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Is Lake Charles A Ponzi Scheme?

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denisvrublevski

Business Insider recently named Lake Charles the fastest-growing city in Louisiana, which sounds great at first. And we are growing – but at what cost? Is all this sudden growth really just an elaborate Ponzi scheme? Well, yes. And also no.

Wait. Hear me out.

It’s important to note that an actual Ponzi scheme is a scam set up with intent to defraud investors, which is illegal and definitely not what’s happening in Lake Charles. There’s nothing illegal about what’s going on in our town, but the structure of a Ponzi scheme – how it actually works – is at the heart of everything.

In the simplest terms, a Ponzi scheme is an investment scam that depends on a constant influx of money from new investors to pay returns to existing investors. As long as the scammer can keep convincing enough new people to invest new money to pay existing investors just enough to keep them happy, he/she can rake in a lot of cash at the top of the pyramid. However, since perpetual growth is unsustainable, the supply of new investors eventually runs out and the whole thing comes crashing down. Every time.

So what does any of that have to do with the Lake Area “boom” we keep hearing about? Well, everything.

To understand what’s going on, we first need to take a good look at the ways Lake Charles is supposedly booming. What are we really seeing in terms of growth in the city?

Two things are immediately apparent. First, there’s been a lot of investment spent revitalizing the downtown area. Second, there’s been even more investment in expanding the city south of 210 by way of adding new neighborhoods and shopping centers. However, everything between Downtown and South Lake Charles is pretty much ignored, with lousy streets, terrible drainage, little to no beautification or even basic maintenance. Why? Because North Lake Charles is “poor” Lake Charles. (You can read more about that here.)

What I’ve just described above is called a development donut, and I’ve written about it before. Unfortunately, it’s a pretty common development pattern, so it’s not limited to Lake Charles. It happens nationwide, and always yields the same results.

the-lake-charles-doughnut

Now, let’s look at how the city is paying for all this growth, because the short answer is that it isn’t. At least not yet, anyway.

Let’s examine what happens when a developer decides to construct a new neighborhood in South Lake Charles. First, he/she needs to buy the land, pay taxes on the land, then pay for all the permits and fees to begin development, followed by buying construction materials, paying taxes on those materials, then hiring a crew, etc…

Once completed, the developer then sells the homes to private residents who take on mortgages, pay more fees and taxes (although everyone in Louisiana can exempt the first $75,000 of their home’s property tax liability by filing for a Homestead Exemption, which is one reason your kid comes home from public school with a new fundraiser every other week), and so on.

So far, so good. All of that sounds like a steady stream of new money coming into the city, right? Well, not exactly.

Yes, it is new revenue, but we need to keep in mind that all of that new development comes at an infrastructure cost the city assumes the burden of – and the more expensive and fancy the neighborhood, the bigger that price tag becomes over time. The city has to build and maintain the infrastructure leading to and away from that neighborhood, which means roads, drainage, sewage, etc… It adds up, but since the real cost of the bill doesn’t come due until later, we tend not to worry about it in the present.

But what happens to all of the existing neighborhoods and areas of the city that have been around for decades? That infrastructure still needs to be maintained, even if only at a minimal standard. How do we fund those costs, when all of the new revenue being generated goes toward building the new infrastructure necessary to support the new construction projects? The simple answer is that we don’t. Not really. Which is one of the big reasons why some parts of the city flood every time someone so much as spills a glass of water in the street.

In short, what’s happening here in Lake Charles is fairly simple: the city is selling the illusion of prosperity instead of actual, sustainable growth in order to help stimulate even more growth through new investments. Because it needs that growth to go one forever, just to barely maintain what it’s already built.

Because all of that growth is a Ponzi scheme, and it’s not limited to our area. The same thing is happening over in Lafayette (on an even bigger scale), and elsewhere in the country. Everywhere, really.

In case that’s still not quite clear, let’s put it all together, and I think you’ll see what I’m talking about.

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In our scenario, the city itself is the founder and owner of this particular scam. Our own personal Bernie Madoff, if you will. When new investors came into the area to start expanding existing plants and building new ones, the city had its initial seed money to begin the long con.

Which is when the “boom” started. All of the construction work led to growth in the Lake Area by way of new housing and shopping venues, which in turn led to the appearance of prosperity. We started hearing all about how our city was growing, how we were booming and how all these new jobs would start being created. Life would improve for everyone, with new places to shop and have fun, and all new homes to live in. Fancy new McMansions and cookie-cutter neighborhoods began popping up, and the city started experiencing a nice new flood of revenue pouring into its coffers, which it used to help fund even more new development to bring in even more money to fund even more growth to bring in even more revenue, and so on…

The problem is when all that expansion slows down and, eventually, stops. Without new revenue sources constantly coming online, the city gets left on the hook for maintaining a massive expansion to its infrastructure that it just can’t afford.

Which is when the “bust” will happen.

The city is depending on perpetual growth to (barely) fund its existing infrastructure obligations, because it needs more and more new money to keep the whole thing going – which is exactly how a Ponzi scheme works.

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It’s also why the city spends less on maintaining the infrastructure of, or stimulating development in, the poorer areas of the city: because it can’t afford to build those nice, wide roads with adequate drainage in the new parts of town while also maintaining and repairing the existing infrastructure in the old parts of the city. In time, even the nice, new neighborhoods we’re building today will become the old neighborhoods of tomorrow, and will be subsequently neglected as the city continues to favor new growth.

Until, of course, there is no more new growth.

Who will be left holding that hot potato once the con has run its course? We will, of course. The residents of this fine city will be expected to pay for it. Even though we already have one of the highest sales tax rates of any city in the entire country, our taxes will go up and up, the city will increase the cost of existing fees while creating all new ones, landlords will increase rent even more (to cover the sharp rise in their property taxes, which the city will undoubtedly raise), and in general, everything will get progressively more and more expensive until people can no longer afford to live here (because you can bet wages aren’t going up any time soon), then there’s a mass exodus and everyone just leaves the city.

It’s happened before, because no one ever seems to learn from the mistakes of the past. In fact, this method of “growth” is pretty much the standard operating procedure of virtually ever city in the country. Boom then bust. You can see it everywhere from big cities like Detroit, to countless smaller towns that rapidly expanded in good times, only to collapse in on themselves the going got tough. And it will happen here too, if we don’t stop it.

The smartest thing the city could do right now is to slow down new development, and instead focus on renovating and enhancing the existing parts of the city it’s neglecting right now. It might seem counter-intuitive, but investing in the “poor” areas of the city actually yields much steadier long-term gains than chasing the dragon of perpetual growth.

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That’s because it’s usually cheaper to fix old things than it is to build new ones. It costs far less to put in more sidewalks or add bike lanes than it does to build miles upon miles of new, wide roads. Encouraging small businesses to take advantage of existing structures is more affordable for everyone than building new shopping centers. It requires much less investment in both the short and long-term to build upon the foundation of what’s already here than it does to create something new from scratch.

But I don’t think anyone believes that will actually happen. People who have money (or the ability to secure enough debt necessary to at least appear to have money) will always want to move away from the people who don’t have it. Developers and landlords seduced by short-term gains will always jack up property values and rent as high as they can, no matter how damaging it will be in the long-term.

We’ve built countless apartment complexes in the past few years, which are currently doing very well. They’re usually fully occupied by people paying exorbitant rent because there’s just not enough housing available right now, so landlords can pretty much charge whatever they want and someone will pay it. For now, anyway.

But once the jobs dry up, once a new round of layoffs hits this plant or that one, once the perpetual growth falters even just a little bit, the whole thing comes crashing down. Anyone putting their money in apartments and RV parks and overpriced rent houses will find themselves losing money as fast as workers lose their jobs. Then, we’ll be stuck with a graveyard of partially occupied, overpriced, and poorly maintained properties.

Until the next boom, that is. When we’ll start the whole nasty business all over again.

There’s a better way, Lake Charles. We just have to look past the short-term greed of a few while working together to plan for a future that’s barreling down on all of us.

And I haven’t even touched on how the city entices developers with tax breaks and subsidies the rest of us pay for in ever-increasing taxes…

Downtown Lake Charles, La.
Scott Lewis

READ MORE: Is Developing The Lakefront Worth Raising Taxes?

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