The rest of the poverty story: reducing expenses important, too

by Michael Jacobs, UNC Professor of Finance, UNC, printed in News and Observer, January 11, 2014.

For those of us old enough to remember Paul Harvey, we know there is always a “rest of the story.” This paper’s recent series on poverty did a superb job of describing the magnitude, trends and consequences of poverty, but it failed to address a very important variable.

Critics blame conservatives for failing to sufficiently fund food stamps and unemployment benefits and for not supporting a higher minimum wage. Poverty is viewed exclusively as a resource issue.

Typically, poverty is measured based on income, so policy prescriptions tend to focus on how to raise the income of the poor. But poverty is a two-sided coin. Equally important to improving resources for the poor is reducing expenses. Policies that raise the cost of living are just as devastating to the poor as insufficient income.

There is a famous progressive saying: “Think globally and act locally.” The federal and state governments have most of the resources to address the income side of the poverty equation. But creating affordable communities is predominantly the job of local governments.

Let’s look at how the home to UNC’s poverty center and the state’s most progressive city has done in creating a community attentive to the poor. Compared with every other community in North Carolina, Chapel Hill and Orange County have:

•  The most expensive housing

•  The highest property taxes

• The highest sales tax rate

•  The most expensive water

• The greatest decline in black population

• The worst performance gap between blacks and whites on end of grade performance tests

•  Virtually no low-cost retailers at which low-income households can shop

• Basically no fast food restaurants, which along with big-box retailers provide entry-level jobs

•  Lost the largest private employer, Blue Cross/Blue Shield of North Carolina, which is moving out of Chapel Hill where it has been headquartered for 80 years.

These outcomes are the result of well-intentioned progressive policies. But policies have highly predictable unintended consequences.

Housing prices are inflated because of the “rural buffer” that constricts the area where homes can be built in order to limit development, coupled with a lengthy and unpredictable process for approving new developments.

Property taxes are so high because Chapel Hill secures a greater percentage of its revenues from residential property taxes than any other community due to a lack of commercial activity and sales tax receipts.

Despite having the most affluent consumers in the state, the sales tax rate is the highest because residents spend so much money at Wal-Mart, Home Depot and Costco stores in other counties because these retailers were not allowed to build in the city limits.

Water rates are the highest in the state because the water board feels its primary job is to reduce consumption rather than to provide affordable water

The racial performance gap is high because middle class black families have been priced out of the community and because significant resources are allocated to teaching math and science in Mandarin rather than doing a better job of teaching them in English

Entry-level jobs are lacking because there are effectively no national retailers or fast-food restaurants in town (drive-through windows are banned).

BCBS is leaving because of all of the above.

Today the cost of sales taxes, property taxes on an average priced home and water in Chapel Hill is about 50 percent higher than in any other city in North Carolina. The same liberals who are crucifying Republicans for not doing enough about poverty have created the most unaffordable community in the state.

The progressive solution to the evaporating economic diversity is to increase taxes further to fund more “affordable housing,” attacking the symptom and compounding the problem. A more sustainable solution would be to create an “affordable community” through policies to reduce housing costs, taxes and water rates.

My Business & Government class is the only course at UNC taught jointly to MBA and law students. My two primary objectives are for each group to better understand how the other thinks and to teach our future leaders to always try to predict the unintended consequences of policy decisions.

Granted, conservatives need to do a better job of addressing the income side of the poverty equation. But liberals need to reconcile their passion for reducing poverty with the economic costs their social, environmental and education policies inflict on the poor.

Michael Jacobs, a former U.S. Treasury official, is a finance professor at UNC’s Kenan-Flagler Business School and CEO of Jacobs Capital.