there is a deep lesson in their style of modeling: Heterogeneity. Misallocation. Dispersion. Inequality. The key lesson is not that “regulation is killing US firms on average.” The US as a whole is doing badly because firms are in the wrong place — misallocation. Each individual firm may feel it’s doing fine. It might consider moving to San Francisco, but say “well, we might be more productive there, but wages are much higher because you have to pay people enough to buy a house, so we wouldn’t make any more money if we were there.” More to the point, a new business who would embody the higher productivity, get workers to move, and put the old unproductive business out of business can’t start.
Macroeconomics and our numbers are designed around the “representative firm” and the “representative worker.” But you are seeing here the macroeconomic effects of microeconomic distortion, and only visible in the amazingly large, widening and persistent differences in productivities, wages, and incomes across areas and companies.
Read the whole post. He discusses two recent papers on the cost of housing supply restrictions. These have gotten a lot of play on other blogs as well. But I emphasize the methodological point. It is very much pro-PSST.
Incidentally, one argument against building more housing that Noah Smith tries to answer is that building more high-quality housing in, say, San Francisco, would simply induce more people to move there. With this “induced demand,” so the argument goes, the cost of living there would not fall. Noah has one response, which is to ask whether the proponents of the argument would go so far as to suggest that destroying housing would lower prices. My alternative response is to say that if “induced demand” is true, then that makes the welfare benefits of more building all the greater.
The whole idea of induced demand (commonly sloganized as “you can’t build your way out of congestion”) is like saying “you can’t grow your way out of hunger.” In a literal sense I suppose it’s true (as long as the population is increasing, we can never be permanently finished building, just as we can never be permanently finished growing food), but that just means we need to keep building. The alternative is unacceptable.
It is ridiculous to blame the market for housing shortages when government deliberately causes them. Urban planning is a cartel and a scam and needs to be abolished.
It’s one thing to say that there is some induced demand effect so that if you build one new building, then demand increases and prices do not decline as much (or perhaps increase) as if there was no induced demand effect.
It’s another to say that there is some sort of permanent induced demand effect so that you double the density of San Francisco and yet prices would not decline.
I got really frustrated reading Phil Price’s pieces on YIMBYism because he wasn’t speaking the language of economics. His original argument was that YIMBYs are racists who want housing prices high to price out minorities. I’m like, what? And then his response was “sorry, not sorry,” which is a poke in the eye.
I tend to be more on Noah Smith side for John Cochrane side in which increased supply will simply increase the number of people moving. So all this building regulation would lower rents for more buyers so a $2,500 apartment drops to ~$2,300. A very worthwhile goal but we are not going to magically change it to $1,800 apartment. (Name a thriving city that has accomplish this anywhere.) And it is not just regulation as there will be more traffic and other areas to grow. (And isn’t San Francisco coffee houses simply more productive than a rural coffeehouse because of more customer traffic? I don’t buy this get rid of unproductive business stuff or PSST here.)
Also Politically, isn’t this mostly a local issue? Our federal and even state government have limited impact here. So are you, John Cochrane, Noah Smith, or Matt Yglesias going to City Council meetings?
With this “induced demand:”
Isn’t that “Induced Demand” wrong according to Micro textbooks? Lower prices simply allow more to buy on the demand curve.
At some point, you run out of people. It’s not a closed system. If people move to SF, they are moving from somewhere else, reducing prices where they came from, which, at some point, drives demand back in the other direction.
Let me ask a micro question — which workers would be more productive in San Francisco, and why? Tech workers? Ok, for the sake of argument, let’s grant that. But even in the SF bay area, tech workers are a minority (12% in SF, 28% in San Jose/Santa Clara). What about the rest of the workforce? Do they produce more output per hour because of better infrastructure, equipment, training, etc? Or are they more productive only in the artificial sense that they have to be paid more due to the high cost of living in the region? And if that’s the case, why would we want to encourage anybody other than tech workers to move there?
It would be one thing if the better pay more than compensated for the higher costs and so non-tech workers experienced greater material well-being in the bay area. But the reverse seems to be true — California has the highest adjusted poverty rate in the country and one of the lowest cost-of-living adjusted median incomes.
Exactly this. If productivity means a cup of coffee costs more because the rent is high, it’s not a meaningful statistic to optimize. From a global perspective, it makes goods less competitive.
>And if that’s the case, why would we want to encourage anybody other than tech workers to move there?
Why would we even encourage tech workers to move there? Wouldn’t that just enrich landlords at the expense of tech workers (assuming that their increased salaries fail to compensate for 10x real estate prices)?
The average schmoe can qualify for several hundred thousand dollars in mortgage loans with very little down. The same schmoe would have no hope of getting similar terms for starting a business. The reason for this is because the government is ultimately underwriting housing debt.
Centrally planning credit causes malinvestment, news at 11.
It might be worth mentioning that the most successful tech sector companies are piling up hundreds of billions of dollars, and they can’t figure out what to do with it.
A sizable chunk of that cash horde is overseas where it isn’t going to be taxed at the US corporate rate.
A mortgage is an asset collateralized loan. Business loans go to wages and services which can not be re-possessed.
If housing were such a safe asset to lend against the US government could easily exit all of its various mortgage subsidy and guarantee schemes and the private market would surely offer 30 year fixed rate mortgages at 4%.