The Recession Obsession : Balancing a Budget at the Expense of L.A.’s Future

<i> Steven P. Erie, who teaches political science at UC San Diego, is writing "Imperial Los Angeles: Public Enterprise and the Politics of Growth, 1880-1993," to be published by Stanford University Press</i>

In “Wild Palms,” Oliver Stone’s miniseries vision of techno-futuristic Los Angeles, a leading character is obsessed by a family memory of a late-20th-Century political conflagration. Burned out in a riot, his tailor-father had to sell off the remnants of his business under the banner: “Everything Must Go.”

In today’s political climate, the same slogan spells out the possible fate of L.A.’s historic “crown jewels”--its proprietary or revenue-producing municipal harbor, water and power, and airports departments. The mayoral candidates, City Council and business community are debating whether the best way to balance the municipal budget and revive the slumping economy is to dismantle the public infrastructure that has served as the real engine of this city’s improbable 20th-Century growth. The city’s leaders only differ over how to organize a fire sale--at recessionary prices--of L.A.’s chief revenue- and job-generating assets.

Richard Riordan wants to lease Los Angeles International Airport to private operators to pay for 3,000 additional cops and reduce the city’s budget deficit. Faced with the city’s worst budget crisis since the Depression, the City Council is considering Tom Bradley’s request to take money from the Harbor Department’s reserve fund to help close the general-fund shortfall. Offering another quick budgetary fix, members of the business community are floating schemes to sell off the Department of Water and Power.


Robbing Los Angeles of its publicly owned and managed infrastructure is a dangerously wrong-headed idea, betraying the philosophy that built the city and, more important, sabotaging its economic future. Privatizers suffer from acute historical amnesia. They have little understanding of how the city was built.

Southern California used to be called “Reagan country,” but early L.A.’s growth violated all the laissez-faire principles of Reaganomics. The magic of the unfettered and unaided market did not build this metropolis. Modern-day Los Angeles would not have been possible without massive public investments in infrastructure.

Early Los Angeles quickly tasted the bitter fruits of a privately run infrastructure. In the late 19th Century, the Southern Pacific Railroad charged Southern Californians all that the traffic would bear. Similarly, local investor-owned water and power companies treated their customers as cash cows, to be frequently milked with high prices for poor service.

The City of the Angels thus learned the hard way about the limits of private enterprise. As monopolies under pressure to produce quick economic results for shareholders, private-infrastructure providers acted as short-term profit maximizers. Their long-term capital-improvement decisions also were governed by investor impatience. L.A.’s private monopolies would not make the expensive capital investments--such as the Owens River Aqueduct, a seven-year project--that did not yield a short-term payoff.

More ominously, the municipal prizes--franchises, contracts and licenses--that created private transportation and utility monopolies offered strong incentives for political corruption. To preserve their privileges, the railroads and utilities captured City Hall. Los Angeles’ analogue to New York’s corrupt Tammany Hall was the Southern Pacific machine.

Forswearing private monopolies, Los Angeles chose to become the nation’s first Keynesian city-state. From the Progressive era onward, the city deliberately--and wisely--chose a public strategy of infrastructure development. Dating from the turn of the century, the Harbor Department and the DWP are the true cornerstones of this city’s phenomenal 20th-Century growth. LAX represents the postwar capstone to the city’s public-infrastructure investment portfolio.


Some huge municipal projects were: the man-made harbor at San Pedro-Wilmington (the largest artificial port in the world); the Owens River Aqueduct (the era’s largest and most expensive aqueduct system), and the Department of Water and Power’s hydroelectric plants (the nation’s largest municipal power system).

Los Angeles’ development agencies both shaped and accelerated the city’s pre-World War II population growth, territorial expansion and industrialization. The Harbor Department and DWP deliberately set the nation’s lowest dock, water and power rates to encourage growth. City bureaucrats, such as the DWP’s Ezra Scattergood, successfully lobbied Detroit automobile manufacturers and Akron tire firms to set up branch plants in Southern California. Public infrastructure was complementary--and a necessary precondition--to the region’s private development by real-estate and business investors.

Following World War II, the municipal airport played a similarly catalytic role in building the region’s aerospace industry. LAX adopted a policy of low landing fees--a controversial issue today--which acted as another magnet for growth.

Under prudent public management of its infrastructure, Los Angeles evolved from a turn-of-the-century cow town of 100,000 into the nation’s second largest metropolis. Greater Los Angeles--with a population of 12 million--is the world’s seventh largest megacity.

The city’s publicly owned crown jewels have been successful because they have been free to pursue a long-term market-maximizing strategy. Their below-market prices have attracted businesses to the Southland. Their investment decisions also have been judicious. Financially responsible to voters and banks, they have chosen public-works projects promising sustained revenue yield and widespread public benefit.

The City Charter has shielded these pricing and investment decisions of the proprietary departments from elected officials. Politicians only have the power to veto--but not to initiate--their decisions. Thus, the crown jewels face little pressure to choose costly public-works projects that only bring political benefits to their sponsors.


The real danger posed by privatization is its threat to sabotage our economic future, to derail the historical forces moving Los Angeles toward the global spotlight. Today, our municipally owned and managed airport and harbor systems are major engines revitalizing the region’s shattered economy. They are engaged in rebuilding the Southland as a gigantic global trading center in the post-Cold War era. An estimated 25% of the Southland’s gross economic product--double the national average--now depends upon international commerce. Foreign trade--up a robust 10% in the past year--represents one of the few economic bright spots. By 1995, an estimated one in six jobs in greater Los Angeles will be related to trade, up from one in 10 in 1990.

If LAX were handed over to private operators, what incentive would there be for the lessee to make the expensive capital investments needed to compete with L.A.’s West Coast rivals for greater global trade? Would additional LAX air-cargo facilities be constructed? Would the proposed new terminal at Ontario International Airport, designed to handle increased traffic from Mexico, be built?

Archrival San Francisco is not betting on a privatized airfield of dreams. A recently approved $2.4-billion public-airport bond aims to make the Bay Area the leading gateway to the Pacific Rim. Could LAX’s proposed private operators match this kind of infrastructure investment? When is the last time a renter, even with a recessionary sweetheart lease, renovated a house? Nor can remodeling be expected from a municipal landlord intent upon beefing up the police force with the airport rent check.

The supposed operating efficiency of a privatized airport also may prove illusory. Critics of the airport charge that the department supports an oversized bureaucracy headed by globe-trotting junketeers. Privatization, it is argued, will trim that fat. Alas, the private sector has its own share of bloated bureaucracies. Witness General Motors and IBM. If Los Angeles’ successful destination is to be a central hub of the 21st Century global economy, the solution to LAX’s troubles is to shape up the crew, not to surrender to privateers who would scuttle the ship in today’s rough economic seas.