Thursday, July 23, 2015

Recent trends in both capital wealth and income are driven almost entirely by housing (a critique of Piketty)

See Piketty Vs. Rognlie: Land Use Restrictions Inflate Housing Values, Drive Wealth Concentration by Chuck DeVore in Fortune. Excerpts:
"Matthew Rognlie, on the other hand, isn’t buying Piketty’s proposition. An M.I.T. doctoral student in economics, Rognlie contends in his “A note on Piketty and diminishing returns to capital,” published a year ago, that the French economist and academic failed to see that “Recent trends in both capital wealth and income are driven almost entirely by housing…” wryly suggesting Piketty’s famous book should have instead been entitled, “Housing in the Twenty-First Century.”

It’s one thing to claim, as Piketty does in front of a large amen chorus to the left, that the game of economics is rigged for the rich. It’s another thing entirely if Piketty’s thesis is founded, not on the high rate of return for capital, but merely the high rate of return for housing in the developed world.
Piketty’s contention generates a vastly different narrative, with satisfying calls for higher taxes on wealth. Piketty gives “Soak the rich!” a new lease as a rallying cry.

Rognlie’s retort is more problematic. If the accumulation of capital is really about equity in homes, then the “problem” of wealth concentration is not an issue of the “1 percent,” rather, it’s an issue of homeowners vs. renters—a far more problematic proposition for elected officials.

And, why are housing values soaring? Rognlie’s notes two studies, one examining New York City and the other, California. These studies found that in “markets with high housing costs” those “costs are driven in large part by artificial scarcity through land use regulation.”"


"All three of these factors [the significance of a state’s cost of living, the degree of urbanization and land use freedom] reliably predict the number of single family homes and mobile homes in a state, with higher costs and more urbanization predicting fewer houses and mobile homes and more land use freedom equating to more single family homes and mobile homes. It’s all fairly much common sense, but it is nice to see statistical reinforcement that notion."

"...what drives the cost of living, of which the greatest share of differences between the states is due to wide variances in the cost of housing?" "... land use freedom, not the degree of urbanization, can explain most of the variance in the cost of living from state-to-state."

"poverty is far worse than advertised in states with high costs of living, most of which is due to onerous property rights restrictions that make it very difficult to build affordable housing."

"Randal O’Toole, a senior fellow with the Cato Institute, notes that houses in California, a state with the nation’s third-most-restrictive land use policies, after New Jersey and Maryland, has gotten “so expensive that no one can buy anything.”

O’Toole says that the median home value to median family income ratio reached 10 to 1 at the height of the housing boom in 2006 in the greater San Francisco Bay area vs. only 2 to 1 in Houston."

"Returning to Rognlie one last time, an additional major critique he has of Piketty is Piketty’s contention that labor will be easier to replace with capital than has historically been the case. This theory is important to Piketty’s case that people with capital will experience greater benefits than that seen by labor.

Rognlie’s retort to Piketty may operate in truly free markets where labor has mobility to meet demands. But, as is often the case with government meddling in the economy, unintended consequences arise, distorting markets.

For instance, persistently high unemployment and poverty levels in Los Angeles might, in a free market for labor, cause some people to either reduce their wage demands to get a job or move to a location where their labor can command a higher premium. But, in the this age of welfare, housing subsidies and the minimum wage, the unemployed are less likely to move for work. This is compounded by proposal to increase the minimum wage in Los Angeles to $15 an hour, pricing large numbers of marginally-skilled people out of the workforce and simultaneously inviting investment in capital to replace the labor that’s been artificially overpriced by government decree."




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