COLUMN RIGHT/ BENJAMIN ZYCHER : Sell the Marina and Invest the Funds : The flap over county leases confuses the ‘fairness’ of prices before and after future events revealed themselves.
That life is full of surprises results from the obvious difficulty with which individuals attempt to predict the future. Human adaptation to this uncertainty takes many forms, foremost among them specialization in the amount and types of risks that people and institutions are willing to bear. Some people accept greater risks in the hope of greater future returns, while others accept a greater certainty of lower returns in order to reduce the risk of outcomes even less salutary.
That is the appropriate context within which analysis of the Marina del Ray leases ought to proceed. To say that the prospective development of the marina was “risky” at the time that the leases were negotiated 30 years ago is a considerable understatement; and it is predictably the case that government--with its politically short time horizons, pressures to subsidize important interest groups and other perverse incentives--usually generates adverse outcomes when it undertakes risky ventures.
Therefore, it was appropriate that the owner of the land--Los Angeles County--signed leases that guaranteed it a certain return, while the leaseholders accepted the risks in the hope of far greater returns. And make no mistake about it: At the time, the prospective risk of financial failure in the marina development was far from trivial.
Things have turned out well for the leaseholders, in part because no one could predict the rise in Southern California land prices during the 1970s and 1980s. That does not mean that anyone has been treated unfairly. For outside observers to argue now that the county’s return is “too low” confuses the “fairness” of negotiated prices before and after future events have revealed themselves.
Equally confused is the casual tendency to equate the interests of the county’s politicians and bureaucrats with those of the taxpayers and the Southern California economy. The county is interested in maximum short-term revenue, the uses of which are shaped both by perceived needs and by interest-group pressures, at the expense of longer-term revenues and overall economic growth. The taxpayers, because they are interested in efficient economic activity in both the public and private sectors, are interested in maximum productivity from all resources, public and private.
Such maximum productivity depends in part on government policy that encourages efficient--that is, profitable--use of resources. It is only natural, and appropriate, that private entrepreneurs would be reluctant to make sizable new investments in the marina without the security of a longer lease; but an attempt to link a lease extension to renegotiated terms for the existing lease would reduce the value of the lease extension. It would be identical to a tax on the lease extension, thus reducing incentives to improve the property. That is hardly consistent with maximum productivity from resources owned publicly. And such reduced wealth inevitably yields smaller investment, reduced employment and fewer of the other central benefits of economic efficiency.
Nor is the use of lease terms calculated as a percentage of leaseholder revenue consistent with that end. That is identical to an excise tax on improvement and preservation of the marina, and so reduces the net return earned by those making the investments. It would be better simply to negotiate a flat rental per time period, perhaps to be renegotiated at specified times, so that those making the investments receive their complete value, and so have complete incentives.
The very best outcome would be achieved were the county simply to sell the land to the highest bidder, and thus allow the market to dictate the terms of its use. After all, is there any more reason for the government to own land than, say, supermarkets?
Some observers profess to be shocked, shocked , at the lower efficiency with which the county has managed its marina property, but that outcome is an entirely predictable and universal characteristic of government enterprise. Returns to the bureaucrats, the taxpayers and the economy as a whole would be far greater were the property sold to the highest bidder and the proceeds invested. But remember not to allow the bureaucrats to choose the investment strategy.
