What is it with you townies? Have you never looked out of the window, when you fly (do you ever drive?) from one city to another, and wondered about all that stuff you see out there? It’s called “land”. It grows food, that you eat. And that land is valuable stuff, and there’s a lot of it, and it can last a very long time, and it pays rent (or owner-equivalent rent). And if the rent on that land is strictly positive (which it is), and if the price of that land is finite (which it is), then the rate of interest you get by dividing that annual rent on land by the price of land is going to be strictly positive. And that’s a real rate of interest, because land is real stuff, and what it produces is real stuff too.
So when you go to a helluva lot of trouble to build a model with a negative equilibrium real rate of interest, and it’s a very fancy complicated model, but it totally ignores land, I really wonder where you are coming from. Actually I don’t wonder. I know where you are coming from. You are coming from the town, or the big city, where you can easily forget about land. But even then: you know that stuff your house or condo is built on? That’s called “land” too.
The crowd whose model’s Nick is challenging probably also believes, and their models would soon reflect, that developing any already undeveloped land comes along with limitless negative externalities — from cataclysmic loss of bio-diversity, to run of the mill obesity caused by sprwling suburbs. Nick’s models would soon have to contend with so many frictions (from taxes to moratoria) that land development will not easily get us out of any stagnation our ruling elites seem content to shepherd along.
Thanks Arnold!
MG: it doesn’t matter (for this question) whether land can be developed or not. What matters is land as a savings vehicle.
I don’t understand how the rent is strictly positive. What about property taxes and upkeep costs?
Surely there are situations where the net rent is negative?
Never negative. The King can make it negative for you, but it positive for the King, and strictly positive everywhere, in sum. This result is mainly from gravity, land ultimately provides the only place to land.
And isn’t the problem in, say, Japan, that land WON’T necessarily be worth more in the future? Less people would mean lower demand for it, so unless we up the restrictions, the price is bound to fall as people die off.
I think Rowe is right in the real world, but the model that (I think) prompted this, the Eggertsson/Mehrotra model, might not deliver the Rowe result even if land were included. Recall that this is an OLG model. If we added land, it would be a saving technology (in this respect it is not so different from the bond in the existing model, other than fixed supply). A cohort with lots of saving could drive the price of land up, paying a premium that swamps rents. Future cohorts with less savings won’t be willing to pay so much for the land, which our over-savers need to offload before dying. So I think returns can still go negative. An infinite horizon model would probably behave differently, as agents have more options for dealing with the storage technology.
In my view the bigger problem with the EM model (and sec stag models more generally) is absence of capital investment. The SS people seem to assume that aggregate demand is only consumption.
So long as the price of land never falls! Yes we know, that never happens. In the long run? In the long run nothing remains the same.
like in all of economic “discoveries” the failure is in the assumptions… the use of exclamation signs is a giveaway that emotions crowded out nuanced analysis.
“IF the rent on that land is strictly positive” — is this why agriculture is subsidized everywhere? The energy input in agriculture can squeeze out all of the positive rent (be it laborer or fossil energy). You can take that rent back from them by violent means, and this happens in history all the time, but then your real asset are armed forces, not land.
Land prices are indeed rising, so there is a process in place that is lowering expected returns on land too.
I have friends who owned houses in various cities in Michigan. The taxes and upkeep surpassed the expected rent, so they abandoned them [effectively donated them to the various municipalities]. Some were sold at auction, but not all. And those properties remain unsold at any price.
I.e. there may be isolated examples that appear to be contrary to Nick’s argument, but even these examples do not negate it because the “land” wasn’t producing anything of value and is not capable of producing anything of value in the expected future.