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It is frequently noted that American politics have become more angry and more bifurcated. The housing supply problem has its fingers in many of our problems, and I believe it includes this. Bear with me here. This might become a long post, but I think the implications may be surprising.
First, I will note that we are clearly seeing a massive out-migration from LA, Silicon Valley, and New York City that is a product of high costs of living. The Census Bureau's new Supplemental Poverty Measure points to much higher poverty rates in places like California and these constrained cities. Here is a BLS report about income inequality among metro areas (MSAs), and again, the west coast and Northeastern cities fare poorly.
The blue state/red state divide is largely about closed access vs. open access. Closed access cities and states are experiencing rising costs and rising poverty, and this is leading to a massive migration of poor households from blue states to red states to escape those policies. I think the different experiences of people within these two parts of the country explain much of the trends we see in politics.
Take immigration. As I have been pointing out, in the open access part of the country, we live in a classical economics world. If a city has opportunities, it leads to population inflows which cause incomes to moderate back toward equilibrium with the rest of the country. Housing supply pretty efficiently rises in these cities to increase housing without skyrocketing costs (unless there are extreme temporary fluctuations such as in the North Dakota oil fields). In closed access cities, opportunity leads to a bidding war for housing, so that incomes can remain elevated, but costs become elevated also.
The differences between these two types of cities are stark. You can tell what type of city it is just by looking through the newspaper. In open access cities, people complain that poor people are moving in and taking away jobs, pushing down wages. In closed access cities, people complain that rich people are moving in and bidding up rents.
People in red states have been taking in an inordinate amount of low income migration, both domestic and international. But, poor people are fleeing the closed access cities. So, to someone living in a closed access city, it seems racist for people to focus their ire on Mexican immigrants. Poor people are struggling just to get by as it is.
Los Angeles has a foot in both worlds. It takes in a lot of Hispanic and low income workers, but it also has sharp housing constraints, so it has high cost and moderate incomes. There tend to be anti-immigrant sentiments in southern California. Meanwhile, San Franciscans proudly proclaim that they are a sanctuary city. In Los Angeles, 44% of households speak Spanish as a first language, compared to 40% who speak English. In San Francisco, only 15% of the population is Hispanic. It's easy to be a sanctuary when you've made your city so costly that even middle class professionals can't afford to live there any more.
There has been a noticeable shift in immigration stances since the days of Reagan and the elder Bush. How much of that shift has come from the economic stresses and migration flows caused by the closed access cities? The open access areas are taking the bulk of the low income immigrants, and in addition the worst limited access cities attract high income immigrants, leading to net domestic migrations of 10% of their populations per decade, or more.
These different experiences, which are the result of different local policies, affect many political sentiments. Think of the different reactions to poverty. Red state voters seem indifferent to the problem of poverty and inequality. But, because their local policies are open access, most of them don't experience an unusual level of inequality or poverty. Locals with high income potentials move away to the closed access cities to capture the high incomes that closed access creates, so those areas lose some of the top-end of their income distribution, and their open access policies don't lead to extreme gains in gross incomes for those who stay. Meanwhile, they see poor households moving in because their cities represent opportunity.
On the other hand, people living in closed access cities see family after family failing to make ends meet. It seems to demonstrate a lack of information when someone like Bernie Sanders or Elizabeth Warren complains that Americans are working harder and harder to take home less and less. Statistically, it is clearly the opposite. Households have fewer earners, typically working fewer hours, and earning more. But, that is really an open access phenomenon. The ever speeding treadmill really is the experience of voters in closed access cities. This is something I intend to post about soon. Much of the rise in aggregate US income inequality is due to rising gross incomes in places like San Francisco. But, once rent expenses are factored in, median households in those cities are actually losing ground. Much of the measured increase in income inequality is a mirage created by using household specific income figures but using nationally averaged cost of living adjustments. To someone in Silicon Valley, it really does seem like an $80,000 household income is unsustainable.
And, in those cities, because there is a continual inflow of high income households and an outflow of lower income households, for any individual household, there is a constant ratcheting of housing expenses until you become that next marginal household that can't make it work anymore and moves away to an open access city. And, the fact that there are too many rich people really would be a legitimate problem to you. To people in open access areas, you would just sound envious and vindictive. But, rich people really did force you to leave your home. Your life would have been better without them, and you would still be able to afford to live a middle class life if they hadn't moved in.
But, the worst repercussions are for those pockets of the most poor, dysfunctional neighborhoods in the closed access cities. If I look at a map of New York City, or Los Angeles, or Washington, DC, one of the things I find striking is how in these cities where housing is so expensive and the demand to get access is so high, there will be pockets of very low value real estate and very poor neighborhoods. Why, for instance, didn't the Bronx gentrify decades ago? And, the sad reason is that the only possible way to live affordably in those cities is to live in a neighborhood that is so crime ridden and rotten that any reasonable outsider with any other options would be too frightened to live there. Think about the implications of that, and the horrors that many low income urban people live through because of this whole complicated state of affairs.
Because, think about what happens if you do live in a rotten neighborhood and you manage to do all the hard community work to make it somewhat functional. In a city as desperate for housing as New York or Los Angeles, the minute that neighborhood becomes safe, the lots that hold those $100,000 duplexes will be worth $500,000, and the neighborhood will gentrify. Here again, we can see how people's own legitimate experiences lead them to the wrong conclusions. What could be more infuriating? If you belonged to that neighborhood? If you had organized and fought and probably even put yourself in danger to do what probably at times seemed nearly impossible, and make your neighborhood livable again? And immediately all these high priced outsiders come in and take that away from you? I cannot imagine the anger I would feel. And yet, the only natural response one would feel is the response that created the unwinnable situation to begin with. Get these damn developers out of my city. The only natural response is the response that dooms the marginalized populations of that city to the choice of living in fear and distress or escaping.
The overwhelming reaction of locals in these cities seems to be to keep putting thumbs in the dike - fighting and scraping to save one little neighborhood at a time while the pressure of a world that wants in just keeps pushing. It is an unwinnable battle. In fact, I would say that even winning will be losing. Possibly, the worst outcome will be if those pressures ever cease, because the benefits of the local professional networks these cities hold will not fund the economic rents that feed the high incomes and high housing rents forever. The world wants in, but the world is also competing. And the day that you stop worrying about the gentrification of your neighborhood may be the first day on the road to being the next Detroit, where everyone still wants their share of economic rents that couldn't keep up with the rising costs any more.
I don't know how we fix this. The natural reaction to these closed access policies is to double down on them locally and to try to impose them nationally. And as the policies keep failing us along the way, closed access advocates become more angry and betrayed, and less capable of recognizing the source of the problem. As I have outlined obsessively, this is at the heart of the recent housing bust and recession. We blamed the lenders and the builders for the housing boom because we just have this blind spot about the problem of access and supply, and in housing we have already gone a long way toward making the entire country a closed-access area. And, one result is that rent expenses across the country have risen by nearly a quarter since the crisis. And yet even now so many observers are complaining about lenders and demand.
I try not to be overwrought in these posts, but it really is frightening to me how strident people can be about inflicting harm on ourselves, and when issues like the overwhelming collapse in the development of housing stock and the clear disequilibria that accompany it can go practically unnoticed, I don't see how the vicious cycle of self inflicted harm and anger ends. The solution is so seemingly simple. Build. Lend. But, in our anger, we can only imagine solutions that are punitive. And our experiences are such visceral confirmations of that anger.
Posted by Kevin Erdmann at 11:22 PM
It is frequently noted that American politics have become more angry and more bifurcated. The housing supply problem has its fingers in many of our problems, and I believe it includes this. Bear with me here. This might become a long post, but I think the implications may be surprising.
First, I will note that we are clearly seeing a massive out-migration from LA, Silicon Valley, and New York City that is a product of high costs of living. The Census Bureau's new Supplemental Poverty Measure points to much higher poverty rates in places like California and these constrained cities. Here is a BLS report about income inequality among metro areas (MSAs), and again, the west coast and Northeastern cities fare poorly.
The blue state/red state divide is largely about closed access vs. open access. Closed access cities and states are experiencing rising costs and rising poverty, and this is leading to a massive migration of poor households from blue states to red states to escape those policies. I think the different experiences of people within these two parts of the country explain much of the trends we see in politics.
Take immigration. As I have been pointing out, in the open access part of the country, we live in a classical economics world. If a city has opportunities, it leads to population inflows which cause incomes to moderate back toward equilibrium with the rest of the country. Housing supply pretty efficiently rises in these cities to increase housing without skyrocketing costs (unless there are extreme temporary fluctuations such as in the North Dakota oil fields). In closed access cities, opportunity leads to a bidding war for housing, so that incomes can remain elevated, but costs become elevated also.
The differences between these two types of cities are stark. You can tell what type of city it is just by looking through the newspaper. In open access cities, people complain that poor people are moving in and taking away jobs, pushing down wages. In closed access cities, people complain that rich people are moving in and bidding up rents.
People in red states have been taking in an inordinate amount of low income migration, both domestic and international. But, poor people are fleeing the closed access cities. So, to someone living in a closed access city, it seems racist for people to focus their ire on Mexican immigrants. Poor people are struggling just to get by as it is.
Los Angeles has a foot in both worlds. It takes in a lot of Hispanic and low income workers, but it also has sharp housing constraints, so it has high cost and moderate incomes. There tend to be anti-immigrant sentiments in southern California. Meanwhile, San Franciscans proudly proclaim that they are a sanctuary city. In Los Angeles, 44% of households speak Spanish as a first language, compared to 40% who speak English. In San Francisco, only 15% of the population is Hispanic. It's easy to be a sanctuary when you've made your city so costly that even middle class professionals can't afford to live there any more.
There has been a noticeable shift in immigration stances since the days of Reagan and the elder Bush. How much of that shift has come from the economic stresses and migration flows caused by the closed access cities? The open access areas are taking the bulk of the low income immigrants, and in addition the worst limited access cities attract high income immigrants, leading to net domestic migrations of 10% of their populations per decade, or more.
These different experiences, which are the result of different local policies, affect many political sentiments. Think of the different reactions to poverty. Red state voters seem indifferent to the problem of poverty and inequality. But, because their local policies are open access, most of them don't experience an unusual level of inequality or poverty. Locals with high income potentials move away to the closed access cities to capture the high incomes that closed access creates, so those areas lose some of the top-end of their income distribution, and their open access policies don't lead to extreme gains in gross incomes for those who stay. Meanwhile, they see poor households moving in because their cities represent opportunity.
On the other hand, people living in closed access cities see family after family failing to make ends meet. It seems to demonstrate a lack of information when someone like Bernie Sanders or Elizabeth Warren complains that Americans are working harder and harder to take home less and less. Statistically, it is clearly the opposite. Households have fewer earners, typically working fewer hours, and earning more. But, that is really an open access phenomenon. The ever speeding treadmill really is the experience of voters in closed access cities. This is something I intend to post about soon. Much of the rise in aggregate US income inequality is due to rising gross incomes in places like San Francisco. But, once rent expenses are factored in, median households in those cities are actually losing ground. Much of the measured increase in income inequality is a mirage created by using household specific income figures but using nationally averaged cost of living adjustments. To someone in Silicon Valley, it really does seem like an $80,000 household income is unsustainable.
And, in those cities, because there is a continual inflow of high income households and an outflow of lower income households, for any individual household, there is a constant ratcheting of housing expenses until you become that next marginal household that can't make it work anymore and moves away to an open access city. And, the fact that there are too many rich people really would be a legitimate problem to you. To people in open access areas, you would just sound envious and vindictive. But, rich people really did force you to leave your home. Your life would have been better without them, and you would still be able to afford to live a middle class life if they hadn't moved in.
But, the worst repercussions are for those pockets of the most poor, dysfunctional neighborhoods in the closed access cities. If I look at a map of New York City, or Los Angeles, or Washington, DC, one of the things I find striking is how in these cities where housing is so expensive and the demand to get access is so high, there will be pockets of very low value real estate and very poor neighborhoods. Why, for instance, didn't the Bronx gentrify decades ago? And, the sad reason is that the only possible way to live affordably in those cities is to live in a neighborhood that is so crime ridden and rotten that any reasonable outsider with any other options would be too frightened to live there. Think about the implications of that, and the horrors that many low income urban people live through because of this whole complicated state of affairs.
Because, think about what happens if you do live in a rotten neighborhood and you manage to do all the hard community work to make it somewhat functional. In a city as desperate for housing as New York or Los Angeles, the minute that neighborhood becomes safe, the lots that hold those $100,000 duplexes will be worth $500,000, and the neighborhood will gentrify. Here again, we can see how people's own legitimate experiences lead them to the wrong conclusions. What could be more infuriating? If you belonged to that neighborhood? If you had organized and fought and probably even put yourself in danger to do what probably at times seemed nearly impossible, and make your neighborhood livable again? And immediately all these high priced outsiders come in and take that away from you? I cannot imagine the anger I would feel. And yet, the only natural response one would feel is the response that created the unwinnable situation to begin with. Get these damn developers out of my city. The only natural response is the response that dooms the marginalized populations of that city to the choice of living in fear and distress or escaping.
The overwhelming reaction of locals in these cities seems to be to keep putting thumbs in the dike - fighting and scraping to save one little neighborhood at a time while the pressure of a world that wants in just keeps pushing. It is an unwinnable battle. In fact, I would say that even winning will be losing. Possibly, the worst outcome will be if those pressures ever cease, because the benefits of the local professional networks these cities hold will not fund the economic rents that feed the high incomes and high housing rents forever. The world wants in, but the world is also competing. And the day that you stop worrying about the gentrification of your neighborhood may be the first day on the road to being the next Detroit, where everyone still wants their share of economic rents that couldn't keep up with the rising costs any more.
I don't know how we fix this. The natural reaction to these closed access policies is to double down on them locally and to try to impose them nationally. And as the policies keep failing us along the way, closed access advocates become more angry and betrayed, and less capable of recognizing the source of the problem. As I have outlined obsessively, this is at the heart of the recent housing bust and recession. We blamed the lenders and the builders for the housing boom because we just have this blind spot about the problem of access and supply, and in housing we have already gone a long way toward making the entire country a closed-access area. And, one result is that rent expenses across the country have risen by nearly a quarter since the crisis. And yet even now so many observers are complaining about lenders and demand.
I try not to be overwrought in these posts, but it really is frightening to me how strident people can be about inflicting harm on ourselves, and when issues like the overwhelming collapse in the development of housing stock and the clear disequilibria that accompany it can go practically unnoticed, I don't see how the vicious cycle of self inflicted harm and anger ends. The solution is so seemingly simple. Build. Lend. But, in our anger, we can only imagine solutions that are punitive. And our experiences are such visceral confirmations of that anger.
Posted by Kevin Erdmann at 11:22 PM
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