Wednesday, November 4, 2015

Housing, A Series: Part 78 - The Intractability of economic stagnation with a supply constraint

A quick follow up to yesterday's post:

The imposition of a supply constraint really has some awful effects on a country, economically and spiritually.  In general, constraining supply directs social interactions into an angry fight for what's available.  One of the beneficial happenstances of free economies is that the power of emergent production allows us all to have a chance at material improvement that doesn't come at the expense of another.  This goes hand in hand with an underestimated improvement in our general moral postures, I think.  Our circle of empathy has grown along with the sorts of trust and interdependency that come with an emergent, open economic order.  But this is context specific.  And, we can become destructive when abundance doesn't come so easily.

Here is a new paper that says economic dislocation is related to subsequent illiberal public policies. Stagnation can leave cultural scars.

The problem with a housing supply constraint is that this is not an item that is easily substitutable.  If there is a supply constraint on trains, we can just drive more cars.  A supply constraint on fish means we eat more beef. And, not only is it difficult to substitute for housing, but the characteristics of our homes - their size, their locations, the neighbors - are important markers of our identity.  The decision to buy a Toyota instead of a Lexus is much less stressful than the decision to leave our homes because of economic stress.

This is not a nominal constraint.  This is a real constraint.  We cannot grow our way out of this problem.  And, in fact, growth makes the problem worse.

There is a lot of conversation about stagnation and the inability of the US economy to grow without an asset bubble.  The stagnation itself is a problem.  But, the inability to grow without creating a "bubble" is a result of this housing supply problem.  And real wage growth tops out because some growth will natural go to bidding up rents on the stagnant housing stock.

So, we have increasing stress and political divisiveness because of a stagnating economy.  But, if we try to solve this with growth, this will lead to a bidding war on houses in the most sought after and the most productive cities, and the stress on low income households in those cities will increase as a result of growth.  I would expect net domestic migration out of those cities to rise when we have economic expansion.

If we refuse to build homes in those cities, there is no feasible way for middle class households in those cities to experience growth.  It can't be done.  San Francisco hasn't had moderate population growth for nearly 50 years.  Manhattan for a century.  And the same trends have happened in the major cities across the Anglosphere.  This is not a minor policy goof.  This is a deep-rooted problem that appears to be imbedded in modern urban governance.  I don't know how we solve it.

In the meantime, real national income is reduced because we substitute grand tract homes in less valuable open access cities for condos over Manhattan which require much less material investment, we lock productive people out of the most vibrant centers at the frontiers of economic innovations, and we keep padding the pockets of legacy real estate owners.  Meanwhile, these effects lead to popular support for tight monetary policy and confiscatory fiscal policy which can't solve the root cause of the problem and create new distortions - traumatic distortions to the extent that these policy shifts contributed to the Great Recession.

1 comment:

  1. The solution? High-rise condos with balconies facing the ocean. Millions of them.

    Just do not tell those homeowners who live near the beach.