Thursday, April 6, 2017

Housing: Part 219 - The Post-Industrial transition and housing bubbles.

I have been moving toward a grand theory of economic epochs.  We are moving toward a post-manufacturing economy.  Just as the move from agriculture to manufacturing led to a wave of urbanization, because production at the time needed to be centralized, today the move from manufacturing to services and non-tradables also requires urbanization, for two reasons.  First, because a core of highly networked and skilled innovation workers need to remain in close contact with one another.  And, second, because they now bring with them a large number of non-tradable sector workers who provide services to them.  This is the new economy.  This is the natural transition of a free society to an information economy.  Those workers we are fretting over, whose jobs are being stolen by Chinese workers or robots, are transitioning to new forms of labor just like every generation before them did.  They are becoming nurses, yoga instructors, baristas, nannies, life coaches, construction workers (if we dared let them), tech support workers, etc., etc. etc.  Those jobs need to be near their customers.  They need urbanization.

I just happened to see a graph comparing manufacturing employment across several countries (Hat Tip: Adam Tooze)  The graph compared US manufacturing income to Japan, Germany, and Korea.  Manufacturing employment has been stronger in all three than in the US.  Guess what else they have in common.  None of them had a housing bubble.  And they tend to run trade surpluses.

So, I went to Fred to see if the pattern holds.  And it does.


The housing bubble, trade deficit countries are down there with the US with half the manufacturing employment that Germany has.  They have moved to a post-industrial economy.  That requires urbanization.  Nobody has figured out, politically, how to allow it to happen.  I predict that the first one that does will experience a flowering of equitable economic growth. 2017
Source: World Bank (via Fred)
PS.  Here's a graph of GINI indexes.  The trade deficit/ housing bubble/ post-industrial economies also have another thing in common.  More income inequality.  A cap on the admittance into the key urban economies has created an economy of exclusion based on a sort of meritocracy.  If you have skills and connections, you can earn an excessively high income, much of which goes to your landlord.


  1. Yes, very good article - what do you think of the Land Tax idea?

    1. It seems like a good idea in theory. I haven't thought about it much in practice. I suppose it could help solve these urbanization problems because existing real estate owners would be taxed more heavily on the gains from location value. It seems like property taxes in general have some positive qualities.

      This relates somewhat to the whole idea of development, upzoning, etc. There is usually some discussion of the problem of takings if a government action causes a piece of land to lose value (declaring it a wetland, etc.). But, it seems like that goes both ways. Why should a landowner keep the benefits of upzoning? Could a good libertarian position come down in favor of some socialization of land values? Development is so tied up with local politics. It seems reasonable, and efficient, to me to socialize more of the gains and losses from land use policy.

  2. It could also just be that manufracturing jobs were lost to fast since 2000.

    1. The funny thing is that employment and labor force participation (adjusted for age demographics) were strong in the 2000s. The effects have only been felt since the recession. This has generally been treated as if the jobs that went to construction were unsustainable and masked the manufacturing losses. As if the housing market since 2006 is the normal one. This causes researchers to totally miss the problem, since they tend to recognize the central problem of housing supply and urban costs. But, their misunderstanding of the housing bubble prevents them from realizing that conclusion fully, since they can't imagine that there weren't enough houses in 2006.

  3. Germany has very strict zoning rules, doesn't it? Why hasn't it had housing price volatility?

    1. I'm not very informed on international policies, but my understanding is that Switzerland and Germany don't have some of the policies that drive prices up. They tend to have policies that reduce housing consumption, and probably drive up the price. So, housing across the board seems to be pretty sparse. But, they didn't have a bubble and I don't believe that their cities have such extreme costs like in the US & other countries. Germany's constitution has a "right to build" clause, which I think gives property owners some freedom regarding building decisions.

    2. Sorry. I realize that looks contradictory. I think their policies tend to make prices (in terms of home prices) moderate while prices(in terms of rents) are high. So, homes tend to be small, etc., but ownership is low and prices are low.

  4. I like this post.

    Yes, first the farm jobs disappeared and people migrated to cities (short-hand, some migration may have caused mechanization).

    Then with manufacturing jobs disappearing, it is work in tech or take in each other's laundry.

    I lived in Los Angeles long enough to see much of this. There were the children of Okies and Arkies when I was growing up, and L.A. was a huge industrial town. By 2012, the newspapers had reverent stories about who opened up what restaurant. Hollywood never died and geographic Hollywood has made a big comeback.

    Yes, the busses are full of nannies in the morning, and people pay $200 (or more!) for a hairdo in a salon.

    Note to bill:

    This paper does not answer everything, and Kevin Erdmann perhaps disagrees with it. I think it makes some sense, and would explain why Germany does not have house price explosions. But then France did not either.

    1. France did have more price volatility than Germany.

    2. Benjamin, two problems I have with that paper:
      1) The reliance on the Taylor Rule. So many papers about the housing boom rely on the Taylor Rule, which the paper claims would have called for a 4% fed funds rate in 2002-2003. That's absurd. I know there are a hundred papers that all treat this as reasonable, as if the Fed was low and the Taylor Rule reflected neutral policy. But, 4% would have been extremely contractionary.

      2) Then, this is used to claim that capital inflows and rising home prices were a product of low rates. Low rates explain home prices in Dallas. They don't explain the much higher prices of homes in California. Rent explains the higher prices in California. And those excess foreign profits that fund the trade deficit are largely being earned in California, not Texas.

    3. Actually, I think Andrea Ferrero (paper author) makes a different error---

      "This paper takes a different perspective and argues that a progressive relaxation of borrowing constraints can generate a strong negative correlation between house prices and the current account."

      In other words, banks handed out money too easily to buyers.

      Ferrero goes on:

      "To the extent that the relaxation of credit constraints affects the whole economy, the increase in domestic borrowing must be financed from abroad, thus generating a current account deficit."

      Ferrero even disputes Taylor's views that interest rates were too low.

      "From a qualitative perspective, these (low interest rate) shocks do contribute to amplify the boom in house prices as well as to widen the current account deficit. However, their quantitative contribution is extremely small."

      So, interest rates are not important.

      I think Ferrero has made a shrewd connection between large chronic trade deficits and exploding house prices, but then slips when he blames house prices on easy borrowing standards.

      I think it the problem is property zoning coupled with large inflows of foreign capital, seeking low-risk investments, and that would be property.

      After all, commercial property had a similar boom-bust.

  5. Multinational firms can artificially shift profits from high-tax to low-tax jurisdictions using a variety of techniques, such as shifting debt to high-tax jurisdictions. Because tax on the income of foreign subsidiaries (except for certain passive income) is deferred until income is repatriated (paid to the U.S. parent as a dividend), this income can avoid current U.S. taxes, perhaps indefinitely. The taxation of passive income (called Subpart F income) has been reduced, perhaps significantly, through the use of hybrid entities that are treated differently in different jurisdictions. The use of hybrid entities was greatly expanded by a new regulation (termed check- the-box) introduced in the late 1990s that had unintended consequences for foreign firms. In addition, earnings from income that is taxed often can be shielded by foreign tax credits on other income. On average, very little tax is paid on the foreign source income of U.S. firms. Ample evidence of a significant amount of profit shifting exists, but the revenue cost estimates vary substantially. Evidence also indicates a significant increase in corporate profit shifting over the past several years. Recent estimates suggest losses that may approach, or even exceed, $100 billion per year.--

    This seems to suggest that large offshore profits of US companies are, to some degree, and artifice of tax codes….

    1. Benjamin, this is true. And, it affects the trade deficit numbers. But, that is kind of an accounting issue. The thing that is true, wherever those profits are booked, is that the post-industrial economies have some firms with very high profits that employ workers with very high incomes, which tend to be located in dense, productive cities.

      These reporting issues don't change their total profitability.

  6. Thanks guys. I'll look at the paper. My real interest is in the missing volatility. If I find any answers, I will report back. Thx!

  7. Having re-read this post a few times, I think it raises question of profound importance to macroeconomists.

    Jeez, most macroeconomists are still jibber-jabbering about inflation or the minimum wage, or if interest rates should be 1.000 or 1.005%. Yes, inflation cannot be let to run wild, and yes, in theory the minimum wage is a bad idea. Interest rates should not be too high or too low.

    But meanwhile, the ground has shifted. There are much bigger issues to wrestle with.

    Urbanization and property zoning for example.