Thursday, December 22, 2016

Housing: Part 197 - It's barriers to trade that are hurting rural workers, not free trade

Tim Duy has recent comments on a popular recent topic - the supposed problem of free trade.
Was this “fair” trade? I think not. Let me suggest this narrative: Sometime during the Clinton Administration, it was decided that an economically strong China was good for both the globe and the U.S. Fair enough. To enable that outcome, U.S. policy deliberately sacrificed manufacturing workers on the theory that a.) the marginal global benefit from the job gain to a Chinese worker exceeded the marginal global cost from a lost US manufacturing job, b.) the U.S. was shifting toward a service sector economy anyway and needed to reposition its workforce accordingly and c.) the transition costs of shifting workers across sectors in the U.S. were minimal.
He concludes that a & b were right, but that c was wrong, and this has had disastrous results.   A couple of other comments from the post:
My take is that “fair trade” as practiced since the late 1990s created another disenfranchised class of citizens. 
The damage done is largely irreversible. In medium-size regions, lower relative housing costs may help attract overflow from the east and west coast urban areas.
Housing costs are an effect, not a cause.  Lower housing costs do not attract overflow.  Lower housing costs are the result of a lack of demand.  But, the thing is housing costs aren't low anywhere.  Rents are high across the board today because we killed the mortgage market and the homebuilding market a decade ago.  They only look low because the coastal urban areas are high.  The reason those areas are high cost is because "fair trade" doesn't include free movement of capital and labor within our own country.

We don't need new federal subsidy programs or job training programs.  We need to let people take the jobs that are already there.  Practically every article on this problem - including Duy's post here - notes the issue of housing affordability.  There would be no great obstacle to the shifting of workers across sectors.  The obstacle is that when they try to make that shift, the gates are closed.  It is expressed through cost, because we still let supply and demand determine the price of housing in the Closed Access cities.  But, at its base, this is a problem of inelastic supply.  The house that worker needs won't get built.  It won't be built because the voters in New York City, Boston, and California make sure it won't get built.

The price, in that context, simply reflects the value that worker is being kept from.  The more opportunities there are in those cities, the higher the price of the housing stock has to be bid to in order to keep those workers out.  The scale of the excess price of a house in coastal California and the northeast is sort of a measure of how much opportunity those workers are getting screwed out of.

Manufacturing employment hasn't been declining any faster than it had for decades before.  Why are things so tense now?  The consensus now seems to be that the housing "bubble" covered up this problem until 2007, and now it has been laid bare.

Actually, the housing "bubble" was just a reflection of the blocked opportunity.  Homes were built outside the Closed Access cities as a second-best alternative.  There was nothing unsustainable about that.  In fact, opening up the Closed Access cities would have provided even more opportunities for growth.  When we killed the housing market, we created a dislocation that continues today.  The stress isn't from a decline in manufacturing.  That's not new.  It's that we have stopped allowing what little bit of that natural transition we were allowing before 2007.  Now, we've got our thumbs down on the whole country, not just the Closed Access cities.

We don't need to fear free trade.  We actually need to try it for a change - in our own country.  California.  New York.  Tear down this wall.


  1. It does not politically resonate so there is basically no hope. But the answer to "free trade" is more "free trade."

    Manufacturing workers of America have experienced the impacts of free trade in what they earn, but not as much in what they spend. We need a manufacturing-style productivity boom in the large, protected, unproductive areas of Real Estate, Healthcare, and Education.

    But convincing people in these industries that they have benefited from protectionism is basically impossible (after all, they view themselves as "educated" unlike mfg workers). And convincing a manufacturing worker that doctors making less money will start to solve his problems is also basically impossible.

    I'm not optimistic. Truth is it's our own fault for letting the problem get this big. The basic trend was obvious 30 years ago. No one cared.

    1. I'm afraid I'm somewhat cynical like you are. It's more satisfying for factions to allow rents to be accrued and then to demand a transfer than it is to create open economies that reduce the rents in the first place. I'm amazed that the economy has remained as functional as it has for as long as it has.

    2. It was exactly that manufacturing productivity boom which allowed for the economy to "function." Now that manufacturing has shrunk, we need a new source of productivity. Problem is the "winners" are typically at the helm of unproductive industries (government, real estate, education, etc) and work to keep protection high.

  2. Great post.

    I would say it is not voters who prevent real estate development, but more accurately, "Property owners with a stake in continued property zoning."

    Some voters who are renters may vote against development as they are weary of congestion. Unable to afford rentals close to work, they endure long commutes. This suggests we need much better infrastructure solutions, most particularly relating to traffic, in our major cities.

    I think there's a solution but it should be universal. There must be a complete ban on property zoning, otherwise any lone neighborhood or city that unzones will be immediately bulldozed over from pressures for development.

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