I can’t shake the idea that captured land value serves as the origin, or at least accelerant, of a great deal of the problems in the United States. What if the YIMBY vs NIMBY fight is just the most visable element of the core economic disease in America? A heads up, if you’re expected a deeply researched 5,000 word post that will YIMBY “pill” your most skeptical colleague, make your peace with disappointment now. But if you’re into policy failures and run-on sentences, you’re in for a good time.
I just can’t get over how often the examination of seemingly every subpar economic context (not immediately attributable to a pandemic or war) comes down to people X are geographically constrained, they need to be proximate to a specific physical location to produce or consume Y, and a huge amount of the economic surplus that would be created from any sort of exchange is captured by land/property owners because legal constraints on development have made the physical place in which an exchange happens THE short side of nearly every market that is pointed to as a failing institution.
Seriously, go through the list of everything that leaves critics of markets ready to burn capitalism (and its fostering society) to the ground. Wages are too low relative to rent. Rent is too high in the places that are near the jobs I want. Public schools aren’t good enough unless you’re willing to carry a mortage that would account for 70% of your take-home pay. Healthcare…eh, maybe not healthcare. Healthcare is crappy for its own bespoke and byzantine set of reasons.
I am a person with no shortage of bodily ailments because I chose to play lots of sports despite never being especially good at them. As a result, I am an avid consumer of physical therapy and therapeutic massage. I have had many conversations about the economics of these fields, and I am now 100% certain that the key to making a career at either, given a minimal level of competence, is not how good you are at your job, but your capacity and good fortune in solving your real estate problem. The entire Massage Envy empire appears to exist not based on greater competence in technique, training, or personnel. It exists solely to extract rents from employees because scale lets them solve the real estate problem (and probably pool liability risk, too). The single biggest thing an individual professional can do to increase their yearly income is not win an award for Therapist of the Year or get 5 stars on Yelp. It’s buying a house with a room they can use as a home office, where they can pay “rent” to themselves and take a tax deduction for the office.
I was once told a likely apocryphal story (that I can’t find on the internet, so it’s probably not true) that the then CEO of Starbucks declared “We make coffee, but we’re in the real estate business.” That their business had matured to the point where revenues could be projected with sufficient accuracy that the profitability had been reduced to identifying opportunities in the real estate market. I don’t know if that ever happened, but that still seems about right to me.
Housing costs hold a special place in how we view our own economic status and security going forward, in part because food costs have been reliably low for so long (knocks on all of the wood). When the rent goes up we feel worse off, not just because we have less disposable income today, but because it increases our expectations for future rent increases as well. We have lots of words for economic insecurity and desperation, but nothing quite makes your blood run cold like the prospect of being homeless, even for the briefest moment.
The phrase “paying your nut” is a lot less common these days. You usually only hear it from self-employed people who live off of a la carte incomes, either in entertainment, freelance, or contracting work. It refers to the minimum amount you have to earn in a month to avoid significant consequences, usually the aggregate of rent/mortgage, utilities, and debt payments. Economists talk about “nominal” and “real” incomes to account for the changes in prices people face. Sometimes there is discussion of “money illusion” where people living under inflation are fooled by higher take-home pay into thinking they’ve become richer. I’ve never been persuaded that nearly anyone suffers from money illusion, nor do I think folks track national price indices and growth statistics.
I think people just know whether it’s easier or harder to pay their nut, and the simplest version of that is the ratio of their take home pay to their rent. Paycheck divided by rent, full stop. If you follow this blog or Jeremy on twitter, you’ll know that one of the puzzles frequently revisited is why Americans are so pessimistic about the economic dynamics of the last 20 to 30 years, and why younger people seem terribly aggrieved about their relative economic status.
So if generational income is fairly consistent and median home mortages account for a slightly declining fraction of median income, what gives? Well, it could all be one big economic mass hysteria, but I’ve got a simpler explanation: the ratio of rent to income to has skyrocketed in the places that young people want to live. Maybe I’m overprojecting my own lived experience, but when I was 25 I did not want to live in a rural area, the suburbs of a major city, or even the downtown of a minor city. I wanted to live in a proper big city. And for a young person, that means living in a small apartment, possibly with roommates, which is exactly the kind of housing places like California stopped building.
Why do so many young people seem pessimistic? Putting aside the absolute failure of politics to produce meaningful climate policy, the simplest explanation is that they have an unpleasant choice. They can live in the same places young people have always lived, only absent any possibility of savings and economic security. Or they can be dispersed from the cultural and economic capitals of our country, and try to build social networks without the benefits of the generational density, plethora of events, and dating markets that have been the hallmark of being a young person in the city since World War I (if not longer).
What will solve this? Policy? California has showed some glimmers of hope. Young people voting with their feet, moving to the shining middle-sized cities that are allowing for growth and affordable rents? Could be, but critical mass is real and growing into a proper metropolis takes decades. Work from home?
That’s interesting enough that I’ll write about it next week. I have thoughts and policy prescriptions, in case any major city is looking for a czar of housing policy (NB: I’m not qualified, but available).
Economist Writing Every Day 
1. So productivity gains mean the cost of food and *stuff* can go down to zero but “land” (*proximity to density and human capital) is fixed. Or is it? Someone I’m sure has quantified the effect that “creating land” through zoning changes or outright eminent domain (in China, say) creates value.
2. High prices in places like LA and NY, at the very least, serve as a useful signal: “Don’t move here!” People moving out of California sounds like the market doing what it’s supposed to do. I’ve always been taught that young peoples’ mobility has been a core strength of the US (and is declining). Maybe public efforts should be directed not to helping them move to big cities, or stay barely afloat there, but to encourage them to move to smaller ones?
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Lol are there really people who are depressed because of “climate change policy”. Religion never dies, it just gets replaced.
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