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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.


big externalities spending g's

This is probably belaboring the obvious, but especially in light of the prior post it is worth noting that there are large external benefits to a society that increases in total aggregate wealth even if that wealth is not equally distributed. This becomes obvious when, like Planet Money did, you ask people whether they would rather be rich 100 years ago or middle-class today. Of course you’d rather have an iPhone and antibiotics – having the ability to consume a high share of social output matters less when “social output” is mostly servitude and pheasant. The vastly increased volume, quality, and diversity of what we have now means that you can eat delicious food for $10 from your local Thai or Vietnamese or Burmese or Indian or Bengali or Japanese or Chinese or Korean or Mexican or Salvadoran take-out joint (just to name a few) that would have been mind-bogglingly exotic to the insanely rich American or European of the McKinley era. This also becomes obvious when you ponder whether you’d rather be rich today but in a poor country like, say, India. Being rich in India would be nice. There are amazing houses to live in and some really great shopping, and you’d get to consume a lot more servitude than a similar-rich American. On the other hand, major roads in India are still clogged by goats and cows. Take your pick.

This is likely what frustrated me so much about Mr. Money Moustache – not his own choices, which are his own, but his preachy self-righteousness. Mr. Money Moustache can live so well on so little in large part because the rest of us are working so much harder to keep streets clean, power running, vaccinating, fighting crime, and so on and so on. Mr. Money Moustache is massively benefiting from the positive externalities of living in the wealthiest society Earth has ever produced and is sufficiently oblivious to that fact as to suggest his own choices could and should be everyone’s simultaneously.

Without more commentary, it is also worth noting the latest research on happiness and income both across and within countries.

if you're not drowning, then justice is done

Don Boudreaux (does reading Cafe Hayek make me a masochist, BTW?) thinks he has something here, but he doesn’t:

If (by whatever criteria) the process is fair, then the outcomes are fair.  If the process is not fair, then at least some outcomes are lamentable.  If those lamentable outcomes involve too little income for Smith and too much for Jones, then this income difference is evidence of the unfair or skewed or crony-fied process.  But the object of my concern in such situations isn’t the income difference as such; rather, it’s the unfair or skewed or crony-fied process that gave rise to it.

Forget about how much work is being done here by the parenthetical; this is mostly specious and otherwise useless. Let’s use some real life examples:

Let’s say black people are enslaved and forced to labor for centuries. I bet Prof. Boudreax and I would certainly agree that process is unfair.

Now let’s say that all slavery is abolished, and the entire socioeconomic system (somehow) peacefully replaced with a system that Prof. Boudreaux considers completely fair on a forward-looking basis. Are outcomes now fair? I would argue, no, because the inputs are biased then even an ideal process can’t produce ideal outcomes. But let’s say that the process iteratively produces improved outcomes. At what point does it produce ideal inputs that then lead to truly ideal outputs via the ideal process? One iteration? Two? Ten? Never? What if the theory of the second-best kicks in – where, once any condition of optimality is changed, you cannot presume that you can maximize your target goal by maintaining all the conditions that would have produced the ideal outcome under the original optimal set?

What if a process that is ideal at some time t produces outcomes that alter the process at some time t+x? Take Robert Nozick’s infamous example of Wilt Chamberlain, whereby ideal inputs and an ideal process can produce outcomes many would consider unfair (though, obviously, not Nozick or Boudreaux [or probably Wilt the Stilt]). What if Wilt decides that, now that he is vastly richer than everyone else in society, he is going to bribe a politician to sell him state assets at below-market prices. What if inequality, even inequality produced via ideal processes with ideal inputs, inexorably produce outcomes that lead to non-ideal processes?

What about luck? What if what distinguished Prof. Boudreaux’s Jones and Smith was some completely unpredictable and random event – an asteroid incinerates Jones’ barn, a once-in-a-thousand-year storm destroys Smith’s ship? What determines whether Facebook becomes a world-beater and not Friendster or MySpace? Can even an ideal process mitigate for those inequalities? What if luck, or chance, or events beyond human control and understanding, drive most of the gaps between life outcomes?

I agree with Prof. Boudreaux more than he probably would suspect. I believe that a system that allows for private property, broad freedom to transact, and inevitable dispersion in the distribution of wealth is likely ideal, both from a utilitarian and non-utilitarian perspective. Yet Prof. Boudreaux accuses those who worry about these inequalities of smallness, of envy, of corroded character. I would argue that it is he who has exploited a certain myopia and smallness to leverage a handful of economic insights into a worldview that justifies a corrosive lack of empathy and a smallness of the soul.

So Radley Balko brought up on Twitter a "Challenge To Lefty Bloggers" that he published back in 2009. Some of his questions are perfectly reasonable: I think we should target NGDP in a way commesurate with 4% inflation, for example; I’m also in favor of marginal (not total or average) tax rates of ~90% under certain circumstances. Some of his questions are irrelevant (the "unfunded liability" of Social Security is a non-sequitur), confused (I think he scrambles marginal and average tax burdens), or just silly (our average tax rate is close to the median – what greater suffering dare you inflict!?).

But some of them are conceptually flawed in a way I think is interesting. Firstly, his "size-of-government" metric is hopelessly flawed. More interestingly, though, are the questions about income inequality and progressive taxation – what are the optimal levels of each? The trick here is that claiming to have a theoretic or empirical basis for an exact number is a fool’s errand. The real answer to this question is "less and more than we currently have, respectively." So let’s use a little more of the latter to alleviate some of the former, and see what happens! It doesn’t have to be radical – we could just nudge up top marginal tax rates, perhaps create a new millionare’s bracket, and use the money to expand the EITC (which I know doesn’t directly affect pre-tax income inequality on either end but just roll with me here). Will that devastate innovation? Will Atlas shrug? Meh – I doubt it. In fact, Galt’s Gulch was a rather lonely place even when top marginal tax rates in the United States were 90%+. So rather than demand anyone decare a single optimal point, let’s agree that "too few people claim too large a share of national income" and nudge it a bit and see what happens. That’s what democracy is for!

Ashok Rao busts me for being lazy this morning, and he has me dead to rights. I blithely waved away a further discussion of what would actually happen if there was a large secular increase in aggregate saving on the part of the poor. I was lazy about this, and in my defense, I was using “economic disequlibirum” as a stand-in for saying “a) I’m at the office, b) I didn’t think it was entirely relevant to the final conclusion of my post, and c) I was feeling lazy.”

So now that, at the very least, condition a) has been relieved, let’s take a look at Ashok’s point. He notes – quite correctly – that 1) even if you make unrealistically egalitarian assumptions about the initial wealth distribution that increased saving by the poor doesn’t affect the ratio very much, and the more broad point that 2) the wealth gap between rich and poor will continue to increase so long as the rich save at a higher rate than the poor regardless of the initial distribution. Both of these are correct, but they do end up being somewhat tangential to the real question re: the effect on the economy on a substantial secular increase in the social desire to save.

This is, in fact, a much disputed question in economics, and what effects it might have (and whether that effect depends on whether current conditions are recessionary and whether we’re at the ZLB) are not the subject of much consensus. As a general point, though, Americans used to save much more, so if we decided to save more now, in all actuality it may not have much economic impact at all.


But just because things used to be one way doesn’t mean that, under current conditions, they could just be that way again – a lot has changed since the 1970s and perhaps it might not be so simple to revert back to saving that much. Tangentially, I’m really not a huge fan of the distinction between “saving” and “consuming” anyway, so maybe I’m not the perfect person to be breaking this down, but what the heck, let’s give it a shot:

What happens to the economy when the poor start saving more depends on what “savings” is in this context. Let’s start with some real data – the lowest quintile of Americans take home 3.4% of national income, and therefore a 1% increase in the savings rate of “the poor” (defining that as coterminous with the bottom quintile of earners, which is totally not actually correct) would result in an increase in the total national savings rate of .034%. So we’re talking pretty small taters, frankly, which is really the key issue.

But beyond that, we can still discuss the theoretical side, which truly does depend on what “savings” means. If it means “putting the money into deposit accounts at banks” then the aggregate effect of those savings depends on whether it increases loaned funds from that bank in an amount that equals or exceeds the forgone consumption. The reason the “paradox of thrift” doesn’t always hold is that the saved money “has to go somewhere” which means it could (though not will) become someone else’s consumption (of perhaps a more durable good) that will offset the loss in more short-term oriented consumptions. So the disequilibirum” that results could be a net loss in output and/or it could be a sectoral shift in output, and how disequilibirum-izing you think that is depends on how PSST-y you think the economy is or more broadly how inflexible it his, how high transaction and discovery costs are, how rooted labor markets are, that kind of thing.

Anyway, the point is, while this is theoretically all interesting, my two conclusions from Ashok’s post are a) the net short-term economic impact of even a substantial shift in the savings preferences of the poor will be small and b) I still think the conclusion of my prior post was right because it wasn’t dependent on whether or not a) is true.

Felix Salmon has a great post in which he links to some great journalism from NPR, and I’d love to talk about it but I am just too distracted by this picture:

I see only three explanations for this picture:

1. John Thune is bribing an AP photographer.
2. John Thune is chosen by God to lead us to a messianic age.
3. John Thune is the Icarus II:

We report, you decide.


Matt Yglesias is correct to ding Jamie Dimon for claiming that he pays “39.6 percent in taxes.” But he doesn’t ding him nearly hard enough!

So, in no particular order:

· Matt’s point that the top tax bracket is 35%, not 39.6%, is correct.

· But that’s just the top tax bracket! Assuming he and his spouse are filing jointly, on income under $379,151 they would pay no more than 33%, which declines quickly to brackets of 28%, 25%, 15%, and 10%. So that top tax bracket is only applied to the 379n151st dollar of income and beyond.

· I would be very, very, very surprised to learn that Jamie Dimon and his spouse take claim no deductions, credits, or exemptions on their taxes. Very, very, very, very, very, very surprised.

· I would also be very, very, very, very, very surprised to learn that Dimon & spouse claim all their income as “income” and none of it as “capital gains” which can be taxed at a top rate as low as 15% depending on how it is claimed.

· Dimon is roughly correct about the top tax bracket in New York City – “add in another 12 percent in New York state and city taxes” – but again forgets that this rate is not applied to all his income, just that above the top bracket, which is $90,000 in NYC but a cool half-a-million for the state.

· He weirdly neglects to mention sales or property taxes in this, which would buttress his argument.

Anyway, the point of this is that unless Jamie Dimon has the world’s worst accountant or is patriotically donating to the US Treasury there is just no way he’s giving every other dollar he makes to the government. And his whiny stupidity about this certainly doesn’t strengthen the argument that people who can accumulate Dimon-esque levels of wealth are somehow especially gifted and therefore morally entitled to hoard wealth.


Just listened to Planet Money discuss subsidies for having babies, and thought, first of all, since I am now engaged to get married and both the fiancee and I are on the same page re: having a couple kids, I hope the United States institues such a policy! Maybe it could united pro-lifers (incentive to carry pregnancy to term) and progressives (it would largely be a very progressive redistribution of wealth)!

But more importantly the economic logic behind it sort-of-tangentially reminded me of a pet concern of mine:

This can be good for a little while. With a young workforce and fewer babies to take care of, a country can show enormous growth.

But then people start to get old, and governments say uh-oh.

"Who’s going to pay the bills? Who’s going to pay for pensions?" says Patricia Boling, a political scientist at Purdue.

In many countries, including the U.S., workers pay for retirees’ pensions. Fewer kids means fewer workers funding those pensions.

"And in countries that have really low fertility rates, that’s a very extreme problem," Boling says. It "makes what we have in the United States … look like peanuts."

All true! And yet one would think that overall economic growth could fund a higher retiree-to-worker ratio, right?

Here’s my vision for the future of the economy:

  • Robots replace humans at doing some job. A few humans are unemployed, but overall there is a consumer surplus.
  • Repeat.

Here is where my simulation diverges. Essentially, replacing a human worker with a robot is substituting capitol (the machine) for labor (the worker). On a small scale this will simply cause sectoral shifts; if it gets cheaper to buy some tchotchke because a robot made it instead of a human, when I buy the tchotchke I save some money which I will then use to buy coffee and when demand for coffee goes up it causes a commesurate rise in employment in the coffee sector. Yay! But on a sufficiently large scale you are faced with what I like to call the reverse-Ford problem:

Mr. Ford announced that he was doubling the pay of thousands of his employees, to at least $5 a day. With his company selling Model T’s as fast as it could make them, his workers deserved to share in the profits, he said. […]

The mythology around this story holds that Mr. Ford wanted to pay his workers enough so they could afford the products they were making.

In fact, that wasn’t his original reasoning. But others made the point, and, in time, it became part of Mr. Ford’s rationale as well. The idea became a linchpin in an industrial philosophy known as Fordism.

More production could lead to better wages, which in turn would lead to more spending by the public, yet more production and eventually even higher wages.

"One’s own employees ought to be one’s own best customers," Mr. Ford said years later. "Paying high wages," he concluded, "is behind the prosperity of this country."

So what happens to Ford Motors if making the same number of cars requires far less labor input, replaced by less-expensive capitol input? Well you get higher and higher wealth and income inequality as those at the top need not share their profits with a large workforce.

So what happens when there exist enough robots to basically obviate human labor from the fundamentals of the economy?

I see three possible futures:

  • Robot dystopia – a few scions of capitol control all the machines, make vast fortunes, and surrender as little as possible, leaving most of the rest of humanity living at subsistence levels.
  • Robot utopia – socialization of wealth through whatever mechanism, meaning the vast surplus is shared relatively equitably, meaning most people have most of their needs met and are free to pursue higher levels on the Maslow heirarchy.
  • Robot apocalypse – the robots rise as one to destroy us all.

I don’t know what to do about option #3, but I am concerned that ruling that out that option #1 is more likely than option #2. And the reason I think that has to do with, well, baby subsidies. To some extent we are facing a similar problem – the economy is producing more but finding that more and more of the humans in the system don’t have a great deal of utility but still require resources. In theory this shouldn’t be hard, but in practice it’s proving difficult. Even in Japan where they had some nasty economic times they have still passed their original peak GDP and are have a very high GDP per capita, though not nearly as high as the United States. Keep in mind also that a lot of Japan’s troubles here are culturally based; a different country facing similar demographics would probably not have such a difficult time. But looking at the United States where GOP scissors are already being aimed at Social Security despite being projected not to run into any trouble for the next 75 years because raising taxes on wealthier individuals is the dread socialism doesn’t necessarily leave me optimistic that we’ll be able to wrest sufficient control of the Great Robot Surplus from the hands of its nominal owners before they are able to consolidate control.

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