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Via Dean Baker, Matt Yglesias slices at the heart of the apparent contradiction between a strategy to increase household wealth via homeownership and a desire to ensure housing affordability. I have some thoughts.

A while ago I aborted a half-drafted attempt to add a comprehensive entry into the Guaranteed Basic Income discussion that was hot in a certain tres geeque segment of the blogosphere a few moons ago. One of the points I wanted to discuss at that time was a counterproposal being floated that endorsed a guaranteed issuance of some quantity of capital at some point in time rather than a guaranteed series of regular payments. At the time my argument against that was focused on failing to protect those who were vulnerable, exploited, or just plain irresponsible; but I think the issue of housing policy demonstrates another, perhaps deeper flaw in that kind of system, and in the broader program to empower individuals via ownership of property.

To summarize/generalize/probably bastardize, one of Ricardo’s great contributions was the twinned insights that rents accrue to land and surplus production accrues to rentiers. The transition from agriculture to industry and information hasn’t undone that insight as much as it’s relocated it – the economics of urban agglomeration has made land in metropolitan areas, especially in high-wage areas and neighborhoods and those in the urban core, extremely valuable and therefore extremely expensive. In a purely “free market” for land and housing it is not unreasonble to surmise that land ownership would quickly become highly concentrated and this would, absent some public policy intervention, become economically, politically, and morally problematic.

In our society, we solve this problem through a network of incentive structures that encourage, enable, and empower individuals to own their own homes – that is, to purchase and own via leverage the land and house they occupy rather than rent them. This is the the public policy solution you might call “democratic rentiership” – essentially, rather than deal with a handful of massive rentiers, to create a nation of little rentiers, all receiving implicit rents from occupying their homes without paying rent.

The problem with creating a nation of little rentiers, though, is that you have created a vast, broad-based interest in increasing the value of the owned property. In this case, that property is actually two inseperable but distinguishable factors – the land and the house upon it, a machine, capital, that provides at its most basic a flow of housing to its occupant. By incentivizing individuals to own this bundle of land and capital, we are incentivizing them to seek and encourage an increase in not only the value of land – an unamibigous good that is a symptom of increasing wealth, prosperity, and happiness – but also of the house which is more often than not a symptom of an artificial scarcity in housing units created by legal regimes that restrict the housing unit/land unit ratio. I would argue that any program that tries to leverage public resources or create incentives to encourage democratized ownership of rent-producing assets would have the same effect.

Now, in terms of a static equilibrium, there is no reason to prefer, per se, widespread ownership of land, capital, or any source of rents rather than a tax and redistribution system that targets the rentiers for the former and the renters for the latter, and in some ways it’s preferable. But one thing that I think distinguishes progressives is insights into dynamic equilibria – ie, that a society in which a small number of people control a vast amount of the wealth is prone to instability, and additionally that under those circumstances the tax and redistribution system is unlikely to survive the effort of the concentrated power of the rentier class brought to bear on terminating it. Not to mention that while, in theory, a large owner of many, many houses may be more able to bear the cost of the myriad small occurances of maintenance that houses demand, in practice landlords absent a strong system of legal accountability often will be derelict in those duties.

Another issue, though, is that there are certain ineffable sources of utility that come from homeownership that are difficulty to quanity, price, or address through public policy. I plan to discuss this more soon in this space, but my wife and I just bought a house, and among the myriad reasons we did so is a frustration with what you might call the spiritual limitations of renting. My wife and I have been renting together for years and we own some art – nothing fancy, some posters and prints and photographs – that we have never hung, tolerated ugly wall colors, yearned for hardwood floors, put up with hand-me-down furniture, and fretted frequently over issues with landlords and co-tenants of the same building. There is a sense of liberation, autonomy, and actualization that come with having that level of possesion, control, security, and intimacy with the space one calls home, and it’s likely rooted in something primal and difficult to model. A nation of rentors, rather than rentiers, may be one that creates certain economic efficiencies but also loses…something.

Note that this post doesn’t contain any proposals. On this, at this moment, I am lacking.


The Washington Post busted open the big story about the raisin market, then opined about it, then Planet Money did an excellent story about it. For those without time to click through the genuinely fascinating links, the basics of the story is that raisins, somewhat uniquely, have their supply and demand managed centrally by a government committee, who essentially confiscates a share (sometimes a very large one) of raisin farmers’ output and with varying levels of compensation. This is probably bad public policy, and there’s no reason that this shouldn’t be done away with.

However, there is a sense in all these stories that there is something unusually unjust about the structure of this market. But I’m not sure that’s true. Let’s imagine, instead, that there was simply an additional sales tax on raisins, not unique to raisins at all. In that case, the price would rise, so demand would fall, so supply would contract and the price would rise and eventually we’d settle on an equilibrium where the overall raisin supply is lower and the price is higher and the government collects some revenue. You could even have the tax vary each year to target a price (as opposed to a tax that is a consistent percentage of the otherwise-market-determined price).

In this case, what we have instead is situation where the government targets the supply side rather than the demand side, but to pretty much a similar result, except the government collects its revenue not in money but in-kind.  Now, the fluctuations in the crop portion taken for the reserve and the uncertainty of compensation definitely feels more unfair, but the biggest difference I can see in this scenario is that in the tax scenario you’d probably have fewer raisin farmers, whereas under the status quo there seem to be more raisin farmers than the eventual market price would otherwise produce.

That, to me, is the biggest curiosity – why don’t more farmers do what the one farmer in the Planet Money story does and switch out to a less-regulated crop like almonds? The answer is that if we were in an equilibrium where no raisins were being confiscated then the existing raisin farmers would probably be making substantial profits, thus attracting new entrants into the industry, each one individually having no impact on the market but collectively driving up supply to the point where confiscation would begin. That, along with emotional attachments and the transaction costs of switching crops, probably keeps an equilibrium where you’ll always have more raisin farmers producing more supply than the eventual raisin price would otherwise demand.

In some ways, this solution is more socially optimal – because you still have farmers incentivized to produce as many raisins as possible even as the government is driving up the price, when in the taxation scenario you’d probably have a lower raisin supply. This allows raisins to be donated to school lunch programs, for example, that otherwise wouldn’t exist. In the tax scenario, however, the government could give the money to schools to spend how they see best fit, and that way would probably be better.

Additionally, you could raise the overall sales tax a miniscule amount and deregulate raisins and that would really be socially optimal. Freedom!

Russ Roberts says he can use "Econ 0" to show that the minimum wage reduces employment:

The minimum wage makes some workers, those with the lowest skills, more expensive than they otherwise would be. When things get more expensive, people look for ways to avoid that increased expense. In the case of the minimum wage, employers try to substitute machines and technology for workers, or use higher-skilled workers who are already paid above the minimum instead of lower-skilled workers. It doesn’t require any extreme assumptions about the labor market being in equilibrium or that the demand curve is derived from the marginal product of labor. It’s just that there is some demand for labor and that it slopes downward. All that means is that when workers get more expensive, you try to avoid paying those costs. This is a not neoclassical or neoliberal or Chicago view of the world. It’s everyone’s view of the world.

Well, sure. But note that he doesn’t solve for the general equilibrium:

In the case of the minimum wage, employers try to substitute machines and technology for workers, or use higher-skilled workers who are already paid above the minimum instead of lower-skilled workers.

OK, so – it used to be that when you went to the grocery store, a human laborer tabulated the cost of your goods and accepted payments. But because the minimum wage increased exogenously, grocery stores now find it profitable to substitute touch-screen DIY checkout stations for cashiers. Fine. Employment is reduced. But the firm that produces the checkout stations has now seen demand for their product increased. Assuming they have no idle capacity (which you don’t have to), they’ll have to procure more inputs, at least some of which will probably be labor – but even if their production constraint is 100% capital, the producer of that capital, who has now seen an exogenous increase in demand, may have a labor input as well.

Also, the firm that substitutes the technology will probably still have overall higher costs than under the prior equilibrium, which will presumably reduce their profits. But it will increase the profits of the firms that supply them with the capital that they are substituting the labor. So, in some sense, you could imagine a world where the overall effect of the minimum wage is to transfer income from firms dependent on low-cost labor to some combination of labor and those firms that are less dependent on low-cost labor without having any effect on the overall level of labor employment or the overall labor share of income (though presumably one or the other must change).

You can also imagine that, by accelerating the scheduling by which firms implement labor-saving technologies, you are generating positive externalities.

You can also imagine that, assuming a program that guarantees an income of $12,000/yr + health care in exchange for leaving the workforce, increasing the minimum wage might increase the incentive to elect for work over such a program.

Anyway, I am starting to think that seemingly-intelligent people who refuse to examine the question of the minimum wage except through a very narrow lens are bringing more baggage to this debate then they’d care to admit.

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