Links

I don't have much to say or add.  This is a great summary of policy recommendations for the California housing market.  Title: "25 Solutions From A Builder’s Perspective To Fix The California Housing Crisis"



Also, here is an excerpt from a recent EconTalk podcast with Brink Lindsey and Steven Teles.  It is on the topic of occupational licensing.  I generally find that it is hard to exaggerate how much the defense of licensing depends on assumptions that vastly overstate the utility of licensing and understate the amount of coordination and safety we take for granted in ways that have nothing to do with licensing. Lindsey makes a great point regarding that.

Brink Lindsey: Sure. Yeah, you're absolutely right that--licensing doesn't do its work by insuring that incredibly complicated tasks are performed by highly trained people. So, you use the example, 'Of course, we don't want somebody walking off the street doing heart surgery.' But the fact is, that there is no licensing of heart surgeons. There's only licensing of general practitioners. If you complete a U.S. residency in anything, and pass a state medical exam, you are a doctor--licensed to practice medicine. So, if you complete a residency in podiatry and pass a state licensing exam, you are legally entitled to do heart transplants or brain surgery or anything you can convince anybody to let you do. But, of course, that's not going to happen, because no practice will hire you; no hospital will give you admitting or surgical privileges. Simple commercial incentives backstopped by concerns about malpractice liability will suffice to ensure that highly complicated tasks are performed by highly trained people. What licensing does is ensure that tasks that don't require all that extensive training are still performed by highly trained people. And they have a captive audience and they can overcharge for it. So, there's just no problem with, you know, wildcat brain surgery. But, there's a lot of problem with people having to pay too much to get a finger splinted, or to check out for an ear infection, or to do lots of other humdrum things that mid-level professionals like nurse practitioners could perform fine but that in most states are not allowed to do so because of the licensing regime.

Housing: Part 276 - No, the Contagion cities aren't in better shape today.

Bill McBride, at Calculated Risk, has a post up about economic growth in the bubble cities (HT: Daniel Miller).  McBride points out that unemployment rates are low in cities like Riverside, CA.  And, since their economies are less dependent on construction and building now, their recovery is on more solid ground.

I think this is a good example - one of many - of how the notion that the bubble was the anomaly and the bust was a return to normalcy, shades one's viewpoint about what is happening in the economy in general in a way that diverts focus from important issues.

Now, first, I would say that the ideal world would be one where Los Angeles and San Francisco were growing instead of Riverside and Phoenix.  Really, what we have here (and I say this as a happy resident of the Phoenix area) are cities that are inferior substitutions for cities where residents would rather live.  The growth of Phoenix and Riverside is largely the product of a post-industrial refugee crisis, as financially constrained households are forced out of cities with limited housing options.

But, given the world we have, cities like Phoenix and Riverside should absolutely be growing, and it would be appropriate, right, and healthy for their economic growth to be dependent on construction.  In truth, even without the Closed Access refugee problem, Phoenix would likely have strong migration in-flows from the Midwest and the North.  But, certainly, in an economy with an unencumbered financial sector and coastal housing shortages, these cities today would be growing at their practical limits.

This is where unemployment rates can be a bit misleading.  In cities where economic expansion is manifest in migration, it is primarily migration shifts that adjust to changing conditions.  This is why the recession beginning in December 2007 is dated so long after the Federal Reserve had initiated policies that were too contractionary.  Employment growth had started to turn south at the end of 2006, but this didn't lead to much of a rise in unemployment rates, because at the time, hundreds of thousands of households were flooding out of Closed Access cities to escape their rising costs.  So, the first thing that happened was that the migration flows abruptly stopped in 2007.

It was only after this first adjustment in migration patterns that unemployment started to rise.  Here is a graph of LA & Phoenix employment (indexed for comparison) and the unemployment rate.


Source

In the 2001 recession, when employment growth stalled, the unemployment rate rose in both cities.  But, notice what happened in 2006.  There was a downtrend in employment growth in both cities, and that continued until 2008, when employment dropped disastrously in both cities.  (As an aside, this chart is one of many that makes me shake my head at the pressure the Fed was taking in September 2008 not to stabilize the economy.  For Goodness' sake.)  Notice two other things, too:

1) Employment levels held on longer in LA than in Phoenix.  Phoenix employment really started to fall at the end of 2007, after the subprime market crashed.  LA held on until the September 2008 debacle.  Previously, about 2% of Los Angeles' population had been moving away each year, many of them to Phoenix, but this mostly stopped by 2008.

2) In August 2006, the unemployment rate in Phoenix was 3.6%.  In LA it was 4.4%.  A year later, in Phoenix it was down to 3.1% and in LA it was up to 4.8%.  We can see the effect of the whipsaw in migration in the unemployment rates.

By many measures, one could reasonably argue that a weak recession had begun by the middle of 2006.

Now, back to Bill McBride's comments, we can see the damage that the housing bust did to the Contagion cities more clearly in population and income levels than in the unemployment rate.  And, the economy since 2005 has not been kind to them.

Source

Here is a graph of personal income per capita (indexed to 2005 at the peak of the housing boom).  Before the Great Recession, incomes across cities of all types correlated reasonably well with one another.  But, when the housing bust hit, and was enforced, the damage was targeted at the cities which had previously been both aspirational destinations for Americans from the interior, and a release valve for Closed Access refugees.

LA is in black.  The Contagion cities are in orange tones.  Other cities are in blue tones.  The damage has especially hit the Contagion cities.

Source

We can see the effect in population growth, too.  Here is a similar graph, showing the Civilian Labor Force for each MSA (indexed to the end of 2007, when the housing bust and the recession had eliminated net in-migration).  The Contagion cities were fast growers during and well before the housing boom.  In fact, in spite of the errant claims that they had overbuilt during the boom, their growth rates didn't change that much during that period.

But, they changed drastically with the bust.  (Much of the deviation after the bust, in the graph, is from 2010 Census revisions, but we can see that the trends across all cities were fairly flat.  Only recently have labor force growth rates picked up somewhat in those cities.

What would be great would be if LA managed to grow again.  But, lacking that, healing will come with growth in the Contagion cities.  And, the causation isn't that we need to build homes to boost spending.  (Well, first and foremost, we need to build homes because they provide shelter and access to urban amenities!)  The causation is that a functional, healed economy will manifest itself in a return to old patterns - migration, homeownership, incomes that moderate between various cities.

But, for now - no.  These cities aren't in better shape today.

Housing: Part 275 - Closed Access Watch: Denver

Cities like Denver, Seattle, and Washington, DC are sort of cities on the fence.  They generally can build more houses than the Closed Access cities, so that they don't tend to have such strong out-migration of working class households.  But, they also dabble in their share of odd housing policy choices.

Denver was the topic of this recent article in the Wall Street Journal.

The title is: "Denver Has a Plan for Its Many Luxury Apartments: Housing Subsidies", and it opens: "Denver has a plan for its glut of sparkling new, high-end rental apartments with amenities like gyms, roof decks and sometimes even pet spas: It will use them to house teachers, medical technicians and others who can’t afford the city’s soaring rents."

How do we have a glut of units and soaring rents at the same time?  How is this article a thing at all?  The story should stop here.  "Hey! Great news! Denver built a bunch of housing units, and now rents aren't high any more."  One way to make sure added supply doesn't create affordable rents would be to throw a bunch of subsidies at the demand for the market, so if there is a need for a story here, it seems like it would be to explain that this is a bad idea.  This seems like a classic Baptist & Bootlegger setup, where subsidies for working class households are used to mask payoffs to politically connected business interests.

The plan depends a lot on the notion that there is a luxury market, which has been overbuilt and currently has vacancies, even though rents are out of reach for typical buyers, and an affordable market which has seen little building so that there is a shortage of supply.

Within a city, there are countless processes which create substitutions between those markets.  The conceit that somehow they are separate enough to treat them this way is wrong.  Households in Denver spend about 30% of their incomes on rent, give or take.  It doesn't really matter whether there is 4,000 sq. ft. of housing in Denver for each household, or 500 sq. ft.  It doesn't matter if they have dirt floors or granite countertops.  Whatever the stock of housing is, residents of Denver will settle on using that stock, and they will spend about 30% of their incomes to do it.  The idea that there are units that will have to sit empty in the midst of a housing shortage because they aren't built for the right sub-market is ludicrous.  Making that match is what markets do.  If they aren't doing that, then we need to find what is blocking markets from working, not start building a bunch of makeshift, distortive taxpayer-funded subsidies.

The unasked question here is, why are there too many luxury units and not enough affordable units being built.  It really is depressing to see how universally satisfying it seems to be to chalk this up to developers' stupidity or greed.  Oddly, 12 years ago developers were building too many affordable houses because of their stupidity and greed!  Developers' stupidity and greed really is the most powerful force in the universe.  It can explain everything, all the time.

According to the article, "Residents in this city of roughly 693,000 will receive subsidies to live in the units for two years, during which time a portion of their rent will be put into a savings account that can be used for a down payment."

Now, Denver has become a bit expensive, because rent inflation has been persistently high there.  It's not fully a "Closed Access" city, but it's working on admission to the club.  But, even in Denver, you can find properties like this: a 1,600 sq. ft. townhome, which, as of today, is valued at just under 300,000.  Zillow estimates rent at $1,850/month, and monthly mortgage expenses of $934.  These households don't need a subsidy.  They could lower their monthly expenses today by buying a home like this.

Why don't they?  Because it's basically illegal to lend to them.  So, the city decides to concoct this scheme of subsidies to do publically what we have deemed unacceptable to do privately.  Doesn't it just sound so precious and good, though, when we reframe it as a public program that subsidizes a down payment for a teacher or a nurse.  So much more morally uplifting than giving an auto mechanic a subprime mortgage with a 3% down payment to move into that townhome.  Never mind that the math is basically the same.  (Actually, the townhome buyer gets to pocket the rent payments, while the subsidized teacher sends the rent payment to the developer as long as he is technically a renter.)  Private lending is the devil's work.

In the meantime, the fact that a 1,600 sq. ft. townhome costs nearly $300,000, and that many more expensive homes can be found throughout Denver is all the evidence we need to call foul on the notion that there is any sort of supply glut of housing in Denver.  Realistically, Denver would need to build until there was significant rent deflation to get anywhere near something they could claim was a glut.  That is basically their choice - keep letting these incongruities build up until they are fully Closed Access, and tens of thousands of working class households have to pack up and move each year so that Denver can become another mega-sized gated community for the winners in the post-industrial, Closed Access economy.  Or, build until rent inflation reverses.

There aren't any other options, even if we want there to be.  The default outcome here is to pretend there are other options, which really just means you will be a Closed Access city.  As far as I know, this is the primary path for becoming a Closed Access city.  I am not aware of any metropolitan policy statements from 20 years ago laying out how any city intended to create outrageously high real estate prices and an American refugee crisis so that local real estate owners could capture the productive surplus of the post-industrial economy.  This means that there is plausible deniability and when Closed Access overtakes a city, the complexity of the problem allows everyone to blame their favorite scapegoats - housing programs, developers, lenders, the Fed, the GSEs, "the rich", monopoly corporations, etc., etc.

PS: Here is a measure of unsold inventory in Denver, from Zillow.

Housing: Part 274 - Wow! Scott Wiener swings for the fences.

California State Senator, Scott Wiener, has introduced legislation that would be revolutionary.  I agree with "Market Urbanism" that this would immediately transform the California housing industry, to the extent that building is not obstructed in other ways, which it certainly will be if passed.  But, momentum is turning into a hopeful direction.  And, the focus on density around transit means that this bill is an aggressive way to push housing expansion in a way that weakens arguments claiming building will increase traffic, will only be for rich newcomers, and will increase rents on other local units.

In short:

These three bills (1) mandate denser and taller zoning near transit; (2) create a more data-driven and less political Regional Housing Needs Assessment process (RHNA provides local communities with numerical housing goals) and require communities to address past RHNA shortfalls; and (3) make it easier to build farmworker housing while maintaining strong worker protections.

If enough momentum can ever build in housing supply so that rents moderate or fall, and the perverse migration pattern pushing working class households away from economically strong cities can reverse, it will be interesting to see how the debate evolves.

Housing: Part 273 - Rental income in a repressed regime

Reader Ben Cole pointed me to this article on rising housing costs.  In general, I thought it was a decent article.  It avoided some of the worst problems I see in housing reporting.  But, I think it might make for a useful template from which to look at some basic reminders about housing income and costs.

The article includes this graph:


The measure the author uses does appear to include both owner-occupied rent and tenant rent to individual owners.  This does represent almost all rental income, because housing is a very unconcentrated sector, and most properties are held by individuals.

But we have to be careful about these measures, because housing is a real asset, but the BEA measures income in nominal terms.

Ownership is divided between residual owners (equity holders) and fixed income owners (creditors).  I can use BEA data to estimate the incomes of owners and creditors for both owned and rented properties.  Here is the data for "Net Operating Surplus", which is net income before interest payments:

Rent has generally been rising as a portion of domestic income.  Before the 1990s, this was largely due to increasing consumption of real housing.  Since the 1990s, rising, and even level, rental income is due to rent inflation in cities with constraints on housing expansion.

Next, I further disaggregate this between creditors and equity-holders.  The equity lines (the dark lines) should roughly add up to the graph that I copied from the article.  These measures of rental income to owners are much less stationary than the net operating surplus measure I used to show total net rental income above, but we can see that most of that movement is due to shifting shares of income between owners and creditors.  It has little to do with net operating surplus.

A major cause of this shift is the problem that interest payments include an inflation premium while rental income is in real terms. (Owners gain their inflation premium through the nominal rising value of the property over time.)  So, these measures are really pretty useless.

Next, I have estimated the real interest payment, and added the inflation portion of the interest payment back to the owner, since that portion of the payment really is a purchase of equity, if we think about it in real terms.  (A level nominal value of the outstanding mortgage is actually a declining real value because of inflation.)  I have simply subtracted annual CPI inflation from the effective interest rate, so this measure is a bit messy, but it's close enough.

Here, we can see that the author is on to something, even though she has arrived there accidentally.  Owners really are pocketing a rising income.  This rising income comes from two sources: (1) rising net operating surplus from rising rents, and (2) declining real mortgage rates, and the larger factor is declining mortgage rates.

This points to one of the misconceptions about housing that comes from paradigms that pin Wall Street as the boogeyman of the crisis.  Incomes to financial intermediaries and creditors have been cut very low.  The reason is that lending markets are generally competitive.  Returns get bid down to the competitive level, and since the crisis has led many investors to seek safe income, there are many competitors for lending.  Homeowners, on the other hand, are protected by (1) political limits to new housing in Closed Access cities, and (2) political limits to lending that limit access to new ownership in other cities since the crisis.  Both of these limitations to competition increase their profits, but they have different effects on price.  The first limit increases rental income with a stable yield on investment, so property values increase.  The second limit increases rental income by increasing the yield on investment, so it operates by increasing rent and decreasing price.  This means that it is good for homeowners in general, but very bad for existing owners who need to sell and very good for existing potential buyers who can still buy in spite of the government's attempts at thwarting mortgage lending.

Since investors tend to be much less leveraged than owner-occupiers, they have not benefitted as much from low interest rates.

Using Federal Reserve measures of mortgages outstanding and real estate market values, we can estimate yields for homeowners and lenders, based on current home prices.

These yields tend to run together over the long term.  The deviations in the 1970s are due to inflation shocks, which caused mortgages outstanding to be repaid with inflated dollars, decreasing the real yields to lenders.  Then, when inflation was pushed back down in the 1980s, that led to higher yields for lenders, since the dollars they were paid back with were worth more than they had been expected to be.  But, the ability of homeowners to refinance limited the upside to lenders.  The recent deviation isn't from an inflation shock.  It is from the two sources of obstruction - obstructed building and obstructed lending - which push owner yields up and lender yields down.


Here is a section from the article:

In the aftermath of the downturn, home values nose-dived, distressed properties were plentiful, and interest rates were at all-time lows. In conditions like those, owners hold all the cards - even when they’re also the tenants.
That’s well and good for Americans who are already homeowners, but the flip side is that many renters have been stuck. Many have been unable to transition into homeownership, whether because of stricter underwriting and regulations — or because of what Khater calls “economic” reasons like unemployment or stagnant wages. And as home prices started to rebound, ownership became out of reach.
“The decline in homeownership and rapidly rising home prices are a driver of inequality,” Khater said in an interview. “As a lower proportion of Americans own a home and that’s the biggest portion of wealth, that drives a wedge between the haves and have-nots. Homeownership is a great way for the middle class to achieve wealth and those opportunities are declining.”
Khater has advocated developing housing policy to address supply — more options that are more affordable for ordinary Americans — rather than demand, with more attractive financing deals. For owners and renters alike, he said, shelter is the biggest expense. If policymakers addressed out-of-control housing costs, that would be “a great way to enhance living standards,” Khater said.

The "That's well and good for Americans who are already homeowners" line is sort of an echo to my analysis above, but the author seems to ignore the huge capital losses that were taken by homeowners.  This is a strange conclusion to come to when describing the aftermath of a foreclosure crisis.  But, confusion about these matters is not unusual.  It partly comes from confusion about housing as an investment vs. as consumption.  The author is describing a situation where an owner-occupier who owned a $200,000 house that had annual net rental income of $10,000 now owns a home worth, say, $175,000, with net rental income of $12,000, in real terms.  I don't think homeowners are out celebrating their windfall rental income profits as a result of this.

On the other hand, if they are wealthy enough to be considered worthy by the CFPB, and they managed to refinance their mortgage from 6% to 4% in the meantime, then they probably are quite happy about that.  But, that added cash flow didn't come from their market power over their renter (themselves), but from their market power over "Wall Street", who are competing over who can lend to the limited number of borrowers the government has deemed acceptable.

This is yet another way that the "they bailed out Wall Street instead of bailing out families" rhetoric is not useful.  It's not even wrong.  It's like watching a TV channel that has a scrambled signal.  It comes from seeing information in a way that renders it incapable of conveying a coherent story.  In the section from the article above, the quoted economist joins the conventional view that loosened lending standards can't be a part of the solution.  At least the quoted economist recognizes the supply problem.

Housing: Part 272 - California makes housing legal, LA urgently moves to correct.

California passed a law streamlining the process for getting approval to build backyard units ("accessory dwelling units" or ADUs).  Since California cities have been engaged in intensive housing deprivation for years, any freedom to build housing will attract many willing builders.  In this case, the new law has led to thousands of new small rental units.

In response, LA has introduced an ordinance to limit their use, including cutting the maximum size from 1200 square feet to 640 square feet.

The last section of the ordinance, titled, "Urgency Clause" begins:

The City finds and declares that this ordinance is required for the immediate protection of the public peace, health, and safety for the following reasons: The City is currently in the midst of a housing crisis, with the supply of affordable options unable to support the demand for housing in the City. The US Census reports that vacancy rates for housing in the Los Angeles area are currently the lowest of any major city. A housing option that is currently available and affordable for many in the City is Accessory Dwelling Units.

The next paragraph begins:

While Accessory Dwelling Units are assets in mitigating the housing crisis, Los Angeles is a very unique city....

And the rest of the "Urgency Clause" is a list of reasons why LA needs to limit ADUs.

And the tenants' unions will keep complaining that obstructive zoning is necessary because developers only build luxury units.

Closed Access and Public Sentiment - Taxes

I have been meaning to do a broader post on corporate taxes, incomes, etc., regarding the way that corporate taxes are being treated as if they are simply pocketed by shareholders.  This clearly cannot be the case in the long run in an open economy.  But today, I just want to make one brief observation.

I am wrong about that in a Closed Access economy.  And, this is one of many reasons why Closed Access is so damaging.

Here is a tweet from Kim-Mai Cutler, who does some great work on housing issues in California:

Yep, let's make it even more profitable to operate real estate passthroughs while cutting affordable housing production during a housing crisis across most major American cities. (Exacerbating the status quo since the 1980s™.) https://t.co/gxY9ZwfdxW

— Kim-Mai Cutler (@kimmaicutler) December 19, 2017

My first instinct is to naysay this tweet.  But, that's because my instinct is an Open Access instinct.  For classical economic models to work, we have to live in a sufficiently open system.  In Phoenix, making real estate passthroughs more profitable would be an affordable housing policy, because it would induce new investment into rental properties, it would make the pre-tax return required by real estate investments lower, and it would lower the rent on properties of a given cost.

We can argue how many subsidies vs. taxes we should apply to real estate.  Maybe we don't want to subsidize real estate.  That would be fine.  But, we should be able to agree that, in terms of rent - which is the important factor for actual housing affordability - subsidies to real estate investors will make the existing housing stock more affordable and will increase supply.

But, this doesn't happen in Closed Access cities.  There is a political limit to supply in those cities.  So, if tax policy shifts to give landlords more profit, they do pocket the profit.  It doesn't matter if new capital would be drawn to real estate in a Closed Access city.  Supply does not reflect economic costs and benefits.

To the extent that this benefits landlords while pulling back on mortgage interest deductions reduces benefits to homeowners, this set of policies probably does level the playing field a little more compared to how it has been in Closed Access cities, so that owner-occupiers with access to credit may be less likely to outbid landlords on existing units.

In general, Closed Access markets aren't governed by supply and demand, though.  They are governed by the battle over economic rents that are the result of political exclusion.  So, on new units, if the basic building cost would be $200,000 per unit, and they sell for $600,000 per unit, the difference will inevitably be claimed by various interest groups.  Mostly, the difference will be claimed through various impositions, fees, and taxes, that are negotiated between local governments and the builders.

So, policies like tax subsidies don't affect supply.  Instead, they affect prices - how far prices are above the natural market cost that would arise in a market that allowed new supply.  And, to a certain extent, they reflect a battle between various levels of government about who gets to claim the economic rents from exclusion.

Now, workers who might earn $100,000 in Atlanta may move to San Francisco where they earn $150,000, but with $40,000 in additional costs.  $20,000 of that might go to the landlord, $10,000 to the local government in taxes, and $10,000 to the federal government in taxes.

The proposed policy of eliminating the deductibility of local taxes might shift the economic rents, in the long run, all else equal, with $18,000 going to the landlord, $9,000 going to local government, and $13,000 going to the federal government.  (These are broad, made up numbers to help think about the context.)  So, reducing the SALT deduction is really a way for the federal government to get its hand on some of those economic rents.

It's tempting to say, let's find ways to tax those cities even more, until all the economic rents flow to Washington and there is no more advantage to political exclusion.  But, the best solution would be to open those cities up so that more Americans can benefit from the amenities and characteristics that allow those cities to collect economic rents to begin with.

On the other hand, our chosen policies have been so poor that bringing down home prices through targeted taxes on Closed Access cities would be a huge improvement on the policies we chose to implement in our zeal to bring down home prices.

In any case, the core of the problem is Closed Access.  Where the idea that capitalists just pocket public largesse might normally be fallacious, Closed Access makes it true.  And, this reasonably leads to a plurality in public opinion to enforce policies that are explicitly damaging.

November 2017 CPI

More of the same.

By the way, I don't see falling rent inflation as a good thing.  There isn't enough residential investment to moderate rent inflation through supply.  It is a demand-side effect.  This is reminiscent of 2007.  I continue to expect rate hikes to trigger a contraction, but admittedly I've been a little ahead of the curve on this.

Inflation has declined and lending has been soft, but it hasn't yet translated into broader contraction.  Although, long bond positions haven't performed so badly in the meantime.

November Employment Flows

I have been on the lookout for a bit of a contraction because of Fed hawkishness, stalled credit growth, etc.  So far, this has not come about.  Strangely, bank lending seems to have stalled at about the time of the 2016 election, but at the same time, at least initially, the yield curve steepened, which should be a bullish sign, and of course equities have shown healthy growth.

Employment tends to be a lagging indicator, so it isn't necessarily that useful for making tactical cyclical decisions, but in the year since the election, employment flows have also been surprising.  Both in net terms and in gross terms, they have taken bullish turns.

Near the end of 2016, net flows from Unemployment to Employment had been showing weakness, but this has completely reversed, and now net flows from unemployed to employed are back to recovery levels.

And, gross flows were all turning sour in late 2016.  Flows between Employment and "Not in Labor Force" had started to decline in both directions, which is bearish.  And flows between Unemployed and "Not in Labor Force" and Unemployed and Employed had both stopped declining, which also tends to happen during contractions.  But, these flows have also reverted to bullish trends.

Go figure.

The Fed seems intent on sucking cash out of the economy while the CFPB continues to enforce capital repression on working class home buyers.  Yet, there appears to be some loosening of credit, possibly simply from the continued rebuilding of equity, and low-end housing is finally recovering at a rate similar to high-end homes.  There is a lot of catching up to do there, though, if we will ever stand for it.  Are there enough tailwinds to keep this thing going?  I hope.  With so many contradictions, it's tough to be a speculator in this context, though.

If we talked about labor like we talk about capital

We have all seen many articles, such as this one, with the title, "Can't Find Good Workers? Pay Up!"  There is a pervasive notion that morally and practically, wages are always too low and asset prices are always too high.  In the big, bad complicated world, those prices mostly are simply a reflection of fundamental economic reality, so that forcing them in the direction we are predisposed to favoring can create unintended consequences.  Even trying to change those fundamental realities to nudge those prices into a friendly direction might lead to outcomes that are difficult to fully understand.

There are issues where it is the case - that prices are too high and wages are too low - and changing the fundamental economic reality can be beneficial to everyone.  I have gone on and on here about the housing problem, and how allowing new capital into urban housing markets would lower asset prices and increase real wages in a way that would almost certainly be beneficial to everyone (except urban rentiers).  In 2006-2008, we did manage to bring down asset prices, and this was generally cheered or accepted.  But, the fundamental reality we changed in order to do that (credit and monetary deprivation) didn't really have much to do with why asset prices were high to begin with, so we have been drowning in unintended consequences ever since.

But, since this notion that wages are always too low and prices are always too high dominates public thought, in a sort of vulgar way, the Treasury and the Fed have never really been taken to task for the mistakes they made.  Instead, they have been largely criticized for the few things they did right, which were helping to keep asset prices from collapsing for the wrong reasons.

....aaaanyway, when all is said and done, it is a bit disconcerting to me how much of our conception of what has happened is predetermined.  If you get sick, the reaction from someone who believes in evil spirits vs. someone who believes in germ theory will be strikingly different.  It really seems to me that in many cases, our perception hinges on a set of choices that really has that broad of a scale.  This is especially true in complex areas, and that certainly includes finance.  Sometimes books or documentaries regarding the financial crisis even reference demon terminology, as if to make the point.

This caused me to imagine how it would look if we spoke about labor markets the same way we talk about capital markets.........

---------------------------

As the recovery heads toward a decade, it is getting harder and harder for workers to keep counting on the "greater fool" to keep this going.  Employers who are addicted to the gravy train need more workers to feed the beast, but all the good workers are taken.  So, those marginal resumes start looking more and more enticing.  And, wages keep getting pushed up as employers "reach for capacity".

Is there any way these substandard workers will ever pay off for those greedy employers?  Unlikely.  But, "You gotta keep dancing until the music stops." as they say.

As the frenzy builds, the gap between work histories and education on resumes and the actual qualifications of the remaining job seekers widens.  But, who cares?  Those workers get placed through the booming temp sector.  It's not their problem if the worker isn't qualified.  It would be one thing if you were hiring someone to work in your own office, but now we just combine all these substandard workers into one big pool that gets divvied up among employers.  In this frothy market, they naively take those resumes at face value, and the employment agencies pocket their fees.  And the machine just keeps cranking along.

Obviously, we need some regulation to stop this from getting out of hand.  If we had put a stop to the frothy labor markets of the 1990s, maybe we would have had more stable compensation since then instead of the declining labor force participation and stagnant wages that we ended up with.  Federal agencies need to put safeguards in place to prevent labor contracts with inflated wages and to prosecute false applications and resumes.    We all know this stuff is going on, yet have there been any high profile prosecutions?

And, of course, loose money is the grease in the gears that keeps goosing this thing on so that the inevitable collapse will be just that much deeper. (Oh, I guess this part of the rhetoric does stay the same.)