Thursday, August 4, 2016

The path to shared prosperity is lavender, pt. II

I want to expand a little more on yesterday's post, because I think the obstructionism in the housing market and the clear economic stress and inequality that come from that present such a great case study in how the red vs. blue framing fails to lead us to productive policy shifts.

Yesterday, I referenced a New York Times op-ed by Jacob S. Hacker and Paul Pierson, where the authors describe red state versus blue state policies as "cut and extract" versus "investments in education, infrastructure, urban quality of life and human services".

I mentioned in the earlier post how I think part of the problem with the "blue" case is that it treats private capital as a fixed factor.  In the op-ed, the "red" policies - "low taxes, lax regulations or greater exploitation of natural resources" - are dismissed as poor drivers of growth.

I suggested a motte and bailey fallacy in yesterday's post regarding the causes of high urban housing costs, and I think this is another sort of motte and bailey fallacy.  This is similar to a common way of approaching minimum wage hikes.  Clearly at some level minimum wages are destructive, and at some level they are insignificant.  How often are studies of 30 cent localized hikes used as evidence in support of a nationwide hike to $15?  Or, for that matter, how many economists supported the hike from $5.15 to $7.25 from 2007 to 2009, based on the idea that small hikes in a strong economy would be unlikely to create disemployment only to sit silently in 2009 as the last hike was implemented amid unemployment that had jumped by 4% in the prior year?

Marginal changes in taxation or regulation are dismissed as insignificant, and this sort of leads to a heuristic where those policies are placed in the "all else equal" bucket.  So, every suggested investment in education, infrastructure, urban quality of life, and human services, comes packaged with its own set of marginal expected benefits, and the mandates or taxes that are required to create them are marginal enough to ignore, in isolation.

This amounts to a contortion of scale when scale is small enough to be a rounding error among uncontrollable factors.  How much of public debate really revolves around this problem of implied disagreements about marginal effects?  That's all well and good.  And, nobody has a monopoly on accurate measurement of marginal effects.  So, those disagreements aren't about to go away.

But, a problem arises when marginal effects cease to be marginal.  And, this is what we see in the housing problem.  Hacker and Pierson notice that there is a housing problem.  But, their heuristic - that the benefits of public dispensation can be counted as benefits while the relationship between public policy and private capital dispensation is muddled enough that it can be ignored - has been carried to a scale far beyond reason.

The housing context in Closed Access cities is so obstructed that the effect of taxes and regulations has ceased to be marginal.  It is existential.  There is broad repression of private capital.  That repression defines those cities.  Yet, they hold their heuristic so strongly - that the only capital worth measuring regarding public policies is public capital - that they can regard the cause of the stresses in those cities as insignificant.

Yet, it is clear beyond doubt that blocks full of high rise housing in places like Manhattan and San Francisco would be transformative - in a way that would represent a massive transfer of wealth and income from rich to poor.  That looks like a "greater exploitation of natural resources" to me.  It's hard to think of a more extreme example of exploitation of natural resources than capturing trillions of dollars of value out of little cubes of space 300 feet above the streets of Manhattan.  There is one, and only one, way to get there - lax regulation on residential housing where those valuable little cubes reside.

If you think it can't be done, keep in mind that these cities have no problem finding ways to create commercial density.

But, the heuristic is too strong.  Private capital is a ceteris paribus variable.  "We should remember that the key drivers of growth are science, education and innovation, not low taxes, lax regulations or greater exploitation of natural resources," the authors report, axiomatically.  "Water?" asks the fish.  "What's water?"

Private capital is desperately needed in the blue cities.  Privately allocated capital intended to earn a profit for wealthy investors.  Trickle down, some might call it.  What a strange thing to call it.  Did the millions of blue city refugees who fled to places like Phoenix, Dallas, and Atlanta have to wait for apartments to trickle down from the rich homeowners in those cities?  Of course not.  Those cities are full of spacious, inexpensive living spaces - spaces available for little more than the cost to build them.

In Dallas wealthy homeowners reach a limit of diminishing utility on luxury housing.  There is little to limit the clamoring for luxury housing in New York City and San Francisco, because the arbitrary (regulatory) limits to private capital inflows have turned those units into status goods.  It is precisely the places that limit the application of private capital where residents end up fighting over a limited supply like jackels, with the powerful sucking up all they can, leaving the weakest without.

It seems as if expanding housing in the Closed Access cities will simply attract more rich homebuyers.  (The Financial Times had a great recent piece about Tokyo, where housing is affordable and relatively plentiful because of deregulated zoning.)  In the act of fixing the problem, the residual stresses of the limited regime will look like a "trickle down" effect, where new housing creates its own political problems and dislocations and the spoils seem to go to the powerful.

Ironically, the arbitrary constraints in the Closed Access cities that attract the rich, powerful, and skilled, create a sense of high status in those cities.  Then, we mistake the outcomes of inequitable policies as signs of greatness.  We end up believing that the source of value in those cities is some inherent quality that they possess.  We create these economic centers where power and wealth become ensconced through arbitrary deprivation, then we idolize the status of that power.  Yet, the power and the status come from the economic rents which flow into the cities where competing labor and capital are locked out.

At the other end, the destitution those cities create for their low status residents lead them to move to more open states.  And those states are ridiculed for taking in more than their share of federal transfers.

In a paradigm that takes no measure of private capital flows, those public transfers count, but the endless line of migrants are missed.  The excess profits earned by blue city landlords, highly skilled workers, and firms, in their cities walled off to competitors, are missed.  All that matters are transfers and status.  With those blue colored glasses on, it looks like the Closed cities have the status and the Open cities get the transfers.  Who wouldn't want to be blue?

Imagine what bright path this country could travel if the equalizing effect of flowing private capital could be recognized.  It has become obvious.  Can it become obvious enough to overcome our need to divide?  The thing is, if the blinders about that can be removed, we can still make the science, education, and innovation stuff happen, and it might actually be wonderful.  These regimes aren't mutually exclusive.  Is putting a hard cap on the size of our innovative cities helping to create innovation?


  1. Man, if I could find a way to put this before the eyes of so many people. Write that book, damnit!

  2. "There is one, and only one, way to get there - lax regulation on residential housing where those valuable little cubes reside."

    Love the post...disagree with language. Not "lax regulation." Some regs are necessary, such as on releasing carcinogens into the environment or trading nuclear weapons with an enemy.

    Property zoning is about depriving property owners of their rights and restricting free market development, uusually to the advantage of property owners already ensconced. It is not "lax regulation" to put free markets to work.

    1. I agree. It may have been an error to write it that way. I was using the same language that the op-ed had used, in part to highlight the bias in their language.

  3. "We should remember that the key drivers of growth are science, education and innovation, not low taxes, lax regulations or greater exploitation of natural resources."
    This snippet from the NYT authors is pretty troubling to me. It suggests they don't know what economic growth is. We're talking about how much stuff is being produced and consumed, not how much could be be produced given current technology. If we outlaw or restrict the production of a good that we are perfectly capable of producing with current technology, we are most definitely causing economic decline, without doing any damage to technological capabilities. And vice versa, removing impediments to production and trade of goods we already know how to produce is every bit as valuable as improving the technological capacity to produce.

    I only skimmed the article, but did the authors try to argue that the 'red state' regulatory regime is conducive to more resource-intensive economies? Or the other way around? Because either seems dubious to me. Hong Kong is more 'red state' than 'blue state' and it's a commercial center with very little focus on resources, while its more 'blue state' neighbor, the mainland, has a very resource intensive economy. The same can be said for Singapore and Malaysia.

    It seems like beneath the political tropes, the kernel of the op-ed's point is this: public investment is more productive than private investment. Referring to scientific research and education, particularly. In terms of education, I would dispute that the amount of money invested in education in a given city correlates strongly with productivity of that city's labor force in this country. Also, though people often point out that only a small fraction of private investment goes to research, the same is true for public investment (especially when we exclude publicly funded research in fields with little to no economic value). And of course we can't just compare dollars spent, that's not a measure of actual value. A billion dollars spent on a particle accelerator may well be less economically productive than 10 million spend on private pharmaceutical research.

    Sorry for ranting. Good post. I agree with Chuck, can't wait for the book.

    1. Yep. Probably best not to think too much about it. The op-ed is an exercise in straw-manning. The saddest part is that the academy outside of economics and some applied sciences has become so homogenous, I suspect the authors don't know they are straw-manning.

    2. I agree, the intellectual homogeneity is stifling, as well as self-perpetuating. I think an honest scholar, even if he is completely convinced of his intellectual opponents' wrongness, should still want or even demand that they have a presence in the academy so as to keep him and his colleagues honest and at the top of their game. A mind that isn't challenged regularly atrophies, as does a worldview I think. Just like a market devoid of competition.