Friday, August 5, 2016

The path to shared prosperity is lavender, Pt. III

Some more scattered thoughts I neglected to include in the earlier parts:

One theme of the original op-ed was the implication that regulatory and tax burdens on private economic activity are inconsequential.  Normally, for those who disagree with that implication, the focus is on how regulations make it harder for firms to be productive.

Our broken housing market bares the counterintuitive core of this disagreement, though.  On the surface, it looks like those who emphasize the importance of a light-handed regulatory regime are defending corporations.  Progressives frequently refer to these arguments as fronts for the rich and powerful, as if the rich and powerful are the source of the argument, and the idea that economic gains "trickle down" to the less powerful is just a sort of cover for the real motivations.

But, dismissing the effects of sloppy or overbearing regulatory regimes on private economic outcomes covers up the way those regulations help entrenched interests just as much as it covers us the way regulations hurt new competition.

A heuristic that ignores these effects tends to miss ways in which productivity and abundance are squelched.  And, that is a problem.  But, the far more damaging problem is that the heuristic misses the ways in which powerful entrenched interests benefit from overbearing regulations.  Since it goes unnoticed, it spreads unabated.  This seems to be ironic, but it shouldn't.  Old money and entrenched corporations are to progressive egalitarianism as the Bootlegger is to the Baptist.  The irony is crucial to the form.  The most entrenched political economic rents are inevitably enabled by those who suppose that tax and regulatory policies aren't an important driver of private economic activity.

The dismissal of effects on private activity is what makes taxation and fair tax rates such a central theme.  They act as a direct public transfer, so they operate in the realm of the seen.  The central position of tax policy in the progressive story of the late 20th century is a product of that selective observation.

One irony is that as marginal tax rates declined on high income labor and rose on low income labor (mostly in the form of means tested subsidies), the historical norms of work and leisure flipped, with high income workers now working longer hours, in general, than low income workers.  That certainly seems like a betrayal of the idea that second and third order effects of tax policies are unimportant.  But, more to the point, the idea that changing tax rates, themselves, could explain more than a small portion of the measured changes at the highest income levels, requires an unspoken belief in those second and third order effects, mathematically if not rhetorically.

So, we are stuck in this endless loop, where overwhelming and obvious regulatory barriers prevent equity and broad affluence, and redistribution through taxation is the solution proposed to fix it.  Those refugees from New York, Massachusetts, and California aren't moving to Arizona, Texas, Florida, and Georgia for the taxes.  They are clearly moving because of the uncountable ways in which freely flowing capital and labor can do things like provide affordable housing.  You know what has never sustainably created a city full of affordable housing?  A public "affordable housing" policy framework.  The only cities with aggressive "affordable housing" programs are cities filled with voters who presume that equitable capital allocation is public capital allocation and that private capital allocation is just so much "trickle down" economics.

The housing crisis has a megaphone, pointed at our ears, and it is yelling, "The crucial source of equitable abundance is the lightly regulated flow of capital."  Freedom of entry is so key.  One may argue against the dislocations it creates - whether those dislocations are laid off factory workers or neighborhoods losing their character - but one cannot honestly argue against freedom of entry while presuming to support shared prosperity.

One might hope that the relationship between careful regulation and freedom of entry could be parsed intelligently, so that important regulatory details could be maintained without being captured by entrenched interests.  The endless flow of economic refugees out of our blue cities to places Hacker Pierson characterize as "cut and extract" suggests that the enlightened blue states haven't figured that out.  Let's hope they can.  Until they do, thank goodness for the second best alternative "cut and extract" states.  Fortunately, the only thing standing in the way of the solution is the simple act of recognizing the best parts of the non-blue policy framework and implementing those - namely, the centrality of private capital in the pursuit of equitable growth.

This sort of discipline is common among those who compete in the world of private capital.  Industrial espionage is usually meant to find the best of what competitors are doing.  Political espionage is usually meant to find the worst of what competitors are doing.  In this regard, the political homogeneity of the American academy does not engender hope.


  1. Thank you for writing this. The housing question is so important, and your treatment shows how land use policy is right at the nexus of the inequality and political divides in the US.

    I have to admit, though, that I'm not convinced that argument that blue politics cause closed access. My theory is that the problem is the US system of land use – zoning – which cuts across partisan lines. Maybe the only reason San Francisco is closed and Dallas open is that Dallas hasn't run out of empty land yet.

    Compare SF and LA to cities like Fresno, Sacramento, and Riverside. All the cities are in the same state. All of them usually elect Democratic candidates. But SF and LA are cripplingly expensive, but the valley cities are affordable.

    Why? Because the valley cities still have greenfield land to develop. You can repeat the exercise for big cities in red states. Dallas, too, voted in 2012 for Obama by a big margin, but the metro is open access, presumably because it still has land to sprawl.

    Is there an example of a metro that ran out of greenfield, but is still open access because it found the political will to allow density? Toronto and Tokyo, surely. Houston, maaaybe.

    There are also several land use issues like taxation and locus of control that don't seem to map neatly to this red/blue dichotomy. One of the big dysfunctions in CA land use is Prop 13. Texas has a much more reasonable property tax regime. Are CA's low property taxes blue? They seem red to me, if anything. "Cut and extract", indeed!

    Along those lines, the most notorious anti-housing cities in CA tend to be the small, wealthiest, and most conservative cities in the big metro areas. Think Palo Alto, Malibu, or La Jolla.

    Similarly, the political coalition that supports liberal land use in Houston includes black ministers:

    1. Excellent points, Rafael. I usually try to avoid the red/blue divide, but the op-ed I have been reacting to used that framing.

      I think there is a natural political problem in Anglosphere countries that leads to an inability for cities to achieve high density and this has run up against the new high value that density has. Ironically, the sources of that value are the high levels of education and innovation fostered by the blue policies the authors prefer. So, I may be being especially unfair to take my frustrations out on blue policies, since the causal factor here may be the value of dense human capital that seems to have developed in places that are "blue".

      Partly, the reason I am especially hard on the progressive core cities is that it just seems especially egregious that they refuse to allow density in places like Manhattan and San Francisco proper, since density is the point of those places. It is the thing that gives them value, and the cache associated with those cities is change, opportunity, and growth.
      And, I think, in a way, I can at least understand self-interested obstruction, even if I agree we should fight it. But, the progressive ideology in those cities is to believe that private supply won't support equitable change, and then the same people righteously preach to the rest of us about how much we need to use confiscatory policies to create equitable outcomes. The righteous ignorance is a bit infuriating. Then, they act like the only reason anyone could possibly dislike their divisive tactics is because they are selfish, backward, or in the pay of the powerful. And, all the while, lower income families are fleeing their cities like a sinking ship.

      I probably have a mixture of an emotional response and a reaction to real distinctions. I try to avoid the framing because I don't trust political reactions, including my own. You have excellent points here.

      I do think, though, that there are subtle reasons these problems tend to be blue. Thinking in terms of North, Wallis, and Weingast's open access orders vs. limited access orders, I think what we call conservative in the US tends to be more liberal with regard to the universal legal regimes that define open access orders. Property tax regimes, rent control, etc., that tend to crop up in progressive cities and states tend to lead to a web of taxes and subsidies that eventually add up to a limited access legal regime, where who you are determines your status in the marketplace. American progressives seem to lack much concern about the cumulative effects of those sorts of piecemeal legal impositions. When we have inherited an open access order, it is Burkean conservatism that ends up being its defender.

    2. I think perhaps one of the advantages of housing policy discussions is that, being tedious in most people's minds, it doesn't rouse political passions the way income tax discussions do, so one needn't fear being pigeon-holed for stating an opinion on the matter. And of course in many states things like zoning and even rent control are fairly broadly popular across the political spectrum (though I think party affiliation may not be a good metric for this; after all, a San Francisco Republican is arguably to the left of a Dallas Democrat).

      But I do think it's hard to ignore that, at least as far as what important thinkers write on the subject, that there is a bit of a political division on the matter. You will see opposition to stringent land use restrictions in Thomas Sowell's books, while you will also see Paul Krugman (to my disappointment, as I use to think of him as a fairly pro-market progressive) defend land use restrictions in Manhattan. Whether that ideological divide translates into different approaches to housing policy in practice? I don't know. Probably not that much.

    3. I think there is a pretty strong correlation. On the other hand, I think this allows for a less political posture, in a way. This problem is almost all about housing. A partisan might say, "Look! Everyone is running away from the blue states because they are so terrible." While I do think this is a window into the less obvious problems with progressive governance, this problem and the national stresses it is creating are probably mostly tied to the housing problem. Fix the housing problem, and the blue states become magnets for in-migration because they really do have a lot of economic opportunity. But, fixing the housing problem, to a certain extent, probably requires some deep shift of focus in progressive ideology. Maybe we could say the same things about the right and monetary policy.

  2. Links to my name are not working, Kevin, and this does not reflect housing per se. But clearly regulation often times fixes and problem while creating other big problems. Housing is not alone. This is a quote from my article, showing that Basel regulation regarding bank capital requirements, (along with regulations of newly formed clearinghouses also covered in the article), are divorcing the bond markets from other markets. Even Goldman Sachs admitted it to be true. Here is the quote from an interesting study:

    This means that the interest rate on Treasuries is lower than it would otherwise have to be because part of the demand for Treasuries comes from their use as safe debt – a way to safely transfer value through time. Convenience yield is the basic property of money, so Treasuries are essentially money.


    The second problem is that the LCR may result in a shortage of safe debt because too much of the Treasuries is tied up in backing repo. When there is a shortage of government-produced safe debt, the private sector steps in to produce close substitutes, asset-backed securities. But the private sector can’t produce riskless debt.

    And Kevin that does not even include massive demand that takes away bonds from normal market functions in the clearinghouses. It is just like housing. Force a mote of little building and high prices around your special and favored rich town, and you will live like kings.

    1. I just don't see that much of a problem. Lots of things affect demand for different securities. As long as the price can adjust, I don't see the problem. To the extent there is a "shortage", GSE MBS's are useful, but there are regulatory barriers to expanding mortgage debt. I think housing is a big cause of this problem. Housing would be providing trillions of dollars in safe assets if we hadn't spent the last 20 years undermining the market.

    2. You make a great point Kevin. People don't trust asset backed securities, because of what happened to the housing market. The authors of the article I cite say securitization was actually a result of private creation of safe collateral but they say it can never be as safe as sovereign bonds. So, for the purposes of bank capital requirements and clearinghouse collateral requirements, bonds have taken over from MBSs, resulting in a shortage of bonds and perhaps a need for quality MBSs as well.

    3. So, you wonder, Kevin, if the powers that be undermined private asset based MBSs in order to force sovereign bond use or if it was just an accident. I cannot prove the charge, but it would not surprise me if the powers that be broke the securitization process on purpose. I would love to find out the answer to that.

  3. Thanks for the detailed reply.

    I definitely agree that Anglo cities have a really hard time with density. I like to frame it as a technical problem: one of the challenges of our time is to develop the political "technology" to build dense megacities again. I admit that's probably too apolitical of a frame.

    And you're definitely right that many progressive interests fight against a more open order. Here in CA, right now progressive interests like tenant groups and labor are fighting the governor's by-right housing process reform. I find their opposition very frustrating for the very reasons you mention here. They don't see the problem as a closed access order. They accept the closed access and see the problem as "tenants/poor people just need to fight harder to acquire more power!". Then, exactly as you said, they attack moves toward more open access as unilateral disarmament, not mutual disarmament ��

    1. Oops, sorry. I replied to the wrong thread.

  4. Great post and comments.
    Lately I have been pondering interest on excess reserves, which the Fed would actually like to raise.

    As the majority of bank lending is on property, even higher interest on excess reserves could have a very harmful effect on real estate. I post on this over at Historinhas.

    1. Interesting. At some point, I would expect deposit rates to rise along with IOR. I'm not sure margins are the problem here. I think the largest problem is that Consumer Financial Protection bureau, etc. There are a bunch of vague liabilities imposed on mortgages to the bottom half of the mortgage market. Right now, those mortgages could be made with huge margins and they would still be reasonable for households living in low priced homes, which have declined in value relative to high priced homes by at least 20% or 30% across most cities, due to lack of credit.

  5. That's important, what you say. But when IOER goes to 1% I think banks will be inclined to get lazy. Take the federal dope and go golfing.

  6. Benjamin, I think you are right. The banks will get lazy if/when IOER goes to 1%. Which would be extremely contractionary, so if it ever does get to 1%, it won't get the opportunity to stay there for long. It will end up like the ECB's experience in 2011/2012. If the Fed had any sense, it would cut IOR to 0% right now. Get things rocking so that it can eventually return its balance sheet to a more normal size.

  7. Bill-
    I worry you are right....we could see a perfect storm. Say IOER at 1.25% and then a recession. The Fed likes to move incrementally and bureaucratically.

    Not every recession is 2008 but it could get ugly....