Richard Epstein: Senseless in Seattle

On first inspection, Seattle is and ought to be the envy of the rest of the United States. In 2017, its population stood at about 713,000 people and was growing at 3.1 percent per year, the fastest growth rate of any U.S. city. Its economic revival has been driven by an influx of new software, technology, and internet companies. Among the major corporations headquartered there are Amazon, Starbucks, Nordstrom, and Weyerhaeuser.

But all is not well in Seattle, which is now riven by deep political divisions over what to do about the problem of homelessness. Right now, about 8,000 people within the city limits are homeless, and the city saw 169 homeless deaths in 2017.

The progressive leadership within the City Council has introduced or adopted a number of measures to address this issue that are sure to backfire. The first is a special head tax on employment; the second is an ordinance that forbids landlords from inquiring into the criminal records of prospective tenants; and the third is a steep increase in the city’s minimum wage. But the real problem is that sixty-nine percent of Seattle is zoned only for single-family homes, which means there is a sharp division between where wealthy elites live and where lower-income and less-educated people are congregated. The progressive city council has maintained these barriers, with profound social consequences.

This past week, the Seattle City Council announced plans for a head tax of $500 per employee, but only on those 500 or 600 businesses in the city that gross over $20 million dollars per year. That money will be used to provide for low-income housing and emergency services for homeless people. That tax works out to over $20 million per year for Amazon, which employs some 45,000 people in Seattle. Amazon did not take kindly to this special tax that could easily rise over time. It thus took the extraordinary step of stopping construction on its new 17-story office tower on Rainier Square that on completion could house an additional 7,000 to 8,000 workers. Its exit threat is credible. Amazon has opened up new office spaces for about 5,000 more workers in Boston and Vancouver—the latter in part because of the difficulty of getting suitable visas into the United States. And it is actively looking for a second headquarters—that it could convert into its new primary hub.  Remember Boeing left town in 2001.

Councilmember Mike O’Brien, who sponsored the new head tax, put his case as follows: “We need companies that are profitable and making billions of dollars every year to help with the folks that are being forced out of housing and ending up on the street.” But this heartfelt sentiment should not carry the day. Amazon already pays its fair share of real estate and other taxes to the city. Most of its billions in profits are not generated in Seattle, but by its huge national and global footprint. It would hardly do for every locality to replicate the Seattle tax. Nor should they try. The correct form of redistributive taxes is on general revenues, whether on property or on income. The voters who want to impose the tax on others should be prepared to impose it on themselves. Picking on one group of successful firms will likely reduce their presence or even drive them out of town, as with Amazon. And it will surely deter other successful firms from coming in.

Likewise, O’Brien is cagey about who has “forced” the homeless onto the street. It is hard to pin this on Amazon, which has brought enormous wealth to Seattle; and he overlooks destructive city policies that contribute to the problem of homelessness, most notably those relating to single-family zoning, which crimps the construction of new affordable housing units. No city should cripple or kill its strong horses. Instead it should expand its tax base through private development that could cater these underserviced communities.

The city’s other response exhibits the same short-sightedness. In August 2017, Seattle unanimously passed its Fair Chance Housing ordinance that forbids local landlords from running criminal background checks in all but sex offender cases. The ordinance carries with it fines that run between $11,000 and $55,000. The Ordinance introduces findings that these checks have a disparate impact on minority groups, especially African Americans. Like so many misguided disparate impact claims, this one fails to explain why criminal records are not relevant to landlords, given the greater risk that such tenants could pose to other tenants. Nor is there any allegation that these tests were administered in a way calculated to single out black persons with criminal records, but not white persons. Nonetheless Councilmember Lisa Herbold insisted that “Blocking formerly incarcerated people from accessing stable housing is an extrajudicial punishment not consistent with the rule of law." But no refusal to deal ever counts as punishment, for if it did, then no one anywhere could ever inquire about criminal records, even, say, at schools or day-care centers. Nor does this age-old practice offend the rule of law, which requires sufficient notice and fair application of known legal rules but in no way mandates antidiscrimination ordinances in competitive markets.

But armed with these flimsy rationales, the Seattle ordinance puts into place an expensive civil rights enforcement mechanism, and it offers, of course, no compensation for landlords whose property values decline because other tenants choose to leave or insist on paying lower rents in light of their perceived higher risk. Likewise, the ordinance offers no defense to a landlord who might be sued by any person on the premises who is assaulted or injured by tenants on whom they are not allowed to do background checks. Indeed, a negative consequence of the ordinance is that it makes it all the harder for blacks without criminal records to obtain rental housing. And through it all, the ordinance does not add one single unit of new housing to the market. Indeed, it is more likely that the change will reduce the available stock of rental housing by increasing the costs of doing business—at least, ironically, if the high rents ($2,000 per month for a one-bedroom apartment) don’t make this entire issue go away.

It is, therefore, of no surprise that landlords are belatedly striking back with their own lawsuit that treats the ordinance as overbroad and insufficiently protective of landlord rights. But they are in hostile judicial terrain. However unwise the ordinance, today’s canonical progressive position holds that ordinances that restrict a landlord’s choice of tenants come with a strong presumption of constitutionality, especially in civil rights cases. Local governments always claim that the costs of their ordinances are low—but they are never prepared to give landlords financial assurances or assistances if they prove wrong.

The last of the Seattle ordinances in the crosshairs is its $15.00/per hour minimum wage law, which was intended to boost the income of the city’s low-income workers. It should come as no surprise that the law has had the opposite effect. All employers adapt to minimum wage laws. They fire workers; they reduce hours; they invest in more capital equipment run by higher wage workers; they even leave town in frustration. A recent study by economists at the University of Washington concludes that these effects more than offset the nominal increase in wages, such that the “average low-wage work in the city lost $125 per month” because of the increase. That works out to a loss of $1,500 per year for the average low-income worker, which could easily reach 10 percent of their previous wages.

No highly technical empirical study is needed, however, to show the foolishness of any minimum wage, which reduces employment opportunities and raises administrative costs. The empirics only establish the magnitude of the loss; they cannot salvage minimum wage laws. Real world complications make it hard to isolate the effect of a change in the minimum wage law from other events that influence wage levels, like a local shift in supply or demand, or new taxes and ordinances that even the most skilled economic investigators could overlook.

Yet the theory speaks volumes. A priori, there is no way to tell what impact any particular minimum wage hike will have on employment. If the equilibrium wage is above the new minimum wage level, there should be little or no immediate response. The possibilities of further hikes, or of an economic slow down, could introduce elements of uncertainty that could push employment down. In all scenarios, the effects are negative. But for policy work, the Seattle City Council cannot banish the laws of supply and demand.

So a common thread links all three of these misadventures. Preexisting regulation creates all sorts of market distortions for housing and labor. A sensible City Council removes the imperfections. A Progressive City Council doubles down on failed policies, and only makes matters worse. Sadly, even Seattle cannot repeal the law of unintended consequences.

Professor Richard A. Epstein, the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, is the Laurence A. Tisch Professor of Law, New York University Law School, and a senior lecturer at the University of Chicago.  This article was first published by the Hoover Institute's Defining Ideas.