Sunday, November 12, 2017

Housing: Part 268 - Trickle Down Economics meets Housing Policy

"Trickle down" economics refers to economic policies that are meant to remove obstacles to private capital development.  The story generally told (skeptically) is that if employers pay lower taxes, they will invest more, hiring more workers and raising wages.  This tends to rhetorically frame economic activity in a way that focuses on anecdotal transitional shifts between employers and employees.

As framed, there isn't anything explicitly false about this description, and, as framed, this story is one about which we might be wise to be skeptical.  The devil is in the framing, because:
  • Systematic effects are more important than anecdotal effects.
  • Long-term effects are more important than transitional effects.
  • The relationship between producers and consumers is more important than the relationship between employers and employees.
In each case, "trickle down" rhetoric focuses on the least relevant ways of contextualizing capital-friendly economic policies.

This rhetoric is even used in housing markets.  In a 2015 opinion piece in the San Francisco Examiner, titled "It's still called trickle-down economics, even in San Francisco", then San Francisco Supervisor David Campos wrote:
Free marketeers are claiming that if we build enough luxury housing it will eventually trickle down and turn into housing for the poor and middle class. This is the failed policy of Reaganomics at its worst.
I had referenced the Campos piece before.  I was revisiting it recently, and I had forgotten how obtuse it was.  It is strange that the "trickle down" rhetorical logic is applied here to housing.  First, housing is basically a pure form of capital.  There is no employer/employee relationship.  This is purely a matter of capital deployed for use by consumers.  Where in this story is there anything trickling down?  If 100 new units are allowed to be built, then there are 100 new units available, now.  If those are "luxury" units, they are still units.  It's not like high income households are some sort of alien symbiotes that spontaneously reproduce when a unit is completed to claim the new space.  Somebody, most often somebody already living in the city, will claim the new unit and another unit will become available immediately.  There is no need to wait for some hoped for investment.  The investment itself is the initial action.  There is nothing left to trickle.  In traditional trickle down rhetoric, one might argue that giving tax breaks to developers in the hope that they invest it in new units is futile.  It's the hope for the investment itself that is deemed naïve.  But, here, the investment is the whole point of the thing.

Second, Closed Access housing policies have been in place long enough to see the difference between the long-term effects and transitional effects.  Campos is complaining here about transitions - that new market rate units will just attract wealthy new tenants, leaving working class tenants out in the cold.  Let's forget for a moment the near-sightedness of that contention.  We don't need to logic through the way new supply would help all parts of the local housing market.  We don't need to work through the logic because there are "n minus 5" metropolitan areas in this country who have what Campos would call trickle down housing markets, and all of them have more affordable housing.  In fact, the more "trickle down" they go, the more affordable their housing is.  Working class families aren't lined up in Dallas, hoping for that promised affordable housing which somehow never comes.  It never left.  Don't call it a comeback.  It's been there for years.  Where are working class families waiting for affordable housing to trickle down?  New York City, Boston, LA, and San Francisco, where heroes like David Campos get letters from desperate residents who need someone to fight against the free market ideologues to help secure them some lottery ticket to publicly subsidized housing.  (From the op-ed: "If you're currently seeking housing in our city and can't afford market rates you have three choices: be homeless, leave, or get on a long wait list for low-income housing.")

Third, these policies have also been in place long enough that we can see the systemic effects.  Campos references 2,000 Ellis Act evictions, which arise when landlords sell homes that have tenants in them, usually at controlled rental rates.  Each of those is an anecdote.  But, tens of thousands of households are forced to move away from the San Francisco metro area every year because of the lack of units.  Those are systematic.

Part of the problem is that cities like San Francisco have implemented such extreme levels of capital repression for so long, that their housing markets don't have anything close to market rates.  Even the publicly negotiated "below market" rate units are more expensive to build than units in an actual market would be, but for the capital repression.  And, since this is the case, it seems clear that people like Campos see the housing market in San Francisco as some sort of foreign creature and only the subsidized stock of housing is true San Francisco housing.
When people are evicted from their rent controlled homes we diminish supply. When apartment owners convert units to condos we diminish supply. When homeowners put units on the short term rental market we diminish supply.  
He is making that distinction quite explicitly here.

It is tempting to point out the absurdity here.  I mean, go listen in on any conversation among macro-economists, market forecasters, realtors, Fed officials, developers, investors - basically any group of people engaged in anything but politics.  You will never here a single conversation based on this conceit.  None of those people have ever talked about how rising supply will lead to rising rents.  It is quite the opposite.  In fact, it is part of the problem, because while people like Campos deny a central role for market-developed units in affordability, all of those other people are concerned about stability, and every time new supply in the Closed Access cities gets close to something reasonable, they start worrying about oversupply, and how its going to crater the local real estate market - fearing the ever near bubble/bust dynamic.

But, the problem here is that San Francisco is so far out of sorts that the long-term is far, far away.  It's transition as far as the eye can see.  And, it really would take tens or hundreds of thousands of units to bring costs in market-rate housing down far enough to start to effect supply with costs that are in the range of subsidized affordable housing.  In Campos' world, the real San Francisco really wouldn't benefit from those new units.  It's not that supply isn't the long-term solution.  It's that San Francisco is too far from the end of the tunnel to see the light.

From the piece: "Think about it this way: if there were a bread shortage in San Francisco and the cost of bread skyrocketed, no amount of fancy cake would fix the bread market." and later "If the city needs more affordable housing then let's build affordable housing."  Notice that, here, Campos treats "luxury" housing and "affordable" housing as two different stocks of units, differentiated by some sort of real, material characteristic.

But, this is at odds with his description of the housing market above.  When he describes a unit shifting from subsidized rentals to market condos as a loss of a unit, he implicitly acknowledges that there is nothing special about "luxury" units.  If an "affordable" unit can suddenly become a "luxury" unit simply by moving from apartment to condo, then, surely a "luxury" unit can become an "affordable" unit when supply growth in other parts of the city lowers market rents.

Campos is engaging in some real rhetorical hocus-pocus here.  There is no question that supply and demand work in the San Francisco housing market.  If units rent for $4 per square foot, added supply would bring them down to $3.50 or $3, or whatever.  Campos' position is that if affordable housing is housing that rents for $1 or $2, then reducing rents to $3 per square foot is useless.  That's all happening out in the "luxury" market, which Campos considers irrelevant to the "affordable" market.

He claims that he is fighting "trickle down" or "supply-side" ideology, and that it is he and his allies who actually understand supply and demand.  But, he has rhetorically removed supply and demand from the San Francisco market.  When units are moved from his subsidized programs into markets, he explicitly refers to this as a loss of a unit.  The world of supply and demand has been wholly and explicitly erased from his view.  He goes through the motions of that for us.  You can see him doing it in the piece.

The stock of "affordable" units in San Francisco, which is the only market he acknowledges the relevance of, certainly has nothing to do with supply and demand.  That stock of units is explicitly part of a program that has politically imposed prices in a context of perpetual shortage.

He says, "Let me be clear - not a single affordable housing activist denies the existence of the law of supply and demand."  Really?  His own piece is a systematic contradiction of that statement.  On the other hand, he follows that sentence with, "Where we all agree is that the incredibly complex San Francisco housing crisis won't be solved by the recitation of freshman economics notes." And, on this matter, the rest of the piece is a systematic confirmation of the statement.

Shooting a ball into a basket can be solved by a recitation of freshman physics notes.  However, winning a game of basketball is incredibly complex.  Why?  Because in basketball, one must contend with defense.  Building affordable housing can be solved by a recitation of freshman economics notes.  However, building affordable housing in San Francisco is incredibly complex.  Why?  Because in San Francisco, one must contend with defense.

In historically developed urban centers some defense is inevitable.  There are legacy residents who have certain expectations and demands, and those sorts of demands might be universal - just as complicated if Austin attempts to build a dense residential center for tech workers as it would be in San Francisco.  The international scope of this problem suggests this is the case.  And, surely, in those contexts, nonsense is an important tool for those legacy residents in the quest for stability and exclusion.  So, in a way, this sort of rhetoric is endogenous.  Supply and demand exists for nonsense, too.  But, it must also be true that, on the margin, nonsense might be coaxed into advancing or retreating, and in retreat, might allow for enough progress to pull some cities past a tipping point into functionality.  When it comes to tipping points for the quantity of nonsense, San Francisco is probably nowhere near the margin.  But, cities like Seattle and Washington, DC are.

Seattle and Washington, DC build a lot more housing than San Francisco does, and while supply there has some constraints, housing markets are still functional enough for supply to affect costs in a way that can still be immediately felt in affordable neighborhoods.  Supply and demand is visible in those cities, so that it can't so easily be rhetorically dismissed.  The demand for both housing and nonsense in those cities is strong - in a way, they seem to be complementary goods.  We need to supply the former and not the latter.


  1. My assumption with politicians like David Campos is that they either know better and are lying, or that they are willfully ignorant.

    It is heartening though to see some progressives and Democrats ( move on this issue, I hope that they will soon move some Democrat politicians.

    1. It seems like the issue is getting attention these days.

  2. Amen, brother, amen.

    My only comment is that other cities regarded as conservative, such as Newport Beach, CA, engage in much the same repression of capital markets.

    Also, every closed-access city is ringed by suburbs with similar repressive policies.

  3. People are so fantastically good at seeing what they want to see and bending policy towards their ends by arguing for supposed benefits to the commonweal. There was a post on this topic on just this week where commenters were arguing that the propertied have the right to preserve the value of their assets by restricting new growth, and others brought up building codes and pointed out a highrise in SF that was plagued by construction problems, as if regulation were a one dimensional spectrum. I for one do not think the capital repression in the housing market will end any time soon.