Kevin Erdmann on capital income, rental income and labor compensation

Kevin Erdmann has three very interesting posts.  Three posts back he showed that the rise in the income of capital that has recently been discussed by people like Paul Krugman and Brad DeLong is not quite what you might expect:

We start with Profit (the blue line at the bottom).  I have extended the time frame further back.  The green line represents all returns to corporate capital, both to debt and equity.  The debt portion peaked in the early 1980’s when corporate leverage was at its highest.  When we make this correction, we find that corporate returns to capital have been flat for 40 or 50 years.  If we add in proprietors’ income, we find that returns to capital have been flat or declining for a century.  From 1929 to about 1985, there was a trend of profit claims moving from proprietors to creditors.  From 1985 to the present, there was a trend of profit claims moving from creditors to equity owners.  But, there is no trend of increasing total returns to capital over the past 30 years.

And, when we take the longer view, there really isn’t so much of a trend in private fixed investment either, especially considering that investment continues to recover from the recent recession.  Investment is well above the levels of the 1950s.  Investment as a share of GDP ranged from 10-12% until the 1970s.  Since then, the range has moved up to 11-14% and is currently 12.3%.

There is nothing to see here.

So we have more corporate profits (return on equity) and less interest income from corporate debt, with no significant change in the total return to corporate capital. So why is labor’s share of income falling?  From two posts back:

First, this is a little tricky, because 60% of American households own their homes.  So, in effect, this is a measure of rent we are paying ourselves.  Or, put differently, this is a measure of the income share we capture because home ownership tends to provide excess returns.

The trend in Compensation has dropped from about 57% in 1970 to about 53% – a 4% drop.  But, the trend in Rent + Compensation has dropped from about 59% to 57%.  Rental income explains about half the drop in Compensation Share, and in fact, accounts for more than all of the drop in Compensation Share since the previous low point in 2006.

To the extent that Rental Income supplements Compensation, this income is probably distributed mostly to middle and upper-middle class households.  So, both the level and the distribution of household Compensation Share are probably helped by reducing excess returns to Rental Income.

So a big part of it is the rise in the share of national income going to rents.  But that’s not all—from his most recent post:

This means that since 2008, Compensation income is being displaced by net Rental income.  For households that rent their residences, this means that real income has been reduced by rent inflation.  For households that own their residences, this means that real income has been reduced by rent inflation, but has been replaced by Rental Income.  So, policies that are keeping home prices down are benefitting households that own their homes at the expense of households that don’t.  All households look like they have lower real incomes.  However, real income of home owning households is understated because the high inflation of their imputed rent is being deducted from their compensation income and is being re-constituted as capital income.

The third graph shows relative nominal changes in Compensation and Rental Income since the 4th Quarter of 2008.  Nominal Compensation has increased $1.2 trillion since the end of 2008.  Rental Income has increased by $350 billion.  For home owning households, their experienced real incomes have increased by $350 billion more than what their statistical compensation levels are showing, because this rent inflation generally is not affecting their cash flow.

Non-homeowning households have experienced rent inflation as measured, and the gains from that rent are generally accounted for as reductions in their real incomes, relative to nominal incomes, and as profits to firms in the real estate industry.

The housing shortage is reducing the Compensation share of national income through both mechanisms – home owners and renters.  One path goes to Rental Income and doesn’t really affect real household incomes and the other goes to profit and does really affect real household incomes.  Both represent a shift in total income to generally higher income households.

The irony is that so many people seem to agree that rising home prices, by making homes less affordable, are hurting lower income households.  If we don’t put the clamps down on the banks, they will just drive us right over another speculative cliff, so the story goes.  Sadly, the tight regulatory and monetary regime that comes out of this flawed reasoning is the thing that is actually hurting low income households.

These three posts are packed with fascinating information.  I’d read them in reverse order, from the older to the more recent.


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22 Responses to “Kevin Erdmann on capital income, rental income and labor compensation”

  1. Gravatar of Lorenzo from Oz Lorenzo from Oz
    1. November 2014 at 22:48

    Thanks for the links (he’s on my bloglist, but somehow I missed these posts). Great post. Two relevant links: liberal (in US terms) cities are expensive:
    http://www.theatlantic.com/business/archive/2014/10/why-are-liberal-cities-so-unaffordable/382045/

    That would be because of the land-rationing.

    And African-Americans are leaving such cities:
    http://www.washingtonpost.com/posteverything/wp/2014/10/29/college-graduates-are-pushing-african-americans-out-of-cities/?tid=HP_opinion

    That would also be due to land rationing. Which also, of course, creates assets strongly prone to demand shocks.

  2. Gravatar of Benjamin Cole Benjamin Cole
    1. November 2014 at 23:21

    Lorenzo–

    I grew up in Los Angeles. It went from being a white and black city, with large brown population, to brown and white and yellow city, and blacks, as you say, are disappearing. They are moving inland.

    There is traditional urban economics at play here. City cores always become more valuable than outskirts. I say “always,” but that was trumped in the US from 1970 through 1995ish by white flight, crime, schools, racism, freeways you name it.

    Since then urban dynamics are reasserting themselves. That said, I am totally for rapid condo building in urban areas. This is happening in downtown Los Angeles, btw, which has had an increasing population.

    Thought of the day:

    If the Fed did not pay IOR, would banks by now have gotten around to charging depositors for the right to deposit money?

    I think so. I think there a glut of capital, and the price signal would reduce returns on secure savings to a minus figure.

  3. Gravatar of Nick Nick
    2. November 2014 at 04:42

    I enjoyed those posts thoroughly, a lot of food for thought.
    But I feel ‘benefits home owners at the expense of renters’ may be a bit off.
    Renters experience the loss of income relatively smoothly, but the beneficiaries are not a signal group. There are home owners who ‘rent from themselves’ and they may not follow the rental market closely. They experience the extra income from rents as excess return to home value which does not come smoothly (at least the way our central bank does things). Then there are landowners who actually rent out their property and have a better view of the market. They may understand when they have ‘too much’ price apreciation relative to the rent they are able to charge, they are able to sell real estate without buying more to replace it, and are able to sell fractions of their real estate portfolio instead of deciding to personally switch from being an owner to a renter. They can create a smoother income gain for themselves.
    So I think it’s really a system for the ‘upper middle class’ and above I guess. However you want to define these things. It really starts to work for you when you can own enough property to rent to others. The people who only own their own homes get something, but it’s not such a hot deal for them.

  4. Gravatar of Michael Byrnes Michael Byrnes
    2. November 2014 at 05:06

    Kevin Erdmann wrote:

    “The irony is that so many people seem to agree that rising home prices, by making homes less affordable, are hurting lower income households. If we don’t put the clamps down on the banks, they will just drive us right over another speculative cliff, so the story goes. Sadly, the tight regulatory and monetary regime that comes out of this flawed reasoning is the thing that is actually hurting low income households.”

    Can your argument be summarized this way:

    1. Rising home prices, in and of themselves, are not a problem. The problem is underlying conditions (low supply, regulations that restrict production) that happen to lead to higher prices. The rising prices are just a sign of the problem, not the problem itself.

    2. Monetary and regulatory policies that hold prices down exacerbate the problem. They don’t solve the underlying supply problem (if anything, they are a disincentive to more production that exacerbates the supply problem), and they add a demand problem on top of it that just makes things worse, particulary for those who don’t own their homes.

  5. Gravatar of ssumner ssumner
    2. November 2014 at 05:14

    Nick, I bought a two family in a nice suburb of Boston during the 1991 recession, when prices were low. I live in one unit. Even so it hasn’t been a good investment. I wish I’d put the money into something else, like stocks or high yield bonds.

  6. Gravatar of Nick Nick
    2. November 2014 at 05:37

    Scott,
    I think what you are saying fits with my point, although maybe ‘upper middle class’ is the stiking point. I’m trying to say that when you are talking about capturing ‘excess returns’ in housing you are talking about maintaining a relatively diverse real estate investment portfolio. But even the excess returns that exist are not so tempting compared to the equity risk premium. So you don’t even want too much of your money to be in RE even with better than historical returns. So who can afford to own a relatively diverse collection of rental units while only keeping their total RE investment around 20-40% of net worth? Well in MA very wealthy people. But in Maine you just have to be a doctor.

  7. Gravatar of Major.Freedom Major.Freedom
    2. November 2014 at 05:38

    Kevin Erdman is ignoring the reduction in real income to low income families from loose money, which results from goods prices rising faster than their wage rates.

    Also, and more importantly, inflation redirects resources away from net wealth generating activity and towards net wealth consuming activity, which reduces overall productivity.

    Finally, and most importantly, inflation causes the whole economy’s capital structure to become distorted thus making recession inevitable in the future by either persistent accelerating inflation and eventual currency collapse, or what has happened for the last 50 years, abandonment of accelerating inflation and revealing fewer errors sooner rather than more errors later on. This business cycle hurts the poor the most because they can least afford to live off their savings.

    Other than that, a good analysis of income distribution. Good on data, weaker on theory.

  8. Gravatar of Philippe Philippe
    2. November 2014 at 06:32

    “persistent accelerating inflation”

    why would an inflation target, or an NGDP target, lead to accelerating inflation?

    If I choose to drive at 50mph, why would that cause me to constantly accelerate?

  9. Gravatar of benjamin cole benjamin cole
    2. November 2014 at 07:00

    Phillipe-inflation is always persistent accelerating or galloping or skyrocketing or something. Inflation is never moderate for long, like say it was 1982 to 2008. Inflation might be moderate in practice or in history, but never in theory.

  10. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    2. November 2014 at 07:28

    Too bad Rich Lyons didn’t have that first of Kevin’s posts, when he pressed Laura and Emmanuel for their evidence that income inequality was a problem (at about 19 minutes in);

    http://www.youtube.com/watch?v=5u4o6yMhL1w

  11. Gravatar of Kevin Erdmann Kevin Erdmann
    2. November 2014 at 13:02

    Nick, you’re right. My language was a bit sloppy there.

    Thanks for taking a look at this, Scott. These posts were one of those fun moments where I knew that there were a couple of technical corrections that should be made to Krugman’s original chart, but I had no idea where the data would lead, and I had somehow completely missed the extreme jump in net rental income over the past several years until now.

    At the time I finished the first post, I really was asking the question, “Where could the decline in compensation be coming from?” I knew capital returns were probably level once my adjustments were made, but I really didn’t know the answer when I started. And of course the answer I found fits very nicely into the narrative of a housing market in disequilibrium.

    One could argue that there are problems with Federal intrusions into housing markets that make them more crisis prone. That certainly might be true. But, I think we need to realize that there are strong practical and historical reasons why access to real estate ownership is limited due to the all-or-nothing form of ownership of owner-occupied homes. This context will tend to provide above-market risk-adjusted returns to high wealth households who can jump the hurdles required to attain ownership.

    I don’t like to feed the fetish of making income inequality the defining factor in public policy. But, I do think there are interesting issues here that make it difficult to come easily to optimal public policy. I don’t like seeing high returns related to limited access because we’re all better off when the prices are right and returns are efficiently bid to equilibriums.

  12. Gravatar of Major.Freedom Major.Freedom
    2. November 2014 at 15:52

    Philippe:

    “why would an inflation target, or an NGDP target, lead to accelerating inflation?”

    To be precise, accelerating monetary inflation.

    The reason is grounded on the fact that a division of labor economy is made up of more than just spending. It is made up of real capital as well.

    Socialist money, as long as it is in force, puts constant stress on the capital structure. The more stressed the economy gets, the greater the rate of monetary inflation needed to support it. As capital becomes more stressed, it appears to the monetarists that money is too tight, despite the fact that the rate of dollars created by the Fed is increasing over the mid to long term.

    As more and more money creation is needed to support the more and more distorted economy the investors of which would otherwise want deflationary correction, what happens is that the same total spending requires accelerating monetary inflation. We saw this in Australia before they slowed the rate down and allowed a partial correction (a rise in unemployment and fall in output as resources were reallocated to more valued sustainable uses) to occur.

    “If I choose to drive at 50mph, why would that cause me to constantly accelerate?”

    You didn’t get the analogy. For a bike that is being damaged over time as you remain at an unsustainable speed of 15, more and more force on the bike is needed to keep the bike up at that speed. That force is the destructive aspect, not the changes in speed. The changes in speed are the result of the forces.

    Market monetarists are, so to speak, only focusing on the speed of the bike, and ignoring the structure of the bike and the max force that can be sustainably applied to it. They believe that the bike should always go at 15, as their misguided ideal of a “constancy”, an arbitrary “policy” for the moving speed. In reality they have no clue how fast the bike can go because they don’t understand the bike’s structure.

    In fact, no one individual knows the bike’s structure, because nobody knows the aggregated preferences and capital abundance, and those are what determine the optimal bike structure. It is only through individual buying and selling on the market, can anyone get a glimpse of what the bike structure sort of looks like.

    Sumner has no clue whether 4.5% NGDPLT is the right NGDP. It is a pure arbitrary assertion that totally ignores the myriad of billions of individual’s preferences. It is crude, destructive, banal, and most of all lazy. It is incredibly lazy to just pull 4.5% or any other percent out of one’s arse and insist that the important thing is that it is a constant. Human life is not constant. Imposing a constant on humans is self-destructive.

    Humans need and require room to determine their own money and their own spending. Not some monolithic one size fits all Goodhart and Lucas susceptible aggregate statistic.

    No central plan target has worked in history. None. All have failed. Every new target or rule was advanced as what should have been advanced all along, and whose absence was the reason for past failures. If only we had this rule enforced all along, then all of humanity would have reached utopia.

    If you can understand why constant growth in spending on an individual firm’s output, no matter what investments they make and no matter what they produce and offer for sale, will lead to degradations in that firm’s resource usage, then you should be able to understand why constant growth in spending for a group of firms that make up an “OCA” territory will lead to degradations as well. In the former case it is obvious, but for some strange reason, monetarists have tremendous difficulty accepting it for the latter case.

    It is as if we’re supposed to believe that when a whole economy’s investor population are deprived of market money, that no matter how many mistakes are made by a sub-group of investors caused by not having access to market money based information, there will be other investors who did not make any mistakes because they had the supernatural ability to know what the economy would have otherwise looked like had there been market based money, and made decisions based on those counter-factual relative prices, interest rates, profits and losses, and risk premia.

    All hail supernatural investors who…act as if there is no central bank at all…because that is the ideal reaction we want when we advocate for…uh…central banking! LOL

  13. Gravatar of Philippe Philippe
    2. November 2014 at 16:27

    “To be precise, accelerating monetary inflation”

    That is not precise. What I suppose you mean by ‘monetary inflation’ is an increase in the quantity of money. But an increase in the quantity of money can be accompanied by a general fall in prices, i.e. an increase in the purchasing power of money – which is what people, yourself included, usually refer to as deflation. So the main problem with your idiosyncratic definition of ‘inflation’ is that it doesn’t really make sense.

    “would otherwise want deflationary correction”

    By ‘deflationary’ do you mean generally falling prices or a contraction in the money supply?

    Assuming for the sake of argument that by its nature central banking requires an ever-accelerating increase in the quantity of money, why is this a problem if prices are not constantly rising at an accelerating rate, but are instead increasing at a steady rate (say 2%) on average, in line with the central bank’s inflation target?

  14. Gravatar of Philippe Philippe
    2. November 2014 at 16:45

    “central plan”

    an inflation target or ngdp target is not a ‘central plan’ which determines everything that should be produced and consumed. It is simply a nominal target. Do you not even know the difference?

    “constant growth in spending on an individual firm’s output, no matter what investments they make and no matter what they produce and offer for sale”

    Why would you spend your money on a firm’s output, no matter what investments they make and no matter what they produce and offer for sale? Do you just like randomly throwing your money away?

    “did not make any mistakes because they had the supernatural ability to know what the economy would have otherwise looked like had there been market based money”

    So you are saying that in your imaginary ancap world, investors would not make ‘mistakes’? Do you mean that there would be no such things as crashes, depressions, recessions, financial crises, mass bankruptcies, mass unemployment, etc? Are you saying that these things would not exist in your imaginary ancap world?

    “act as if there is no central bank at all…because that is the ideal reaction we want when we advocate for…uh…central banking!”

    That is extremely confused. No one advocates central bank policy on that basis.

  15. Gravatar of Major.Freedom Major.Freedom
    2. November 2014 at 22:42

    Philippe:

    “To be precise, accelerating monetary inflation”

    “That is not precise. What I suppose you mean by ‘monetary inflation’ is an increase in the quantity of money.”

    See? Precise. If I was not precise, you would not have known that.

    “But an increase in the quantity of money can be accompanied by a general fall in prices, i.e. an increase in the purchasing power of money – which is what people, yourself included, usually refer to as deflation. So the main problem with your idiosyncratic definition of ‘inflation’ is that it doesn’t really make sense.”

    How is this relevant to anything I said?

    “would otherwise want deflationary correction”

    “By ‘deflationary’ do you mean generally falling prices or a contraction in the money supply?”

    Why do you demand I repeat myself?

    “Assuming for the sake of argument that by its nature central banking requires an ever-accelerating increase in the quantity of money, why is this a problem if prices are not constantly rising at an accelerating rate, but are instead increasing at a steady rate (say 2%) on average, in line with the central bank’s inflation target?”

    That is not possible in the long run with accelerating money supply growth.

    “central plan”

    “an inflation target or ngdp target is not a ‘central plan'”

    It is a central plan.

    “which determines everything that should be produced and consumed.”

    Not even the Soviet Union government determined everything.

    A central plan is not necessarily all inclusive. There can be central planning in specific industries and projects. Central planning means a plan that is brought about centrally. Since when did “plan” only mean a plan for all and every production?

    “It is simply a nominal target. Do you not even know the difference?”

    Where did I claim that a central plan must be all encompassing? Not even the Soviet Union government had full control. There was a black market.

    “constant growth in spending on an individual firm’s output, no matter what investments they make and no matter what they produce and offer for sale”

    “Why would you spend your money on a firm’s output, no matter what investments they make and no matter what they produce and offer for sale?”

    Who said I would? The government has the printing press. They will spend on that firm’s output.

    The point is not who will spend the money, the point concerns a target of spending no matter what is produced.

    “Do you just like randomly throwing your money away?”

    Where did I say I would be the one spending money at that firm? I was talking about a central plan that targets spending by the state printing and spending money.

    “did not make any mistakes because they had the supernatural ability to know what the economy would have otherwise looked like had there been market based money”

    “So you are saying that in your imaginary ancap world, investors would not make ‘mistakes’?”

    Where did I say that?

    “Do you mean that there would be no such things as crashes, depressions, recessions, financial crises, mass bankruptcies, mass unemployment, etc? Are you saying that these things would not exist in your imaginary ancap world?”

    Where did I say that?

    “act as if there is no central bank at all…because that is the ideal reaction we want when we advocate for…uh…central banking!”

    “That is extremely confused. No one advocates central bank policy on that basis.”

    You haven’t gotten out much. Every debate I have had with monetary socialists boils down to a faith that investors won’t be misled by the central bank vis a vis production project sustainability. They’ll be able to figure out what would have otherwise prevailed in a free market and make decisions according to that alleged knowledge. I am not making this up. This is what I have been told many times.

  16. Gravatar of ssumner ssumner
    3. November 2014 at 06:19

    Nick, The monetary returns are fine, but the constant frustrations of owning rental property make it an undesirable investment, in my view. Unless you are good at fixing things. Stocks are much better.

    Kevin, I think the biggest problem here is zoning regs. Houses are very affordable for average people in Texas, much less so in Boston and California

  17. Gravatar of Philippe Philippe
    3. November 2014 at 08:09

    “Why do you demand I repeat myself?”

    I don’t. What do you mean by ‘deflation’ there?

    “That is not possible in the long run with accelerating money supply growth”

    So if the central bank has, say, an inflation target of 2%, and an inflation target of 2% is not compatible with an ever-accelerating increase in the quantity of money, then there will not be an ever-accelerating increase in the quantity of money.

    “the point concerns a target of spending no matter what is produced”

    It’s up to people to decide how to spend their money. There is no reason why a nominal income target should make them want to randomly throw away their money on stuff they don’t want.

    A nominal income target simply specifies a desired level of total $ spending in the economy. People decide what to spend their money on.

    “I was talking about a central plan that targets spending by the state printing and spending money”

    An NGDP target doesn’t target a particular level of state spending. Nor does it imply that the state should spend money on ‘anything’.

    “Where did I say that?”

    You said that investors “did not make any mistakes because they had the supernatural ability to know what the economy would have otherwise looked like had there been market based money”. You are saying that if there was what you call “market based money” (by which you mean ‘if we lived in ancapistan’) investors would not make “mistakes”.

  18. Gravatar of TravisV TravisV
    3. November 2014 at 18:31

    Kevin Erdmann wrote:

    “I don’t like to feed the fetish of making income inequality the defining factor in public policy. But, I do think there are interesting issues here that make it difficult to come easily to optimal public policy. I don’t like seeing high returns related to limited access because we’re all better off when the prices are right and returns are efficiently bid to equilibriums.”

    I think Yglesias might have had a post a while back on how rising real estate values are a huge component of the gains to the top 1%……

  19. Gravatar of Michael Byrnes Michael Byrnes
    3. November 2014 at 19:01

    Yglesias wrote a whole (short) book about the artificial scarcity of housing:

    http://www.amazon.com/The-Rent-Too-Damn-High-ebook/dp/B0078XGJXO

  20. Gravatar of Major.Freedom Major.Freedom
    3. November 2014 at 19:37

    Philippe:

    “”Why do you demand I repeat myself?””

    “I don’t. What do you mean by ‘deflation’ there?”

    You don’t demand I repeat myself, you just keep asking me to answer questions you’ve already asked before.

    By deflation I mean fall in the supply of money brought about by deposit money created by credit expansion, being eliminated due to credit contraction. When this happens, assuming the crude assumption that the relationship between supply and of volume of spending is constant, then spending falls, along with profitability. This forces reallocation of resources and labor due to bankruptcy and liability constraints.

    “That is not possible in the long run with accelerating money supply growth”

    “So if the central bank has, say, an inflation target of 2%, and an inflation target of 2% is not compatible with an ever-accelerating increase in the quantity of money, then there will not be an ever-accelerating increase in the quantity of money.”

    That falsely assumes the central bank can always target 2% price inflation given the money supply growth accelerates.

    “the point concerns a target of spending no matter what is produced”

    “It’s up to people to decide how to spend their money.”

    No it isn’t. If some people in the market drop their spending, and nobody else in the market raises their spending, then in NGDPLT the central bank (part of the state) must print and spend for themselves, or else there is no NGDPLT.

    “There is no reason why a nominal income target should make them want to randomly throw away their money on stuff they don’t want.”

    I am not claiming that buy stuff they don’t want. The problem is not that people throw money away on stuff they don’t want. The problem is that the goods that are produced, are produced in a context of relative prices and interest rates manipulated by central banks, and misleads investors into producing goods that people want and are willing to buy, but the investors cannot sustain that total aggregate production because it is physically impossible.

    “A nominal income target simply specifies a desired level of total $ spending in the economy. People decide what to spend their money on.”

    No they don’t. If any one individual drops their present spending, with the intention of increasing future spending, then their preferences are not able to be fully communicated to investors. The central bank will print and spend money for itself, or else the NGDPLT rule is not met.

    A nominal income target puts ultimate control of spending in the hands of the state.

    “I was talking about a central plan that targets spending by the state printing and spending money”

    “An NGDP target doesn’t target a particular level of state spending. Nor does it imply that the state should spend money on ‘anything’.”

    The means by which the target is met is by the state printing and spending money. After the goods and securities go towards the state the other way, then the increased money balances of the sellers are then used to increase their spending, and so on down the line.

    The state prints and spends money in NGDPLT. The subsequent respending after the state has already acquired the resources and securities, is not the initial spending or the initial goods transferring. The state acquires assets by non-earned money printing, and special interest groups in the public acquire newly printed money by sending assets to the state. The state gains assets effectively for free, since they do not earn the money they print. The special interest groups acquire newly created money, and the net surplus gains to them come at the expense of everyone else who receive the new money later on after prices have already risen for them before their incomes have risen.

    That’s NGDPLT. Raising exploitation to just before that which results in political revolution or insurrection. Hire intellectuals to give academic credence to the exploitation. Encourage fear in the public that without the exploiters, most of them will die from starvation.

    “Where did I say that?”

    “You said that investors “did not make any mistakes because they had the supernatural ability to know what the economy would have otherwise looked like had there been market based money”.”

    Haha, no that was a characterization of the MM ideology. They hope and pray that some investors take up the slack and compensate for the errors made by investors who took the price system as a reflection of actual consumer preferences.

    A lot of investors have been educated in Austrian theory, and that has played a large role in why all the OMO stimulus is not having the same effect it might have had in years past. A lot of investors know that they should be investing as if optimal interest rates, prices, spending, every nominal statistic, are different than they actually are. Of course, the lack in sufficient spending is being falsely perceived by MMs as a flaw in omnipotent central banking.

    “You are saying that if there was what you call “market based money” (by which you mean ‘if we lived in ancapistan’) investors would not make “mistakes”.”

    They would not make the mistakes caused by government manipulation of money. They would still make mistakes in a free market due to errors in forecasting demand, savings, and goods preferences.

    Eliminating state intervention in money eliminates errors caused by that intervention. It doesn’t eliminate all errors whatever.

  21. Gravatar of Kevin Erdmann Kevin Erdmann
    3. November 2014 at 20:22

    Travis, is that just because when middle class people sell their homes after a decade or two of appreciation, they show up as 1 per centers the year of the sale? Or is there something else going on?

  22. Gravatar of Kevin Erdmann Kevin Erdmann
    4. November 2014 at 10:40

    Michael Byrnes:

    Sorry I didn’t respond to you earlier.

    I think there are two separate issues here. One is the array of regulatory, cultural, and practical issues about access to affordable housing. My recent work on housing hasn’t really addressed this. Zoning is really about a balance regarding supply and externalities. Homes usually provide some excess return compared to renting (IOW they are underpriced) because of the practical difficulty of establishing a position in a home. You can’t just buy 1 share of a home like you can buy one share of Berkshire Hathaway. Generally, I think it’s probably best to aim for credit markets that lower the excess return and provide more universal access. I generally have a better attitude about the housing boom in the 2000s than most people because I think high prices were largely a result of low nominal interest rates doing exactly this. Of course, after decades of providing excess returns, homes developed the reputation of being an investment you should always make if you could get access. Since this changed, home buyers need to consider home investments as thoroughly as they would consider balances between stocks, bonds, etc. Convention doesn’t change that readily, so a lot of people that probably shouldn’t have had exposure to real estate got burned.

    The other issue is cyclical. Homes are in disequilibrium, not because they were too high in the 2000s. Mortgage levels were quite normal then. They are in disequilibrium because equity values collapsed. This happened because of the collapse in the nominal economy and its effect on the banks. The Fed could have helped by adding enough liquidity to get home prices back up to equilibrium levels, but they didn’t. So there is a supply constraint in housing due to dysfunctional housing credit markets (and pro-cyclical regulatory issues). Intrinsic values of homes are much higher than current nominal values. Closing that gap is an important ingredient in the continued recovery of the economy.

    Once that happens, there should be a release of new economic growth as that source of saving and investing becomes functional. As to where home prices should be in the long run regarding other constraints on supply is a much more difficult question. But that relates to both rent and home prices. My case regarding intrinsic value of homes rests of home prices in relation to rents.

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