Comment by ScottBurson | Hacker News Reader

Comment by ScottBurson | Hacker News Reader

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One answer is that the market forces tend to funnel all increases in income to landowners as rent.

I was not familiar with this theory until a few days ago, when someone here on HN linked to an online version (edited and abridged) of Henry George's Progress and Poverty [0]. I've been reading it since; its clarity is stunning: I feel as if a great veil has been lifted from my eyes. Whether I'll still feel that way in a few days, months, or years remains to be seen, but for the moment, Henry George has me eating out of the palm of his hand.

Whatever the general validity of his theory, it certainly seems to explain the SF Bay Area extremely well. Salaries here sound incredible to people outside the area, but then it costs so much more to live here as to deny the wage earner much of the benefit. Broadly, we can break the population into three groups. Renters, obviously, have to pay the market rents, which seem to rise inexorably. Those who bought houses here years ago, before the big increases in property values, and are still living in them, are the ones who can really enjoy the high salaries they can earn here. Those who bought property here more recently, on the other hand, have large mortgages, because someone who previously owned the property made a pile of money when they sold it. In effect, the mortgage is like rent being paid to whichever previous owner or owners saw the property appreciate.

George's theory starts with Ricardo's law of rent [1], which is a truism of classical economics (and another idea I was not aware of until just recently). One could say it takes that law to its logical conclusion.

EDITED to add: while George's theory has not been fully embraced by mainstream economics, it hasn't been completely rejected by any means. Joseph Stiglitz, Herbert Simon, and to some extent Milton Friedman are some of its adherents, and Hayek credits George with awakening his interest in economics. [2]

[0] http://www.henrygeorge.org/pcontents.htm

[1] https://en.wikipedia.org/wiki/Law_of_rent

[2] https://en.wikipedia.org/wiki/Georgism

One answer is that the market forces tend to funnel all increases in income to landowners as rent.

This is partially a result of Americans choosing to consume more housing than citizens of peer nations or, indeed, Americans historically. The size of the average owned American home doubled since 1950. You can save a substantial amount of money if you're willing to live like a 2015 Japanese salaryman or a 1950 American middle class family, but the modal American considers that standard of living "poverty" and is unwilling to accept it.

Another layer is that big houses gate access to good school districts, which is a very, very deep can of worms.

Zoning has a lot to do with home sizes. In general American cities are zoned to not allow smaller units, even for those who might prefer the cheaper rent if given a choice. Japan has much simpler and more flexible zoning laws.

...But Japan doesn’t have the history of racially motivated urban design in general, so the story is a bit complicated.

That, and America has been heavily subsidizing an automobile-based lifestyle for 60–70 years, encouraging people to trade more living space for longer commutes, without facing the full infrastructure costs of the choice.

Japan does have a quite different problem with real estate, however[1].

[1] http://freakonomics.com/2014/02/27/why-are-japanese-homes-di...

Japan has extreme ghettoization of immigrants; most landlords will simply refuse to rent to foreigners.

Sure. I don’t mean that Americans are as a rule more racist than Japanese, or anything like that.

What I mean is, Japan didn’t design its whole large-scale metropolitan plan around racial segregation, the way many places in America did.

This is a nice comparison between Japanese and US zoning laws:

http://urbankchoze.blogspot.de/2014/04/japanese-zoning.html

I think in a lot cases you might have this backwards.

Many new schools, especially in the South, are built in the county or in a more rural part of the town, because property is cheap or donated there.

If the school is a "good" (you can decide on what that means for you) school, then all of a sudden, the property near that school become much more valuable to build home on for parents.

If the value of the property goes up, taxes go up in those new divisions.

Now, you have a situation where THE SCHOOL has driven off poor families and increased its own budget ... just because it was "good" to start off with!

So it isn't always that people are building the "good" schools on already expensive property to cater to the wealthy.

The house/ school district connection is not a small matter: it transforms housing into a positional good, and (under present conditions) a zero-sum game. In many places, it is not possible to exercise a preference for a cheaper, more modest home without also accepting a tradeoff in school quality.

> The house/ school district connection is not a small matter

If you are a parent, it is a BIG deal. Over the past 10 or so years my location movements have had available education in the top three criteria (along with price and crime rate).

Yes, but the effects George describes would operate even in the absence of those forces. They are inherent to urbanization itself.

The focus on rent is a good legacy of George's theory. However, I was quickly disappointed by the book that was linked. George was doing well critiquing previous economic theory that had separate theories of wages, rent, and profit. He showed instead that it must be that production = wages + rent + interest, as a formula that relates them and can be rearranged. Then in the next chapter, 12, he falls into a sort of absurdity about the nature of interest, where he claims interest exists because of natural increase, such as of bees or ageing wine, and wouldn't exist otherwise.

That's not an advanced enough theory of why there's interest on capital and the rate of it. It doesn't even seem quite sane, in comparison with the example of reasoning that he was setting and teaching up to that point. There should be some school of economics that promotes a George-like view of rent, but that isn't embarrassing when it comes to explaining capital and interest.

George is also fairly "antique" as far as macroeconomists go. It's not too much of an exaggeration that anything from before the ~1950's is consider little more than curiosities that illustrate progress of economics thought.

For the most comprehensive book on the subject, see http://www.amazon.com/Modern-Macroeconomics-Origins-Developm...

> Then in the next chapter, 12, he falls into a sort of absurdity about the nature of interest

Yes, I noticed that too. I'm not enough of an economist (obviously) to know what he should have said instead.

It's a weakness, but I don't think it's fatal to his key point, which is that urban land values are socially created and should benefit society as a whole.

Productivity growth is measured in terms of the lowest quality mass produced consumer goods that are still around across the decades, because it's measured along with estimating inflation, which is measured that way. So inflation has been higher than the conventional government provided numbers, and productivity growth lower. You can buy more cheap boxed stuff for an hour's wages, and you can get much more advanced technology and other advances in the quality of products and services. But people can't live on enhanced quality, phones with more features, or increased quantities of the lowest quality of food, when they're trying to live an American lifestyle that takes a car, housing, medical care, education, and so on.

Also consider that the median wage in the U.S. includes the effect of a lot of immigration. Average immigrants make more than they would in their countries of origin, but less than average Americans, while average American born workers have done better than the median statistic. College educated American born workers have done better yet, but a lot of that increase has been paid in the form of mortgages and rent to retirees and the rich, because of urban housing market inflation, as ScottBurson pointed out.

Fortunately, there's an easy workaround for the ever-increasing land rents, which should work even in places like the SF Bay Area: you can just have a group of people pool their resources to pay for a given plot of land, usually in the form of an "apartment building". Unfortunately, those are illegal in almost all of the Bay Area, and in SF itself, even in the few places where you can build a new one, the process takes forever and costs a lot of money. As a result, housing becomes a rare and collectible good, and people have to either crowd into the existing units, pay a lot of money, or have punishingly long commutes.

>apartment buildings are illegal

Well, I guess they don't want tall buildings falling over due to a quake...

This is equally the case in most other US cities, most especially the expensive ones, but even including the likes of Chicago. It's kind of baffling: a four bedroom house with one kitchen and four roommates is perfectly fine per the zoning code, but that same house split into two apartments with two people living in each one would only be allowed in a relatively small fraction of the city (generally a smaller fraction than _actually has_ such buildings, btw). It's almost like the zoning bureaucrats think stoves are some kind of evil that needs to be strictly limited.

They should get Japanese engineers to come in and build the apartment buildings then. Tokyo is still standing.

has nothing to do with that, has everything to do with maintaining the "look and feel" of SF.

I'd be careful to apply what's happening in the bay area globally. It's a bit of a unique set of circumstances. On the east coast, where suburban sprawl is much more common, we don't have the rent issues of SF even in places like the triangle where there's a fair amount of technical development going on.

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