Now, let's make only one change in that story - a change that describes our world more accurately. Let's take away that shiny new high rise with a 10% vacancy rate. That is the only change. Here, incidentally, is a graph showing (1) the portion of US employees living in the New York City, San Francisco, or San Jose MSA's and (2) the rate of single unit housing starts. This is the core of the story of the housing "bubble". These are the cities with the highest incomes and the most dynamic economic sectors in the country, and the housing boom was facilitating a migration away from them. This must be a rare story in the history of human migration. We have found a way to cause people to flee prosperity.
The couple had been looking at their options, and even though it would mean a 20% cut in wages for jobs similar to what they had in San Francisco, they decided that life in Phoenix would end up being more affordable. In Phoenix they could move into a spacious 2,500 sq. ft. home for less rent than their little apartment had fetched. In fact, it was so affordable, they could qualify for a mortgage to buy that spacious home. And, so they did.
One simple change - one home built in Phoenix instead of San Francisco. And, the result is a litany of statistical information that describes the 2000s:
1) We still get the app, and the whiz still gets his fortune, although his real income (along with everyone else, as measured) is lower because of rent inflation. So, there is stagnation in real incomes, though that isn't as much of a concern to our whiz as it is to the custodians and school teachers who, unlike our couple, are still hanging on in San Francisco.
2) There is no new landlord earning a market return on a shiny new high rise. Instead, there is an old landlord who keeps earning higher and higher returns on her old building as rents rise. She is still earning a market return, but that return is based on capital gains on the old building that now earns $4,000 rent instead of earning $1,000 on four apartments in the new high rise. Since computer whizzes keep moving in, it seems that rent increases will continue as long as anyone can tell, so since our landlord foresees more gains in the future, she has raised the selling price of her old building even faster than she has raised the rents.
3) Our couple sees their nominal income fall even though their actual standard of living has increased. In aggregate statistical measures, though, their move reduces the average real income because their move has a negative effect on nominal income but no significant effect on inflation. Our whiz created an effect on inflation by bidding up the price of housing in San Francisco. But, Phoenix encourages new home building, so there is no rent inflation from the new house in Phoenix. It affects neither the Case-Shiller index of home prices nor the CPI rent level. And, now they are in debt.
This one simple change - a lack of housing in the places where people would like to live - leads to more debt, more homeowners, more residential investment because of the larger home in Phoenix, lower nominal incomes, lower measured real incomes, higher capital incomes, higher home prices on average, level nominal spending on housing (rent) and falling real spending on housing.
Note the irony that the only character who is clearly worse off in our new version of the story is our computer whiz, who must now spend more of the very high profits he earns from his app on rent. Off-stage, there are also many low income residents of San Francisco who are much worse off in the second version of our story.
Statistically, this paints a story of stagnant real wages, over-investment in homes, over-indebtedness, and workers who are losing negotiating power and claiming less of the national income. In the nuts and bolts of our story, though, all of those statistical facts are either not true or are unimportant.
The thing is, we all know these characters. This is not a contrived tale. And, the funny thing about this story, which, as we can see, contains all the same familiar people with all the same motivations, but is simply missing a well-placed apartment building, is that to these characters, the narrative is completely different.
The factual narrative is simple: deprivation. We have deprived ourselves of a unit of housing. The whiz kid sees it as a deprivation story. He sees a frustrating sort of entrance fee on the road to his American dream - a large down payment he has to make to break into an innovative industry - a cost that would be difficult if he doesn't happen to come from a wealthy family. Although, he probably earns some extra income as a result of the barrier to entry that the missing apartment creates into his industry.
The landlord and the couple see a bunch of tech workers coming in and throwing their weight around, bidding up rents. The couple see these tech workers forcing their friends out of their neighborhoods and undermining their community. They see excess and wealth ruining the fabric of their town. They also see a greedy landlord who keeps ratcheting up their cost of living and simply pocketing unearned profits, putting them on an endless treadmill of working harder and harder just to maintain their standard of living.
Their new neighbors in Phoenix see more of that California money piling in, funding one new neighborhood of McMansions after another. And, everyone else watching this unfold sees greedy banks piling up mortgages on their balance sheets for families that somehow can go from 1,000 sq. ft. renters to 2,500 sq. ft. owners and all those statistics about stagnation and over-investment.
And they all look at this simple picture of avoidable deprivation and they see unsustainable excess and greed. I say they are deceived both by their own experiences and by the seemingly obvious statistical measures that confirm it. And, so we are engaged in an ongoing process of engaging the effect of supply deprivation and solving it by imposing demand deprivation. When we are left with an economy that seems only capable of bubbles or busts, we naturally blame the folks that seem to be holding all the cards - the bankers, the landlord, and the whiz kid. The rich just keep getting richer. "Stop the lending, stop the building, tax the whiz kid. If we do let you build apartments in San Francisco, you can sure as heck bet that we're going to try to stop you from building apartments for people like him. And, for Pete's sake, stop printing all that money. Can't you see it's driving up the price of everything and just lining the pockets of capitalists?"
“Tell me,” the great twentieth-century philosopher Ludwig Wittgenstein once asked a friend, “why do people always say it was natural for man to assume that the sun went around the Earth rather than that the Earth was rotating?” His friend replied, “Well, obviously because it just looks as though the Sun is going around the Earth.” Wittgenstein responded, “Well, what would it have looked like if it had looked as though the Earth was rotating?”