Category Archives: Four Forces Watch

Upward-Sloping Demand Curves

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Why are big cities becoming expensive places to live? One answer is that they have good jobs and restrictions on housing construction. That may be right.

But one possibility I want to throw out there is that people want affluent neighbors. If I want an affluent neighbor, and an affluent neighbor is going to live in a neighborhood with high prices, then in some sense I want to live in a neighborhood with high prices. In the extreme, this makes my demand for neighborhoods upward-sloping. Higher prices make me want to live there.

I first considered this possibility many years ago when thinking about school vouchers. I thought that if what people really want for their children is to have them go to school with affluent children, then vouchers would not work as well. Instead of allowing non-affluent parents to send their children to good private schools, the result would just be that good private schools would raise prices so that only affluent children can attend.

I also think that some colleges that are not in the top tier may face upward-sloping demand. George Washington University, which is hardly an academic icon, may benefit from charging very high tuition. Affluent parents come and see a student population that is predominantly affluent, and this gives them comfort that sending their children to GW is a high-status thing to do.

Back to cities. Suppose that an important “urban amenity” is having a lot of affluent people around. Young singles may wish to meet potential marriage partners who are affluent. People who have acquired affluent tastes (sushi, yoga, wine) may want to be around people with similar tastes.

If that is the case, then there is not much that a mid-sized midwestern city can do to lure affluent people. The cost of living there is not high enough to create a barrier to non-affluent people living there. And that means that affluent people will not want to live there.

Assortative Sex Ratios

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Jon Birger writes,

Multiple studies show that college-educated Americans are increasingly reluctant to marry those lacking a college degree. This bias is having a devastating impact on the dating market for college-educated women. Why? According to 2012 population estimates from the U.S. Census Bureau’s American Community Survey, there are 5.5 million college-educated women in the U.S. between the ages of 22 and 29 versus 4.1 million such men. That’s four women for every three men. Among college grads age 30 to 39, there are 7.4 million women versus 6.0 million men—five women for every four men.

In the Mad Men era, when there were men than women who had graduated college, some men married “down.” Now, when there are more women than men graduating college, we have assortative mating. The result is that women have a harder time finding a “suitable” husband.

And there is this:

One fact that becomes apparent when studying the demographics of religion is that it is almost always the women who are more devout. Across all faiths, women are less likely than men to leave organized religion. According to the Pew Research Center, 67 percent of self-described atheists are men. Statistically speaking, an atheist meeting may be one of the best places for single women to meet available men.

Tyler Cowen on Labor-Leisure Trends

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In his column he writes,

Yet it is a strange society that disproportionately bunches much work and stress for so many women in the middle of their lives, and rewards them only much later with leisure. It is a kind of feast or famine for work, leisure and earnings.

In terms of the four forces, I would say that as the size of the New Commanding Heights sectors (education and health care) increases relative to manufacturing, the proportion of women doing market work has gone up. With bifurcated family patterns, we see higher-status families where parents work until their children have completed their education. Then they retire.

Note that the cost of goods and services other than education and health care has tended to fall. Thus, the way to get the most leisure is to resist the cultural pressure to live in a high-status city, have your children attend a high-status college, and buy “good” health insurance (meaning a pre-paid health plan as opposed to real insurance). If you can do that while earning a decent wage when you work, you can afford a lot of leisure.

Four Forces and Urbanism

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Justin Fox writes,

Basically, urban life is becoming a luxury good in much of the U.S., in part because there isn’t enough of it to go around.

Pointer from Mark Thoma.

I think of this in terms of the four forces. The New Commanding Heights of education and health care tend to concentrate in inner cities. This helps draw affluent professionals to cities, leading to gentrification. Then you get the sorts of amenities that affluent professionals like–bike lanes, sushi restaurants, yoga studios. The urban-suburban demographics becomes sorted by taste as well as by occupation.

Idiosyncratic Housing Market Perspective

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Kevin Erdmann, whose comments on this blog are much appreciated, wrote

There wasn’t even a housing boom. We all just decided to freak out about the one type of homebuilding that was growing – single family units for sale – and ignore every single other category of housing supply, which included homes built by owner, multi-unit homes, and manufactured homes. All of those categories had been in decline. Of course, it was the decline that created the illusion of a boom, because it was precisely those cities where we can’t build, yet where income opportunities are available, where home prices were skyrocketing, because households were bidding up the stagnant pool of homes in those cities in an attempt at economic opportunity in a country that has become inflexible.

What I think he is saying is this (and I could be wrong in my characterization):

1. Because of natural and artificial constraints on supply in cities like SF, the housing stock stays just about fixed, so any increase in demand shows up in price.

2. People have to live somewhere. When supply is fixed in some places, some households get pushed to other places. However, the rise in supply in those other places was never much ahead of demand.

3. If there were excess supply, we would expect rents to fall, and they have not.

4. The sharp fall in house prices came from tightening mortgage credit by much more than was necessary.

My own thoughts:

1. A fact that is salient to me is that the share of mortgages for non-owner-occupied homes went from about 5 percent before 2004 to at least 15 percent in 2006. To me, this says that at the margin there was some demand that was not driven by housing needs. Also, I believe that in housing the marginal supplies and demands exert big effects on prices, even though those marginal Q’s are small relative to the stock of housing and the total number of household.

2. Another salient fact is that the average price-to-rent ratio also shot up over this period.

3. This suggests to me that something other than “pure” supply and demand was at work in driving up house prices. I am inclined to see some combination of looser credit and (unrealistic) expectations for house price increases.

4. I think that Kevin is right to stress that the characteristics of housing markets differ in different locations. In SF or DC, rapid gentrification combined with restricted supply gives you one dynamic. (I don’t think I would pin it all on people bidding for “an attempt at economic opportunity,” as if these cities offer better jobs to people of every skill, which is what Enrico Moretti has claimed. Instead, I see a shift in economic opportunity inside cities away from low-skilled workers and toward professionals in the New Commanding Heights sectors.) In rural Ohio, a long decline in economic opportunity gives you another dynamic. In Texas, a big population inflow with more elastic supply gives you yet another dynamic. I could imagine that national averages, including the national averages I tout as “salient facts,” could be quite deceiving. Perhaps to understand the whole you need to study the parts.

Scott Alexander Puts Me in His Corner

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On the subject of poverty, he offers a two-by-two matrix to classify viewpoints.

On one axis, you can think that the capitalist system is basically competitive or basically cooperative. The former view is that it creates winners and losers. The latter view is that it is a rising tide that lifts all boats.

On the other axis, you can be optimistic or pessimistic. If you are optimistic, you think that a bit of social change can take care of poverty. If you are pessimistic, then if you think of the system as competitive you want revolution. If you think of the system as cooperative, you end up like this:

we’re all in this together, but that helping the poor is really hard. . .capitalism is more the solution than the problem, and that we should think of this in terms of complicated impersonal social and educational factors preventing poor people from fitting into the economy. . .worry school lunches won’t be enough. Maybe even hiring great teachers, giving everybody free health care, ending racism, and giving generous vocational training to people in need wouldn’t be enough. If we held a communist revolution, it wouldn’t do a thing: you can’t hold a revolution against skill mismatch. This is a very gloomy quadrant, and I don’t blame people for not wanting to be in it. But it’s where I spend most of my time.

Me, too. Except note that over the past two hundred years the tide has lifted more and more boats, quite dramatically. It is still lifting more and more boats, but those boats are more likely to be in China, India, or Africa than in the rural United States. And places like St. Louis.

Why Fewer Publicly Traded Firms?

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Alex Tabarrok writes,

The total number of firms has dropped far less than the number of publicly traded firms, so in part this is probably due to laws affecting publicly traded firms in particular such as Sarbanes-Oxley. But there has also been a drop in the total number of firms. As a result, concentration ratios have increased which suggests that competition might have fallen.

Some possible stories.

1. The number of manufacturing firms declines as manufacturing declines as a share of GDP. Meanwhile, in the growing sectors of health care and education, government creates huge barriers to entry. It seems to actively encourage consolidation in health care.

2. The Internet and globalization create winners-take-most markets in several categories. Think of how many department stores were killed off by Wal-mart.

3. Lots of consolidation in finance. Remember that as recently as the 1970s banks were not allowed to cross state lines, so we probably had more banks than was efficient well into the 1990s.

I am not ready to buy the story that competition has fallen across the board. One of the big stories of the past couple decades is the big rise in prices in education and health care and the much slower rise in prices for manufactured goods. To me, that goes along more with a story of government policies to subsidize demand and restrict supply in the former sectors.

Tyler Cowen on Trends in Leisure and Work

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The video is here. Recommended.

I agree with most of what he says, and to the extent that I differ I am probably wrong.

He frames the question in terms of Keynes’ prediction that by 2030 we would see a work week of about 15 hours. My thoughts:

1. As William Gibson said, the future is here, it is just not evenly distributed. Tyler says, correctly, that the elderly have grabbed a huge share of any increase in leisure. But “elderly” is not some different social class. It is us when we get to be that age.

2. Suppose that the median adult male in 1930 started working at age 16 and worked until he died, and that the median adult male today starts working at age 20, retires at age 60, and dies at age 80. Take those 20 years of leisure and spread them across the working ages of 20-60, and that amounts to 1/3 of a year of leisure. If you think that you have about 100 hours a week to allocate (otherwise you are engaged in required activities like sleeping), 1/3 of a week is about 33 hours. So maybe you can say that we’ve taken about 33 hours off the typical work week, but we’ve decided to save those 33 hours for when we’re old. So if you worked 60 hours in Keynes’ day, now in effect you work 27 hours, and he is not so far off.

3. Note that the natural distribution of leisure might be quite different, but the eligibility rules for Medicare and Social Security are a major influence.

4. Another point Tyler makes that I would have made also is that the disutility of work has fallen. My guess is that Keynes did not foresee this or take it into account.

5. In fact, one of Tyler’s claims, which I do not dispute, is that for many people the utility of work is actually positive. In any event, if you gave people the wealth they have in 2016 but they faced the composition of jobs that existed in 1930, I bet a lot fewer people would choose to work full time.

6. Tyler points out that one factor increasing reported work hours is women substituting market work for home production. Again, I agree. In a variation on (5), suppose you offered a modern working woman a chance to earn her current wage for doing housework and child care as it was done in 1930. How many women would take you up on that? I’m guessing not many.

7. Tyler predicts that more people will work more hours going forward. His reasoning is that in cross-section, we observe the highest earners tending to work more hours. If that same pattern holds in time series, and earnings go up, then we should see more hours of work.

I think that is a dubious inference. The “one percent” are different not just in terms of ability but also in terms of preferences. They choose wealth-maximization with more gusto than the rest of us.

There are plenty of reasons to choose something other than the wealth-maximizing career path. In my case, I have inexpensive tastes. I also have a low tolerance for interpersonal stress. Others may have a low tolerance for risk. Some may have a strong attachment to living in a location that does not offer the highest nominal salary.

There are many margins along which people can adjust to higher wealth. I do not think that we can extrapolate from the behavior of the “one percent” to predict how the rest of us will choose.

Related: Timothy Taylor on what is a good job.

A good job has what economists have called an element of “gift exchange,” which means that a motivated worker stands ready to offer some extra effort and energy beyond the bare minimum, while a motivated employer stands ready to offer their workers at all skill levels some extra pay, training, and support beyond the bare minimum.

Four Forces Watch

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Shelly Lundberg, Robert A. Pollak, and Jenna E. Stearns write,

We argue that college graduate parents use marriage as a commitment device to facilitate intensive joint investments in their children. For less educated couples for whom such investments are less desirable or less feasible, commitment and, hence, marriage has less value relative to cohabitation. The resulting socioeconomic divergence has implications for children and for future inequality.

American Workers and Substitution

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Raven Molloy and others, in a paper for a Brookings conference, show that there has been a largely unexplained decline in the rate of job switching and other measures of what they call labor market fluidity over the past three decades. Pointer from Nick Bunker via Mark Thoma.

My thoughts turn to the four forces, and in particular to globalization and the rise of the Internet. Think of three margins of substitution:

1. Substitute American workers for other American workers.

2. Substitute foreign workers for American workers.

3. Substitute capital equipment (including computers) for American workers.

If the elasticity of substitution has gone up for (2) and (3), might it not follow that we would see less of (1)? In more concrete terms, if a firm wishes to expand, nowadays it can increase production overseas or use more capital equipment, rather than hire more American workers. That would reduce (domestic) labor fluidity.