt based on results. China’s so big it has to federalize – in fact, it has to sub-federalize – but that doesn’t mean Beijing will like the resulting inability to control what happens in the provinces because the provinces are moving too fast. To say nothing of people’s ability to adapt and innovate:
Many officials are haunted by the (unsubstantiated) notion that allowing farmers to trade their property freely might prompt millions of them to sell up and move into cities, with no place to return to if they fail to prosper.
The Beijing officials aren’t afraid of ‘no place to return’ – they’re afraid a quarter of a billion new urban dwellers will create political pressure that when concentrated can topple autocracies.
Mr Xi likely fears that promoting them may impose crippling financial burdens on local governments and unleash yet more uncontrollable social forces. He may be a leader of enormous power, but he is afraid to use it to make the changes China most needs.
That’s zero-sum thinking – in fact, negative-sum, since it presumes that rural people will always be poor, backward, and dependent, even when they change their abode and education and lifestyle. I’ve previously written that Mr. Xi appears unschooled in economics and fearful of economic mobility, the virtues of private property, and the constructive power of markets. Mr. Xi doesn’t get that.
And I should worry about what you think … why?
But he knows that something is fermenting in Chongqing:
President Xi also paid a visit to Chongqing that month. It was the first by a Chinese president since the municipality’s reforms began, and was widely interpreted as a sign of his endorsement of Chongqing’s efforts. But neither men expressed full-throated support for the reforms.
I think Mr. Xi’s caution is more about self-preservation. While he cannot undo Chongqing’s reforms, to embrace them would be an endorsement of Mr. Bo, a box which Mr. Xi intends to keep firmly closed.
Only Bo knows what’s inside