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June 14, 2018

Speechless in Seattle

Seattle is being mismanaged. Readers from Seattle probably know what I am talking about. Conservatives (I suppose you could include me in that category) would say that Seattle’s city government will send them down the path of Detroit, but I think it’s a little more complicated than that.

First of all, Seattle has pretty much been in a permabull market since the early nineties and that movie where Tom Hanks lives on a houseboat.

I lived there from 1996-1998: Starbucks was just getting going; Microsoft was in full swing. Now there is Amazon and a bunch of other stuff. The place is blessed with lots of human capital (in spite of the crappy weather and 18 hours of darkness in the winter).

You know what else it is blessed with? Zero state income taxes. So it is not surprising that Seattle has flourished for decades and has some of the most successful companies in the world.

But somewhere along the line, the politics in Seattle took a left turn. Or should I say, a red turn. Kshama Sawant has been a city council member since 2014. She is definitely a socialist, and a little less warm and fuzzy than Bernie Sanders. And it’s not like the rest of the city council is conservative.

A Curious Thing to Tax

Not too long ago, the left-leaning City Council passed a 2.25% income tax for incomes above $250,000, and $500,000 for couples.

It was the latest in a number of attempts to levy some form of income tax in the state. Such an income tax is unconstitutional, and the courts blocked it. The city is considering an appeal.

But the bigger news is that the city council recently passed a $275 “head tax”—literally a tax on every job in the city. Or at least, a tax on every full-time employee in businesses with more than $20 million in annual revenue.

The head tax was even more controversial than the income tax. Amazon, who obviously employs a lot of people in the city, stopped work on a construction project in town, imperiling a bunch of jobs.

The point of the tax was to raise revenue to fight homelessness, but if what is going on in San Francisco is any guide, those tens and hundreds of millions meant to “fight” homelessness usually only ends up encouraging it. (The Daily Dirtnap readers will recognize the principle of Costanza, where efforts to fight a thing usually result in more of that thing).

Anyway, the head tax was a failure, too—it passed unanimously, but was overturned on Tuesday by a vote of 7-2 on account of huge resistance from the business community.

Jobs are a curious thing to tax. If you tax something, you get less of it, and I can’t imagine a government body anywhere that would explicitly be against jobs, but this is Seattle—ops normal.

The Rise and Fall of Cities

Nobody wants to be Detroit, or the “new” Detroit. Or, for that matter, 1970s, Taxi Driver-era New York. I went to Milwaukee about a month ago—no fun.

Why do some cities succeed where others fail?

I’m going to answer that question with an admission—I don’t know the full answer.

We know in some cases what doesn’t work. In the case of my own hometown, Norwich, Connecticut, harassing businesses until they leave town and set up right outside of city limits doesn’t work.

In the case of old New York, spending money and bankrupting your city didn’t work.

People like saying that liberal politics did Detroit in, but Detroit is also obviously a victim of economic forces far outside of its control. So there is a bit of luck involved, too.

Here’s a short list of what makes for a prosperous city:

1. Few and fair regulations

2. Low taxes

3. Good infrastructure/transportation

4. Smart people

5. Stable, predictable politics

6. Good weather (it counts more than you think)

7. Education

8. Low crime

9. Clustering (where several businesses in a particular industry cluster together: like San Francisco for tech, New York for finance)

10. Supply of housing

Notice I did not say “price of housing.” If you have a good supply of housing, the price takes care of itself.

But the number one determinant of a city’s success is regulations. Check out this great piece on former Washington D.C. mayor Marion Berry, written by the libertarian Jeffrey Tucker. Berry was famously corrupt, and when his regulators would descend on businesses with citations, the businesses would pay them a little bit to go away, and they would go away.

After Berry’s fall from grace and his successor was appointed, the city ground to a halt because the regulators actually had to enforce all the ridiculous regulations. Really amazing.

You can do a lot of damage to a city if your City Hall is full of business-hating ideologues.

Seattle probably won’t end up like Detroit. It’ll end up like San Francisco, filled with billionaires and vagrants. Costanza again—efforts to fight inequality usually result in even more inequality.

The bodega owners, the cab drivers, the hot dog stand guys—those people work really hard for not a lot of money. They are the lifeblood of any large city. If you make things difficult for them, everyone’s quality of life goes down. And people leave.

Today’s New York is an interesting case study. In the de Blasio era, quality of life has been on a slight decline the last five years, but not enough to make people leave.

No, it is the elimination of the state and local tax deduction that will make people do that.

Jared Dillian
Editor, The 10th Man

Jared's premium investment service, Street Freak, is available now. Click here for our introductory offer. Jared Dillian, former head of ETF Trading at one of the biggest Wall Street firms and author of the highly acclaimed books, Street Freak: Money and Madness at Lehman Brothers , and All the Evil of This World , shows you how to pick and trade trends, and master your inner instincts. Learn how to use “Angry Analytics” as a leading indicator of budding trends you can profit from… and how to view any market situation through the lens of a trader. Jared’s keen insight into market psychology combined with an edgy, provocative voice make Street Freak an investment advisory like no other. Follow Jared on Twitter at @dailydirtnap.

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