Inequality, Piketty and Matthew Yglesias’ The Rent Is Too Damn High

RentIsTooDamnHigh

I’m an unabashed fan of Matthew Yglesias’ writing. See how he starts this recent explainer on Piketty’s book on inequality:

Thomas Piketty’s Capital in the 21st Century is the most important economics book of the year, if not the decade. It’s also 696 pages long, translated from French, filled with methodological asides and in-depth looks at unique data, packed with allusions to 19th century novels, and generally a bit of a slog. 

The good news is that there’s no advanced math, and anyone who puts in the time can read the book. But if you just want the bottom line, we have you covered.

The rest of the explainer is well worth your time. Why learn about Piketty? Well, as New York Times columnist Ross Douthat points out, Piketty is “the one book this year that everyone in my profession will be required to pretend to have diligently read.” Unfortunately I’m still slogging away, not having reached the point where I’ll pretend to have skimmed read every word. So in the meantime let’s talk about an inequality book I’ve actually finished. Yglesias’ 2012 ebook: The Rent Is Too Damn High. What to do about it, and why it matters more than you think. It’s short, takes less than an hour, hits an important inequality topic, and only costs $3.97 on Amazon. If that sounds like too much to ask, keep reading. Only 915 words to go.

I’d summarize Yglesias as follows:

  1. The Rent is Too Damn High is a real problem with far larger consequences (inequality, national economic productivity) than is commonly understood.
  2. The solution is to increase density in the most desirable and expensive places to live, such as the San Francisco Bay Area, New York, Boston.
  3. To make this happen we need to remove zoning restrictions blocking construction. For example removing rules on building heights, parking requirements, and other types of not in my backyard restrictions.
  4. The best way to help poor people is to allow them to move to where the money is. And this (in the big picture) helps everyone. Right now where I live in the San Francisco Bay Area, I have first hand experience of friends and family moving away solely due to housing costs. Overly aggressive building restrictions in the most desirable places to live makes for a geographically stratified society. Plus it would be pretty awesome if more people I knew could afford to live in such an otherwise great place.

Let me quote from Yglesias’ final paragraph:

Americans are not blocking proposals for new development and then whispering, “Not in my backyard,” while grinning with pleasure at the prospect of contributing to national economic stagnation and ecological decline. Most people don’t pay that much attention to local regulatory policy, and most voters (along with the elected officials who represent them) don’t understand this issue well. Why should they, when it’s hardly been on the agenda of public or political debate? The first step to solving the problem is simply to acknowledge it exists. The country, for all its challenges, has massive untapped potential locked within its citizens and its prosperous cities. All we need to do to unlock it is to let people do what they already want to do: build more houses, shops, and offices where people want to live.

For more context let’s go to economist Paul Krugman:

Economists who have ventured into the alleged real world often quote Princeton’s Alan Blinder, who has formulated what he calls ”Murphy’s Law of economic policy”: ”Economists have the least influence on policy where they know the most and are most agreed; they have the most influence on policy where they know the least and disagree most vehemently.” It’s flip and cynical, but it’s true….

San Francisco is a city where a technology-fueled housing boom has collided with a draconian rent-control law.

The analysis of rent control is among the best-understood issues in all of economics, and — among economists, anyway — one of the least controversial. In 1992 a poll of the American Economic Association found 93 percent of its members agreeing that ”a ceiling on rents reduces the quality and quantity of housing.” Almost every freshman-level textbook contains a case study on rent control, using its known adverse side effects to illustrate the principles of supply and demand. Sky-high rents on uncontrolled apartments, because desperate renters have nowhere to go — and the absence of new apartment construction, despite those high rents, because landlords fear that controls will be extended? Predictable. Bitter relations between tenants and landlords, with an arms race between ever-more ingenious strategies to force tenants out — what yesterday’s article oddly described as ”free-market horror stories” — and constantly proliferating regulations designed to block those strategies? Predictable.

To see how housing and zoning restrictions play out in practice, here’s a chart on income inequality (vertical axis) and housing affordability (horizontal axis). San Francisco comes out as you’d expect with high income inequality and housing costs way above median income.

TruliaHousingInequality
image source

The reason liberal adoption is so crucial is liberal cities are where these problems are most acute. It’s a “blue city” problem. For example San Francisco voted 83% Obama in the last election. San Francisco stopped growing in 1950, and never cracked a million people. It’s such a great place. Let’s build additional housing so more people can enjoy it! And as Yglesias points out in his zoning article on San Francisco, it’s less dense than Queens.

640px-San_Francisco_CA_Population_Growth
image source

Now this is a blog about what the future might hold. So let’s put this in historical context, and speculate on where things might be headed. One advantage of getting older (I’m 50) is that the first presidential election I remember was Reagan-Carter in 1980. I clearly recall that time. Free market thinking was Conservative only. Liberals were very pro-rent control and for price controls of all sorts. Fast forward 35 years. We have a hard core progressive like Matthew Yglesias arguing for less zoning restrictions. That is, a market solution. This would never have happened when I was younger. Plus I got to quote Krugman (another hard core liberal) for good measure.

If greater density and less restrictive zoning is going to come where it matters most, local progressive voters have to get on board. Given the historical direction, I’m cautiously optimistic. And the good news is that unlike Piketty’s concerns with capitalism itself, easing zoning restrictions is politically possible to envision in the world we live in today. Though when I lived in San Francisco I once brought up rent control in a bar discussion, and well, let’s just say I never made that mistake again. Yglesias and progressives like him have their work cut out for them. Keep up the good work. We’ll get there.

___________________________________

Minor Footnote: was very amused to find the search first result on that Krugman San Francisco quote “San Francisco is a city where a technology-fueled housing boom has collided with a draconian rent-control law” returned the ever loquacious Marc Andreessen on twitter. Worth a click just for Andreessen’s response to doubters: “Good luck in your alternate universe!” smiley-face-smile

3 thoughts on “Inequality, Piketty and Matthew Yglesias’ The Rent Is Too Damn High

  1. Matthew and Paul are both intellectuals, so I am not impressed that liberals are turning a new leaf.

    Also, you say that San Francisco is a great place to live. And it has low density. Correlation or causation?

    1. A related question would be why are liberals for socialist/progressive economics. Not sure who would agree with me, but I think the related, common people’s question: “Why are college professors so liberal?” has to do not with their learned status but their socialist style employment – tenure, housing, dining, health care at university are all similar to socialist government. Just environment / neighbors, the same reason most “choose” their ideologies. And constant exposure to liberalism of students as well.

  2. Nathan, the premise of those you are reading about is apparently that overly tight zoning restrictions cause rents to be higher than they would and should be otherwise. I have written the same thing, using IMO a better example involving the Washington Monument. (Basically I argued it should be replaced with something taller, since the regs prohibit any buildings taller than it. See https://twitter.com/jasontaylor7/statuses/174682847486029826 and ±-6 tweets. They already started to follow some of my advice in allowing taller buildings in some areas of DC.)

    However, your analysis doesn’t have much detail, like the cost of building taller homes. Until the, the following logic should be considered.

    We presumably live in a free and open capitalist society. On that basis, if you are right, REITs, homebuilders, real estate developers, and other real-estate actors would be banding together to lobby congress and local governments in order to educate them and the public to change these allegedly over-restrictive zoning regulations, so that these actors could build taller homes and apartments in the hopes of undercutting the existing rent/mortgage market, whilst capturing a handy profit.

    But what is that “handy profit”? Well, it’s equal to just under the present rental prices minus their amortized low-risk cost. But that cost isn’t zero. It is the amortized sum of several costs and involves one-time construction costs, ongoing maintenance costs, the long bond interest rate, taxes, insurance, fees, selling costs, closing costs, risk from MH370 blowing up, risk of nuclear war, the probability that other actors undercut the market even more in the future, etc. Realize, One World Trade Center cost over 4 Billion USD.

    But are REITs et al. lobbying our local governments? I’ve not seen any big ads in the local paper. No signs saying, “allow 5-story homes now!” Therefore, if all aspects of the above logic are correct, the anticipated profit from building taller buildings is perhaps actually around zero, and there isn’t a high-rent problem in the first place.

    Perhaps that’s just how much it costs to live.

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