National Review Online
National Review asked me to write a piece based on one of my inequality posts. Because I had relied heavily on research by Kevin Erdmann, I asked him to co-author the piece with me. It was just posted here. Kevin gave me a much better sense of how our public policies discriminate against renters.
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8. June 2015 at 11:42
Thanks Scott. It was very generous of you to ask me to co-author. It was a pleasure working with you.
8. June 2015 at 11:54
– For once I can agree for say 70% to 80% with the ideas penned down.
– But some of those public policies that have led to an increase of inequality, are “pushed through”/”have been encouraged” by the same folks who stand to benefit from those public policies.
Take e.g., zoning restrictions. These limit the amount of houses build and therefore push home prices higher and lead to higher rents. But one won’t hear the landlords complaining who benefit from those rising home prices. They don’t like that zoning restrictions are relaxed and will oppose such relaxing. Relaxing those restrictions will hurt the value of their properties.
8. June 2015 at 12:30
Willy2,
I would also expect to see a Baptist and Bootlegger dynamic here. But, it looks to me like in places like New York City and San Francisco, the most powerful and vocal opponents of new housing supply are progressives who really do see themselves as opponents of developers and landlords. It could be that as you move from the city core to the suburbs, the anti-building policies remain, but the constituency changes from core city progressives to suburban developers. But, in the city cores, it seems like the progressives have themselves tied in knots. They have pushed rents to exorbitant levels with decades of oppressive building regulations, so that now they won’t allow any new building unless it is built to rent at rates far below those that prevail as a result of those policies. They see increased supply as a “trickle down” solution, and they won’t even allow a trickle.
8. June 2015 at 13:05
That was a great article. Though I wonder how much the intangible assets showing up on the books for corporations is really a result of changes in accounting rules. I’m from the high tech industry and I remember that when the rules changed on goodwill write downs, tech companies were very willing to pay ridiculously high prices to acquire other companies because they no longer had to divert earnings every year to pay down that goodwill.
8. June 2015 at 13:11
Gordon, Yes, many people have told me not to take the intangible figures too seriously. But the increase is so large, and so consistent with casual observation about the nature of modern high tech firms, that I have to think there’s at least some truth to the shift.
8. June 2015 at 14:15
Gordon, I’m not sure that the effect of accounting is that important for this specific issue. In the Apple example, we are just comparing tangible equity to market value, so the book value of intangibles doesn’t factor into it. Apple’s non-tangible market value alone amounts to about 3% of the entire value of US non-financial corporations.
8. June 2015 at 16:51
The distortion arises because the consumption of housing services is not subject to a progressive consumption tax. This would be less important for low-consumption renters v owners than high-consumption renters v owners. The problem also exists in progressive income tax schemes.
8. June 2015 at 19:03
you would think “Redistribute California” would b an unbeatable catch phrase on the left, but “developer”, “for-profit” identity politics seems to supersede the apparent benefits of building more bedrooms in the coolest places
8. June 2015 at 21:12
Scott,
Yes, public policy unfairly favors homeowners and those with children in some ways. I’d like to see all government incentives for homebuying and having children eliminated. If we want to grow our population more rapidly, we should open or borders.
8. June 2015 at 21:44
I’m a landlord, and quite a rich one, in the upper 1%. In the DC area I am against certain zoning restrictions that prevent me from building a higher density building. It’s also hard to sue agencies these days, so you have to resort to threats like getting your neighbors to sign petitions for greater density and the like, which some of them who have no imagination don’t like to sign.
As for Scott Sumner’s article, it was Ok but made a logical error: after pointing out how few housing starts result in higher rents, which is bad for society as a whole, it then assumed that strong IP is also bad for society as a whole, ignoring that without IP you would default to trade secret and there would be less incentive to actually build something, other than First Mover Advantage, if there was no IP. A lot (indeed almost all) college professors miss this obvious point.
8. June 2015 at 23:33
read the article after reading Ray’s comment above, expecting to see Scott arguiing strongly against IP. Of course, Scott does not do that at all!
There is a very interesting discussion to be had about where the limits of IP should lie. Scott’s article does not say there ought not to be patents, he asks whether all IP provides wider benefits.
For example, until quite recently, getting a US patent for some types of invention was much easier than getting a European patent for the same invention. That gap has narrowed significantly in recent years.
Interesting article. The housing issues apply very similarly to the UK.
9. June 2015 at 01:14
Willy2, do strict zoning regulations really benefit landlords? I would assume it depresses the value of land by reducing iit’s utility.
9. June 2015 at 02:32
ChargerCarl wrote:
“Willy2, do strict zoning regulations really benefit landlords? I would assume it depresses the value of land by reducing iit’s utility.”
It also reduces the utility of the competition, though. In the absence of stict zoning restrictions, a slumlord’s tenants have nowhere else to go. New housing, to the extent it can be built at all, will target higher value customers. Take the zoning issueaway and the slumlord may have to compete to maintain his tenants..
9. June 2015 at 04:37
Scott, I agree.
Ray, Kevin and I did not say we were opposed to IP, that would be absurd. You really ought to learn how to read someday.
Blue Eyes knows how to read.
9. June 2015 at 04:46
Nice job Kevin.
One quibble guys:
“Our owner-biased tax code already puts renters at a disadvantage, relative to homeowners, because the rent they pay must cover all the income and capital-gains taxes that landlords pay but homeowners do not.”
I don’t think this is accurate. I think things are much more fluid. Rents reflect wages according to my buddies who manage 10K+ single family homes in 20+ markets. In fact, a lot of this is played for appreciation, or there’s simply no profit at all.
Generally a boots on the ground mid-market rule you can follow is that a single family homes cannot be managed professionally given Minimum Wage (plus taxes labor costs) for less than a $950 rent – at break even.
This is why I argue that slums are created by minimum wage – meaning a failure to do Uber for Welfare.
In a Chicago blighted neighborhood with 30% unemployment, with Uber for Welfare in place, where rehab construction labor cost say $160/wk – the single family home could be professionally managed for $700-750. The cost of a turn (which occurs every 14 months) is almost 60% labor.
The lack of properly priced labor (labor priced after welfare, without minimum wage, with work being required) keeps poor areas from being able to get home loans, or even flip homes in markets, unless gentrification has set in.
9. June 2015 at 06:11
@Prof Sumner
I was surprised not to see your defense of consumption as a measure of living standards, and also, more explicitly, a defense of non-taxation of capital gains you have done here in this blog.
@”intangibles discussion”
They have been always there, in my opinion, accounting rules were not created to show economic value, they have other objectives
9. June 2015 at 06:15
Very good article.
I have one comment regarding the labor share of income. I’ll agree that compensation of employees has fallen as a share of national income and personal income over the past few decades. However, transfer payments have dramatically risen over the past few decades as well. I think if you count transfer payments as income to labor rather than capital (and I think that would make the most sense), there hasn’t really been a meaningful shift in the distribution at all over the past 50 years.
Using the BEA’s personal income data, I consider receipts on assets, rental income and proprietor income to be capital income and compensation of employees and transfer payments net of contributions to social insurance to be labor income. This isn’t a perfect division (proprietor income is a mix of labor and capital income, for example), but I think it’s a reasonable breakout. Regular workers will see their income in the form of wages, benefits and transfer payments (unemployment insurance, Social Security, Medicare, etc). Owners of capital enjoy rents, income on their assets and the income produced by the businesses they own.
In 1964, 71.3% of personal income went to compensating employees, and 2.1% went towards net transfer payments, for a total of 73.4% to labor. On the capital side, 11.2% went to proprietors, 3.6% to rents and 11.8% as income on assets, for a total of 26.6% to capital.
In 2014, only 62.6% of personal income went to labor, but transfer payments jumped to 9.2%, for a total of 71.9% overall. On the capital side, proprietor income fell to 9.4%, rents increased to 4.3% and receipts on assets increased to 14.4%, for a total of 28.1%.
To take a longer term average, from 1955-1964, labor averaged 73.4% vs. 26.6% to capital, and from 2005-2014, labor averaged 72.6% vs. 27.4% to capital.
9. June 2015 at 06:33
Excellent article, Scott and Kevin.
9. June 2015 at 07:34
Sumner spins b.s. even when the evidence is in writing! I produce the salient paragraph below. Conclusion: Sumner et al slap IP because they think it drives ‘inequality’! Amazingly bad logic. Of course proprietary technology is by definition a monopoly, and thus produces ‘inequality’, but the tradeoff is it eventually goes into the public domain (e.g., ‘generic drugs’).
Sumner et al: “There are good arguments for some intellectual-property protection, which can spur innovation. And yet many economists on both the left and the right have argued that the protections have gone too far, into areas with no obvious social benefits. Copyright protections once lasted for 14 years, applied only to maps and books, and could be renewed once if the author was still alive. Now they’ve been extended to many other products, extend for 50 years after the death of the author, and last for at least 95 years for corporations. These extensions are widely seen as reflecting the lobbying power of companies such as Disney. In the high-tech sector, patents are often granted for seemingly minor and obvious innovations. President Obama has recently been pressing the Asian countries to enact stricter intellectual-property protections. This may be in America’s self-interest, but transferring money from Asian consumers to Disney shareholders almost certainly worsens global inequality.
9. June 2015 at 08:04
I may have disagreed vehemently with pretty much every other article you’ve written on inequality, but I thought this article was a necessary and fantastic synthesis.
The media reaction treated Rognlie as contradicting Picketty; I see Rognlie as elaborating Picketty.
The capital glut, real-wage slowdown and productivity/wage divergence, the growth of finance profits, seem to all be tied to the economic rents you listed absorbing increasing shares of the economy.
9. June 2015 at 08:45
I haven’t read the meat of the Sumner/Erdmann article yet (looks interesting), but I’m curious if anybody else experienced this ad on the NR site:
http://stuffconcerningstuff.blogspot.com/p/embarrassing-garbage.html
I rarely visit NR, but I’m surprised to have seen something from obvious hucksters like that there.
9. June 2015 at 11:28
Even French socialists can learn;
http://www.dw.de/france-unveils-measures-to-boost-job-creation/a-18505207
‘In a bid to reverse the upward trend in unemployment, the French government has announced a raft of measures, including more flexible labor rules and reduced costs, aimed at encouraging small firms to create more jobs. ‘
Specifically; ‘Small firms “can hesitate to hire because they feel there is too much uncertainty, too much complexity,” PM Valls said. “Today’s measures are meant to lift the constraints … and make life easier for small and very small firms and encourage them to hire,” he added.’
Which is the advice Jean Tirole gave after he won the Nobel Prize.
9. June 2015 at 13:04
I see another reason why inequality has risen. In the 1960s & 1970s workers/employees received wage rises at or above price inflation.
Starting in the early 1980s wage rises were below inflation. And that has undermined the pruchasing power of labor.
9. June 2015 at 15:00
^Perhaps that can be explained by the Fed’s asymmetric stance towards inflation since 1980? i.e. viewing deviations above its target as far worse and needing of action than deviations below target.
9. June 2015 at 16:20
Justin, interesting.
Willy2, I think the housing supply problem is part of the problem you’re talking about. Some of that inflation (and, thus, part of the decline in real wages) is a reflection of housing supply constraints. For low income renters in the expensive metro areas, this has amounted to a large cumulative reduction in real income over time – maybe 50% supply based rent inflation over 20 years on a budget item that is 1/3 to 1/2 of a low income household in those cities.
9. June 2015 at 20:49
@ChargerCarl: Who determines wage increases ? The FED or employers ?
But those wage increases below inflation have haunted the employers/producers as well. When wages rise by say 3% with inflation at say 5%, then producers WILL feel a drop in REAL demand by 2% AS WELL. In that regard, by limiting wage incereases, employers have & are undermining their own sales/demand.
@Kevin: Agree. But wages is only ONE factor among many others. I only wanted to highlight one factor that wasn’t mentioned in the article.
There’s another reason why government policies are detrimental: taxation. Government has doled out (generous) tax exemptions & tax deductions (think interest payments for mortgages). It was meant well, to help the homeowner. But time after time that favourable tax legislation have made things worse. e.g. gave real estate prices an extra push higher and forced e.g. rents to go much higher as well.
Remember the words “Only little people pay taxes” ?
http://content.time.com/time/specials/packages/article/0,28804,1891335_1891333_1891317,00.html
Reversing all those things that have increased inequality is close to impossible. Too many people simply benefit too much from those beneficial rules & regulations. In that regard, I fear only a (severe) economic downturn/recession will help to reverse all those bad things.
10. June 2015 at 06:29
Great article. I sent it around. About the intangible assets, I imagine that a largest of these are Goodwill and Intellectual property. Goodwill measures (mostly) the premiums paid to acquire another company. I wonder if there has been a similar rise in Goodwill in recent decades reflecting a consolidating corporate sector. If so it may be an effect of your second cause, regulatory burden on small firms.
10. June 2015 at 07:21
Morgan, Yes, low wage subsidies would help.
Jose, You can only do so much in one article.
Justin, Good point.
Thanks Britmouse.
Ray, I don’t see how your point relates to my article. I didn’t say I oppose IP.
Thanks myb6.
Patrick, Good find.
Willy2, I don’t agree with that.
ChargerCarl, I doubt monetary policy has much effect, especially in the long run.
10. June 2015 at 21:01
@Scot: Can you tell me with what you don’t agree.