How we can actually solve the housing shortage

Sep 16 JDN 2458378

In previous posts I’ve talked about the housing crisis facing most of the world’s major cities. (Even many cities in Africa are now facing a housing crisis!) In this post, I’m going to look at the empirical data to see if we can find a way to solve this crisis.

Most of the answer, it turns out, is really not that complicated: Build more housing.

There is a little bit more to it than that, but only a little bit. The basic problem is simply that there are more households than there are houses to hold them.

One of the biggest hurdles to fixing the housing crisis comes ironically from the left, in resistance to so-called “gentrification”. Local resistance to new construction is one of the greatest obstacles to keeping housing affordable. State and federal regulations are generally quite sensible: No industrial waste near the playgrounds. It’s the local regulations that make new housing so difficult.

I can understand why people fight “gentrification”: They see new housing going in as housing prices increase, and naturally assume that new houses cause higher prices. But it’s really the other way around: High prices cause new construction, which brings prices down. By its nature, new housing is almost always more expensive than existing housing. Building new housing still brings down the overall price of housing, even when the new housing is expensive. Building luxury condos does make existing apartments more affordable—and not building anything most certainly does not.

California’s housing crisis is particularly severe: California has been building less than half the units needed to sustain its current population trend since the crash in 2008. It’s worst of all in the Bay Area, where 500,000 jobs were added since 2009—and only 50,000 homes. California also has a big problem with delays in the permit process: Typically it takes as long as three or four years between approval and actual breaking ground.

We are seeing this in Oakland currently: The government has approved an actually reasonable amount of housing for once (vastly more than what they usually do), and as a result they may have a chance at keeping Oakland affordable even as it grows its population and economy. And yet we still get serious journalists saying utter nonsense like The building boom and resulting gentrification are squeezing the city’s most vulnerable.” Building booms don’t cause gentrification. Building booms are the best response to gentrification. When you say things like that, you sound to an economist like you’re saying “Pizza is so expensive; we need to stop people from making pizza!”

Homeowners who want to increase their property values may actually be rational—if incredibly selfish and monopolistic—in trying to block new construction. But activists who oppose “gentrification” need to stop shooting themselves in the foot by fighting the very same development that would have made housing cheaper.

The simplest thing we can do is make it easier to build housing. Streamline the permit process, provide subsidies, remove unnecessary regulations. Housing is one of the few markets where I can actually see a lot of unnecessary regulations. We don’t need to require parking; we should provide better public transit instead. And while requiring solar panels (as the whole state is now doing) sounds nice, it makes everything a lot more expensive—and by only requiring it on new housing, you are effectively saying you don’t want any new housing. I love solar panels, but what you should be doing is subsidizing solar panels, not requiring them. Does that cost the state budget more? Yes. Raise taxes on something else (a particularly good idea: electricity consumption) if you have to. But by mandating solar panels without any subsidies to support them, you are effectively putting a tax on new housing—which is exactly what California does not need.

It’s still a good idea to create incentives to build not simply housing, but affordable housing. There are ways to do this as well. Denver did an excellent job in creating an Affordable Housing Fund that they immediately spent in converting vacant apartments into affordable housing units.

There are also good reasons to try to fight foreign ownership of housing (and really, speculative ownership of housing in general). There is a strong correlation between current account deficits and housing appreciation, which makes sense if foreign investors are buying up our housing and making it more expensive. If Trump could actually reduce our trade deficit, that would drive down our current account deficit and quite likely make our housing more affordable. Of course, he has absolutely no idea how to do that.

Victor Duggan has a pretty good plan for lowering housing prices in Ireland which includes a land tax (as I’ve discussed previously) and a tax on foreign ownership of real estate. I disagree with him about the “Help-to-Buy” program, however; I actually think that was a fine idea, since the goal is not simply to keep housing cheap but to get people into houses. That wealth transfer is going to raise prices at the producer side—increasing production—but not at the consumer side—because people get compensated by the tax rebate. The net result should be more housing without more cost for buyers. You could have done the same thing by subsidizing construction, but I actually like the idea of putting the money directly in the pockets of homeowners. The tax incidence shouldn’t be much different in the long run, but it makes for a much more appealing and popular program.

Most trade barriers are not tariffs

Jul 8 JDN 2458309

When we talk about “protectionism” or “trade barriers”, what usually comes to mind is tariffs: taxes imposed on imports or exports. But especially now that international trade organizations have successfully reduced tariffs around the world, most trade barriers are not of this form at all.

Especially in highly-developed countries, but really almost everywhere, the most common trade barriers are what is simply but inelegantly called non-tariff barriers to trade: this includes licenses, quotas, subsidies, bailout guarantees, labeling requirements, and even some environmental regulations.

Non-tariff barriers are much more complicated to deal with, for at least three reasons.

First, with the exception of quotas and subsidies, non-tariff barriers are not easily quantifiable. We can easily put a number on the value of a tariff (though its impact is somewhat subtler than that), but this is not so easy for the effect of a bailout guarantee or a labeling requirement.

Second, non-tariff barriers are often much harder to detect. It’s obvious enough that imposing a tax on imported steel will reduce our imports of steel; but it requires a deeper understanding of the trade system to understand why bailing out domestic banks would distort financial flows, interest rates and exchange rates (even though the impact of this may actually be larger—the effect on global trade of US bank bailouts was between $35 billion and $110 billion).

Third, some trade barriers are either justifiable or simply inevitable. Simply having customs screening at the border is a non-tariff barrier, but it is widely regarded as a justifiable security measure (and I agree, by the way, even though I am generally in favor of much more open borders). Requiring strict labor and environmental standards on the production of products both domestic and imported is highly beneficial, but also imposes a trade barrier. In a broader sense, differences in language and culture could even be regarded as trade barriers (they certainly increase the real cost of trade), but it’s not clear that we could eliminate such things even if we wanted to.

This requires us to look very closely at almost every major government policy, to see how it might be distorting world trade. Some policies won’t meaningfully distort trade at all; these are not trade barriers. Others will distort trade, but are beneficial enough in other ways that they are still worth it; these are justifiable trade barriers. Still others will distort trade so much that they cannot be justified despite their other benefits. Finally, some policies will be put in place more or less explicitly to distort trade, usually in the form of protectionism to prop up domestic industries.

Protectionist policies are of course the first things to get rid of. Honestly, it baffles me that people even want to impose them in the first place. For some reason they think of exports as the benefit and imports as the cost, when it’s really the other way around; when we impose protectionism, we go out of our way to make it harder to get cars and iPhones so that we can stop other countries from taking our green paper. This seems to be tied to the fact that people think of jobs as something desirable, when really it’s wealth that’s desirable, and jobs are just one way of getting wealth—in some sense the most expensive way. Our macroeconomic policy obsesses over inflation, which is almost literally meaningless (as long as it is not too unpredictable, really nothing would change if inflation were raised from 2% to 4% or even 10%) and unemployment, which is at best an imperfect indicator of what we really should care about, namely the welfare of our people. A world of full employment with poverty wages is much worse than a world of high unemployment where a basic income provides for everyone’s needs. It is true that in our current system, unemployment is closely tied to a lot of very bad outcomes—but I maintain that this is largely because unemployment entails losing your income and your healthcare.

Some regulations that appear benign may actually be harmful because of their effects on trade. Yet I should also point out that it’s possible to go too far the other direction, and start tearing down all regulations in the name of reducing trade barriers. We particularly seem to do this in the financial industry, where “deregulation” seems to be on everyone’s lips until it causes a crisis, then we impose some regulations that fix the worst problems, things look good for awhile—and then we go back around and everyone starts talking about “deregulation” again. Meanwhile, the same people who talk about “freedom” as an excuse for removing financial safeguards are the ones who lock up children at the border. I think this is something that needs to be reframed: Which regulations are you removing? Just what, exactly, are you making legal that wasn’t before? Legalizing murder would be “deregulation”.

Trade policy, therefore, is a very delicate balance, between removing distortions and protecting legitimate public interests, between the needs of your own country and the world as a whole. This is why we need this whole apparatus of international trade institutions; it’s not a simple matter.

But I will say this: It would probably help if people educated themselves a bit more about how trade actually works before voting in politicians who promise to “save their jobs” from foreign competition.

The Asymmetry that Rules the World

JDN 2456921 PDT 13:30.

One single asymmetry underlies millions of problems and challenges the world has always faced. No, it’s not Christianity versus Islam (or atheism). No, it’s not the enormous disparities in wealth between the rich and the poor, though you’re getting warmer.

It is the asymmetry of information—the fundamental fact that what you know and what I know are not the same. If this seems so obvious as to be unworthy of comment, maybe you should tell that to the generations of economists who have assumed perfect information in all of their models.

It’s not clear that information asymmetry could ever go away—even in the utopian post-scarcity economy of the Culture, one of the few sacred rules is the sanctity of individual thought. The closest to an information-symmetric world I can think of is the Borg, and with that in mind we may ask whether we want such a thing after all. It could even be argued that total information symmetry is logically impossible, because once you make two individuals know and believe exactly the same things, you don’t have two individuals anymore, you just have one. (And then where do we draw the line? It’s that damn Ship of Theseus again—except of course the problem was never the ship, but defining the boundaries of Theseus himself.)

Right now you may be thinking: So what? Why is asymmetric information so important? Well, as I mentioned in an earlier post, the Myerson-Satterthwaithe Theorem proves—mathematically proves, as certain as 2+2=4—that in the presence of asymmetric information, there is no market mechanism that guarantees Pareto-efficiency.

You can’t square that circle; because information is asymmetric, there’s just no way to make a free market that insures Pareto efficiency. This result is so strong that it actually makes you begin to wonder if we should just give up on economics entirely! If there’s no way we can possibly make a market that works, why bother at all?

But this is not the appropriate response. First of all, Pareto-efficiency is overrated; there are plenty of bad systems that are Pareto-efficient, and even some good systems that aren’t quite Pareto-efficient.

More importantly, even if there is no perfect market system, there clearly are better and worse market systems. Life is better here in the US than it is in Venezuela. Life in Sweden is arguably a bit better still (though not in every dimension). Life in Zambia and North Korea is absolutely horrific. Clearly there are better and worse ways to run a society, and the market system is a big part of that. The quality—and sometimes quantity—of life of billions of people can be made better or worse by the decisions we make in managing our economic system. Asymmetric information cannot be conquered, but it can be tamed.

This is actually a major subject for cognitive economics: How can we devise systems of regulation that minimize the damage done by asymmetric information? Akerlof’s Nobel was for his work on this subject, especially his famous paper “The Market for Lemons” in which he showed how product quality regulations could increase efficiency using the example of lemon cars. What he showed was, in short, that libertarian deregulation is stupid; removing regulations on product safety and quality doesn’t increase efficiency, it reduces it. (This is of course only true if the regulations are good ones; but despite protests from the supplement industry I really don’t see how “this bottle of pills must contain what it claims to contain” is an illegitimate regulation.)

Unfortunately, the way we currently write regulations leaves much to be desired: Basically, lobbyists pay hundreds of staffers to make hundreds of pages that no human being can be expected to read, and then hands them to Congress with a wink and a reminder of last year’s campaign contributions, who passes them without question. (Can you believe the US is one of the least corrupt governments in the world? Yup, that’s how bad it is out there.) As a result, we have a huge morass of regulations that nobody really understands, and there is a whole “industry” of people whose job it is to decode those regulations and use them to the advantage of whoever is paying them—lawyers. The amount of deadweight loss introduced into our economy is almost incalculable; if I had to guess, I’d have to put it somewhere in the trillions of dollars per year. At the very least, I can tell you that the $200 billion per year spent by corporations on litigation is all deadweight loss due to bad regulation. That is an industry that should not exist—I cannot stress this enough. We’ve become so accustomed to the idea that regulations are this complicated that people have to be paid six-figure salaries to understand them that we never stopped to think whether this made any sense. The US Constitution was originally printed on 6 pages.

The tax code should contain one formula for setting tax brackets with one or two parameters to adjust to circumstances, and then a list of maybe two dozen goods with special excise taxes for their externalities (like gasoline and tobacco). In reality it is over 70,000 pages.

Laws should be written with a clear and general intent, and then any weird cases can be resolved in court—because there will always be cases you couldn’t anticipate. Shakespeare was onto something when he wrote, “First, kill all the lawyers.” (I wouldn’t kill them; I’d fire them and make them find a job doing something genuinely useful, like engineering or management.)

All told, I think you could run an entire country with less than 100 pages of regulations. Furthermore, these should be 100 pages that are taught to every high school student, because after all, we’re supposed to be following them. How are we supposed to follow them if we don’t even know them? There’s a principle called ignorantia non excusatignorance does not excuse—which is frankly Kafkaesque. If you can be arrested for breaking a law you didn’t even know existed, in what sense can we call this a free society? (People make up strawman counterexamples: “Gee, officer, I didn’t know it was illegal to murder people!” But all you need is a standard of reasonable knowledge and due diligence, which courts already use to make decisions.)

So, in that sense, I absolutely favor deregulation. But my reasons are totally different from libertarians: I don’t want regulations to stop constraining businesses, I want regulations to be so simple and clear that no one can get around them. In the system I envision, you wouldn’t be able to sell fraudulent derivatives, because on page 3 it would clearly say that fraud is illegal and punishable in proportion to the amount of money involved.

But until that happens—and let’s face it, it’s gonna be awhile—we’re stuck with these ridiculous regulations, and that introduces a whole new type of asymmetric information. This is the way that regulations can make our economy less efficient; they distort what we can do not just by making it illegal, but by making it so we don’t know what is illegal.

The wealthy and powerful can hire people to explain—or evade—the regulations, while the rest of us are forced to live with them. You’ve felt this in a small way if you’ve ever gotten a parking ticket and didn’t know why. Asymmetric information strikes again.