City of Unearned Wealth

San Diegans wring their hands about political corruption as if it's something new. Ha. It would be better to ruminate on the economic and societal framework that has long encouraged and rewarded such corruption.

The fact is that for half a century, San Diego has been an easy-come, easy-go society marked by political corruption, stock market frauds, and real estate speculation, sometimes greased with laundered money. Unfortunately, few people knew it -- or wanted to know it.

With prosecutors and judges historically looking the other way, why would any briber or bribee be deterred? Four years ago, the government investigated the gifts that Padres majority owner John Moores had showered on then-councilmember Valerie Stallings. Moores was angling for a city-subsidized ballpark and one-tenth of downtown at a steep discount. Stallings got off with a wrist slap and Moores was not even charged.

The then-U.S. attorney declared that there was nothing wrong with giving money to politicians, even though the giver had so much to gain monetarily. Later, that former U.S. attorney was named to the so-called ethics commission.

In this environment, why should any politician turn down a gift from a favor-seeker? Or worry about getting caught?

More than in other cities, San Diego's big and little folks accumulate their money from what economists call "the unearned increment." That's defined as "an unearned rise in the market value of property resulting from general market factors." The word "unearned" is key: real estate values increase without any effort by the owner. A stock market swindle, too, can be an example of the unearned increment: insiders amass bucks by cooking the books, not creating a better recipe for business success.

That "unearned," no-effort mentality appeals to con artists, breeds fast-buck schemes, and attracts money of dubious origin. And a border town always has some of that floating around.

Before San Diego became known nationally as Enron by the Sea, it was called Scam Diego. For many decades, it has been a haven for Ponzi schemes and similar pyramids, up-front loan fee schemes, stock market and accounting scams, telemarketing fraud against the elderly, ad nauseam.

The establishment insists that its money is earned. For example, the city fathers proclaim that San Diego is one of the leading biotech centers in the United States. Last year, the Milken Institute rated American cities on key biotech indicators. It concluded that San Diego was the nation's top biotech hub, narrowly beating Boston. Business pages of local newspapers celebrate the industry, pouring reportorial resources into following biotech companies.

Now hear this: I asked Cheryl Mason, labor market analyst for San Diego's Employment Development Department office, just how many biotech jobs there are. She estimated that in 2004, there were 20,900 biotech jobs -- "scientists, analysts, support staff, anyone working for a biotech or pharmaceutical firm," she says. Real estate topped that: last year, there was an annual average of 22,000 jobs for real estate sales and support, and that did not include the real estate people who were self-employed.

So biotech jobs were only 1.65 percent of total nonfarm jobs in San Diego County last year, and real estate jobs were 1.73 percent. Thus far this year, real estate jobs are 1.75 percent of total nonfarm employment -- compared, for example, with the 1.2 percent of Minneapolis-St. Paul, which has a cooler real estate market (and climate, for that matter). San Diego promoters prefer to say that there were 38,934 bioscience and biomedical jobs last year, but that was only 3 percent of total nonfarm employment. Actual biotech jobs are a little more than half of that bioscience/biomed total.

Up to now, the way to rake in money in biotechs has been to get cheap stock in an emerging company, tout a new drug that will come someday, take the stock public, and systematically bail out for 500,000 percent profits as the stock zooms. Whether or not a medicine eventuates, the insiders and venture capitalists get rich. The only people who take risk are the wee folk who buy at the market and lose. Because companies go public whether or not they are viable, insiders can hardly lose.

That's true of real estate developments too, although the contractors usually need the help of friendly politicians. The condo craze in the ballpark district and the commercialization of the former Naval Training Center are examples of politician-assisted welfare.

More is coming. As soon as Congressman Randy "Duke" Cunningham was a political corpse, the Base Realignment and Closure Commission began to wonder why the Marine Corps Recruit Depot and the Navy Broadway Complex weren't on the closure list. Cunningham and his Republican colleague, Duncan Hunter, normally fight closures of San Diego bases. Republican real estate nabobs have tried in the past to defeat Hunter. Any guesses why? Everybody claims to want military bases, but the developers talk out of both sides of their mouths. The Navy Broadway Complex will probably anchor a North Embarcadero development. The Marines will retain the recruit depot for now, but San Diego developers eye it as another upscale housing plum.

Next up: Marine Corps Air Station Miramar. Hunter will be told to shut up. (Ever wonder if the local real estate industry gathered the goods on Cunningham?)

The little folks can't play so rough, of course. But they have their own unearned asset. It's a house worth $550,000. The proletariat increase their standard of living by taking out loans on inflated equity or pulling out cash by refinancing a mortgage. Housing affordability in San Diego is among the lowest in the nation, and almost 50 percent of mortgages are now the hyper-risky zero-interest variety, the highest percentage in the nation, according to Business Week magazine.

Once again, commoners are speculating on real estate. With only 8 percent of San Diegans employed in manufacturing, scholars once fretted that the economy would become dominated by burger flippers. Wrong. Make that condo flippers.

San Diego may be broke, but it's not dull. The late critic Brooks Atkinson once described bawdy Restoration England as an era in which "the only sin was to be dull." In San Diego, the only sin is to be prudent and hardworking -- to make money in earned increments.

It amazes me to see national media assert that until just a few years ago, San Diego was cleanly and efficiently run. Not so. The cozy relationship between politicians and the real estate industry goes back decades, with one brief respite during Pete Wilson's mayoralty. (He abandoned it when he focused his eyes on higher office.) The pension mess has been building since the mid-1980s. Accounting/stock market scams run from U.S. Financial and U.S. National Bank in the 1960s and '70s to Peregrine Systems in the 2000s.

What San Diego has had was a public relations campaign called "America's Finest City" that even its own citizens believed. It was unearned.