Wednesday, August 27, 2014

Krugman on housing

I generally don't read Paul Krugman -- bad for the blood pressure -- and I even less often respond -- don't dignify the insults or feed the trolls. But I took a long plane flight yesterday, and the Times was all I had to read, so I stumbled across his column on housing.

After getting through the customary political barbs at Republicans (Rick Perry in this case), and snarky insults ("the habit economists pushing this line have of getting their facts wrong"), I found something almost sensible.

People, especially "middle class" people,  are moving away from New York and to California, and to Texas and Georgia. Nominal wages in Texas and Georgia are not higher. So why do they move? Answer: Real wages are a lot higher, because the cost of living is so much less. It's practically like moving to a foreign country (in  many ways!). You are earning $100,000 in the un-hip part of Brooklyn, they offer you 80,000 zingbats to move to Truckgunistan. Is it a good deal? Well, you get two dollars per zingbat, so sure!

Real wages are higher in large part because housing costs are lower. And housing costs are lower because...
high housing prices in slow-growing states also owe a lot to policies that sharply limit construction. Limits on building height in the cities, zoning that blocks denser development in the suburbs and other policies constrict housing on both coasts; meanwhile, looser regulation in the South has kept the supply of housing elastic and the cost of living low.
So conservative complaints about excess regulation and intrusive government aren’t entirely wrong,
Yup. When people want to live somewhere, you can build denser and higher -- the best answer -- you can build out -- causing a lot of transportation gridlock, long commutes, and pollution as people drive by artificially low density housing on their way to work -- or you can watch prices explode.

There is plenty more wrong in the economics of the column -- for example, "workers" aren't a homogenous lot, and "productivity" is not a constant of nature, independent of numbers or of occupation. Hedge fund managers are productive (at least by usual measurement) in New York. That does not mean that auto assembly workers will be more productive if they move back to New York. So moving everyone back to New York and California is not likely to double GDP. But it's nice to see an admission of a major problem caused by regulation.

On the second-to-last sentence, he's still going strong
It would be great to see the real key — affordable housing — become a national issue. 
Indeed it would. But faced with the inevitable, unavoidable, logically unassailable conclusion -- we need a massive liberalization of zoning laws, planning restrictions, and so forth, allowing people to build up and dense, and thereby create an immense supply of slightly used housing too as people move out into the new stuff--his political blinders just won't let him do it:
But I don’t think Democrats are willing to nominate Mayor Bill de Blasio for president just yet. 
Bill de Blasio?? That champion of free markets?  From that paragon of low-cost housing,.... New York City? Touting that well-proven, time-tested solution: more regulation, set-asides, rent control, government construction, and quotas? Just like they have in Texas and Georgia?

Well, today Grumpy got two good LOLs from the news.


  1. Two dollars per zingbat you mean.

  2. This strikes me as somewhat unfair. De Blasio doesn't trumpet the upzoning portions of his plan because it's politically unpopular, but it's in there.

  3. The driving assumption of his piece is that because wages are lower in Houston than Manhattan, jobs in Houston are less productive than in Manhattan. Is Prof K, buying into the competitive equilibrium that wages = a workers marginal product? Well, I didn't know Prof K felt CEOs, hedge fund managers and McD's wages were so efficiently set ... Oh wait, i'm trying to draw some consistency in assumptions ...

  4. "When people want to live somewhere, you can build denser and higher -- the best answer -- you can build out -- causing a lot of transportation gridlock, long commutes, and pollution"

    Except that kids (and most adults) do better with back yards than with balconies. Throw in the fact that higher density means higher crime, plus increased vulnerability to disease and terrorist attack. Then there's the point that the average car gets about 33 passenger miles per gallon (PMPG), while the average bus gets about 29 PMPG, and the average passenger train about 26 PMPG. The so-called advantages of high-density living disappear pretty quickly in the face of reality. Best to leave Krugman in New York, while the rest of us relax in Truckgunistan.

    1. "Except that kids (and most adults) do better with back yards than with balconies."

      Exactly what I was thinking. Glad somebody else agrees. I can't imagine living in a high-rise. (Even the ones that have balconies... many don't.)

  5. In defense of Krugman:

    (1) He picks his fights and his words very carefully. Some of his critics read more into his writings than is there and then criticize the things they have themselves injected.

    (2) If Krugman thinks that politician "A"'s plan does not add up, and cannot be made to add up, then I believe it is fair and appropriate for Professor Krugman to say: "Politician "A"'s plan cannot be made to add up so I conclude he is either a fool or a charlatan." Politician "A" might then complain that Krugman is being rude but the truly crushing response would be for politician "A" to publish a detailed plan that actually adds up. The fact that there seem to be a lot of responses to Krugman complaining about manners or style and not so many that crush him with facts and details suggests that Krugman's attacks are probably mostly fair ball.

    We all bring our own experiences to judging Krugman's style. I'm a lawyer who has dabbled in retail politics. By the standards I am used to, Krugman is positively gentlemanly.

    Just saying ...

    1. Kotlikoff's article is an example of my point. Kotlikoff complains of Krugman's manners when the truly crushing response would be to supply the details that Krugman complains are missing.

    2. "In the paranoid and juvenile mind of Paul Krugman"

      I hope you see the irony ...

    3. Yeah, that was over the line for my usual decorum limits on this blog. I only let it through because the links were useful. Absalon, a few of yours are getting deleted for violations of decorum.

    4. I know some of my posts don't make it through. Perhaps as high as one half. It's your blog. Editorial control is your prerogative.

      FWIW, I agree with your decision to post Paul's comment. I read the two links. They tell us more about Kotlikoff than they do about Krugman.

    5. Sorry for stepping over the line.

      The links tell us that Larry Kotlikoff is a mainstream economist with reasonable concerns about the long-term fiscal health of the country; that he has spent his career studying intergenerational accounting; that there is a debate about how to properly measure long-term liabilities and what to include as long-term liabilities; that he wants to slow the growth rate of federal spending without harming the poor or elderly; the he doesn't like name-calling. What do the links tell you about Larry Kotlikoff?

  6. Right... because the southern US states are famous for their compact, walkable human-scale urbanism. Seaside, Florida maybe. Austin, TX in parts. Savannah, Georgia, sure.

    Otherwise, the archetypical southern street scene is abundant tax-paid asphalt as far as the eye can see...

    How do the parking minima regulations stack up in each region?

  7. What if increasing population density by itself reduces quality of life & standard of living? Relaxing regulations will make the whole world as shitty as the aforementioned "non-hip part of Brooklyn".

  8. Another part of the equation I think is interesting is debt. if you move to Dallas from New York, the real value of your debt increases and it will take you longer to pay off on average (other things equal)

    So if I have lots of debt, shouldn't I be avoiding the south? But I think Dallas has the most indebted residents...anyone know the direction of causality here?

    1. According to Experian, Dallas and Houston have the highest personal debt per capita of 20 US cities. Of the 20 cities, 19 saw growth in personal debt.

      The only city where personal debt didn't rise is Detroit.

      Maybe personal debt hss risen in proportion to lender confidence, borrower confidence, or the purchase of high-ticket items such as houses. Dallas and Houston are, after all, in the state that has experienced the greatest recent job growth. The Houston housing market is booming.

      Perhaps people aren't moving to increase their real wages, but to get any wages at all.

    2. Disposible, not nominal, income is what matters for debt servicing.

  9. According to NYU's Furman Center, 82% of all rental units in "Core Manhattan" (below 112th on the west side and 96th on the east side) are either rent stabilized or rent controlled... and Bill De Blasio says we need more "affordable" housing.

    *those numbers may be slightly off as this comment was written from memory, but qualitatively the point is correct.

  10. What are master of drawing the wrong conclusion. Krugman also misses an obvious underlying factor: housing bubbles, in fact all asset inflation, results directly from too much money sloshing about. You can't have otherwise unwarranted rises in housing prices by 400+%, or the stock market by 2000+% since 1970 any other way. If the money lenders in the temple of finance will not lend to huge jumps in prices between sales, prices basically cannot go up because the vast majority of housing is financed by super debt on the personal level. Take Texas. Whatever you thing of Reagan versus Obama, in Reagans' time over a thousand back robbers who own the banks (and Savings and Loans) went to jail for their misdeed. Texas put on very tough banking regulation. Yes, Texas with superior (more restrictive) banking controls than anywhere else in the nation. So come the 2008/2009 crash Texas pretty much went through neither up or down very much. But NYC, LA, Seattle, they have lots and lots and lots of people literally with to much cash and definitely with more cash than brains, so the housing markets exploded paradoxically even during down turns. The Corporate press literally owned by the same people as the financial industry put out massive propaganda this asset inflation was good while pretending to decry wage inflation. Guess what, guys, just like an exploding germ colony in a Petri dish, eventual the edges of the container must get reached, in this case the debt carrying capacity of the wage earning suckers lured into this high risk financial casino garme. Pop. Bang. Nothing but nothing to do with "natural" limits or geography or regulation, just good old financial excess that the government continues to bail out and support. There is the regulation that has gone bad. Let securitization of mortgages collapse, it is a fraud propped up by government intervention. Let basic economic forces drive prices yet again.

  11. John correctly points out that workers are not homogeneous and so Krugman is being careless when he compares average wages across cities. (And we all get careless when digging for facts to support our side and so let’s leave it at that not accuse PK of trying to deceive the casual NYT reader). But Krugman is probably right, at least in some sense, when he says that worker productivity is greater in high wage states like NY than it is here in low wage Texas.

    But if you think about it, low worker productivity can be a sign that a region’s economy is in really good shape. To see why, just do a little Econ 101. When housing and other living costs are low, the supply of labor shifts to the right and the equilibrium moves down marginal product of labor curve (aka, the labor demand curve). (To be technically correct, I’m arguing that low costs of housing may shift the nominal labor supply curve by more than the nominal labor demand curve.) On the margin, low productivity workers get jobs in Texas that they couldn’t get in places like NY.

    For example, here in Dallas the marginal car mechanic works under an awning using simple hand tools. Chances are that he can’t read repair manuals and service bulletins written in English. His day is spent trying to help poor people keep their clunkers on the road. I’m pretty sure that in Manhattan the marginal mechanic works in an extremely well equipped shop and has access to the very best training. His day is spent helping hedge fund managers get their Maserati’s ready for the weekend in the Hamptons. The Maserati mechanic is much more productive than the clunker mechanic, a fact reflected in the wages.

    There are Maserati mechanics in Dallas. I doubt that there are many clunker mechanics in Manhattan, they can’t afford to operate there. And so if you looked, you’d see that average wages and average productivity are lower in Dallas.

    Now maybe I’m just repeating John’s point and showing that it’s wrong to aggregate Maserati mechanics and clunker mechanics—that we shouldn’t put them on the same MPL curve. Fine. But when people bag on Texas—and believe me, there’s plenty here to complain about—they shouldn’t say that low average wages, even low average real wages, are a bad thing. Low average wages mean that low productivity workers have opportunities they wouldn’t have elsewhere.

  12. I read Krugman's column and agreed with his point about housing. But when he said that last line about de Blasio, I nearly fell over laughing...

  13. Because of building restrictions, the supply of accommodation in e.g. New York is more or less fixed. At the margin, real wages are equated between NY and Houston, and the shortage of apartments in NY 'sets' the higher nominal wage at which this occurs. Someone has to be prepared to pay this higher nominal wage to the marginal resident of NY - so they will either be more 'productive' in a financial sense (the hedge fund manager), or at least able to charge high prices because they are scarce producers of not-really-tradable services (the barber).

  14. I'm really puzzled by Krugman's closing zinger comparing Perry with DeBlasio and his remark that "I don’t think Democrats are willing to nominate Mayor Bill de Blasio for president just yet."

    Krugman identified the cause of the high cost of housing as follows:

    "Limits on building height in the cities, zoning that blocks denser development in the suburbs and other policies constrict housing on both coasts; meanwhile, looser regulation in the South has kept the supply of housing elastic and the cost of living low."

    I would really like to know what power the President of the United States has to reduce local zoning regulations and building heights. The last time I checked this was within the province of local governments. It seems to me that DeBlasio is in exactly the job where he might be able to do something about New York City zoning laws and the high cost of housing in New York City.

  15. The thing that this conversation typically misses - I was recently back in Richmond Va on a family visit. Richmond about 10 years ago finally completed the SW leg of ots belt line. When it first opened, traffic was nearly non existent. 10 years on, it's full of cars. What happened - development followed transportation availability. Now, most of us don't think of transportation planning when thinking about this topic. But it is a clear case of government policy shaping market behavior. And I'm no expert, but my intuition says that this kind of "positive" regulation is more important than the negative kind.


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