I agree with many of the points you make: productivity measures are invalid, prices are set by economic fundamentals (tax policy, interest rates), and more.
But I take issue with this: "Free markets cannot fix poverty".
WAT? What if not free markets lifted billions out of poverty in our lifetime?
Markets do generate unequal outcomes and these result in housing problems as people compete for better quality locations. This has been the case for two centuries at least.
Is housing overall better quality and larger than ever? Yes. That’s a good outcome. But that market competition does create some losers along the way.
If we're comparing broadly capitalist to broadly socialist economies over historical horizons, then certainly freer markets have proven far more capable engines of economic growth than central planning.
No dispute from me there.
Two points in response.
First, in the narrow context I was writing in - housing affordability - the issue at hand is whether deregulated private provision will ever adequately house the poor ("fix poverty" in this context = meaning "house the poor in standards of living the rest of us are comfortable with").
If I were to write "free markets, no matter how perfectly they are working, no matter how free of market failure, cannot remediate the inability of those on low incomes to purchase access to adequate housing via private markets, since market outcomes are never more equitable than the distribution of resources market participants bring to them, and public provision will therefore always be required", would you be happier with that?
That was the thrust of my comment "free markets can't fix poverty".
Second, it's interesting to think how the fixed nature of land means even high incomes by historical standards can be insufficient to purchase adequate housing.
Cities are basically a "tournament economy"; the limited amount of land with any given accessibility qualities is allocated by private markets to those with the highest purchasing power, and in proportion to their share of purchasing power.
Unlike the consumption of, say, smartphones or food, consumption of housing services becomes harder for the poor as the rich get richer, because market competition over access to limited land sees more and more well-located land locked up by wealthier people in the form of backyards, large houses, etc.
Inequality creates its own (housing) poverty.
So I don't drive a clear distinction between the two, in this context. High incomes by historical standards can still produce material housing poverty. This was the thrust of Henry George's "Progress and Poverty", centring on the monopoly that is land.
It is staggering to me that I can buy a smartphone with computing power those on the Apollo program could only have dreamed of for the same price as ONE NIGHT'S accommodation costs me in a humble house in Wellington's capital built a decade before the Apollo program commenced and barely modified since then.
I can afford it, luckily, but those not atop the income pile cannot - a living example of Henry George's thesis in action.
To your first point, I don't think your concept of "adequate" is very well defined. "house the poor in standards of living the rest of us are comfortable with" - who are the rest of us? And what is "comfortable"?
(And at what price?).
You could make the claim that we should want the Nth percentile household to be able to afford X% of the living area of a median household in the same location, or something like that.
Now maybe the free market is really not going to deliver that, for the reason you state.
Here I will object that inequality, or relative poverty, is not a good measure of anything.
(I have the same objection every time I hear some scary statistic about the number of people below the poverty line).
Basically, I don't think inequality is something to worry about, only the absolute level of prosperity is (at every percentile of the distribution).
By any global or historical standard, I think the free market delivers surprisingly cheap shelter.
But even if we grant that it's desirable to have more equal access to housing, I don't understand why intervention in the housing market is required. Why wouldn't the redistribution regime automatically take care of this (and do so in a more efficient way, economically).
To your second point, you say "... the fixed nature of land means even high incomes by historical standards can be insufficient to purchase adequate housing."
If by "purchase housing" you mean buying a home, then I think you're making a mistake. The cost of "housing" is rent. And I insist that rent is surprisingly cheap. For example, a couple on the minimum wage could pay about half of their take home pay for a 2 bedroom apartment in the inner parts of any capital city in Australia. How is that not cheap?
Now the cost of that apartment might be high, because this is a financial asset, and assets are expensive when interest rates are low (and for other reasons also).
I also disagree that the cause is the fixed nature of land. Land is fixed of course, in theory, but in practice it's unlimited, especially considering high rise building.
What is limited is land in highly desired locations, but that's not different from other scarcity (of highly qualified surgeons, truffles, or Lamborghinis).
I do agree with your point about the "tournament economy", I do wonder to what extent housing is a positional good.
"consumption of housing services becomes harder for the poor as the rich get richer". Interesting hypothesis, I can see how that might be true in certain locations, but is that true in general? Let's say the super rich priced everyone out of Bondi, you could still rent in the neighboring suburb, or the one next to that. Let's say they priced everyone out from within 50km of Bondi. In that case, the other people will have to live somewhere, and presumably the government will need to provide infrastructure in that place. It might be far from Bondi though.
Your argument rests on the assumption that land is limited, but in practice it's not, it's only the very desirable land that is expensive.
To your last point, technology is indeed dirt cheap, but it doesn't mean that housing is expensive, at least not if you compare it to wages (which I think is the true measure).
Why is rent expensive if you compare it to durable goods is an interesting question. I suspect that some of the explanation is in the fact that housing is a heavily regulated industry susceptible to government sabotage (construction codes, zoning, subsidies, environmental reviews, NIMBYs), in that respect housing is similar to other expensive goods, like education, and healthcare. But there’s also a case to be made that housing is a positional good to an extent. What are the policy implications of that I’m not sure, and I’d be happy to hear your opinion.
Agree, the relevant price of housing services is rent. Asset prices measure savings, not consumption.
Beyond that I have no firm views on the right definition and metric. Presumably it would involve size, quality, location, and tenure stability. The test/threshold should be grounded in what enables a flourishing human life. I'm agnostic on numbers, but data like "we didn't have kids because we couldn't afford it" would be a litmus test for inadequacy.
Second, I agree, housing unaffordability is simply income inadequacy.
I often say "there's no housing crisis - just an inequality crisis manifest most evidently in housing".
I agree, redistribution could go a long way to solving whatever the problem is in a non-paternalistic way.
In the Georgist tradition the extent of ethical redistribution is "equal sharing of all economic rents, and after that you're on your own". That would produce a flatter income distribution than at present - not as an intrinsic goal, but as a consequence of the ethical principle - and so would go a long way to solving current housing affordability issues.
Third, is housing cheap already?
Some people are fine. Others are homeless or live in squalor, even before layering on addictions and psychological issues.
I'd be happy to let the right test (as per the above) answer that empirical question.
Fourth, the effect of fixed land.
This is interesting to me.
Yes, land area per se is plentiful.
But by "land" or "well-located land" we always mean land with certain accessibility characteristics.
The area of land thus defined is fixed by the spatial extent of infrastructure and service provision. Choose any accessibility/land quality threshold you like, and measure the area. That area is finite. Better transport can and does expand it. But for participants in markets to allocate land to competing uses and people, its fixed.
What about our ability to leverage land into floor space area via construction?
Fixed too. By the convex (rising marginal) costs of floor space.
Define a housing quality threshold of your choice - e.g. great views get +10 points per sqm, noisy neighbours get -5 points, extended elevator commutes -5 points, etc - and define a per sqm marginal construction cost threshold of your choice, and you'll find that floor space (of a given quality at a given cost) is limited by land area (of a given accessibility).
Those are the physical limits imposed by infrastructure and services, interacted with the physical limits imposed by construction technology.
That perspective is my starting point for the claim that land, and therefore housing of a given quality, are types of goods in which inequality creates its own poverty. As rich people get richer they capture more well-located land and construction resources, and the price of housing of a given quality rises for poor people.
It doesn't work the same for smartphones or any other good with diminishing marginal costs.
The fixed buildable area is further cut by two more constraints: regulatory constraints (zoning), and, preservation of land for future development by (in our market system) landowners throttling the rate at which construction of dwelling space takes place.
(The crux of the disagreement over zoning is whether the regulatory constraints are meaningfully binding, in light of the private incentive constraint).
I agree a Georgist unimproved land tax is preferable to the status quo. Friedman called it the least bad tax and I tend to agree.
We obviously disagree on questions of ethics. But I urge you to consider the trade-offs when inviting redistribution, let alone less efficient government interventions.
By any historical or global standard the level of prosperity and social mobility enjoyed even by the poor is enormous and can be hard to grasp without first hand experience.
Now, to the more interesting question of land as a fixed pool.
I’m afraid I don’t understand your claim here.
It is true that at any given point in time, accessible land of some set quality is fixed. But the number of cell phones that can be shipped at any given point in time is also fixed, if nothing else then by the capacity of TSMC fabs to print new chips.
The important point is that new land can come into the pool, and will come, as long as the price system functions, and governments perform their function of providing infrastructure.
(Land banking btw is part of this process of managing scarcity).
Now, I’m not saying that the economics of smartphones and dwellings are the same. There are certainly important differences. But the fundamental point stands.
Although it is true that we're a democracy, we're also a liberal democracy and more importantly an extension of English civilisation. A civilisation who's success was tied to the respect for property rights and voluntary exchange. Unless a liberalised construction market was imposing massive externalities, shouldn't freedom be the default. Shouldn't the oweness be on the planners that need to justify the zoning rules other than "we had them forever" and/or "the people like it".
(If you're going to point to the pressure on the transport system, we could simply manage that using road user charges and congestion fees. Regulating construction seems like an absurd way to solve the problem created by tax funded roads)
The economic case for planning regulations could certainly be better made, but there's a case nonetheless.
There's co-ordination failures: public regulation and infrastructure provision can signal when private investment should occur, maximising the benefits of both and avoiding sequencing problems that lower investment returns/ public BCRs.
There are loads of market failures pricing can't fix, e.g. overshadowing, amenity of streetscapes, run-off.
There's the value that certainty and stability in rules provides to derisking private investment, not just financial, but personal investment in what some people might call social capital, but is best thought about as "community", as per Serkin's "case for zoning" (as regulating the pace and cost of community change).
There's Tiebout efficiency, basically, if jurisdictions set different rules - if it's not just let rip everywhere - then people who prize, say, sunlight, or flower gardens instead of front garages will move to those places, allowing an efficient sorting by personal preference.
There's the "land value maximisation" perspective, which wraps up a lot of the above, and says that the rules should basically seek to maximise total land value, since land value captures the full residual (surplus) value of the activities happening on that land. In that perspective if you were to manage to reduce land values by deregulation that could only have occurred by reducing demand via reducing the amenity / personal value gained by occupants of that place from the sum total of their rights and the rights granted to others.
That's a quick dump in the 5 minutes I allowed myself to respond!
Short version, it's not a no-brainer that there should be no rules.
All due respect, that first point you tried to make is completely false. You do not have a democracy and have never had a democracy. Getting certain democratic rights means nothing if you are unable to exercise them. Hence, it is false when people say (quite often) "democracy is in decline" for since if that were true you would have had a democracy at some point in the past.
Also, "freedom" for what and for whom? Freedom also means nothing if it is liberty but only for whoever has the most government scorepoints in their bank accounts. We need Justice before we can say we have any freedom or liberty.
The subpopulation of uber-rich have a sort of democracy, since their voices are about equally weighted in influencing policy decisions.
Did the deregulation in Auckland induce the population growth in the city? Did the population growth lead to a productivity boom measured either in increased average productivity of Auckland or increased productivity of the people who moved to Auckland?
I don't know about productivity but in principle this is empirically measurable.
In terms of population growth, the current batch of studies don't claim the upzoning affected Auckland's population either way.
However this is rather incompatible with the evident purpose of the reforms, which was to allow more people to live in NZ's most productive city.
As a stylised fact, population pressures from a migration boom arrive first and strongest in Auckland, then flow on to other cities with a lag.
House-building tends to follow.
So I think about the story as being that national population settings drove Auckland's population and housing growth, followed by growth in other centres. Those population pressures also drove both demands for looser zoning, and greater public provision, and private demand for housing which the private house building sector responded to.
I agree with many of the points you make: productivity measures are invalid, prices are set by economic fundamentals (tax policy, interest rates), and more.
But I take issue with this: "Free markets cannot fix poverty".
WAT? What if not free markets lifted billions out of poverty in our lifetime?
Markets do generate unequal outcomes and these result in housing problems as people compete for better quality locations. This has been the case for two centuries at least.
Is housing overall better quality and larger than ever? Yes. That’s a good outcome. But that market competition does create some losers along the way.
You can talk about inequality. But don't conflate inequality with poverty.
I take your point.
If we're comparing broadly capitalist to broadly socialist economies over historical horizons, then certainly freer markets have proven far more capable engines of economic growth than central planning.
No dispute from me there.
Two points in response.
First, in the narrow context I was writing in - housing affordability - the issue at hand is whether deregulated private provision will ever adequately house the poor ("fix poverty" in this context = meaning "house the poor in standards of living the rest of us are comfortable with").
If I were to write "free markets, no matter how perfectly they are working, no matter how free of market failure, cannot remediate the inability of those on low incomes to purchase access to adequate housing via private markets, since market outcomes are never more equitable than the distribution of resources market participants bring to them, and public provision will therefore always be required", would you be happier with that?
That was the thrust of my comment "free markets can't fix poverty".
Second, it's interesting to think how the fixed nature of land means even high incomes by historical standards can be insufficient to purchase adequate housing.
Cities are basically a "tournament economy"; the limited amount of land with any given accessibility qualities is allocated by private markets to those with the highest purchasing power, and in proportion to their share of purchasing power.
Unlike the consumption of, say, smartphones or food, consumption of housing services becomes harder for the poor as the rich get richer, because market competition over access to limited land sees more and more well-located land locked up by wealthier people in the form of backyards, large houses, etc.
Inequality creates its own (housing) poverty.
So I don't drive a clear distinction between the two, in this context. High incomes by historical standards can still produce material housing poverty. This was the thrust of Henry George's "Progress and Poverty", centring on the monopoly that is land.
It is staggering to me that I can buy a smartphone with computing power those on the Apollo program could only have dreamed of for the same price as ONE NIGHT'S accommodation costs me in a humble house in Wellington's capital built a decade before the Apollo program commenced and barely modified since then.
I can afford it, luckily, but those not atop the income pile cannot - a living example of Henry George's thesis in action.
Thanks for the detailed response.
To your first point, I don't think your concept of "adequate" is very well defined. "house the poor in standards of living the rest of us are comfortable with" - who are the rest of us? And what is "comfortable"?
(And at what price?).
You could make the claim that we should want the Nth percentile household to be able to afford X% of the living area of a median household in the same location, or something like that.
Now maybe the free market is really not going to deliver that, for the reason you state.
Here I will object that inequality, or relative poverty, is not a good measure of anything.
(I have the same objection every time I hear some scary statistic about the number of people below the poverty line).
Basically, I don't think inequality is something to worry about, only the absolute level of prosperity is (at every percentile of the distribution).
By any global or historical standard, I think the free market delivers surprisingly cheap shelter.
But even if we grant that it's desirable to have more equal access to housing, I don't understand why intervention in the housing market is required. Why wouldn't the redistribution regime automatically take care of this (and do so in a more efficient way, economically).
To your second point, you say "... the fixed nature of land means even high incomes by historical standards can be insufficient to purchase adequate housing."
If by "purchase housing" you mean buying a home, then I think you're making a mistake. The cost of "housing" is rent. And I insist that rent is surprisingly cheap. For example, a couple on the minimum wage could pay about half of their take home pay for a 2 bedroom apartment in the inner parts of any capital city in Australia. How is that not cheap?
Now the cost of that apartment might be high, because this is a financial asset, and assets are expensive when interest rates are low (and for other reasons also).
I also disagree that the cause is the fixed nature of land. Land is fixed of course, in theory, but in practice it's unlimited, especially considering high rise building.
What is limited is land in highly desired locations, but that's not different from other scarcity (of highly qualified surgeons, truffles, or Lamborghinis).
I do agree with your point about the "tournament economy", I do wonder to what extent housing is a positional good.
"consumption of housing services becomes harder for the poor as the rich get richer". Interesting hypothesis, I can see how that might be true in certain locations, but is that true in general? Let's say the super rich priced everyone out of Bondi, you could still rent in the neighboring suburb, or the one next to that. Let's say they priced everyone out from within 50km of Bondi. In that case, the other people will have to live somewhere, and presumably the government will need to provide infrastructure in that place. It might be far from Bondi though.
Your argument rests on the assumption that land is limited, but in practice it's not, it's only the very desirable land that is expensive.
To your last point, technology is indeed dirt cheap, but it doesn't mean that housing is expensive, at least not if you compare it to wages (which I think is the true measure).
Why is rent expensive if you compare it to durable goods is an interesting question. I suspect that some of the explanation is in the fact that housing is a heavily regulated industry susceptible to government sabotage (construction codes, zoning, subsidies, environmental reviews, NIMBYs), in that respect housing is similar to other expensive goods, like education, and healthcare. But there’s also a case to be made that housing is a positional good to an extent. What are the policy implications of that I’m not sure, and I’d be happy to hear your opinion.
Great thoughts.
I'll respond briefly to each.
First, measuring affordability or adequacy.
Agree, the relevant price of housing services is rent. Asset prices measure savings, not consumption.
Beyond that I have no firm views on the right definition and metric. Presumably it would involve size, quality, location, and tenure stability. The test/threshold should be grounded in what enables a flourishing human life. I'm agnostic on numbers, but data like "we didn't have kids because we couldn't afford it" would be a litmus test for inadequacy.
Second, I agree, housing unaffordability is simply income inadequacy.
I often say "there's no housing crisis - just an inequality crisis manifest most evidently in housing".
I agree, redistribution could go a long way to solving whatever the problem is in a non-paternalistic way.
In the Georgist tradition the extent of ethical redistribution is "equal sharing of all economic rents, and after that you're on your own". That would produce a flatter income distribution than at present - not as an intrinsic goal, but as a consequence of the ethical principle - and so would go a long way to solving current housing affordability issues.
Third, is housing cheap already?
Some people are fine. Others are homeless or live in squalor, even before layering on addictions and psychological issues.
I'd be happy to let the right test (as per the above) answer that empirical question.
Fourth, the effect of fixed land.
This is interesting to me.
Yes, land area per se is plentiful.
But by "land" or "well-located land" we always mean land with certain accessibility characteristics.
The area of land thus defined is fixed by the spatial extent of infrastructure and service provision. Choose any accessibility/land quality threshold you like, and measure the area. That area is finite. Better transport can and does expand it. But for participants in markets to allocate land to competing uses and people, its fixed.
What about our ability to leverage land into floor space area via construction?
Fixed too. By the convex (rising marginal) costs of floor space.
Define a housing quality threshold of your choice - e.g. great views get +10 points per sqm, noisy neighbours get -5 points, extended elevator commutes -5 points, etc - and define a per sqm marginal construction cost threshold of your choice, and you'll find that floor space (of a given quality at a given cost) is limited by land area (of a given accessibility).
Those are the physical limits imposed by infrastructure and services, interacted with the physical limits imposed by construction technology.
That perspective is my starting point for the claim that land, and therefore housing of a given quality, are types of goods in which inequality creates its own poverty. As rich people get richer they capture more well-located land and construction resources, and the price of housing of a given quality rises for poor people.
It doesn't work the same for smartphones or any other good with diminishing marginal costs.
The fixed buildable area is further cut by two more constraints: regulatory constraints (zoning), and, preservation of land for future development by (in our market system) landowners throttling the rate at which construction of dwelling space takes place.
(The crux of the disagreement over zoning is whether the regulatory constraints are meaningfully binding, in light of the private incentive constraint).
Interesting points.
I agree a Georgist unimproved land tax is preferable to the status quo. Friedman called it the least bad tax and I tend to agree.
We obviously disagree on questions of ethics. But I urge you to consider the trade-offs when inviting redistribution, let alone less efficient government interventions.
By any historical or global standard the level of prosperity and social mobility enjoyed even by the poor is enormous and can be hard to grasp without first hand experience.
Now, to the more interesting question of land as a fixed pool.
I’m afraid I don’t understand your claim here.
It is true that at any given point in time, accessible land of some set quality is fixed. But the number of cell phones that can be shipped at any given point in time is also fixed, if nothing else then by the capacity of TSMC fabs to print new chips.
The important point is that new land can come into the pool, and will come, as long as the price system functions, and governments perform their function of providing infrastructure.
(Land banking btw is part of this process of managing scarcity).
Now, I’m not saying that the economics of smartphones and dwellings are the same. There are certainly important differences. But the fundamental point stands.
Unless I misunderstand your point.
Although it is true that we're a democracy, we're also a liberal democracy and more importantly an extension of English civilisation. A civilisation who's success was tied to the respect for property rights and voluntary exchange. Unless a liberalised construction market was imposing massive externalities, shouldn't freedom be the default. Shouldn't the oweness be on the planners that need to justify the zoning rules other than "we had them forever" and/or "the people like it".
(If you're going to point to the pressure on the transport system, we could simply manage that using road user charges and congestion fees. Regulating construction seems like an absurd way to solve the problem created by tax funded roads)
Good thoughts.
The economic case for planning regulations could certainly be better made, but there's a case nonetheless.
There's co-ordination failures: public regulation and infrastructure provision can signal when private investment should occur, maximising the benefits of both and avoiding sequencing problems that lower investment returns/ public BCRs.
There are loads of market failures pricing can't fix, e.g. overshadowing, amenity of streetscapes, run-off.
There's the value that certainty and stability in rules provides to derisking private investment, not just financial, but personal investment in what some people might call social capital, but is best thought about as "community", as per Serkin's "case for zoning" (as regulating the pace and cost of community change).
There's Tiebout efficiency, basically, if jurisdictions set different rules - if it's not just let rip everywhere - then people who prize, say, sunlight, or flower gardens instead of front garages will move to those places, allowing an efficient sorting by personal preference.
There's the "land value maximisation" perspective, which wraps up a lot of the above, and says that the rules should basically seek to maximise total land value, since land value captures the full residual (surplus) value of the activities happening on that land. In that perspective if you were to manage to reduce land values by deregulation that could only have occurred by reducing demand via reducing the amenity / personal value gained by occupants of that place from the sum total of their rights and the rights granted to others.
That's a quick dump in the 5 minutes I allowed myself to respond!
Short version, it's not a no-brainer that there should be no rules.
All due respect, that first point you tried to make is completely false. You do not have a democracy and have never had a democracy. Getting certain democratic rights means nothing if you are unable to exercise them. Hence, it is false when people say (quite often) "democracy is in decline" for since if that were true you would have had a democracy at some point in the past.
Also, "freedom" for what and for whom? Freedom also means nothing if it is liberty but only for whoever has the most government scorepoints in their bank accounts. We need Justice before we can say we have any freedom or liberty.
The subpopulation of uber-rich have a sort of democracy, since their voices are about equally weighted in influencing policy decisions.
Did the deregulation in Auckland induce the population growth in the city? Did the population growth lead to a productivity boom measured either in increased average productivity of Auckland or increased productivity of the people who moved to Auckland?
I don't know about productivity but in principle this is empirically measurable.
In terms of population growth, the current batch of studies don't claim the upzoning affected Auckland's population either way.
However this is rather incompatible with the evident purpose of the reforms, which was to allow more people to live in NZ's most productive city.
As a stylised fact, population pressures from a migration boom arrive first and strongest in Auckland, then flow on to other cities with a lag.
House-building tends to follow.
So I think about the story as being that national population settings drove Auckland's population and housing growth, followed by growth in other centres. Those population pressures also drove both demands for looser zoning, and greater public provision, and private demand for housing which the private house building sector responded to.