Why Rent Is So High and Pay So Low
lareviewofbooks.org
lareviewofbooks.org
My theory: the Fed's zero interest rate policy is very good at inflating asset values: S&P500, housing, you name it.
Rising income is a second-order effect: we hope that rising asset values will lead to increased wages. That used to be the case, but no longer is. Why? Because of automation and globalization probably.
So, the Fed has the pedal to the metal for seven whole years and we get mediocre job growth, no real wage growth, but screaming high housing costs and stock market. And who owns the most real-estate and stocks? The wealthy do, which is why inequality is growing.
Even though I'm critiquing the Fed's policy, I don't have the answers and would probably pursue the same policy. It's a real conundrum. Perhaps basic income, or some other "throw money from helicopters" idea is the solution.
The rich are a lot smarter today than when they were the descendants of feudal landlords - 100 years of meritocracy combined with assortative mating makes for a very clever ruling class.
Edit. Spelling.
We're much more on equal footing in terms of ability to gain information. Whether we act on the information is another issue.
What does a family line which has had uninterrupted, exclusive access to a personal library know?
I mean think about it--what is that family like? That family which has held on to the same chunk of physical space, with books and notebooks, for several generations.
"Equal footing in terms of ability to gain information", my ass!
My own toddler gets confused when he tries to describe his home--probably because he's moved three times in as many years.
I remember the encyclopedias I read as a child. But, I don't have them. I can't review them. I can't consult my notes, nor smell them and get connected to the concrete memory of the day I learned about phases of matter or dry cell batteries.
Those things are important. They change the slope of the playing field.
you cut off the the "more" to make it sound like my statement meant we are equal instead of relatively better than we once were in comparison to the upper class.
then proceeded to provide examples of your toddler being able to retain information and yourself retaining information. both are about memory and ability to recall those memories with accuracy.
Oh, in the first post, my examples are about "ability to gain information [learn]" but you were talking about "ability to gain information [access]". Okay, yes the internet and the public library system are truly wonderful. I do presume that the ruling class (and/or the rich) have some information that is not publicly available, and it's probably very important information, but yes, a poor man can walk into a library today and find treasure laying around. That has improved our footing. :)
If you want to be really clever you just give those smart kids who had a bad school environment bonus marks at the university entrance stage and give full scholarships - say just like the elite universities do right now.
I should mention the aim of the rich is not to maximise production, but their share and status. It does not matter if the pie is smaller as long as the size of your slice is larger.
More fundamentally most very smart people realise that they are outliers and that their children are likely to regress to the mean. While the elite welcome the very clever into their club, they also use their power and status to benefit their not so clever children (e.g. legacy students).
As for leaders who the figurehead is does not matter - ask yourself what do the rulers care more about; who is the POTUS or who is the head of the federal reserve.
The ruling class is both much clever than the past and technology and globalization has allowed their cleverness to result in more control.
In regards the level of control I am most impressed at how subtly it is used. To be able to shift the the share of production from 75% masses / 25% rich to 50% masses / 50% rich in 40 years with barely a peep is truly breathtaking. They have even been able to convince a large section of the population that this is all the fault of people with brown skin.
In regards the rulers have a look at their educational background. In the roles that really matter they are all very clever.
1. https://www.staff.ncl.ac.uk/daniel.nettle/britishjournalpsyc...
Is a bit like saying not to study mathematics because you actually need calculus.
I was not suggesting to not study evolutionary biology (we should just call it biology as there is no such thing as non-evolutionary biology), just explaining what is the area you need to study if you want to understand the question being discussed.
https://www.google.co.uk/search?q=population+genetics+bsc
oh no it isn't
As a unit it often is called something else to appeal more to students and is more often mixed in with other biology fields. This is a general trend across biology where areas that were once separate fields have come back together with the rise of molecular biology.
...
As a unit it often is called something else to appeal more to students and is more often mixed in with other biology fields.
Which is it?
The problem with teaching population genetics is not that it is not important or interesting, but that it involves maths. Biology students and maths are a bit like oil and water.
I don't agree that assortive mating could do what you suggest as quickly as you're suggesting -- evolution is slower than that. But I agree with the general idea that meritocracy has caused a brain drain from the lower classes, and also that the ruling class is quite clever.
As far as transferring 50% of the middle class's wealth upward without a peep -- this has primarily been accomplished through the "culture war." People will vote against their economic interests if it means voting in favor of their cultural biases.
People said the same thing about George W. Bush. We have yet to see any evidence for that assertion, both for him and Hilton.
>>There are plenty of dumb rich as even with assortative mating your children will be normally distributed, just from a higher mean.
Quite a bold claim. I'd like to see a citation.
GWB got a SAT mark that implies a IQ over 130. While he certainly liked to play the fool for his audience, I saw no evidence that he was stupid, just totally corrupt.
>Quite a bold claim. I'd like to see a citation.
Any trait that has more than a few hundred genes influencing it will be normally distributed with the mean of the offspring the mean of the parents. The genetic component of intelligence is influenced by a few thousand genes so it is not surprising to find that intelligence is normally distributed with the offspring mean the mean of the parents. This is population genetics 101.
One of the more interesting observations about human intelligence is the variation in high intelligence is almost all genetics while low intelligence has a quite large environmental component [1].
btw, I think you didn't finish editing:
> normally distributed with the mean of the offspring the mean of the parents
> normally distributed with the offspring mean the mean of the parents
What I wrote about the means is correct. Over the population the mean intelligence of the offspring is equal to the mean intelligence of the parents. Of course with individual parents and offspring you can have sets of children where the means are not the same, but averaged over a large group the means are the same.
Huh? He scored 566 on verbal and 640 on math for a total of 1206 points -- around 140 points below his Yale classmates. I'm not sure how this implies an IQ of over 130, unless you believe that Yale is attended by pure geniuses (hint: it isn't).
Furthermore, both SAT and IQ scores are highly correlated with the quality of education one receives. They don't measure innate intelligence.
But if we still care about IQ, then a 2006 study of presidential IQs estimated Bush's IQ to be around 125, the lowest in any president over the past 50 years, and higher than only three other presidents (Grant, Monroe and Harding). You can read about it if you want [1].
1. http://nces.ed.gov/programs/digest/d10/tables/dt10_154.asp
2. http://www.ets.org/Media/Research/pdf/RR-02-04-Dorans.pdf
Edit. This article is rather interesting [3]. I am not sure how much we can draw from SAT marks from along time ago other than GWB was not an idiot nor the smartest person at Yale. No dumb person is going to graduate from Yale even if they are a legacy student.
3. http://www.slate.com/articles/briefing/articles/2000/01/bill...
Secondly, where's your evidence? Your statement seems to be total conjecture.
http://www.economist.com/blogs/economist-explains/2015/03/ec...
http://www.brookings.edu/blogs/ben-bernanke/posts/2015/03/30...
When you have cheap money, more people think marginal investments now make a lot of sense. But if you create too many online dog food companies, eventually most of them have to be shut down.
It would have been better to allow an organic recovery.
And remove the impediments to hiring. We seem to ignore the law of supply and demand in the labor markets and then scratch our heads when there is a lot of unemployment.
What're those?
Government adds a lot of costs and even fixes the price of unskilled labor in the belief that these workers are benefiting.
But if the total cost of labor is higher than employers are able to pay for labor, they won't hire. This is especially true in a downturn.
If we want to assist these workers, it would be far better to help them directly instead of forcing employers to do it. We'd avoid distorting the market place and shutting a certain percentage out of it altogether.
Where housing is scarce prices are determined by availability of credit more than anything else, so "you can" rapidly becomes "you'll have to, otherwise you'll be outbid by somebody who will".
Over the long term it's a shitty, negative-sum game for everyone except the banks.
How about tax and regulatory reform instead of the current corrupt regime of barriers to keep out the innovative and new for the old and established.
There's so much which would help, but completely corrupt status quo serves the powerful at everyone else's loss, things are this way because the powerful want it this way.
How about neither. How about addressing inequality by pumping money where it belongs, down to the poor, lowering taxes on the 99%, raising them on the 1%, and fixing the source of all the actual problems rather than simply treating symptoms? Markets aren't naturally good and crony capitalism isn't either, they both need tamed.
Respect the wisdom of markets. Allow corrections to take place and don't bury malinvestment under the rug only for it rear it's ugly head worse later on by acting as if you have a better intuition on what the price of money should be.
Most people accept the virtue of free markets. Yet many don't see that the actions the Fed has been taking destroys the concept of a market by artificially supplementing supply or demand in an unbounded way based on a perceived sense of greater understanding.
The problem is it's really hard for most of these policy makers to build a platform based on "Let's do nothing and let the markets correct themselves". In such complex domains like an economy the action bias is very real, problematic, and the best thing to eliminate if you want to renormalize markets.
That's what people thought about textiles and apparel. Neither turned out to be true. Textile mills are coming back to the East Coast (http://www.nytimes.com/2015/08/03/business/chinese-textile-m...) and the number of apparel manufacturing jobs in the Los Angeles County has stabilized in the past several years.
Not to mention the fact that continuously proceeding with such bailouts is simply unsustainable. The problem lies in our modern inability to stomach losses and handle austerity. It's something no one rightfully wants, but when market failures or financial crises occur, it's for a reason. You're witnessing a natural repricing mechanism at work and no one is disagreeing a lot of destruction can be a by product. But I don't buy your narrative that unless we saved those industries in the US they would have permanently moved elsewhere.
The economy is like an organism, not a washing-machine. The most optimal repairing mechanism is itself.
organism have finite life, they die. Washing machine can be maintained/repaired indefinitely. Of course cyborg is the best way.
Extending the organism metaphor, forest fires can be a naturally occurring healthy event that promotes renewal. Sometimes, a fire will burn with enough intensity that the forest itself is destroyed. Should we try to prevent all forest fires, the most destructive fires, or let nature take its course?
http://www.independent.co.uk/news/business/news/three-charts...
A quick search shows an unemployment rate that just crossed below 10% in April. From 2000-2008, the unemployment rate ranged 4-5% (with very high unemployment in the 80s and 90s). http://www.tradingeconomics.com/embed/?s=ieuert&v=2015080617...
Also, government debt to GDP rose steadily and is near historic highs, although has recently begun to fall: http://www.tradingeconomics.com/embed/?s=irldebt2gdp&v=20150...
By which measure is Ireland in a better position than 2008?
The economy is a disaster, especially for young people, home repossessions are just getting started by the banks (who were the actual ones bailed out, wrecking the economy by driving government debt through the roof.) The actual situation on the ground is grim, despite what the official figures might tell you.
Source: Irish person who emigrated.
The 2009 "bailouts" of GM and Chrysler involved each company entering bankruptcy, and having the desirable assets of those firms purchased in bankruptcy by new entities in which the US and Canadian governments were (together) major (in GM's case) or minor (in Chrysler's case) investors. So, any sentence that starts with "if we allowed a large automaker to go bankrupt..." that concludes with describing a result that didn't actually occur is demonstrably incorrect.
And you'd free a loot of resources (people, money, etc) to create something that people really want, instead of forcing them to work on stuff the government has to pay people to buy.
Anyway, what is sending companies out of the US is your government fiscal policies. Start paying the stuff you take from there (instead of buying on loans), and those companies will be back.
So the problem is not necessarily one of free markets but alternatively, one of corruption.
Although money should be just an intermediary tool for trade and negotiation, an artificial asset that is neutral, in the short run this intrinsically valueless paper can distort the markets, even if it has predictable value, but only if it is manipulated into being a store of value that has a better risk adjusted return than private market stores of value.
Paper money has no intrinsic value in itself. If the fed keeps it predictably devaluing fast enough, always moving it towards its intrinsic value, it acts as a very useful enabler of trade by creating a unit of measurement for value and medium of exchange.
But unfortunately, for fiat to enable trade, it also has to artificially be made into a store of value. If this paper is made into a store of value that retains value better than private stores of value (such as stocks, bonds, or just stockpiles of stuff), it jams the markets for private stores of value. It turns savers into accumulators of pieces of paper or numbers in accounts instead of being holders of things that are backed by economic activity and wealth creation. It becomes a subsidy from investors, entrepreneur, job creators and workers to holders of pieces of paper. It is the worst kind of subsidy because it blocks wealth and welfare creation.
The only way for central banks to allow private markets to function properly, is to get money out of the way by making sure it always devalues fast enough that it doesn't overly displace private stores of value that are backed by real economic activity.
At microeconomics malinvestiment happens all the time, and you do want it to fail. Otherwise we'd be still sending typewriter created letters though horsemail.
Now, you are proposing that at the macro-level it does not exist? How is it so? Is malinvestiment one of those things that cancel-out at the macro level? If so, that would be huge, it would be the first real (not nominal) value ever to cancel-out at the macro-level. So, I'll have to ask for your references.
At the aggregate level, the alternative to investment is just economic inactivity. At this level, turning investment into fiat means stopping economic value creation and preventing economy value retention.
Unless you really believe that the unemployed would be destroying more than 100% of the value of the investment they need to work, it's an incorrect assumption.
I think the erroneous assumption that Austrians make is that they think investments are not worth it in the private markets if they have negative returns.
That is incorrect, stores of value can be useful as long as they retain part of their value, that is unless their returns are above -100%. You don't throw out a bag of apple because one of them may rot early. Idle fiat has a return of -100% to the aggregate economy over the time that it is made idle. On the aggregate, it's just paper it doesn't actually carry value forward. It is a claim on value created by others who have not promised to create anything. If you had instead invested the money into stock or a bond, something that enables production, even if you would only have generated -50% returns, you would have added much more value to the aggregate than if the savings would have been kept as idle fiat reserves.
It is crucial that fiat does not price good short term investments out of the market every time the risk adjusted market rates go below -2%. -2% can be an artificially high rate that puts the private market in a gridlock.
Negative returns may well be the natural state for stores of value. Before financial systems existed, almost all investments, had negative returns if you didn’t put work and energy into them. The only way you had to store value was to accumulate stuff, buildings or land. All options either had high maintenance costs, were subject to risk of damage from natural causes and theft, were very volatile or required hard labor to get production out of.
Even in societies with good financial systems, getting risk free, hassle free, positive real returns has been difficult for most of history. This probably reflects the laws of thermodynamics that tell us that things tend to decay without work and energy put into them.
The 20th century was probably the most notable exception. Because of unprecedented demographic and technological growth, positive risk free returns were easy to find. This however, may not continue forever, particularly amidst a aging and retiring population.
Money should not be made an artificial government backstop for stores of value as this destroys the total amount of real wealth in the economy and replaces it with pieces of paper or numbers in accounts. The saving vehicle of last resort should be for people to stockpile stuff they will need in the future (which incidentally creates job because this stuff needs to be produced) not accumulation of fiat.
Anyway, that rant makes no sense. You can't just informally move from real and nominal values at will, as you can't claim that in a population, if everybody lose any amount less than 100% of their wealth, everybody would get richer. Or better, well, you can claim it, you just can not make it real.
I am the one being meticulous about the implications of real vs nominal. In particular I am saying that people's saving should be tied to something real by making sure they end up in something backed by real economic activity like stocks, bonds, actual stuff or credible promises of production of actual stuff.
You on the other hand don't seem to see the different implications between fiat stores of value and real value tied to production and production capacity. You have no problem if people's savings end up as purely nominal idle fiat without any real intrinsic value tied to them, if people's savings accumulate as pure government created claims on production from other people who have not promised to fulfill those claims.
Say you had an isolated farming village where people wanted to save to be able to eat in the winter. It is important that farmers invest their profits into additional production to have something to eat in the winter, even if, because of perdition, the stored crops are only worth 90% of the initial investment required to produce them.
Otherwise, if they instead mandate their government to create a currency that keeps 98% if its real value when other forms of savings available don't, most farmers are going to work, trade part of the crop they don't want to eat to diversify their diet and keep their cash profits to be able to buy something to eat in the winter. They will not produce a crop to store for the winter since it would only return -10% and their central banks promised to keep money at -2% real value.
However, now comes winter and all farmers have cash but few have anything to sell because they didn't reinvest their cash in the production of a stored crop for the winter!
It's going to be difficult for the government to control inflation in such conditions because there will be too few goods for the amount of money people will want to spend. If the government manages to control inflation it will be by depressing the nominal value of the crops of the few farmers who did invest and save a crop for the winter. The central bank might do this by giving high enough interests payment on cash to prevent people from wanting to spend it immediately. In any case, people won't eat much during the winter.
This could all have been prevented if the central bank had kept money devaluating sufficiently and farmers would not have kept their savings as cash but would have reinvested them into an extra crop for the winter and have continued to trade during the winter.
What you call allowing "malinvestment", I call allowing sufficient production or production capacity to fill the needs of the future even if the returns are quite negative on this production.
Note that there are parallels with farmers saving for the winter and a baby boom saving in preparation for retiring and stopping to work.
http://www.usgovernmentspending.com/total_spending_chart
That wealth has to come from somewhere.
From the data there, spending as a share of GDP peaked in FY 2009, bottomed in FY 2014, and rose slightly from that trough through FY 2016. Extending it to the projected FY 2020 levels provides a bigger ramp up than recent years, since the 2018-2020 ramp up is the fastest one since the FY 2009 peak.
The only massive ramp up in recent years was the one leading up to the 2009 peak.
Bubbles happen because borrowing money is subsidized. Unemployment is caused when interference with prices prevent supply and demand from equalizing.
Government may waste capital, but I can point to many things that do.
I think you can increase taxes if you free markets enough and the economy could still grow.
You could GIVE everybody the downpayment for their first house and have a healthy housing market as long as you got rid of all the other subsidies and inducements and tax write-offs. Not proposing that, but you get the idea.
The only recent period of a significant runup in government spending (federal or overall) as a percent of GDP was approximately the second term of the most recent Bush Administration, and the only periods with any sustained growth in that measure since the 1970s are about from the middle of the Carter Administration through Reagan's first term and then again both terms of the second Bush Administration (as noted, with a particularly rapid rise in the second term.) Even with the projected increase in the out years, the projected 2020 spending level as a percent GDP isn't that much ahead of 1970.
Land rents ( which are not the same as "rack rent", what you pay the landlord, but can be related by land prices going up speculatively ) drive out wage rises.
Scott Sumner says we should have Nominal GDP Targeting; if Real GDP is < say, 4%, the rest is made up with inflation.
Should we address rent seeking with land taxes and other Georgist policies?
Rising income may be a second-order effect but the low rate at witch it is happening is because the fed is not stimulating enough and constantly missing its inflation target. If it were, employers would be fighting for employees and wages would grow.
It's true that the wealthy own most of the assets that gain value with fed stimulation. However, they can only capture that value if they sell them and spend the money while the feds are stimulating. The total future revenue generation of assets is not greater, only the relative value of selling and spending the money now (which incidentally creates jobs and raises wages). The other thing that becomes highly valued when central banks stimulate is the creation of new assets, another thing that increases employment.
The Fed does not have "the pedal to the medal" for that it would need to promise to allow inflation go higher which it seems mortally afraid of.
More people with money chase a fixed(-ish) number of homes through rent and purchase. Debt is cheap. The result is high prices. Most people in a job can be replaced with a large available pool of others, the result is low wages though lack of negotiating power.
The unanswered question in the article is whether Reagan/Thatcher caused these changes through their policies or simply rode into power on their effects. History is nothing but a long-term record of the effect of demographic change on political will.
We vote and so politicians listen to our desires. Falling house prices would be a boon for renters and first-time buyers (and probably for society at large), but their political clout is less than that of middle-aged, middle-class property owners.
Link baity article with no real "answer". Rents and house prices follow simple supply and demand over long term. Cities are either already saturated or don't allow new constructions limiting the supply however people never stop flocking to them year over year. Even the medium size cities see net inflow of 50K-100K people every year - which means you need that many more new housing units each year. So ultimately only a few % of people gets to live in city and everyone else are forced to suffer commute. This % keeps declining because population total keeps growing and so the rent keeps rising.
Rent control etc can distort the economics for a while but not over long run. They are just "pain killers" when what you need is real medicine. The real medicine is simply policies that diversifies the areas. For example, encourage businesses to move in surrounding towns by offering tax benefits, build solid transportation network, open new public schools, encourage more constructions outside popular area, build communities with attractive facilities, build venues for cultural and sports events outside of cities and so on.
Transportation is a huge factor in available land that is currently dedicated to parking that could be used for housing. Uber and Lyft could change some land use policies but it is going to take a change in policy overall because I believe that it is largely tied to job growth which is essentially desirability. Seattle is expensive to rent or own in and yet Tacoma and Everett seem very affordable by comparison.
I don't even disagree with the sentiment expressed in this article. I just think it was woefully under-researched.
In present day SV (especially SF), most landlords will require tenants spend no more than 30% of their income on rent as part of the application process-- it's a somewhat fixed rule-of-thumb. As rents have risen, a lot of tenants in non-rent-controlled housing have been effectively priced out and displaced elsewhere.
So it's actually not so easy to demonstrate that landlords have been taking a larger fraction of tenant income; one must adjust for the fact that greedy landlords will also drive away poorer tenants. Simpson's Paradox at work.
"If house prices fall, the middle aged and middle class will be in an uproar. [...] Perhaps even more critically, banks need house prices to rise, or at least not collapse."
"More quality housing would increase its stock, and with supply rising to meet demand, prices would fall. This would be great for young renters, bad for middle-aged property owners, bad for banks. Thus it is not likely to happen. Property prices, at an all time high, are not likely to fall, and if they do, expect the government to put a floor under them."
I couldn't agree more. I'm young and capital-poor, so this fact is a huge problem for me. I don't see a solution.
Vote for politicians not obsessed with propping up the business and real-estate portfolios of wealthy middle-aged people? (assuming you can find such politicians)
Some of us might become those politicians. :)
39% of Americans think they are or will one day be among the top 1%: http://www.nytimes.com/2003/01/12/opinion/the-triumph-of-hop...
It seems kind of far-fetched, but in the Netherlands people sued the government for not doing enough about climate change and won, and I think there's a youth group suing the government in the states about climate change too.
Not sure if the demographics work out politically though.
Then, find the best investment for that, whether property or something else.
That's the solution.
> If they wanted to drive down rents, government could fund the construction of public housing, as they did during the Golden Age.
In housing, government is very clearly the problem, not the solution. It's government zoning regulations which keep demand far below supply: if we'd just lift the ridiculous restrictions, supply would rapidly rise to meet demand. Similarly with the rent control: all it does is impose higher rents on newcomers and the young while providing a great entitlement to the middle-aged and aging.
> you and I could quite easily have gone to the ATM, slipped in our card, and been told the money we thought was safe in our accounts was gone.
It's almost like he's never heard of the FDIC.
When money flows through many hands quickly, prosperity is the result.
When money stagnates and accumulates in deep pools, the economy suffers.
Reducing the number of people being employed reduces the speed of money. That's been happening.
Increasing wealth disparity reduces the speed of money. That's been happening.
Government spending increases the speed of money, but money spent on projects that end up with high concentrations of wealth (stadiums, military) are not as useful as projects that enable further speed increases (transportation, infrastructure, sanitation, urban renewal).
When a cash exchange or transfer is made, it is usually for a product, aka GDP. There is no GDP involved with paying rent. A landlord is someone who can sit on his ass and live off of the GDP the tenant generates in the form of "rent" while offering no GDP back to the economy. The landlord is essentially a parasite, offering nothing beneficial to the economy, he simply can suck the life blood out of you through this strange concept of "owning" the habitat in which you live. Life is a bitch, but it is what it is.
In capitalism you can not only own land as an landlord but you can also own labor. Someone who owns the corporation, can sit on the profits, dividends, and growth without producing actual GDP himself. It's very similar to the landlord situation. The owner of the corporation essentially sucks the lifeblood of the work output generated by employees while doing no work himself. Y-Combinator at its very core is a product of this system, hence the possible downvotes.
Capitalism is great, but landlords and freeloaders who get richer and richer without producing any GDP themselves is a huge negative attribute that is intrinsic to capitalism. Ironically, it is the hopeful opportunity of becoming a freeloader that drives the risk-taking entrepreneurial qualities which in turn make capitalism so effective.
EDIT: I should add I appreciate that you took the time to shed some light on what the downvote may have been about.
Real estate, education and medical care are subsidized. When you subsidize something, they cost more and you get more of it. So we constrain residential real estate development by regulation - zoning, permitting.
Energy and housing - increasingly micro controlled to a fine detail, both spiralling ever upwards way in front of inflation.
Healthcare: massively regulated, increased costs.
Hiring people : massively regulated, increased costs (for the buyer) result : less buyers meaning less employment.
The problem is clearly excessive regulation but any problem is immediately met with calls for more regulation.
Until this becomes so incredibly clear that people can no longer deny it - it will just go on and on.
There's no end to articles exploring the various political angles, but what good are those without understanding the underlying economic constraints?
I'd be most interested in sources that use raw data, introduce mathematical models, and take into account measurable factors such as land availability, construction costs, incentives to invest, transportation, and so forth.
[1] www.calculatedriskblog.com
Rent laws are often blamed for the city's problems in the 1970s, but there were plenty of other issues (underinvestment, depopulation, municipal bankruptcy).
He ignores the fact that rent control causes housing not to be built and so raises prices for everyone who doesn't already have a rent controlled apartment.
Reagan was elected in no small part because of the high unemployment + inflation under Carter. If the 70's were so great would Carter have lost to Reagan by 10 points? If Reagan was so terrible would he have been reelected in a landslide in 1984?
Real wages stopped going up in 1972, not the 1980s, and real wage are what matter.
http://www.pewresearch.org/fact-tank/2014/10/09/for-most-wor...
Unemployment also hit some record highs in the 70s:
http://data.bls.gov/timeseries/LNU04000000?years_option=all_...
So, I think to say that it was bad only for rich people is a very unusual... I think it was probably worse for poor people since they don't have safety nets. It was also the beginning of the end for real wages which have never reached their 1972 peak.
Those are some pretty large assumptions to be wrong on, for the rest of the article, so I'm not really sure how to take it...? Maybe the author can clarify for me?
Edit: better source for real wage data, and clarity.
Money is a very useful technology but the 'economy' really encompasses everything, and expecting some interest rate changes to save a sick economy is like a doctor who is only aware of the existence of the cardiovascular system and has one move -- rapid chest thrusts to get more blood pumping.
By harnessing technology we can make our systems much more sophisticated than that.
I really enjoyed this article, however, I think you have glossed over what really led to the 2008 banking crisis. The banks bundled subprime home loans into securities that were then sold off to investors. As I understand it, what actually put the banks at risk was that banks were selling "Credit Default Swaps" (CDSes) on those bundled mortgage assets. These CDSes were essentially unregulated insurance policies that banks sold to insure the bundled mortgages against losses. Since the CDSes were not technically insurance policies (even though they really were) the banks did not have to keep money put away to cover those insurance policy payouts if the mortgage-backed assets went bad. This resulted in the banks selling many more CDSes than they could actually cover. I'm not an economist or banker, but as I understand it, the unregulated CDS market is what really put the banks at risk in 2008. I highly recommend the book The Big Short by Michael Lewis for anyone interested in the 2008 crash.
1) The switch of bargaining power from workers to capital with Thatcher and Regan. I basically agree with him at least in the UK and US. Less so in places like France.
2) High asset prices - largely due to very low interest rates.
3) Rents to wages. Outside of popular cities like London, NY, SF I'm skeptical it's got much worse. I don't have that much data but here's a graph for NZ for the time period and it kind of goes up a bit and down a bit without much of a trend. http://transportblog.co.nz/wp-content/uploads/2014/07/Rodney...
4) Rent to income in NY, SF, London
In the old days where people worked in mostly industry and agriculture it made sense to be where that was happening. Now when a lot of people are information workers it makes sense to go where the smart people are at so everyone piles into the top cities even if it means packing twice as many into an apartment as used to be the case.
So if your rents so high relative to your wages it's probably because you are in a popular location with a restricted supply of property.
Everyone should see one of the few economists that actually does a proper craft: https://www.youtube.com/watch?v=jqzfOQXCwFg
Many of the other "western countries" just copy this trend and get the same, just with a few years between.
I find it weird that most people don't plan for people with 900px or so wide browsers.
When something that's in limited supply gets popular, it also gets expensive. If someone wants to argue that the limited supply is artificial, be my guest, but I have to point out that it's a lot easier and cheaper to build more humans (or move more humans in) than it is to build more housing for them -- after some inflection point demand will always outstrip supply.
So we build Manhattan straight up, to the limits of engineering, and can now fit 8 million people (~5x more than today). Great, what happens to the next million people? They get priced out! It will always happen!
It didn't have a huge downward impact on real estate prices.
In general terms, the world of one of everything for each one is ending, all the uber-like business models that are popping around prove it feasible and profitable.
Kinda depressing where there is a glaring math error in the 2nd sentence.
Edit: Well I suppose the NY median wage could have been higher than the US median wage that he quotes, but who knows? He doesn't even say.
Anyone know the how of it? Rising rent compared to wage would normally lead to increased building, so this must be prevented somehow.
Here is just one example...
http://www.bizjournals.com/sanfrancisco/blog/real-estate/201...
The TL;DR of this article is that a large new apartment block in SF is being held up by a construction union because the developer is refusing to hire union labor for every contractor role in the project.
Maybe we should reduce the red tape around building new structures and see how far that gets us before plowing more money into public housing and other government interventions.
If you have the capital, you can build whatever you want as long as you don't physically endanger other people (building meets earthquake and fire codes, etc.)
Personally, I don't want to spend more than 20% of my net income on rent + utilities. That way, I can save 50% and use the remaining 30% for food and entertainment.
I am currently at 16% in Seattle and I leave in a very good apartment, but I got lucky.
- A constant influx of people into the cities especially as inner city new york had a bad reputation
- Apartments get bigger. Even if you rent a small one others are causing high rents through making space more scarce
The problem, ultimately, I think is trade agreements.
I came across this comic [1] recently that resonated with me. Trade agreements aren't about trade anymore. Tariffs and protection are at all time lows. Really they're about the free movement of capital.
The English-speaking world and much of the rest of the developed world has embraced the idea that real estate is a speculative investment. This includes allowing foreign capital to flow in and buy up property.
A lot of Manhattan condos are bought by the wealthy, many of them foreign, who don't live here at all (ie it's just a means of parking money) or they visit a few times a year.
The NYT has done a piece on this [2]. Luckily, much of Manhattan is still co-ops. For those of you unfamiliar with the history of this, NYC imposed rent control on property owners in the post-war era (up until 1973). Coops were a reform to allow building owners to divest themselves of apartments being rented below cost after the massive inflation of the 1970s.
Rent control tenants were offered their apartment at a discounted rate. They became owners and the owners divested themselves of the loss-making asset. Win-win.
Co-op residents technically own shares in a corporation. That corporation owns the building. Your shares give you the right to inhabit a certain apartment. You must however abide by the co-op rules. Some are lenient, some very strict. Co-ops can dictate a lot of things like:
- Whether or not you can use the apartment as a pied-a-terre;
- Whether or not and how much you can sublet your apartment (some note at all, some very lenient, lots in between);
- How much financing is allowed. Many require a 20-25% downpayments and significant post-close liquidity. The more aristocratic buildings don't allow financing at all.
And so on.
The net effect though is that most co-ops tend to be fully or near-fully occupied, at least until you get to the very high end. This is actually good for the building and (IMHO) the city.
Without this NYC would be doomed to become a desert of unoccupied condos.
There are problems. Property tax is grossly unfair as the system is decided by the state government in Albany and they have heavily skewed it in favour of SFHs (single family homes). Plus for incumbent owners there are Prop 13 like caps on rate increases.
Also within apartment buildings there are problems. A $100m condo pays $18k/month in property tax. A $3m condo pays $3k. How does that make sense? It probably dates back to Bloomberg's idea that attracting billionaires who never live here is somehow good for the city.
At the same time as all this you need property investment to some degree as that's what provides the rental market. So you can't eliminate it entirely. But this is what I think you need:
1. A higher bracket of capital gains tax paid by non-residents of wherever the property is. This should include any residential property held through corporations or trusts.
Now you have to be careful with this because there's also the flipper market. These are people who buy distressed properties, fix them up and sell them. I actually believe these people are providing a useful service in rehabing neighbourhoods.
2. Property taxes that are in line with market values that don't discriminate on property type;
3. Higher property taxes for non-residents (and trusts and corporations);
4. No property transfer taxes like NYC's "mansion" tax.
Lastly, I don't have a huge amount of sympathy for the argument that people in entry-level jobs should be able to, say, afford to live in Manhattan. Why? Why is living anywhere a right? You hear the same thing about San Francisco.
At least in NYC there are options if you're on a lower income (Queens, NJ, NY, many of which have good transport options). Whatever problems there are in NYC the Bay Area is a mess an order of magnitude worse.
Vouncouver is another place that's had property driven up to sky-high levels. In that case it's because of rich Chinese seeking a safe harbour for their money and/or (ab)using the invest-to-immigrate program in Canada (how is buying an expensive house investing in Canada exactly?).
Freedom of capital is a problem. It allows companies to avoid paying taxes with transfer pricing. It allows voters to vote themselves huge benefits from the government treasury and then abandon the city, state or country when that debt collapses on itself.
[1]: http://economixcomix.com/home/tpp/
[2]: http://www.nytimes.com/2015/01/11/realestate/new-york-citys-...
When I was in London, I couldn't get a beer for less than a fiver
What I find frustrating is that people write and publish articles without consulting the experts like Glaeser or consulting any economist for that matter.
Prices rise because of scarcity. The high cost of housing is from inflated land costs through politically induced scarcity which is done through zoning density restrictions and overuse of historic landmark status. It is really that simple, yet many writers don't seem to understand that concept.
https://docs.google.com/spreadsheets/u/1/d/18UwaThgGikSXzinn...
You can see based on that the average is around $45~50k CAD (if the salary field is blank assume $50k or less as these are less well known, smaller companies with tighter budgets)
rent for studio or 1 bedroom apartment in downtown area where lot of jobs are located is around $1300/month (nvm, it appears to have gone up in the past 3 years, $1700/month according to another users comment).
The thing to note is that many of those houses selling for ~$300k are very small (< 1000sqft). So the average housing cost for a family of 3 is probably much higher.
1. http://www.movingtoportland.net/wp-content/uploads/AverageMe...
1. https://www.rentjungle.com/average-rent-in-vancouver-bc-rent...
2. https://www.rentjungle.com/average-rent-in-portland-or-rent-...
As a result, the price-to-rent ratio has been unreasonable in a similar way to Amazon's stock price.
http://www.theglobeandmail.com/report-on-business/economy/ho...
Developers can do decently well in Vancouver, especially if you are employed by a foreign company. I am not sure about typical salary for developers, but I'm doing okay.
So, compared to San Francisco, for a good developer, Vancouver is slightly better. However, for everyone else in Vancouver, it's a disaster, since the median income is much lower. This is why Vancouver is actually less affordable than San Francisco, for the general population.
http://globalnews.ca/news/1098143/vancouvers-housing-prices-...
I could argue it anecdotally (I live in BC), but here are cold hard numbers instead:
> The median household income across New York City stands at $50,711[1]
> One bedroom apartments in New York rent for $3039 a month on average and two bedroom apartment rents average $3805.[2]
Compare:
> Vancouver Median household income of $73,390 [3] (~$55,877 USD)
> Vancouver, Average 1 bedroom rental $1561, 2 bedroom: $1972 [4]
1 http://project.wnyc.org/median-income-nabes/
2 https://www.rentjungle.com/average-rent-in-new-york-rent-tre...
3 http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/f...
4 http://www.cmhc-schl.gc.ca/odpub/esub/64467/64467_2014_A01.p..., see Figure 7
I would kill for that, just moved into a studio in SF for 2300 plus utilities. A studio.
I'm saying this not to troll (I wouldn't move here today!), but to point out that until people come to their senses and say enough is enough, this insanity won't end.
Rent in NYC is high because people are paying it.
Your pay is low because you decided it is. Lots of CEOs think their pay is low too as they drive a new Lexus off the dealership lot.
Life is shit, eat Arby's. Am I following along?
The decline in wages has nothing to do with him, it has everything with productivity gains through technology and by loss of bargaining power through illegal immigration and by "free" trade agreements like NAFTA - passed by Clinton - which were pure crony capitalism purposely designed to chop the legs out from underneath the American worker. This, combined with out of control government spending - which funnels money printed out of thin air through Wall Street is what caused the conditions described.
I would assume that the populace movement that is gaining steam with sanders and warren will start to expand if the inequality continues.
"The union corruption seems never ending." I agree. Unions are corrupt too much of the time. (Any is too much...)
"Labor has been on the decline for years... The ignorance in the general populace allows this to happen, as people will vote against their own best interests." I presume that this is supposed to mean that labor is in the best interest of people.
So it looks like you said that unions are corrupt, and that labor unions are in the best interest of people. Hence my question.