Despite everything happening in the financial markets and geopolitics, the biggest news this past week, in my opinion, was the Democratic mayoral primary in New York (the City). Given the overwhelming majority the Democrats have in the City, winning the primary is tantamount to winning the entire election. Ordinarily, this wouldn’t move the needle on my personal interest scale. However, this particular primary did.
The reason being? Who the winner was and their political platform.
Previously little-known, 33-year-old state assemblyman Zohran Mamdani won with surprising ease. While I am not a political junkie, a 7-point difference over the next closest challenger seems like a pretty comfortable victory. It was even more impressive since the runner-up was nationally recognized, former NY Governor Andrew Cuomo, the head of the Cuomo political dynasty in the Empire State.
And the political platform? Ah…therein lies why this election was the biggest news item this past week.
Make no bones about it. Mr. Mamdani is what one might call a progressive. In my opinion, that is someone who isn’t completely on board with either the current way of doing things and/or capitalism. On the flip side, what folks might call Maga Republicans are those who aren’t completely on board with either the current way of doing things and/or socialism.
There is that confusing word, socialism. What does it mean? Is there one accepted definition? Or are there many? Perhaps generational differences?
- If you were to ask my daughter— the most liberal-leaning member of our immediate family—what socialism is, she would likely tell you something along the lines of: “making sure wealth is more evenly distributed across the economy and not so heavily concentrated in the hands of the Top 1%.”
Okay, anyone who knows Annie well is howling at that statement. That is clearly her old man talking. However, she WAS an Econ minor and a member of Omicron Delta Epsilon, the international economics honor society. She knows her stuff, and would tell you that is what people of her generation think of as socialism: the social control and equitable distribution of wealth and income.
As for yours truly and like-minded people of my generation? What is our definition of socialism?
- It is when the government controls the means of production in an economic system. Equitable distribution of wealth and income? In Chapter 10 of his classic Animal Farm, George Orwell sums it up best with the following quote: “All animals are equal, but some animals are more equal than others.”
But is Mr. Mamdani a socialist? You know, instead of making that distinction and running afoul of my compliance officer, I will let you read his primary platform on his website by following the link HERE.
As you saw/read, with a couple of exceptions, Mamdani seems more intent on redistributing wealth from the capitalist class than actually owning the means of production. He would do so by increasing the minimum wage for unskilled labor to $30/hour. He would freeze rents for more than 2 million New Yorkers. City buses and childcare would be free for everyone. He would “put our public dollars to work and triple the City’s production of permanently affordable, union-built, rent-stabilized homes – constructing 200,000 new units over the next 10 years.”
Trust me, there are a lot of wishes and promises on the page which undoubtedly appeal to a lot of people. The best part? To pay for it all, he would push to increase taxes on corporations and Top 1% in order to pay for his redistribution of wealth. Further, he plans to “crackdown on bad landlords” and “fight corporate exploitation.”
Understandably, that might make more than a few of the monied elites on the Upper East Side a little, shall we say, uncomfortable. Progressivism is great for everyone, but only in moderation.
The thing is, I have been working in the financial services industry for longer than Mr. Mamdani has been alive. I have held the title of Chief Economist, in some form or fashion, since he was in elementary school. So, when I opine that much of his economic platform seems naively idealistic, I do so from professional experience and observation.
Rent Freezes
Rent freezes? If made permanent and made below the market-clearing price, New York will have a shortage of available housing. Period. This isn’t open for debate. Developers won’t build and landlords won’t rent. Why would they if they can’t make a ‘market’ rate of return on their assets or cash?
Then, this line from the ‘cracking down on bad landlords’ sub-topic on the website:
“That’s why Zohran will overhaul the Mayor’s Office to Protect Tenants and coordinate code enforcement under one roof, making sure agencies work together to hold owners responsible for the conditions of their buildings. Tenants will be able to schedule and track inspections with a revamped 311. If a landlord refuses to make a repair, the City will do it and send them the bill. And in the most extreme cases, when an owner demonstrates consistent neglect for their tenants, the City will decisively step in and take control of their properties. The worst landlords will be put out of business.”
Oh…that paragraph is the proverbial razor’s edge when it comes to ‘individual property rights.’ Freeze the rent and then put the tenant in charge of tenant improvements? If I don’t pay up, the City can confiscate my property? If that/this is the new business environment, why would I want to be a landlord? If I can’t control my revenue or my costs? Shoot, why would I spend precious capital to put up new units in such a location? One which seemingly gives the renter greater property rights than the owner?
You wouldn’t.
City-Owned Grocery Stores
Then, there is the idea of ‘city-owned grocery stores.’ Brother. I would hate to be a convenience store or bodega owner right about now. Shoot. I would hate to be Wegmans, Stop & Shop, C-Town or Key Food. After all, consider this verbiage from the website:
“As Mayor, Zohran will create a network of city-owned grocery stores focused on keeping prices low, not making a profit. Without having to pay rent or property taxes, they will reduce overhead and pass on savings to shoppers. They will buy and sell at wholesale prices, centralize warehousing and distribution, and partner with local neighborhoods on products and sourcing. With New York City already spending millions of dollars to subsidize private grocery store operators (which are not even required to take SNAP/WIC!), we should redirect public money to a real “public option.”
Stores that don’t have to pay rent or property taxes? Which don’t have to worry about turning a profit, and can count on the public coffers for warehousing and distribution? Okay. How can any bodega owner possibly compete? Why would any of those grocery chains which I mentioned plan another location in the City or upgrade the ones they currently have?
Obviously, longer-term, monopolistic public control of the distribution of foodstuffs in the City could lead to inefficient resource allocation and inadequate infrastructure investment. This is due to the fact that the public-owned grocery stores would have a lack of incentive to turn a profit. Without a profit, they would have to turn to other sources of revenue to obtain funding to build out the necessary capacity. In Mamdani’s platform, this would be to soak corporations and Top 1%.
Obviously, this makes the assumption they will hang around for the City to tax them.
Short-Term Appeal
In my mind and estimation, the platform is not likely to work as envisioned long-term. However, in the short-term, say 2-3 years, it could very well deliver as promised. Rents WILL be easier to pay and groceries will be cheaper. The super-rich WILL hang around for a little while to see IF the people in power are really serious. Unskilled labor will love, absolutely love, making $30/hour for as long as it can. All of it, and Mamdani could very easily come out smelling like a rose for a short while.
Then reality will arrive.
Long-Term Consequences
Real estate disinvestment will likely happen IF price ceilings are significantly lower than the market-clearing price. Businesses will move their headquarters out of the City, and the ultrarich will move their primary residence. Food distribution will become bungled due to the increasingly monopolistic competition not having adequate incentives.
And so on and so forth. So, why is this guy so popular? How did the world’s imperial City fall for such a platform? One that some dude in central Alabama can pick apart pretty easily?
The answer is pretty simple: a lot of people don’t believe capitalism works for them. They feel the American Dream is a thing of the past.
In July 2024, Pew Research released a quick research report entitled Americans are split over the state of the American dream.
- In it, only 53% of respondents believed it was still attainable. At first blush, that might not seem that bad.
- However, only 39% of those 18-29 feel as though the American Dream is alive and well, and only 43% of respondents between 30-49.
- As such, only about 40%, or thereabouts, of Americans under 50 believe in what we have largely taken for granted in this countries for generations.
- Even more depressing, only 39% of ‘lower income’ respondents see the light at the end of the tunnel.
Why do they care if some landlord gets the shaft for a couple of years? Or a Stop & Shop or even the local bodega owner? So what if McDonald’s has to pay through the nose to get folks to throw frozen potatoes into boiling grease? Big deal. That is their problem.
Obviously, that is short-term thinking. However, it makes sense. What does the future supply of housing units mean to some disenfranchised 20-something who is having problems paying the rent in the present? Why do they care about the local McDonald’s franchisee’s bottom line when a #1 Value Meal is already too expensive for them? Or the Stop & Shop when they are eating ramen and canned tuna?
If that seems contrived, talk to just about any 24-year-old about their finances. More importantly, talk to them about their future. According to recent research by April Cisneros at UCLA, some 74% of 14-27 year olds “say it’s hard for their generation to achieve happiness compared to previous generations.”
The following quote in the Cisneros’ article sums up the current zeitgeist:
“For many people in my generation, homeownership feels completely out of the realm of possibility, and the idea of having kids when we can’t afford to take care of ourselves seems ridiculous, if not immoral,” Atlas Burrus, the Gen Z-aged author, said of the study. “Most of us are just trying to survive, go to school and go to work while the world is literally burning.”
That quote is why/how a previously little-known, 33-year old state assemblyman Zohran Mamdani with a questionable grasp on economic reality will be the next mayor of New York in November. IF he fully enacts his economic platform, it is highly possible the City will not be as large or as profitable in a decade as it is today.
It is just basic economics and Common Cents.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this and every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
Chief Economist
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as well as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.v