Monday, June 1, 2015

Housing Tax Policy, A Series: Part 36 - We are the 100%, Housing Edition

As I have been working on the piece about limits to urban housing supply, I have coincidentally come across several articles and posts about the problem.

There was this New Yorker piece, with a very interesting reaction from David Glasner to a reaction from Paul Krugman.

There is also this piece at (HT: SSC).

The New Yorker piece is about empty storefronts and old neighborhood retail shops driven out by higher rents.  Some snips (emphasis mine):
“High-rent blight” happens when rising property values, usually understood as a sign of prosperity, start to inflict damage on the city economics that Jane Jacobs wrote about...
If high-rent blight hurts New York’s municipal economy, what, if anything, might be done? Because the problem is tied almost inextricably to the value of New York real estate generally, there are no simple fixes. The #SaveNYC movement and the Small Business Congress NYC advocate the regulation of lease renewal. They support a bill written by the small-business advocate Steve Null that tries to limit rent spikes by making commercial-lease-renewal disputes subject to mandatory mediation and arbitration, like some baseball salaries. Gale Brewer, the Manhattan borough president, supports a different regulation of lease renewals, coupled with zoning rules, that encourages landlords to quit waiting for the jackpot and to start renting. Some, like Moss, want to fine landlords who leave storefronts abandoned, in the hope that they’ll then rent to smaller, quirkier companies instead of Chipotle. There may also be other original solutions to the specific problem of high-rent blight, such as, perhaps, finding ways to let pop-up stores use abandoned spaces on a seasonal basis...
Waits, the owner of the House of Cards & Curiosities, doesn’t endorse any particular solution... But, he said, the tax increases passed on by his landlord have pushed individual businesses like his to the “bursting point.” 
Comments from Krugman:
(I)t’s part of a broader story of big money moving in to desirable neighborhoods, and in the process destroying what makes them desirable...
First, when it comes to things that make urban life better or worse, there is absolutely no reason to have faith in the invisible hand of the market...
Still, we’re now arguably looking at something new, as the really wealthy — domestic malefactors of great wealth, but also oligarchs, princelings, and sheiks — buy up prime real estate and leave it vacant... 
In both of these pieces, supply is not even mentioned.  This is practically the literal definition of beating a dead horse.  Those damnable big city developers just won't make spaces available, no matter how hard we tax them and impose mandates on them.

From the Medium piece, which is by Scott Wiener, a member of the San Francisco Board of Supervisors:
Recently, five of my colleagues on the San Francisco Board of Supervisors proposed a moratorium on privately produced housing in the Mission District, as a response to the undeniable housing crisis confronting our entire city and impacting the Mission with particular intensity. Under the moratorium, no housing development of 5 units or more would be permitted. The only exception would be developments with 100% below market rate subsidized units. Even projects in which half the units are affordable to low or moderate income residents would be banned.
Wiener still supports a laundry list of urban real estate controls.  But, he gets the core problem (emphasis mine):
New residents aren’t moving to the Mission because of new development; rather, they’re moving to the Mission because of the Mission, amazing as it is. People who want to move to the Mission will move there with or without new development. And, without additional housing, they will put more and more pressure on the existing housing stock. Evictions and displacement are the inevitable result of that pressure...
(E)liminating that housing production isn’t going to help anyone, other than existing property owners whose property will become more valuable...
And, yes, in addition to the need for affordable housing, the overall supply of housing matters... Earlier this year, I authored a piece positing that the law of supply and demand applies to housing in San Francisco. While some melodramatically attacked me as channeling the ghost of Ronald Reagan for making that basic point, it really isn’t controversial... Cities that have produced significant new housing — even cities with growing populations — have seen reductions in rents

That last link in Wiener's piece suggests that New York City and Washington DC are loosening the clamps on supply.  But, the reaction from Wiener's fellow San Francisco council members doesn't bode well for San Francisco.  The irony is that the position these urban progressives are taking is basically that we can't allow market forces to dictate housing supply because the wrong sorts of people might end up moving in.  Since in today's political landscape, that's an acceptable position to have, as long as it is taken toward Krugman's "malefactors", it is spoken quite plainly - with moral fervor, even.  And, if everyone has to suffer in order to make sure those people don't move in and ruin everything, then that is what we will do.  And, in the meantime, we will try to impose controls on what market supply still remains that make sure as many of the right sorts of people remain as possible.  It's the 21st century bizarro version of white flight.  I guess that's moral progress of some sort.  The complex mesh of San Franciscan regulations are like bizarro versions of the old racist CC&R's.  You can build housing there if the tenants aren't white or if they have an income below a certain amount, or maybe exceptions can be made if the realtor can confirm that potential tenants were visibly moved while contemplating a Cristopher Wool painting.  But, somehow the uncultured rich white people keep coming anyway.

The further irony is that the surest way to be one of Krugman's "malefactors" is to own real estate in a large progressive city with strong "affordable housing" policies.  But that's just the start of the irony.  This looks like a classic Baptist and Bootlegger situation, where moralists are the public face for a policy that benefits rent-seekers.  But, that would mean that Wiener's opponents are secretly supported by real estate moguls.  I doubt that is the case.  These people all seem sincere.  They really seem to want poorer outcomes for the landlords and developers that they are inadvertently benefitting.  And, I suspect that the landlords and developers work sincerely and fervently to overturn these policies.  In their day-to-day work, they are constantly prevented from managing their properties as they see fit.  When they design new properties, they are consistently imposed upon in ways that make viable projects unviable.

So, everyone works - actively works - against their own long term interests.  Politics is how these social justice advocates work against their long term interests  (or at least their stated goal of having low cost housing).  Markets is how these capitalists would work against their long term interests as regulatory rentiers.  New supply is the only sustainable way that rents and real estate valuations will revert back down to prices that reflect their unencumbered costs.  For this to happen - really the only sustainable way for this to happen - is for new capital to compete with existing capital.  So, total capital will rise, and in absolute terms, there will be more profits.  But returns will be lower, and the "malefactors" will revert back to just investors making an honest market return.  Big city progressives won't allow this to happen because a world where their political control isn't imposed on both production and consumption is, by their definition, a moral failure.  The only way this is distinguishable from old-school social conservatism or sectarianism is that the in-groups and out-groups have been jumbled.  But the outcome demeans everyone, just the same.

Proponents of these supply constraints want exclusivity.  That is what they are calling for, explicitly.  The supply constraint is a first step in achieving that.  But, markets don't create exclusivity in a way that they can control, and exclusivity determined by money seems especially vulgar.  So, painting the households that can afford the artificially scarce housing as "malefactors" is a way to make the manifestation of exclusivity through markets seem more vulgar, giving the preferred forms of exclusivity a patina of moral superiority.  They are saving these neighborhoods.  As the San Francisco supervisor complains regarding Wiener's position, "Let me be clear - not a single affordable housing activist denies the existence of the law of supply and demand...the policies they are pushing aren't referred to by liberals as 'supply and demand' they're called 'free market development' - otherwise known as deregulation."  He understands supply and demand.  He just prefers his own exclusivity to the market's.  And, while no sane observer would include San Franciscan real estate in a list of "deregulated" markets, it must seem that way when you are trying to enforce a strict and peculiar form of exclusivity in a free society.

It's a classic case of the seen vs. the unseen.  The landlord has a building that would cost $10 million to build, and would have units that rent for $1,000 a month.  But, since the city has longstanding barriers to profitable building, it's a $40 million building with units that rent for $4,000 a month, except that the city objects to having $4,000 units, so they force the landlord to rent them for $3,000.  Of course the landlord is upset.  To him, this is clearly a $40 million building.  He might have paid that much for it himself.  And they are forcing him to charge rents below market.  Meanwhile the city is upset at all the greedy landlords who keep jacking up rents.  "That's what faith in free markets gets you," they complain.  And, only rich people can afford $4,000 rent.  The city could have a million units ranging from $1,000 to $10,000, but since they only have half a million units, they rent for at least $4,000, and so only rich people move to the city.  And the city complains, "The rich people are driving up the rents."  "But, you need to build more units," I say.  "That's trickle down economics.  We have added 10,000 units a year, and they just attract more rich people."

Calling for supply is invariably derided as "trickle down" economics.  Normally I would scoff at that.  But, in this case, there really would be a trickle down effect.  These policies have been in place for so long, with such cumulative effect, that it will probably take some time to unwind.  In the Big 5 problem cities - Washington DC, New York City, San Diego, Los Angeles, and San Francisco - cumulative tenant rent has risen by around 40% since 1995.  (Edit: this refers to excess rent inflation that is likely to be a reflection of limited supply.)  And that's for the entire metro areas.  The core cities must be much worse.  New supply wouldn't just cause rents to level off.  We would need to see significant declines for returns on existing properties to return to market levels.  (I say "market levels", but even in 1995 there were unnecessary limits to building in these cities.)

We wouldn't describe market-based housing policies in the rest of the country as "trickle down" because, for the most part, we haven't implemented these damaging supply limitations enough to mess up the market.  So there is plenty of housing of all types for everyone.  Phoenix has many decent apartments for less than $1,000/month.  The progressive housing policies of the big cities have favored rentiers at the expense of renters for decades.  We're not going to work that off immediately.  So, if supply is released, some of those rich villains will probably move in before rents become reasonable again.

These policies are a classic example of politics creating a supply problem and then trying to solve it with a demand solution.  And so - in housing, in education, in health care - we keep chasing less and less relative supply with more and more subsidized dollars, all the while complaining of "malefactors" and the "1%" who are the beneficiaries of these policies.  Time and again, this is our mania.  While this makes us all poorer, it does satisfy the sectarian progressive ambition of our time - maximizing the political dispensation of supply.  (The tide may, thankfully, be moving slowly out on that ambition in primary education.)

But where are the supply-siders that are supposedly such a powerful influence?  Most of the observers I see on the right think the problem is that we have too much money.  This is a monetary bubble we have to pop.  According to the ACS, which goes back to 2005, the median renter in San Francisco saw their nominal income rise from $43,383 to $52,212 from 2005 to 2013 - a whopping 2.5% annual rise.  But $3,600 of that higher nominal income has gone to higher rent - all rent inflation.  Real housing consumption for the median household in San Francisco has been level, or slightly down.  So, after paying for ever more scarce housing, they have seen an annual rise in nominal income of about 1.5%.

But, since the landlord sees the market value of his building rising, observers on the right claim we still are fighting a housing bubble.  We've got too much money!  And we are managing to use all that money to consume less housing every year.  In the words of Jerry Seinfeld, "That's one magic loogie!"  And the solution to this coming from the supposed keepers of the supply side is to cut that nominal income growth even more.  And, it is true, if we cut nominal income enough, property values will fall.  And if that policy "succeeds", just tell yourself you just weren't as wealthy as you thought you were, back when the median household was blowing all those 2.5% income raises on their constantly shrinking home.

There are valid complaints about rent-seeking in agriculture - corn and sugar subsidies, etc.  But, maybe this is the best we can do.  Maybe the lionized farmer has been the mythology keeping us from starving ourselves to death by insisting that for every head of cattle we raise, we have to plant an acre of northern beans for the mandated bean market.  (That's what poor families eat, so we need to make sure it's available.)  And, no, you can't plant beans there, or there, or there.  If you want to plant it there, you'll need to clear it with the planting commission.  Oh, the sandy plot at the back of your lot?  Yes, you have been cleared to plant there, but you'll need to pay a planting tax to do that.  After all, there are some farmers who own prime fields who, for some reason, have become ungodly rich, so we need to start taxing farmers that plant crops, to keep this economic inequality from getting out of hand, especially since beans are now $10 a can, and poor people can barely eat....So, I guess things could be worse.


  1. In general, taxes do not drive investments. My family owns several million dollars worth of Washington DC real estate and taxes are not a factor in our decision to invest. Various jurisdictions in the DC area have differing tax policies that are up to 50% more tax than others, and it's not considered by us. The only thing that matters is price and quality, which is a function of location. We have bought real estate at a prime location at the top of the market, 2006, and made money off it, while buying property in 2009, in a lesser location, and just breaking even. But economists love to talk about the 'marginal' effects, which Jevons would love but in the real world are 'marginal' in the dictionary definition of the word. Same for "minimum wage" arguments btw.

  2. TravisV here.

    It's indisputable that Glasner has a brilliant mind. So his comments are forcing me to reconsider my priors about city planning (free market-leaning), Eisenhower's highway bill (always seemed a huge net positive to me) and Walmart. I haven't totally accepted his arguments about those topics yet and it sounds like you haven't either. But I'm pondering them.

    As an aside, brilliant minds can have such a variety of sympathies. It seems to me that the hearts of Bryan Caplan and Patrick Sullivan are in one place (hostile to the left) while the hearts of Glasner, Noah Smith, Yglesias and Ryan Avent are in another (very sympathetic to the left). Sumner might be exactly in-between. I think Deirdre McCloskey is also in-between, somewhat to the right of Sumner.

    Krugman, Brad DeLong and Jonathan Chait are also smart. But I think they're more biased and far less objective than Glasner, Noah Smith, Yglesias and Ryan Avent.

    1. Yes. Glasner has some great, challenging posts. Folks like him make me wish I had a better grasp of some formal economics and Tyler Cowen's ability to read. There is too much good stuff out there to follow..

  3. TravisV here.

    Alex Tabarrok and Paul Romer had some comments related to this topic:

    1. Yes. Very interesting. That's what is so frustrating about the problem in the core cities. Romer says, "People who say that you can meet the demand through densification and who then resist increases in the allowed floor-area ratio are being dishonest about what their real intensions are." This may be the case in some of the suburb areas, but in the core cities, it just seems like we are dealing with a bunch of know-nothings that aren't even being dishonest. They are just dumb and angry.

      That's what I've been saying to Benjamin Cole. I agree with him that there are problems with housing outside the core cities, but like Romer says, these cities engaged in such forward thinking. They are major global commercial and cultural centers because of that forethought, and now when it comes time to realize that value, they won't just build the building that they are designed to contain. Good planning works along with free exchange, so, in the end, even the best planning can't overcome anti-market bias.

      I do wonder how much the rise of self-driving cars will change the shape of new cities, though.