Monday, July 17, 2017

Housing: Part 242 - Incomes and inequality over time

I saw this recently on Twitter, and it always strikes me as odd when this data about tax rates is used to comment on income inequality.  If this is true, then it is a confirmation of the Laffer Curve.  In fact, for tax rates to have had such strong effects on relative incomes, elasticity of supply of high skilled labor and high return capital must be very high.  We see the same thing at the bottom end of the income spectrum.  Strengthening the safety net in the 1960s and after effectively increased marginal tax rates on poor households, when both taxes and subsidies are accounted for.  And, after these shifts in marginal tax rates, we saw this amazing reversal from the entire history of human economic activity.  Leisure time has flip-flopped.  Now, workers with high incomes work more and workers with lower incomes work less.

So, it seems to me that those who might argue for more progressive income taxes based on these trends must make that argument from a labor supply elasticity presumption.  They must presume that the Laffer Curve is relevant here.  And, the argument, it seems to me, would be that the extra production is somehow being captured by the highly skilled and connected workers, and isn't flowing out to the rest of the labor force or to consumers.  The argument would have to start with the idea that, with higher taxes, those high earners would work or invest less.

Now, to me, that seems like a bit of an uncomfortable position.  And, I think the housing story helps to allay that discomfort.  There seem to be two baskets of countries - those that still have strong manufacturing sectors, trade surpluses, and less income growth over the past two or three decades, and those that have shrinking manufacturing sectors, trade deficits, and more income growth over the past two or three decades.  The former countries tended to not have housing bubbles and the latter group did.

According to Mike Konczal's scatterplot above, it appears that we can add one more characteristic to these two baskets of countries.  The former group has not lowered tax rates on high earners and the latter group has.

The larger story here is that the post-industrial economy requires urbanization.  And, the urban housing problem is obstructing that transition.  Countries with a growth orientation are the countries butting up against that obstruction.

This does leave one mystery though, because housing supply is clearly central to this story.  Japan and Germany clearly have fewer obstacles to housing expansion.  So, which way does the causality run?  Do countries moving more aggressively into post-industrial production also happen to develop obstacles to urban homebuilding?  Or do countries that are still more focused on the manufacturing economy also happen to have fewer limits to urban housing supply?  I don't see any satisfying reasons why this correlation should be true with either direction of causality.  Yet, the pattern is there.  The pattern is even there within the US.  Cities at the center of post-industrial economic growth have high incomes and extensive limits on new housing while the other cities do not tend to have those limits to housing expansion.

Strange.  But, the correlation is striking.  Every time I look at these sorts of measures, like in the Fred graph above, they seem to line up quite nicely into these two groups.

Maybe this is an example of trade management.  An argument is sometimes made that the Asian economic success stories developed with the help of some managed protectionism.  In an age built on human capital, maybe housing constrictions serve as that protectionism, limiting competition among the firms that utilize that labor.  Maybe post-industrial firms are attracted to these protected markets.  Maybe this problem of income inequality and housing affordability is a confirmation of the idea of managed protectionism for nascent industries.


  1. A couple of comments

    "I saw this recently on Twitter, and it always strikes me as odd when this data about tax rates is used to comment on income inequality. If this is true, then it is a confirmation of the Laffer Curve. In fact, for tax rates to have had such strong effects on relative incomes, elasticity of supply of high skilled labor and high return capital must be very high"

    Not necessarily true if the data included capital gains as income, then a lower rate would mean more income over time without any additional labor, but as always the composition is what matters. Check out the following

    A google search has the top marginal tax rate in the US hitting its trough in the late 80s (88-90 it is listed at 20%) and rising ~11 points in '93 to 39.6% where it stands today (with a dip to 35% in 2003 - 2011). If you scroll through Mike Konczal's twitter responses he has a graph showing the share of income for the top 1%. Want to guess when it jumps that 10 points? Most of it from 1990 onward (how you pick endpoints alters it significantly but share of income goes from ~13% (eyeballing the chart) from '88-94 and jumps to ~18% in '09/'10. So 5 points worth of growth came during a period of rising top marginal rates.

    But wait, there is more. The top rate I find for 1964 is 77%, it dropped from 77% to 50% in 1986, the income of the top 1% during this time was basically flat around 8%.

    But wait, there is still more. If you choose a different starting point, say 1945 instead of 1964 the the top marginal rate falls from 94% to 50% in '86, and top 1% share of income drops from 13% to 8%.

    Long story short, the correlation of TMR and increasing inequality only go together from ~87-93, and the reverse can be shown for far longer periods of time in the US.

  2. Great post.

    I think you are onto something, but I am not sure what.

    "The larger story here is that the post-industrial economy requires urbanization. And, the urban housing problem is obstructing that transition. Countries with a growth orientation are the countries butting up against that obstruction."

    Very interesting.

    I may digress, but let's accept the idea that a modern economy is an urbanized economy. We cannot expect people to survive as small farmers (even advocates concede very tough to do), or hunter-gatherers etc. In a modern economy, 95% of people survive by working or investing in a city and not really by choice, any more than people 200 years ago chose to Iive on farms. It is just the way life is now.

    Ergo, we need laws (or an absence of laws) that do everything to allow people to work or start a business in a city, and to make housing as affordable as possible.

    Obviously, I believe property zoning is the primary evil, and must be eliminated.

    Secondarily, any laws that restrict retailing must be eliminated. Most people cannot design and build smartphones. They can retail smartphones. In fact, a few weeks of retailing smartphones, and I would guess the average guy with a push-cart of smartphones would know exactly what most customers want and what models to stock. He could become useful and self-employed. He could---except selling smartphones from a push-cart is illegal in very U.S. city that I know of.

    A local retailing class, operating within zoned property, makes sure no one sells from push-carts, motorcycle-sidecars or trucks. There is a lock on retailing in the city.

    Nevertheless, we have people who are loudly "against the minimum wage."

    I am too, I suppose. But when you think about it, we are forcing people to become employees in urban settings---not self-employed---to rent artificially scarce housing, and then we say we are against the minimum wage.

    It is a convenient application of free-market principles, no?

    I like the fact you are pondering trade and house prices.

    I am trying to generate very broad ideas explaining house prices. Almost truisms.

    House prices respond to the amount of capital flowing into a city's housing stock. Obviously, restricting the supply will have results.

    But where does capital come from? It can come net city exports, tourism, or by taxing money in (Rome, Bangkok, Beijing, Washington, DC), or by volitional capital flows into housing stock from outside the city. Imported capital.

    The role of imported capital entering housing stock varies from city to city but is obvious in New Zealand, or Vancouver Canada.

    A lot to ponder.

    1. Interesting framing. I can't remember if it was the blog or the book, but somewhere I wrote that today's equivalent of 40 acres and a mule is 400 sq. ft. and a subway pass. The difference is that nobody cared about the mule's opinion regarding your arrival. I think you're right that this is a legitimate civil rights issue.

    2. Germany and Japan have low and no population growth. I wonder how that fits into the housing/urbanization question?

    3. It must have some effect, although the pressure on urbanization should still be in effect. It's strange that there are so many factors that seem to correlate - available housing supply coupled with a lack of tax benefits to ownership, strong manufacturing labor markets, trade surpluses.