Monday, March 21, 2016

Housing: Part 129 - Trade, Housing, and Employment

Outsourcing manufacturing to developing economies no more leads to a trade deficit for the US than outsourcing the design of cell phones and PC software leads to a trade deficit for Australia or China.  The balance of trade is a reflection of capital flows.

The economic rents captured by real estate owners, firms, and high income workers in Closed Access cities are paying for all those imports.  There is no balance of exports we have to create to make up for those imports.

If we solved our urban housing problem, the trade deficit would largely go away.  This, in and of itself, would be a bad thing for the US as a whole.  It would mean that foreigners have stopped sending us lots of goods and services in exchange for our over-valued services.

But, it would also mean that we would all have more innovative goods and services at lower prices and the cost of living for all Americans would decline significantly, especially those in Closed Access cities.  The trade deficit is related to variance in incomes and a "rigged" economy, if you will.  But, not in the way it is usually described.  It has little to do with "billionaires" or "Wall Street".  The rigging is being done by planning commissions in LA, San Francisco & Silicon Valley, New York City, and Boston.

It's a shame that if we fixed this problem, the simultaneous improvement in broad real American incomes and the decline in the trade deficit would be taken as evidence that trade is harmful.

PS. Drops in manufacturing employment are clearly associated with recessions.  Yet, there is no bounce back during recoveries.  If this is, indeed, attributed to global trade patterns, shouldn't our first obvious response be to change our status as the country with the world's highest corporate income tax?

Oddly, a common response to this is that effective corporate tax rates are actually not that high, because corporations arrange for so many favorable tax breaks.  The largest supposed tax break, by far, is to move operations and revenues out of the country to literally any other place in the world.  But, for the sake of argument, let's say there are so many domestic tax breaks that corporations really do pay competitive tax rates in the US.  So, this argument basically says that US corporate tax policy is fine because as long as corporations curry favor from politicians, they can get a competitive tax treatment in the US.  This argument basically demands that corporations rig the tax system.  Because, if they don't, locating production in the US saddles them with a 10%+ disadvantage compared to the rest of the world.

In the realm of people who equate trade deficits with falling US manufacturing employment, I see two camps.  (1) those who wish to impose punitive policies on foreign producers and (2) those who wish to impose punitive policies on US corporations.

There is an argument that we need to strike a balance between stability and growth.  But, as a first step, we need to recognize where arguments against international trade are simply a subset of arguments against progress in general.  Where that is the case, proposed solutions to the dislocations caused by international trade need to be convincing in the generalized case as solutions to the dislocations caused by general progress.

PPS. If dislocations from trade are a concern, reducing the cost of dislocations seems like the primary issue.  Some of the concern over trade with, say, China seems to me like it might be measuring the decline in labor mobility that has coincided with the rise of China.  This recent paper (pdf) seems to have some interesting findings on that issue (HT: AT).  They did not find a correlation with land use regulations and declining labor mobility.  But, I can't help but notice the pattern of inter-state migration around the long term trend and the pattern of housing starts and shipments over the same period.  The movement of labor migration above trend at the height of the housing boom and the sharp drop below trend after the bust seem to support the idea that the housing boom was facilitating an escape from high cost cities.  The peculiar character of the housing supply crisis may muddy the waters a bit on this sort of topic, because the migration was away from high costs and to low costs.  It wasn't necessarily away from low employment and to high employment.  The constraints of anti-development forces have reversed the normal trends of human migration, so the footprints of this movement in the data will frequently be counterintuitive.  Low income households are being driven away from cities that generate lucrative labor opportunities.


  1. Fascinating post.

    To use a word a few decades out of date, I am not sure I "grok" the connection between the trade deficit and high-cost cities, or that the trade deficit (as measured) would disappear if the high-cost cities went to no zoning and highest-and-best-use as the default.

    Of course, having been radicalized by Kevin Erdmann, I now believe in highest-and-best property use universally, whether in high-cost cities, or especially in surrounding suburbs and counties.

    My understanding of the trade deficit is foreigners are not buying our over-priced services, but rather accepting slips of paper from us, with which they can buy debt or assets.

    So China owns U.S. Treasuries and Saudi Arabia owns US stocks. Chinese are buying the Waldorf etc. Japan bought of lot of downtown L.A. office towers in the 1980s and 1990s, now worth less than then.

    Here is honking story for Kevin: In 1986, the Japanese company Shuwa bought what was then called Arco Towers in downtown L.A. for $650+/- million. An office complex, it is worth less than half that now. In nominal dollars!

    Thomas Properties bought the building in 2003 for $270 million.

    But office rents downtown are soggy...unchanged since 1980 or so...

    Amazing story. Naturally, some offices are being converted to housing downtown...

    But I think the high-cost city story is not only the core, but the surrounding areas that have been downzoning for generations too. In the L.A. market, Ventura, and OC have square miles of single-family detached only, and low-rise office/retail only.

    Other cities in LA County, be they Pasadena, or Santa Monica, Glendale, etc, have even stricter zoning than L.A. Getting anything built is impossible.

    The inhospitable desert Inland Empire, desperate for any development, took the outflow. So you have literally millions of people sprawled over a hot-as-hell environment, rather than clustered near the perfect temps on the shore, which is where they should be, in hundreds of high-rise condos.

    But in their own neighborhood, everyone becomes a pinko greenie-weenie.

    1. As I thought through the implications of the Closed Access rents on inflation and monetary policy, I realized that limited access is increasing the profits going to firms and workers in those cities. They are earning economic rents on that limited access, and those rents are coming from a global customer base. But, software doesn't get loaded on a ship in LA and counted as an export. It gets sold by a subsidiary in Australia and counted as profits on foreign operations.
      There is a mystery in global capital flows that capital flows into the US consistently are much higher than capital flows out of the US, yet the US consistently earns more on its foreign investments than foreign investors earn on their US investments. I used to think this was just a matter of US investors taking on more risks, so that there was a trade of US corporations investing in risky operations and foreign savers investing in low risk US debt. Economic accounting has a hard time accounting for the excess profit that goes to risk. But, quantitatively, this issue parallels with the Closed Access housing problem. So, I have adjusted my thesis. I don't think the high returns from US foreign investments are purely returns for risk taking. Now I think they are largely economic rents flowing to firms located where there are Closed Access high skilled labor markets. The US has both Closed Access labor markets and risk taking culture that has led to a concentration of firms that utilize those markets.

    2. Lee Adler said a large amount of C & I lending is just going to stock buybacks. Sad. Ponzi-like?

      Also,iIf you don't fix the 405 there will be too much traffic if houses are built to the sea. I don't see the will to fix any of that infrastructure. And on top of that, too many investors are buying houses. They are pushing up the prices to bubble values. They are worse than bad zoning.

      Next, America apparently guarantees return of capital. Well, unless you buy the ARCO building. :)

      Also, I posted this at another blog. Opinions appreciated:

      I am amazed that there are no comments about this article. Interesting article. First, Sumner is probably right, as the Fed let NGDP drop into the toilet in 2008 while watching interest rates that did not drop nearly so fast.

      However, I have a concern about Market Monetarism of Sumner. My concern, not as an economist but as an observer, is that monetary pumps up assets in a global environment where wages do not keep pace. So, when wages do not keep pace one would think that assets, like houses, food and gasoline, should decline. But the thieves of Wall Street and unfortunately, the MM's, are on the same page for different reasons regarding asset purchases. The MMs have noble desires to keep the money supply up. But Wall Street wants to skim from people who are down, whose wages are down.

      And unfortunately, this puts a squeeze on main street. And it isn't just about zoning, but is more about too much money at the top buying too many houses. Same with pushing up futures markets in food and oil. The real guy is screwed while this globalization, which Sumner supports is pinching mainstreet in a really disgusting manner.

      I don't think the solution rests with monetary policy, and certainly not with negative interest rates and cashlessness.

      Author opinion is appreciated.

  2. In re corporate tax rates, the US raises ~2% GDP versus ~3% OECD average. Higher headline rates may have reputational or other effects, but at the bottom line, US corporate tax is low in the developed world, not high.


    1. How much of that is compositional? The table shows high levels of taxation in the US on individual profits. Isn't this a product of US producers using non-corporate forms of ownership and debt financing in order to avoid the corporate tax regime?

      That table is really useful, isn't it? Thanks for the link.