Author: JW Mason

What Should be Universal and Free?

In the US, as in many  countries, local governments often provide fire protection. In general — there are exceptions, but they’re still rare enough to make news — this is a free service, available to everyone who lives in whatever jurisdiction provides it. No one has to sign up or pay for coverage. To most people, I suppose, this is a normal and reasonable thing to do. 

One effect of fire protection is to stop peoples’ homes from burning down. As it happens, rich people are more likely to own homes than poor people. And when people with lower incomes do own houses, they are generally less expensive. So the distributional effect of preventing houses from burning is clearly regressive.

Why should everyone have to pay to keep millionaires’ mansions from burning? Modern apartment buildings probably aren’t even at that great risk of fire, what with sprinkler systems and so on. It’s the big houses up in the hills that are in the greatest danger.

So now comes a new mayor — let’s call him Mayor Pete — who proposes to abolish the municipal fire department and replace it with private fire services that people can contract with. Maybe he’ll take a page from ACA and have gold, silver and bronze levels of fire protection, sold on exchanges. It’s smart to build on what works, after all.

Naturally there will be means-tested vouchers for poor people to pay for fire protection. Or we can, say, cap the cost of fire protection at some percent of household income, with the difference made up by a subsidy. Just be sure you can fully document your income and assets each year, and don’t forget to fill out the forms. Of course not everyone needs fire protection — the homeless are free to opt out, and renters can decide for themselves if they prefer a building with fire coverage or cheaper rent. 

Obviously, I am making an analogy with free college. And obviously, people who don’t support free college (and probably many who do) are going to reject this analogy. Here are some possible counterarguments:

– Everyone wants to not die in a fire. Not everyone wants to go to college.

– If someone falls through the cracks and doesn’t get fire coverage, the effects can be catastrophic — loss of home and possessions, serious injury, death. If some people end up unable to attend college, that is certainly unfortunate but not a disaster in the same way. 

– It’s much more efficient to have a single fire service serving a whole area than to have lots of different contractors providing different levels of coverage in overlapping areas. There would be wasteful duplication of facilities, equipment, and personnel, and in an emergency confusion about who was responsible for what.

– If one house is allowed to burn that creates major risks for the houses nearby. Because fire spreads, fire protection isn’t something you can really opt into or out of on an individual level.

These are not unreasonable objections. On the other hand, we can debate how different fire service and college education really are on these dimensions.

Mike Konczal or I might say that they are not really so different – that many of the same practical considerations that favor a singe free, universal system of fire protection also apply to college. We might say that higher education is not a luxury in the contemporary US, and that if measures to keep the rich from getting a free education at a public college end up also excluding some non-rich people — as they inevitably well — that is a major cost. We might say that the machinery of assessing eligibility for various subsidies, vouchers, etc., collecting fees, and excluding or penalizing those who haven’t paid, is immensely wasteful. We might say that the benefits of higher education are social and public, and that these broader benefits are undermined when education is treated as a private good. 

Noah Smith or the real Mayor Pete might say on the contrary that there are big differences – lots of people don’t go to college and that’s fine; means-testing is accurate and reasonably efficient, at least compared with running duplicate fire departments; and that claims about the importance of higher education to a fulfilling life or a robust democracy are mostly just the self-flattering fantasies of college professors.  

Well, we disagree. But however you apply them in this particular case, these all seem like relevant arguments in thinking about how desirable it is to make a public service free and universal.

What they are not, is arguments about distributional impact. There’s no controversy over the distribution of student debt or tuition spending  – they rise with income, but fall as a proportion of income. We can debate over whether that makes forgiving student debt progressive or regressive, but I don’t think that’s what’s motivating either side here.  Disputes over whether something should be free and universal hinge rather on whether we see it as a fundamental right or a luxury; whether we see the risks of under- and overprovision as symmetrical; whether technical considerations favor provision through a single uniform system;  and whether the service is a public good in the traditional sense, and whether it has significant externalities. If we were actually debating the elimination of universal fire protection, these would be the kinds of arguments people would make. Not ones about the direct distributional impact. 

The distribution of college spending is quite a bit flatter than the distribution of home equity. So if you don’t oppose free universal fire protection on the grounds that it favors the rich, then I’m pretty sure you don’t actually oppose free public college on those grounds either. Mayor Pete certainly does not have any general objection to public spending from which the rich derive more direct benefit than the poor. Indeed, since public goods are mostly complementary to private goods — roads and cars; airports and airlines; meat inspectors and meat; police and private property —  this is probably true of the great majority of public spending, at least if you look at it in the same narrow financial terms that people are looking at college debt forgiveness.

So I don’t think distributional concerns are the real reason that people oppose free universal public college. Presumably the real reasons are some mix of “I think it is very important that everyone is protected from fires, but I don’t think it’s that important that everyone can go to college,” and “Charging people individually for fire protection is impractical, but charging people to go to college seems to work ok.” Which might be reasonable positions! But let’s debate those.

I’d love to have that debate. But I must add that the fact that people who oppose free college keep bringing up the distributional impact, suggests that they may not be confident of winning on other grounds. It suggests that they, at least, don’t believe that most Americans see college education as simply a private good.

ETA: This postwould have been better if I knew anything about the concrete historical development of public fire proteection. Unfortunately, I don’t. Also, on twitter, Matt Bruenig argues that the distributional question isn’t as straightforward as I claim because of insurance. So just to clarify: The point here is that if you’re wodering why we have free, universal public services — and we have a lot of them — imagining them as cash transfers isn’t helpful. The reason the public takes over some service is precisely because it doesn’t fit the model of giving people cash – because the nature of the service makes it unsuitable to treat as a commodity. So the relevant question, if we are asking whether something should be a universal public service, is how well it fits the model of a private good. Not to start by assuming it is a private good and then asking how it is distributed.

Is Productivity Being Undermeasured?

(I am an occasional contributor to roundtables of economists in the magazine The International Economy. This month’s topic was: “What are the policy implications if productivity growth is being under-measured in the official data?” My answer is below.)

How many hamburgers equal one haircut? 

In itself, the question doesn’t make sense. They’re just different things. What we can compare, is how much they cost. This is true across the board: The only way we can convert all the endlessly varied objects and activities that make up “the economy” into a single number, is through their market prices. Markets are what let us express all the various products of human labor as a single quantity we call output. 

This means that productivity is only meaningful in the context of market prices. There are lots of things that people do that are useful, important, even essential to economic life, from raising children to following the law, that can’t be expressed as output per hour. 

So it doesn’t really make sense to ask if the nonmarket effects of technological change mean we are undermeasuring productivity. A new technology may transform our lives in all sorts of ways, but we can’t talk about its effect on productivity except insofar as its products are sold. There’s no other basis on which productivity can even be defined – we have to go by market prices. And what market prices are telling us is that productivity growth is slower than it used to be. 

This slowdown is not really surprising. Manufacturing – where the transformation of work by technology has gone farthest, and where productivity growth almost always fastest –  is steadily shrinking as a share of the economy.

It is true that we often think of economic growth as something broader than market prices. It’s supposed to describe a more general rise in living standards. So a more meaningful way to ask the question might be: Does measured productivity growth accurately reflect the material improvements in people’s lives?

The answer here is indeed no. But unfortunately, in the rich countries at least, the mismeasurement probably goes the opposite way as the question suggests.

Measures like life expectancy used to be closely linked with economic growth. In poor countries, this is still the case – higher GDP is associated with longer lifespans, lower child mortality, and similar improvements in health and wellbeing. If anything, today’s GDP growth may be associated with even faster improvement than we would expect based on the historical record. But in richer countries the opposite is true – higher GDP no longer translates reliably into better health outcomes. In some places – like the UK, and much of the US – life expectancy is actually falling, even as income per capita continues to rise. 

Leisure time is another measure of wellbeing — presumably if people were having an easier time meeting their material needs, they would choose to take more time off work. (Adam Smith once suggested that the amount of leisure people enjoyed was the only meaningful standard of economic value across countries.1) On this measure too, living standards seem to be falling short of GDP growth rather than running ahead of them. Between the end of World War II and the early 1980s, the average weekly hours of an employed American fell by about 15 percent. But since then, average hours per worker have been essentially flat. This makes the postwar growth performance look even better, and the more recent performance worse, than the headline numbers suggest.

It seems likely that measured productivity overstates, rather than understates, our real improvement in living standards, at least in the US.  If so, the policy implications seem clear. Policymakers should worry less about growth, and more about concrete interventions that we know improve people’s lives – things like universal access to childcare and health care, high-quality education, and paid time off for all. 

Considerations on Rent Control

(On November 13, I was invited to testify before the Jersey City city council on rent control. Below is an edited version of my testimony.)

My name is J. W. Mason. I have a Ph.D. in Economics from the University of Massachusetts at Amherst, I am an assistant professor of economics at John Jay College of the City University of New York, and I am a Fellow at the Rosevelt Institute.

My goal today is to present some general observations on rent regulation from the perspective of an economist.

Among economists, rent regulation seems be in similar situation as the minimum wage was 20 years ago. At that time, most economists  took it for granted that raising the minimum wage would reduce employment. Textbooks said that it was simple supply and demand — if you raise the price of something, people will buy less of it. But as more state and local governments raised minimum wages, it turned out to be very hard to find any negative effect on employment. This was confirmed by more and more careful empirical studies. Today, it is clear that minimum wages do not reduce employment. And as economists have worked to understand why not, this has improved our theories of the labor market.

Rent regulation may be going through a similar evolution today. You may still see textbooks saying that as a price control, rent regulation will reduce the supply of housing. But as the share of Americans renting their homes has increased, more and more jurisdictions are considering or implementing rent regulation. This has brought new attention from economists, and as with the minimum wage, we are finding that the simple supply-and-demand story doesn’t capture what happens in the real world.

As of 2019, there are approximately 200 cities in the US with some type of rent regulation. Most of them are in three states — New York, New Jersey, and California. Other areas where rent control was once widespread, such as Massachusetts, have seen it eliminated by state law.

A number of recent studies have looked at the effects of rent regulations on housing supply, focusing on changes in rent regulations in New Jersey and California and the elimination of rent control in Massachusetts. Contrary to the predictions of the simple supply-and-demand model, none of these studies have found evidence that introducing or strengthening rent regulations reduces new housing construction, or that eliminating rent regulation increases construction. Most of these studies do, however, find that rent control is effective at holding down rents.

A 2007 study by David Sims and a 2014 study by Autor, Palmer, and Pathak both look at the effects of the end of rent control in Massachusetts, after the passage of Question 9 by Massachusetts ballot referendum in 1994. Sims found that the end of rent control had little effect on the construction of new housing. He did however find evidence that rent control decreased the number of available rental units, by encouraging condo conversions. In other words, rent control seemed to affect the quantity of rental housing, but not the total quantity of the housing stock. Unsurprisingly, Sims also found significant increases in rent charged after decontrol, suggesting that rent control was effective in limiting rent increases. Finally, he found that rent controlled units had much longer tenure times, supporting the idea that rent control promotes neighborhood stability. Autor and coauthors reached similar conclusions. They also found that eliminating rent control also raised rents in homes in the same area that were never subject to the controls, reinforcing the idea that rent control contributes to neighborhood stability.

A 2007 study by Gilderbloom and Ye of more recent rent control laws here in New Jersey finds evidence that rent controls actually increase the supply of rental housing, by incentivizing landlords to subdivide larger rental units.

A 2015 study by Ambrosius, Glderbloom and coauthors also looks at changes in New Jersey rent regulations. As with the previous study, they find that rent control in New Jersey has not produced any detectable reduction in new housing supply. However, they also find that many of these laws,  because of their relatively generous provisions, in particular vacancy decontrol, only limit rent increases on a relatively small number of housing units. 

The most recent major study of rent control, by Diamond McQuade, and Qian in 2018, uses detailed data on San Francisco housing market to look at the effect of the mid-1990s change in rent control rules there. They suggest that while the law did effectively limit rent increases, and had no effect on new housing construction, it did have a negative effect n the supply of rental housing by encouraging condo conversions. 

The main conclusions from this literature are, first, that rent regulation is effective in limiting rent increases, although how effective it is depends on the specifics of the law. Vacancy decontrol in particular may significantly weaken rent control. Second, there is no evidence that rent regulations reduce the overall supply of housing. They, may, however, reduce the supply of rental housing if it is easy for landlords to convert apartments to condominiums or other non-rental uses. This suggests that limitations on these kinds of conversions may be worth exploring. Third, in addition to their effect on the overall level of rents, rent regulations also play an important role in promoting neighborhood stability and protecting long-term tenants.

Let me now turn to the question of why the textbook story is wrong. There are several features of housing markets and of rent control that help explain why the simple supply-and-demand model is inapplicable.

First, these arguments misunderstand the goal of rent regulation. In part, it is to preserve the supply of affordable housing. But it also recognizes the legitimate interest of long-term tenants in remaining in their homes. A rented house or apartment is still a family’s home, which they have a reasonable expectation of remaining in on terms similar to those they have enjoyed in the past. Just as we have a legal principle that people cannot be arbitrarily deprived of their property, and just as many local governments put limits on how rapidly property taxes can increase, a goal of rent control is to give people similar protection from being forced out of their homes by rent increases. 

Second, and related to this, there is a social interest in income diversity and stable neighborhoods. In the absence of rent control or other measures to control housing costs, an area that sees rising productivity or improved amenities may see a sharp rise in rents and become affordable only for higher-income households. Besides the questions of equity this raises, there are economic costs here, as it becomes difficult for people holding lower paid jobs to live within commuting distance; an area that becomes more homogenous may also lose the social and cultural dynamism that caused the improvement in the first place. Similarly, the evidence seems clear that in the absence of rent regulation, turnover among tenants will be higher, leading to less stable communities and discouraging investment by renters in their neighborhoods. The absence of rent regulation may also create political obstacles to efforts to increase housing supply, attract new employers, or otherwise improve urban areas, since current residents correctly perceive that the result of any improvement may be higher rents and displacement. Rent regulation removes these conflicts between the social interest in thriving, high-wage cities and the interests of current residents. This makes it an important component of any broader urban development program.

Third, rent regulations in general affect only increases in rents. When a new property comes on the market, landlords can charge whatever the market will bear. And when they make major improvements, again, most existing rent regulations, including the current Jersey City law, allow them to recapture those costs via higher rents. So what rent control is limiting are the rent increases that are not the result of anything the landlord has done — the rent increases that result from the increased desirability of a particular area, or of a broader regional shortage of housing relative to demand. There is no reason that limiting these windfall gains should affect the supply of housing.

Fourth, in many high-cost areas, housing supply is relatively fixed. The reason that existing homes in many large cities cost multiple times more than the costs of construction, is that the ability to add new housing in these areas is very limited, by some mix of regulatory barriers like zoning, and physical or economic barriers. In economists’ terms, the supply of housing in these areas is inelastic  – it doesn’t respond very much to changes in price. This fact is widely recognized, but its implications for rent regulation are not. In a setting where the supply of new housing is already limited by other factors  – whether land-use policy or the capacity of existing infrastructure or sheer physical limits on construction –  rent regulation will have little or no additional effect on housing supply. Instead, it will simply reduce the monopoly profits enjoyed by owners of existing housing.

Fifth, housing is very long-lived. According to the Bureau of Economic Analysis, the average age of a tenant-occupied residential structure in the US is 42 years. In much of the northeast and in older cities, the average age will be greater. The fact that housing lasts this long has important implications. No one constructing new housing is thinking about returns that far out. Most business investment is expected to repay its costs in less than 10 years. Housing construction may have a longer payback period — as we know, much construction is financed with 30-year mortgages. But the rents 40 or more years in the future are simply not a factor in the construction of new housing.  This means that there is a great deal of space to regulate the rents on existing housing without affecting the decision to build or not build

The bottom line is that rents in the everyday sense are often also economic rents. When economists use the term rent, they mean a payment that someone receives from some economic activity because of an exclusive right over it, as opposed to contributing some productive resource. When a landlord gets an income because they are lucky enough to own land in an area where demand is growing and new supply is limited, or an income from an older building that has already fully paid back its construction costs, these are rents in the economic sense. They come from a kind of monopoly, not from contributing real resources to production of housing. And one thing that almost all economists agree on is that removing economic rents does not have costs in terms of reduced output or efficiency. 

Finally, I would like to offer a few design principles for rent regulation, based on my read of the literature.

First, rent control needs to be combined with other measures to create more affordable housing. The main goals of rent regulation are to protect renters’ legitimate interest in remaining in their homes; to advance the social interest in stable, mixed-income neighborhoods; and to curb the market power of landlords. Other measures, including subsidies and incentives, reforms to land-use rules, and public investment in social housing, are needed to increase the supply of affordable housing. These two approaches should be seen as complements.

Second, there are good reasons that most existing rent control focuses on rent increases rather than the absolute level of rents. Rent control structured this way allows new housing to claim the market rent, giving the developer a chance to recover the costs of construction. Rent increases many years after the building is finished are more likely to reflect changes in the value of the location, rather than the costs of production. From the point of view of allowing existing tenants to remain in their homes, it is also makes sense to focus on increases, rather than the absolute level of rents.

Third, since rent regulation is aimed at the monopoly rents claimed by landlords, it should allow for reasonable rent increases to reflect increased costs of maintaining a building. At the same time, there is a danger that landlords will engage in unneeded improvements if this allows them to raise rents more than they would otherwise be allowed to. A natural way to balance this is to adjust the allowable rent increase each year based on some measure of average costs or a broader price index, as in the current Jersey City law.

Fourth, for rent control to be effective, tenants also need to be protected from the threat of eviction or other pressure from landlords. To give renters genuine security in their homes, they need an automatic right to renew their lease, unless the landlord can demonstrate nonpayment of rent or other good cause.

Fifth rent control is more likely to have perverse effects when the controls are incomplete. When rent regulations do reduce the supply of affordable rental housing, this is typically because they have loopholes allowing landlords to escape the regulations. In particular, vacancy decontrol or allowing larger rent increases on vacancy significantly reduces the impact of rent control and may encourage landlords to push out existing tenants. There is also some evidence that landlords seek to avoid rent regulation by converting rental units into units for sale. To avoid these kinds of unintended consequences, rent regulations should be as comprehensive as possible, and options to remove units from the regulated market need to be closed off wherever possible. 

Thank you.

CBO Interest Rate Forecasts, 2011-2019

This is just a brief addition to the previous post. I should have included this figure, which shows the CBO’s 10-year forecasts for the interest rate on the 10-year Treasury bond, compared with the actual interest rate.

Forecasts by year made. Source: CBO 10-Year Economic Projections, various years

One obvious point here is that, for most of the past decade, the CBO has been projecting a return of interest rates to “normal” levels, which has stubbornly failed to take place. If we compare the interest rate on Treasury bonds at any point since 2010 to the CBO’s forecasts from a couple years before, the actual interest rate is lower than the forecast. This is especially true in the earlier years.

Another point, more relevant to my post, is the latest adjustment really is a big deal. While there have been comparable downward adjustments, there haven’t been any in a while; in fact for the past four years the long-run forecast has been fixed around 3.7 percent.2 This is also the first interest rate forecast since the recession that predicts that interest rates will remain near current levels indefinitely. Of course, it may still end up being an overestimate, if the recent decline in rates continues.

One takeaway is that when trying to guess what interest rates will be in the future, you probably can’t do better than assuming that they’ll be more or less where current rates are. There have been many, many confident predictions over the past decade that interest rates will soon rise — the CBO is far from the worst offender here — and they have consistently been proven wrong. If you want to talk about the future path of government debt, or some similar question where interest rates matter, you need a very good reason to assume interest rates much higher than what we see today. A strong feeling that interest rates just have to go up someday, isn’t enough. And as long as interest rates remain close to current levels, the debt ratio is not going to go up very much, even with deficits significantly larger than today’s.

I should note that while I think pictures like this are clarifying, I don’t find that they’re always effective rhetorically. People who are committed to some variety of hard-money view find it easy to say, “well sure, predictions of rising rates have been wrong for many years. But how do you know they won’t be right this time?”

* * *

If you’re just interested in the policy debate, you can stop reading here. But I can’t help pointing to another takeaway, from a more theoretical perspective: This picture is clearly not the result of a process where expected value of a variable is just an unbiased estimate of its true future value. In that case the errors should be distributed at random around the actual path, instead of all way off to one side.3

To be sure, the CBO’s numbers are not forecasts in a strict sense, but inputs into its legally mandated projections of the future path of the debt. The CBO needs to make forecasts in a way that minimizes not just ex post errors, but challenges to is credibility and neutrality. The relevant question is not whether the forecasts are as accurate as they can be, but whether they are “reasonable” in some broader sense. And this is as it should be! If I were dictator of the CBO, I would not insist on using forecast values that I myself think will be closest to the true values, but would balance this against the need for a consistent and transparent methodology and the costs of getting too far from the views of the relevant community of experts. The CBO is not simply a machine for generating forecasts, it plays a specific role in a concrete political process.

But of course, this isn’t just the CBO. Any institution operates on the basis of a set of shared beliefs about the world, and the process by which those beliefs are generated needs to be compatible with the other activities and reproduction of the institution. In any setting where people have to act collectively, getting as accurate as possible a picture of the relevant facts needs to be weighed against the need for some picture that everyone can agree on. Which, from the point of view of economics, suggests we need to think more carefully about expectations. We need to distinguish between the “expected” value as the central tendency of a given probability distribution; the subjective belief in someone’s head about the likely outcome; and the implicit belief about the outcome that is the basis of the relevant behavior. The essence of the rational expectations revolution was to collapse these three senses into the first one, effectively removing expectations as an independent object of inquiry.

For anyone interested, here is the R code that generates the above figure. I think including the relevant code whenever you present quantitative results is best practice, for blogs as much as anywhere else.

# can update this as new projections become available
files <- c('https://www.cbo.gov/system/files/2018-06/51135-2011-08-economicprojections.xlsx',
'https://www.cbo.gov/system/files/2018-06/51135-2012-08-economicprojections.xlsx',
'https://www.cbo.gov/sites/default/files/recurringdata/51135-2013-02-economicprojections.xls',
'https://www.cbo.gov/sites/default/files/recurringdata/51135-2014-08-economicprojections.xlsx',
'https://www.cbo.gov/sites/default/files/recurringdata/51135-2015-08-economicprojections.xlsx',
'https://www.cbo.gov/sites/default/files/recurringdata/51135-2016-08-economicprojections-2.xlsx',
'https://www.cbo.gov/sites/default/files/recurringdata/51135-2017-06-economicprojections2.xlsx',
'https://www.cbo.gov/system/files/2018-08/51135-2018-08-economicprojections.xlsx',
'https://www.cbo.gov/system/files/2019-08/51135-2019-08-economicprojections_1.xlsx')
# using the August reports where available. For some reason there's none in summer 2013.

n <- length(files)
cbo.projections <- list()

for (i in 1:n) {
temp <- tempfile()
download.file(files[i], temp)
x <- read.xlsx(temp, sheetIndex = 3)
unlink(temp)
cbo.projections[[i]] <- x
}

names(cbo.projections) <- 2011:2019

cbo.interest <- as.data.frame(matrix(nrow=n*2, ncol=12))
names(cbo.interest) <- c('forecast.year', paste0('y', 1:11))
cbo.interest[,1] <- rep(2011:2019, each=2)

s <- c(7, 7, 8, rep(7, n-3))
# for some reason in 2013 the data starts one column further over.

for (i in 1:n){
x <- cbo.projections[[i]]
yearrow <- subset(x, x[,4]=='Units', select=s[i]:(s[i]+10))
interestrow <- subset(x, x[,2]=='10-Year Treasury Note', select=s[i]:(s[i]+10))
for (j in 1:11){
cbo.interest[i*2-1, j+1] <- levels(yearrow[1,j])[yearrow[1,j]]
cbo.interest[i*2, j+1] <- levels(interestrow[1,j])[interestrow[1,j]]
}

}

interest <- read.delim('https://fred.stlouisfed.org/data/GS10.txt', skip=16, sep =' ')[,-2:-3]
names(interest) <- c('date', 'GS10')
interest$year <- substr(interest$date, 1, 4)
interest.ann <- aggregate(interest$GS10, by=list(interest$year), FUN=mean)

y1 <- 2010
y2 <- 2029

plot(x=y1:y2, y =y1:y2, ylim=c(0,6), xlab='', ylab='Projected Interest Rate')
for (i in seq(1, n*2, by=2)){
lines(x=cbo.interest[i,-1], y=cbo.interest[i+1,-1], col=rainbow(n*2)[i])
}
lines(x=2010:2019, y=interest.ann[58:67,2], lwd=2)
legend(x='bottomright', legend = 2011:2019, col=rainbow(n*2)[seq(1, n*2, by=2)], bty='n', lty=1, ncol=2)
title(main='CBO forecasts for the 10-Year Treasury Bond, 2011-2019')
# the correct thing to do here would be to convert the data to long format and produce the plot with ggplot.
# would be simpler and give prettier results. But this works and I am too lazy to redo it.

 

The CBO Just Handed Us Two Trillion Dollars

Anyone who follows the DC budget game at all knows that the Congressional Budget Office (CBO) is supposed to be its referee. Any proposal that involves new spending or revenue is scored by the CBO for its impact on the federal debt over the next ten years. That score normally sets the terms on which the proposal will be debated and voted on. This ritual is sufficiently established that most spending proposals are described in terms of their cost over the next ten years – the CBO’s scoring window.

The CBO doesn’t only assess individual bills, it also gives a baseline, producing regular forecasts of major economic variables and the path of the debt under current policy. In a sense, these forecasts are the playing field on which budget proposals compete. So it ought to be a big deal when the CBO changes the shape of the field.

In their most recent 10-year budget and economic forecast, the CBO made a big change, reducing their long-run forecast of the interest rate on government bonds by almost a full percentage point, from 3.7 to 2.9. (See Table 2.6 here.)

Most directly, the new, lower interest rate reduces expected debt payments over the next decade by $2.2 trillion. It also significantly reduces the expected debt-GDP ratio. Under the assumptions the CBO was using at the start of this year, the debt ratio under existing policy would reach 120 percent by 2040. Using the new interest rate assumption, it reaches only 106 percent. With one change of assumptions, a third of the long-run rise in the federal debt just disappeared.

Debt-GDP Ratio with CBO Interest Forecasts of January vs August 2019

While this downward revision is exceptionally large, it’s hardly the first time the CBO has adjusted its interest rate forecasts. In April 2018, they raised their estimate of the long-run rate on 10-year bonds from 3.1 percnet to 3.8 percent. But that upward move is an exception; for most of the past decade, the CBO has been steadily adjusting its interest rate frecasts downward, adapting — like most other macroeconomic forecasters — to the failure of the economy to return to pre-recession trends. As recently as February 2014, they were predicting a long-run rate of 5 percent. And it’s likely the interest-rate forecast will continue to decline; the current 10-year Treasury rate is less than 1.8 percent.

The newest forecast was released in August, and as far as I can tell the change in the interest-rate assumption has gotten almost no attention in the two months since then. But it really should.

At the very least, this means that anyone arguing that federal debt is a climate-change-level threat to humanity needs to update their talking points. The claim that federal debt “will be close to 150% of GDP by 2050” is, as of August, not even close to correct. With the new interest assumptions, the figure is less than 120 percent.

To be fair, an argument that doesn’t go beyond “oooh, big number, scary” isn’t likely to be much affected by this revision. But the new interest estimate has broader implications.

If the term “fiscal space” means anything, lower expected interest rates have to mean that there is more of it. That $2 trillion in interest savings the new CBO estimate has handed us, could presumably be used for something else. As a downpayment on single-payer health coverage, say, or as public investment in decarbonization as part of a Green New Deal. Whatever spending we think most urgent or politically practical, we could borrow an extra percent of GDP or so a year to pay for it, and leave the long-term debt picture looking no worse than before.

Whatever level of federal spending you thought would keep the debt on a reasonable path a year ago, you should think that number is $2 trillion higher today. 

To be clear, CBO scoring doesn’t actually work this way. Budget proposals are evaluated relative to the baseline, wherever that happens to be. So the change in the interest assumption will have only a marginal effect on the score for individual bills. But if there is any rational content to the CBO scoring ritual, it has to involve some sort of judgement about what level of debt is reasonable, relative to GDP. If you take CBO debt forecasts seriously – as almost everyone in the policy world at least claims to – then lower interest rates mean more space for new borrowing.

Lower future interest rates also have  implications for stabilization policy. They mean that in the next recession, whenever it comes, there will be even less space for the Federal Reserve to lower rates to boost demand, and a correspondingly greater need for fiscal policy – a point that, fortunately, members of the House Budget Committee seem to understand.

There’s one more, even broader, implication of the new forecast. What does it mean that the CBO keeps revising its forecasts of future interest rates downward, even as federal debt itself continues to rise?  Obviously there is not the tight relationship between a high debt-GDP ratio and rising interest rates that austerity-promoting economists like to predict. Which should raise a question for anyone interested in macroeconomic policy or public budgets: If high federal debt doesn’t have any reliable effect on interest rates, then what exactly is its economic cost supposed to be?

 

(Cross-posted from the Roosevelt Institute blog.)

 

In The American Prospect: The Collapse of Austerity Economics

(This review is coauthored with Arjun Jayadev, and appears in the Fall 2019 issue of the The American Prospect. The version below includes a few passages that were cut from the published version for space reasons.)

Review of Albert Alesina, Carlo Faverro and Francesco Giavazzi,  Austerity: When It Works and When It Doesn’t
With Arjun Jayadev

A decade ago, Alberto Alesina was one of the most influential economists in the world. His theory of ‘expansionary austerity’ – the paradoxical notion that reducing public expenditure would lead to an increase in economic activity — was one of the hottest ideas in macroeconomics. He claimed to have shown that government surpluses could actually boost growth, but only if they were achieved via spending cuts rather than tax increases. At a moment when many governments were seeking Keynesian remedies to a global recession, his work (along with fellow Harvard economist Silvia Ardagna) reassured conservatives that there was no conflict between keeping up demand in a crisis, and the longer-term goal of reining in the public sector.

Not surprisingly, his ideas were taken up by right-wing politicians both in Europe and in the US, where he was widely cited by the Republicans who took control of the House in 2010. Along with the work of Reinhart and Rogoff on the supposed dangers of excessive government debt, Alesina’s work provided one of the key intellectual props for the shift among elite policymakers towards fiscal consolidation and austerity.

 Right from the outset, other economists pointed to serious flaws in the case for expansionary austerity, and challenged virtually aspect of the statistical exercises underlying it. A partial list of criticisms includes: using inappropriate measures of fiscal balance; misapplying lessons from boom times to periods of crisis; misclassifying episodes of fiscal expansion as austerity; and generalizing from the special conditions of small open economies, where exchange rate moves could cushion the effects of austerity. Even the most cherished result— that expenditure based austerity worked better than tax-based austerity — has been convincingly challenged.

In 2009, Alesina suggested that Europe was likely to see faster growth because it was cutting public spending in response to the crisis, while the US had embraced conventional Keynesian stimulus. He was right about the difference in responses to the crisis; about economic growth, not so much. The US recovery was weak by historical standards, but in Europe there was hardly a recovery at all. In the countries that cut public spending the most, such as Spain, Portugal, and Ireland, GDP remained below its 2008 peak four, five, even six years after the crisis. By 2013 the financial journalist Jim Tankersley could offer an unequivocal verdict: “No advanced economy has proved Alesina correct in the wake of the Great Recession.”  

Macroeconomic debates have moved on since then. A large new empirical literature on fiscal policy has emerged over the past decade, the great majority of it confirming the old Keynesian wisdom that in a depressed economy, increased public spending can raise output by perhaps $1.50 for each dollar spent. New questions have been raised about central banks’ ability to stabilize the economy, whether with conventional monetary policy or with new tools like forward guidance and quantitative easing. The seemingly permanent reality of low interest rates has changed the debate over the sustainability of government finances, with prominent mainstream economists suggesting that public debt no longer poses the dangers it was once thought to. The revived idea of secular stagnation has suggested that economic stimulus may not be a problem for occasional downturns, but an ongoing necessity. And the urgency of climate change has created big new tasks for the public sector. 

It’s a very different conversation from a decade ago. Can Alesina’s ideas adapt to this new environment? 

That’s the challenge for his new book, Austerity: When It Works and When It Doesn’t, which offers a summing-up of work on government budgets that goes back now almost three decades. Through the years, Alesina has had a rotating case of co-authors, often from Bocconi University in Italy; this book is co-authored with Carlo Ferro and Francisco Giavazzi, both professors there. Given the way that the book has been advertised and promoted (“towering”, a “counterblast”), one might expect a thorough response to the new arguments that have developed over the past decade about aggregate demand management and the appropriate size of the public sector.

Disappointingly, this is not the case. There has been no marking of beliefs to market. For the most part, the book restates the same arguments that were made a decade ago: countries with high public debt must adopt austerity, and this will not hurt growth if it takes the form spending cuts rather than tax increases. Alesina and his coauthors do make some effort to respond to specific methodological criticisms of the earlier work. But they don’t engage with – or even acknowledge – the larger shifts in the landscape. Tellingly, all the book’s formal analysis and almost all of its text (as well as the online data appendix) stop in 2014. For what is supposed to be a definitive statement, it’s an odd choice. Why ignore everything we might learn about austerity and government budgets from the experiences of the past five years?

The book also operates at an odd mix of registers, which makes it hard to understand who the audience is. Exoteric chapters seemingly intended for a broad readership are interspersed with math-heavy esoteric chapters that will be read only by professional economists. You get the feeling this is mostly material that sat in a drawer for a long time before being fished out and stapled together into a book.

To be fair, there are some advances from the previous iterations. Alesina’s earlier work had been criticized for ignoring problems of causality – when high growth and government surpluses are found together, how do we know which is causing which?  Now, instead of relying on purely statistical measures of association, there is more extensive attention given to what has been called the “narrative” approach, with periods of austerity defined by the stated intentions of policy makers rather than simply by changes in the budget position. This approach– pioneered by Romer and Romer to understand US policy actions and expanded by economists at the IMF — does have advantages over the naive statistical approach. By including only tax increases and spending cuts made for reasons other than current economic conditions, it avoids, in principle at least, the problem of fiscal adjustments resulting from changes in economic activity, rather than causing them. But it is still no substitute for a real historical analysis that considers the whole complex of factors influencing both budget positions and growth. Gesturing towards the need for more substantive narrative, the later chapters include several case studies on various OECD countries which undertook austerity measures. These are rather thin and have a Wikipedia air about them; in any case the great bulk of the argument is still based on statistical exercises.

Those who are not convinced by the econometrics in Alesina’s earlier work will not be convinced here either. Even people who share the authors’ commitment to rolling back the public sector may suspect that they are in the presence of what is politely called motivated reasoning. 

To those who don’t share that commitment, it is clear from the opening pages that we are dealing with ideological fiction, not objective analysis. Per Alesina and co, most austerity episodes reflect countries persistently spending beyond their means, with debt rising until a tipping point is reached. But in Europe – surely ground zero in any discussion of contemporary austerity – this story lacks even superficial plausibility. On the eve of their crises, Ireland, Spain and even Portugal had debt-GDP ratios below that of unscathed France; Spain and Ireland were well below Germany. (The fact that Germany consistently ran large deficits in the decade before the crisis is not mentioned here.) Indeed, until 2011 Ireland, now an austerity poster child, had the lowest debt ratio of any major Western European country.

The book asserts that episodes of austerity triggered by outside pressures – as opposed to a government’s own mismanagement of its finances – are rare exceptions. But in Europe they were the rule. The crisis came first, then the turn to austerity; the rising debt ratios came last, driven mainly by falling GDP; budget deficits were an effect, not a cause. Even Greece, perhaps the one country where public finances were a genuine problem before the crisis, is a case in point: From 2010 to 2015, deep cutbacks in public services successfully reduced public debt by about $15 billion euros, or 5 percent — but the debt-GDP ratio still rose by 30 points, thanks to a collapse in GDP.

It would be easy to debate the book point by point. But it’s more useful to take a step back, and think about the larger argument. While the book shifts erratically in tone and subject, underlying all of its arguments – and the larger pro-austerity case – is a rigid logical skeleton. First, a government’s fiscal balance (surplus or deficit) over time determines its debt-GDP ratio. If a country has a high debt to GDP, that is “almost always … the result of overspending relative to tax revenues.” (2) Second, the debt ratio leads markets to be confident in the government’s debt – private investors do not want to buy the debt of a country that has already issued too much. Third, the state of market confidence determines the interest rate the government faces, or whether it can borrow at all. Fourth, there is a clear line where high debt and high interest rates make debt unsustainable; austerity is the unavoidable requirement once that line is passed. And finally, when austerity restores debt sustainability that contributes – via lower interest rates and “confidence” more broadly – to economic growth, especially if the austerity involves spending cuts. 

Individually, these claims are in keeping with the conventional wisdom of the business press and the maxims of “sound finance.” Together, they make a causal story that’s a one-way track with no side branches: Any problems that a government encounters with debt are the result of its fiscal choices in the past. And any solution must involve a different set of fiscal choices – higher taxes or, better, less public spending. 

If you accept the premises, the conclusions follow logically. Even better, they offer the satisfying spectacle of public-sector hubris meeting its nemesis. 

But real-world debt dynamics don’t run along such well-oiled tracks. At every step, there are forks, sidings and roundabouts, that leave the link from fiscal misconduct to well-deserved austerity much less direct than the book suggests.

First of all, as a historical matter, differences in growth, inflation and interest rates are at least as important as the fiscal position in determining the evolution of the debt ratio over time. Where debt is already high, moderately slower growth or higher interest rates can easily raise the debt ratio faster than even very large surpluses can reduce it – as many countries subject to austerity have discovered.

Conversely, rapid economic growth and low interest rates can lead to very large reductions in the debt ratio without the government ever running surpluses, as in the US and UK after World War II. More recently, Ireland reduced its debt-GDP ratio by 20 points in just five years in the mid-1990s while continuing to run substantial deficits, thanks to very fast growth of the “Celtic tiger” period. In situations like the European crisis, extraordinary actions like public assumptions of private debt or writedowns by creditors (as in Cyprus and Greece) can also produce large changes in the stock of debt, without any changes in spending or taxes. Ireland again is an example: The decision to assume the liabilities of private banks catapulted its debt-GDP ratio from 27 percent to over 100 percent practically overnight. Cases like this make a mockery of the book’s central claim that a country’s debt burden reliably reflects its past fiscal choices.

At the second step, market demand for government clearly is not an “objective” assessment of the fiscal position, but reflects crowd psychology, self-confirming conventional expectations, and all the other pathologies of speculative markets. The claim that the interest rates facing a country are directly and reliably linked to the state of its public finances is critical to the book’s argument; rising interest rates are the channel by which high debt creates pressure for austerity, while falling interest rates are the channel by which austerity supports renewed growth. But the claim that interest rates reflect the soundness or otherwise of public budgets runs up against a glaring problem: The financial markets that recoil from a country’s bonds one day were usually buying them eagerly the day before. The same markets that sent interest rates on Spanish, Portuguese and Greek bonds soaring in 2010 were the ones snapping up their public and private debt at rock-bottom rates in the mid-2000s. And they’re the same markets that are setting interest rates for those countries at historical low levels today (Greece now pays less to borrow than the US!), even as their debt ratios, in many cases, remain extremely high.

The authors get hopelessly tangled on this point. They want to insist both that post-crisis interest rates reflect the true state of public finances, and that the low rates before the crisis were the result of a speculative bubble. But they can’t have it both ways: If low rates in 2005 were not a sign that the state of public finances was sound, then high rates in 2010 can’t be a sign that they were unsound.

If the analysis had extended beyond 2014, this problem would only have gotten worse. What’s really striking about interest rates in Europe in recent years is how uniformly they have declined. Ireland, which has managed to reduce its debt ratio by 50 points since 2010, today borrows at less than 1 percent. But so does Spain, whose debt ratio increased by 40 points over the same period. The claim that interest rates are mainly a function of a country’s fiscal position just doesn’t fit the historical experience. It’s hard to exaggerate how critical this is for the whole argument. Rising interest rates are the only cost Alesina and his coauthors ever mention for high debt, and hence the only reason for austerity; and reducing interest costs is the only intelligible mechanism they offer for the supposed growth-boosting effects of austerity – vague invocations of “confidence” don’t count.

And this brings us to the third step. One of the clearest macroeconomic lessons of the past decade is that market confidence doesn’t matter: A determined central bank can set interest rates on public borrowing at whatever level it chooses. In the years before 2007, there were endless warnings that if the US did not get its fiscal house in order, it would be faced with rising interest rates, a flight from the dollar and eventually the prospect of default. (In 2005, Nouriel Roubini and Brad Setser were bold enough to predict that unsustainable deficits would lead to a collapse in the dollar within the next two years.) Today, with the debt much higher than even the pessimistic forecasts of that period, the federal government borrows more cheaply than ever in history. And there hasn’t been even a hint of the Fed losing control of interest rates.

Similar stories apply around the world. Perhaps the clearest illustration of central banks’ power over financial markets came in 2011-2012, when a series of interventions by the European Central bank – culminating in Mario Draghi’s famous “whatever it takes” — stopped the sharp spike in southern European interest rates in its tracks. With an implicit guarantee from their central banks – which other developed countries like the US and UK also enjoy – governments simply don’t need to worry about losing access to credit. To the extent that governments like Greece remained locked out of the markets after Draghi’s announcement, this was a policy choice by the ECB, not a market outcome. 

If countries can face financial crises even when their debt ratio is low, and can enjoy ultra-low interest rates even when they are high, then it’s hard to see why the debt ratio should be a major object of policy. Alesina and colleagues’ central question – whether expenditure-based or tax-based austerity is better for growth – is irrelevant, since there’s no good reason for austerity at all. 

In a world of chronically low interest rates and active central banks, government debt just isn’t a problem. At one point, this was a fringe position but today it’s been accepted by economists with as impeccable mainstream credentials as Olivier Blanchard, Lawrence Summers and Jason Furman – the former chief economist of the IMF, Treasury Secretary and chair of the Council of Economic Advisors, respectively. But not by Alesina, who just goes on singing the same old songs.

The pro-austerity arguments in this book will therefore face more of a headwind than they did when Alesina made them a decade ago. “Sound finance” is no longer the pillar of elite opinion it once was. As we write this, Christine Lagarde, the new head of the European Central Bank, is calling for European governments to spend more during downturns – something hard to imagine when Alesina’s ideas were in vogue. In the US, meanwhile, concerns about the federal debt seem almost passe.

This is progress, from our point of view. The intellectual case for austerity has collapsed, and this book will do little to rebuild it. But that has not yet led to an expansion of public spending – let alone one large enough to restore genuine full employment and meet the challenge of climate change and other urgent social needs. The austerity machinery of the euro system and IMF still churns away, grinding out misery and unemployment across southern Europe and elsewhere, even if it no longer commands the general assent that it once did. At the level of ideas, Keynesian economists can point to real gains in the decade since the crisis. At the level of concrete policy, the work has barely begun.

Can We Afford a Green New Deal?

[I was at an event the other night bringing together people from the economic-policy and climate activism worlds. I was asked to talk about the macroeconomic case for a Green New Deal, and the question of “how do we pay for it?” Here is a somewhat extended and edited version of my remarks.]

Most of the Democratic candidates now have plans for major public investment programs to deal with the challenge of climate change. These involve spending on the order of 2 percent of GDP on average, ranging from half a percent for Beto O’Rourke up to 4 percent for Bernie Sanders.  

A question that will get asked about any of these plans is, how do we pay for it? Can we afford it?

We might simply reject the question, on the grounds that what we cannot afford is to continue dumping carbon into the atmosphere. Any plan to substantially reduce carbon emissions will pass any reasonable cost-benefit test.

But I think we should answer the “pay for it” question. It has a good answer!

The question is really two questions:

– How can federal government finance it? – what new money coming in will match the new money going out?

– Are the real resources available, or will we have to sacrifice production in other areas?

On first question, given that low interest rates now seem to be a permanent feature of our world, it is very hard to make a an argument that additional borrowing on the scale of 2, 3 or even 4 percent of GDP would be economically costly. When interest rates are below GDP growth rates, the debt-to-GDP ratio stabilzies on its own, even if you run deficits forever. Unlike in the 1980s and 1990s, when interest rates were higher, today it is impossible for public debt to snowball out of control.

If it has no effect on growth, additional debt-financed spending of 2 percent of GDP would bring the debt-GDP ratio to about 105 percent in 2030. Debt-financed spending of 4 percent of GDP would bring the ratio to 125 percent. Looking around the world, or at history, there is just no evidence that debt at that level has any economic costs. The US ended World War II with a debt ratio of about 120 percent of GDP, the UK over 200 percent. Japan today has a debt ratio of 250 percent of GDP, while France and Belgium have debt ratios around 100 percent. None of these countries have seen any of the negative consequences – spiking interest rates, rising inflation, a collapsing exchange rate — that are supposed to follow from excessive government debt. Quite the opposite, in fact.

And if there is any boost to growth from additional spending – any role for what economists call called hysteresis — then the debt ratio would be even smaller. If we take a standard estimate of the multiplier — the boost to GDP from an additional dollar of public spending — of 1.5, and assume half of that effect is permanent, then debt-financed public spending can actually leave the debt ratio lower than it would be otherwise. In which case the new spending would fully pay for itself, even without any new revenue. Of course there is a lot of uncertainty around these questions – I wouldn’t promise an effect on growth that large. But it doesn’t seem crazy to think that a program public investment could substantially raise the economy’s productive potential. 

If we do want to raise revenue, there is also plenty of space for taxes on very high incomes and wealth, or a carbon tax, or other taxes that are socially desirable for their own sake, to finance some substantial portion of a decarbonization program. A recent very thorough study of the space for high-end income and wealth taxes by a couple of professors at NYU identified taxes that could raise over 2 percent of GDP on a very targeted base of the highest incomes. A wealth tax, again targeted at the very richest households, could raise another 2 percent or so. These are taxes we would like to raise anyway, because great concentrations of income and wealth are bad for our democracy and for our society. (There’s even evidence they are bad for our health.) So if we can finance decarbonization this way, we shouldn’t see it as a cost.

We often hear that it’s a fantasy to say that decarbonization will be economically costless, that it isn’t realistic to talk about spending on this scale without broad-based tax increases, without sacrifices by the middle class households. But this is crackpot realism. Of course there will be costs in particular carbon-intensive sectors of the economy. But the notion that investing in decarbonization necessarily requires sacrifices by working people in general, or painful choices about the federal budget, is just not borne out by the numbers. 

On the real resources side, the critical point is that by any measure, the US economy has operated below potential for the large majority of the time in recent decades. Taking official statistics at face value, since 1980 there have been 192 months when the unemployment rate was more than one point above the NAIRU – the unemployment rate targeted by the Fed. There have been only 18 months when it was more than one point below. It took a full seven years after the last downturn for output to return to official estimate of potential. The total shortfall equaled 25 percent of GDP. 

Even the most ambitious climate plan would have been barely enough spending to fill that gap.

And there are lots of reasons to think that these official measure understates economic potential. GDP today is more than 10 percent below what was forecast a decade ago. Labor force participation still significantly down from a decade, even among those 25-54 – prime working-age adults. Inflation is still below target. Wage growth is still slow. Almost any alternative measure you can think of suggests that the economy is running well below potential even today, and that there is enough slack for a substantial program of public investment without the need to reduce production of anything else.

Even if we think the economy is operating at normal capacity today, there are major social benefits to letting demand push up against capacity – to running the economy hot. There is strong evidence that the only way you get a rise in the wage share and especially a rise in wages at the lower end, is with sustained very low unemployment – what people call a high-pressure economy. Consistent with that, we’ve begun to see some recovery in wages at the bottom of the distribution in the past couple years. This is welcome, but it’s nowhere enough to make up for losses in previous years. For that, we still need more spending, stronger demand.

And that’s today. In a few years, we are likely to want more spending much more. 

Today many people are talking about the possibility of recession within next year or so. Nobody except for a few cranks is talking about a sudden surge of inflation, or sudden takeoff of wages.

If there is a recession, the ability of the Fed and other central banks to offset a fall in demand is gong to be even more limited this time than it was in the last recession. In past recessions, the Fed has typically reduced rates by 5 points, and this has still not been enough to stabilize demand. Now we will be starting from a federal funds rate of only 2 percent, giving room for only 2 points of cuts. And there is good reason to think that the economy is less sensitive to changes in the policy rate than we used to believe. Central bankers themselves are quite clear that we will need more public spending in a recession. When Fed chair Jay Powell testified before Congress earlier this summer, Alexandria Ocasio-Cortez asked him what he would do in the event of another deep recession. He said monetary policy would not be enough, that the Fed would need help from fiscal policy – from the federal government spending more. Christine Lagarde, in her first public comments after being appointed head of the European Central Bank, said the same thing, that governments in the eurozone needed to spend more to boost demand. The central bank can’t be “the only game in town,” she said.

One of the big lessons of the stimulus debates in the last recession is that it is very hard to ramp up public spending in a hurry. There are not a lot of “shovel ready” projects out there waiting for someone to just start writing checks. So if we think we are going to need a big boost to public spending in the near future, we had better begin ramping it up now. 

Many discussions of the cost of responding to climate change start from the idea that we are fully using our resources. If this were true, we’d have to ask how much consumption is worth giving up today in order to maintain a habitable planet in the future. Obviously the answer should be: A lot! But we don’t have to ask the question, because it isn’t true. We are living in a world where we are not using all our real resources, because of a lack of demand. Some people call this secular stagnation.  We are living in a world where the central macroeconomic problem is that there is too little spending to fully utilize the economy’s productive potential – not just occasionally in recessions, but all the time, or at least on average. 

Some people will say to this: Ok, we agree that the economy is running below capacity. We agree there is space to add more federal debt, and to raise taxes on the rich. Still, you could use that space for anything. It’s not a case for Green New Deal specifically.

This sounds superficially reasonable, but I don’t think it’s right. Because the evidence of recent history suggests that we won’t use that space.

Almost everyone today agrees that stimulus in last recession was too small — and that even if it might have been big enough in the abstract, it was offset by massive anti-stimulus at the state-local level. The situation in Europe is even worse, with deep austerity almost everywhere, with the result that countries like Italy have lower GDP than a decade ago. Even when mainstream economists say there is actually a case for deficit spending and not to worry about balanced budgets, it turns out to be very hard to get the political system to listen.

If we don’t use our productive capacity and our financial capacity for a Green New Deal, it’s very likely we won’t use it for anything.

The discussion  of public budgets, among economists and much of the media and policy world, has not caught up to reality. We still talk about governments being subject to deficit bias – that’s a term of art in the macroeconomics literature, used to justify all kinds of rules to restrict government spending. We have this idea that without some sort of hard external constraint, elected officials are going to declare it’s Christmas every day and shovel money out the door on anything popular. We assume that you need some sort of disciplining device to force policymakers to make hard choices, or else they will just try to spend without limit. But governments today don’t suffer from deficit bias. On the contrary: The problem is austerity bias. For whatever reason governments refuse to spend even when the economic case for it is overwhelming. 

This isn’t just a wasted opportunity for all sorts of valuable public spending. It imposes real costs in slower growth, fewer jobs, lower wages. And slow growth and low employment and wages have political costs too, as we know. 

In this environment, it’s wrong to think about tradeoffs and making hard choices. This may sound strange coming from an economists, but it’s wrong to think about opportunity costs. The question is not, why should we do this rather than that? The question is, how do we break through the logjam that stops us from doing anything at all?

One of the unique things about climate change is that it may be a crisis urgent enough to overcome the entrenched austerity bias of governments, and to push public spending up toward the level needed to get true full employment. It may be the only thing urgent enough other than a major war — which we certainly do not want. 

So when we look at the cost of the climate proposals out there against today’s macroeconomic background, the question should not be, are they too expensive? The question should be: Are they expensive enough? 

A Baker’s Dozen of Reasons Not to Worry about Government Debt

(EDIT: It’s not sufficiently clear in the original post, but I wrote this as a sort of compendium of arguments one might use in response to claims that the federal debt is a binding constraint on new spending. I’m not saying these are the best or only reasons to reject the idea that federal government cannot borrow more. I’m saying that these are arguments that seem to have some traction in the mainstream policy world, such that you could use them in a newspaper op-ed or conversation with a congress member’s staff. Also, a premise here is that there are urgent needs we want the public sector to spend more on. Apart from the last couple, these are not arguments for more public dbet as an end in itself.)

 

Why might larger budget deficits be ok?

There are a number of reasons why economists, policymakers and advocates believe that increased public borrowing is not something to be afraid of. As I’ll discuss below, the fundamental factor linking most of these reasons is the idea that the US economy is generally operating below capacity.

When we think about the fiscal balance – the difference between government spending and government revenue – we always have to keep in mind that it has two sides: the real side and the financial side. Whenever the government increases spending, it has two kinds of effects. First, all else equal, it increases the amount of government debt in circulation. And second, it increases demand for goods and services, both directly when the government buys them and indirectly as government spending creates incomes for private businesses and households. 

To put it another way, for government to successfully raise spending without raising taxes, two things have to be true. First, someone – banks, wealthy families, foreign countries – has to be willing to hold the additional debt that the government issues. And second, someone has to be prepared to sell whatever it is that the government is trying to buy. If we are asking what kinds of limits there might be to deficit spending, we have to think about both sides. A government’s spending may face financial constraints, if people are unwilling to hold more of its debt; or real constraints, if the economy cannot produce the additional goods and services it is trying to buy.

Some people who think higher deficits are not a problem – particularly those associated with Modern Monetary Theory – believe that the US federal government never faces financial constraints, so only the real constraints matter. Others believe that the federal government might in principle face financial constraints, but there are good reasons to think that they are not an issue today. For policy purposes, the difference between these positions may not be very important.

On the real constraint side, the essential question is how close the economy is to potential output, or full employment. (The two terms are used interchanegably.) In an economy operating at potential, government can only increase its spending f the private sector reduces its spending. This “crowding out” is the real cost of increased public spending. In an economy below potential, on the other hand, the goods and services purchased by increased public spending come from mobilizing unused productive capacity, so there is no crowding out. In. fact, if the fiscal multiplier is big enough (greater than one) then increased purchases of goods and services by the public sector will result in more goods and services being purchased by the private sector as well.

Below, I lay out a baker’s dozen of related arguments for why, from a macroeconomic perspective, we should welcome increased debt-financed public spending. Some people who believe in greater public borrowing would accept all of these arguments; some only some of them. 

Real-economy arguments for more public borrowing

1. The economy generally operates below potential. Over the past 30 years, there have been three recessions, each followed by a long period of weak growth and high unemployment. By official measures, in 10 of the past 30 years GDP has been at least two points below potential; there have been only six months when it was more than two points above potential. And there has been no periods of high inflation. This suggests that in general, the economy is not running at full capacity; there is additional productive potential that could be mobilized by higher public spending, without crowding out private spending. In that sense, there is no real cost to higher public spending, and no need top offset it with higher taxes. Even better, higher public spending will help close the output gap and raise private spending as well.

2. There are long run forces pushing down demand. Larry Summers famously reintroduced into the economic conversation the idea of secular stagnation – that there is a long-run tendency for private spending to fall short of the economy’s productive potential. There are many reasons we might expect private spending to be lower, relative to national income, in the future than in the past. Among these: increased monopoly power; the shift toward information-based rather than resource-intensive production; increased shareholder power; a more unequal distribution of income; slower population growth; and the satiation of demand for market consumption, in favor of leisure and nonmarket activities. (The first three of these factors tend to reduce investment spending, the last  three consumption spending.)  If this idea is correct, the demand shortfalls of the past thirty years are not an anomaly, and we should expect them to grow larger in the future.

3. Potential output is mismeasured; we are still well below it. Even by the conventional measures of unemployment and potential output, the US economy has spent far more time in recent decades below target than above it. But if the target is mismeasured, the problem may be even worse. There are good reasons to think that both productivity and laborforce growth over the past decade have been depressed by weak demand. If this is the case, the US economy even at the height of a supposed boom, may in fact be operating well below potential today. The fact that  even with measured unemployment below 4 percent wage growth has accelerated only modestly, and inflation has not accelerated at all, is important evidence for this view.

4. Recessions and jobless recoveries have occurred repeatedly in past, will occur again in the future. Whether or not the US economy is at potential today, the current expansion will not continue forever. Recessions have occurred in the past and will occur in the future. Many forecasts believe there is a high risk of recession is likely in the relatively near future; the fact that the Fed is moving toward cutting rates suggests that they share this view. When thinking about what fiscal balance is appropriate, we need to consider not just where the economy is today but where it is likely to be in coming years.

5. Monetary policy is not effective at maintaining full employment. In the past, weak demand and recessions weren’t considered an argument for more public spending because it was assumed that a central bank following the correct policy rule could quickly return the economy to full employment. But it is increasingly clear that central banks do not have the tools (and perhaps the willingness) to precent extended periods of weak demand. It is increasingly recognized that fiscal policy is also required to stabilize demand. In his July testimony before Congress, Fed chair Jerome Powell said explicitly that in the event of another deep recession, the Fed would need help from fiscal policy. One important reason for this is the problem of the zero lower bound – since the policy interest rate cannot be set below zero, there is a limit to how far the Fed can lower it in a recession.

6. It’s hard to ramp up public spending quickly in recession. Orthodox opinion has long been that fiscal policy is not as effective as monetary policy in a recession because it takes much longer to ramp up public spending than to cut interest rates. While the experience of the Great Recession undermined conventional wisdom on many points, it supported it on this one. The ARRA stimulus bill was supposed to direct spending to “shovel-ready” projects, but in fact the majority of the infrastructure spending funded by the bill came several years after it passed. There are many institutional obstacles to increasing public spending rapidly. This means that if we need higher public spending in a recession, the best thing is to have higher spending all the time. If that leads to an overheating economy in the boom, that is an easier problem for the Fed to solve then a deep recession.

7. The costs of getting demand wrong are not symmetrical. Traditionally policymakers have defined their goal as keeping output as close to potential as possible. But it is increasingly clear that the costs of demand falling short are greater than the costs of demand overshooting potential. One reason for this is the previous point – that conventional policy has an easier time reining in excessive demand than stimulating weak demand. (As the old saying has it, “you can’t push on a string.”) A second reason is that demand has effects that go beyond the level of output. In particular, strong demand and low unemployment redistribute income toward workers from owners, and toward lower-wage workers in particular. Periods of weak demand, conversely, reduce the share of income going to workers. If we think the upward redistribution of income over the past generation is a problem, we should prefer to let demand overshoot potential than fall short of it.

8. Weak demand may have permanent effects on potential output. Traditionally, economists saw the economy’s long-term growth as being completely independent of demand conditions. People spending more money might raise production and employment today, but the long-term growth of potential output depended on structural factors – demographics, technological change, and so on. More recently, however, there has been renewed interest in the idea that weak demand can reduce potential output, an effect known as hysteresis. high unemployment may lead more people to drop out of the laborforce, while low unemployment may lead more people to enter the laborforce (or immigrate from abroad.) Strong demand may also lead to faster productivity growth. If hysteresis is real, then demand shortfalls don’t reduce output and employment this year, but potentially many years in the future as well. This is another reason to be more worried about demand falling short than overshooting, hence another reason to prefer a more expansionary fiscal stance, which normally implies more public borrowing.

Financial arguments for more public borrowing

9. With low interest rates, debt does not snowball. Traditionally, concerns about the financing of government spending have focused on whether debt is “sustainable” – whether debt levels will stabilize as a fraction of GDP, or rise without limit. When interest rates are greater than GDP growth rates, this implies a hard limit to government borrowing – to keep the debt-GDP ratio on a stable path, a deficit in one year must be made up for by a larger surplus in a future year. Otherwise, the interest on the existing debt will imply more and more borrowing, with the debt-GDP ratio rising without limit. But when interest rates on government debt are below growth rates, as they have been for the past 25 years, the debt ratio will stabilize on its own – deficits do not have to be offset with surpluses. This makes much of the earlier concern with debt sustainability obsolete.

10. There is good reason to think interest rates will remain low. There are a number of reasons to think that interest rates on public debt are likely to remain low, even if debt ratios rise considerably higher. First, low interest rates reflect the conditions of chronic weak demand discussed above, for two reasons. First, low investment means less demand for borrowed funds. And second, weak demand means that the interest rate set by the central bank is likely to be low. A second reason to expect low interest rates to continue is that the past ten years have repeatedly falsified predictions of bond vigilantes driving up the rates on government debt. Prior to the financial crisis of 2007-2008, many observers expected a catastrophic flight by investors away from US government debt and the dollar, but in fact, the crisis saw a steep fall interest rates on government debt and a rise in the dollar, as investors all over the world rushed to the safety of Treasury debt. Similarly, in Europe, even in the worst crisis-hit countries like Greece, interest rates are at their lowest point in history. Similarly Japan, with one of the highest debt0-GDP ratios ever recorded (about triple that of the US) continues to borrow at very low rats. Third, the experience of the past ten years have made it clear that even if investors were to demand higher interest rates on government debt, modern central banks can easily overcome this. The most dramatic illustration of this came in the summer of 2012, when a public statement by European Central bank chief Mario Draghi “we will do whatever it takes, and believe me, it will be enough”) reversed the spike in interest rates in countries like Italy, Spain and Portugal practically overnight. Finally, the prices of bonds — with hardly any premium for 30 year bonds over 5 and 10 year maturities — show that private investors do not expect a rise in interest rates any time in the foreseeable future.

11. With hysteresis, higher public borrowing can pay for itself. Even if we are concerned about lowering the debt-GDP ratio, the existence of hysteresis (point 8 above) means that cutting public borrowing is necessarily the right way to get there. In a world where the long-term path of GDP depends on aggregate demand, austerity can be self-defeating even in its own narrow financial terms. If lower public spending reduces demand, then it can lead to lower GDP, potentially raising the debt to GDP ratio even if it succeeds in reducing debt. Greece offers a clear example of this – the fiscal surpluses between 2010 and 2015 succeeded in reducing government debt by 5 percent, but the deep austerity contributed to a fall in GDP of 25 percent. So the debt-GDP ratio actually rose. Similarly, if debt-financed public spending leads to faster growth, the debt-GDP ratio may end up lower than otherwise. 

12. Federal debt is an important asset for financial markets. The points up to now have been arguments for why higher public debt is acceptable. But there is also an argument that increased public debt would be a positive good. Financial markets depend on Treasury debt as a safe, liquid asset. Federal government debt offers an absolutely safe asset that can always be sold quickly and at a predictable price – something that is extremely valuable for banks and other financial institutions. There is a strong argument that the growth of the mortgage-backed security market in the 2000s was fundamentally driven by a scarcity of government debt – many financial institutions wanted (or were compelled by regulation) to hold a substantial amount of ultrasafe, liquid debt, and there was not enough government debt in circulation to meet this demand. So financial markets came up with mortgage-backed securities as a supposed alternative – with disastrous results. Similarly, after the recession, one argument for why the recovery was so slow was a “safe asset shortage” – financial institutions were unwilling to make risky loans without  holdings of ultrasafe assets to balance them. While these concerns have receded today, there is still good reason to expect a “flight to safety” toward Treasury debt in the event of a new crisis, and government debt remains important for settling many financial contracts and pricing other assets. So strange as it may sound, there is a serious argument – made by, among others, Nobel prize winner Jean Tirole in his book on financial liquidity — that increased government borrowing would make the financial system more stable and increase access to credit for other borrowers.

13. Federal debt is an important asset for the rest of the world. Federal debt is an important asset not just for the US financial system, but for the rest of the world. In today’s dollar-based international system, the great majority of international trade and investment is denominated in dollars, and most foreign-exchange transactions involve dollars. As a result, central banks (and private financial institutions) all over the world hold foreign-exchange reserves primarily in the form of dollars. These dollar reserves are mainly held in the form of Treasury debt. Close to half of federal debt is now held abroad, mainly as reserves by foreign governments. These holdings are essential for the stability of the international financial system – without adequate reserves, countries are vulnerable to sudden flows of “hot money” out of their countries. As Barry Eichengreen – perhaps the leading economic historian of the international financial system, — has noted, a deep market for government is an essential requirement for a currency to serve as the global reserve currency. If the US is going to be a responsible partner for the rest of the world — and continue reaping the benefits of being at the center of the global economy — it needs to provide an adequate supply of safe government debt for the rest of the world to hold as reserves.

 (I wrote this document for internal use at the Roosevelt Institute. Figured I might as well put it up here as well. Obviously it would benefit from links to supporting material, which I may add at some point.)

The Return of the Renter

Every month, the Census releases new numbers on new housing construction. As an indicator of current economic conditions, June’s numbers didn’t give any dramatic news one way or another. But they did highlight a trend that I think should get more attention: the decline of single-family housing in the US.

To market watchers, housing is an important sign of business cycle turning points. A well-known article argues that Housing Is the Business Cycle.  From this point of view, June’s numbers were not very informative. They told the same story the last several months’ did: After steadily rising from the end of the recession, housing construction has stabilized — housing starts and permits issued have been basically unchanged since early 2017. Last month’s housing starts were almost exactly the same as last summer’s. The fact that housing construction is no longer rising might perhaps be seen as a sign of economic weakness; but it’s hard to take it as a sign of a crisis or imminent downturn.But pulling back from the month by month variation, the most recent numbers reflect two related trends that may be more important than the ups and downs of the business cycle.

The first trend is the secular decline in housing construction. Housing starts, while higher than  a few years ago, are still very low by historical standards — not just compared with the boom period of the 2000s, but with most earlier periods as well. On a per capita basis, new housing construction is at a level seen only at the bottom of the worst recessions before 2007.  Compared with an annual average of 6.5 new units per thousand people in the 1980s and 1990s, the current rate is less than 4 per thousand, and shows no sign of returning to the old rate.

It’s hard to say how much this decline in new housing construction is a specifically post-bubble-and-crisis phenomenon, and how much it reflects longer-term trends. People sometimes suggest that low rates of housing construction are the flipside of the housing boom of the 2000s. There was a strong case for this in the years immediately after the recession, when the fraction of vacant houses was well above historical levels. But since then, the inventory of vacant houses has come down toward more normal levels.

Meanwhile, if we look at new housing construction per capita over a longer period, there is a fairly steady long-term decline – it’s not clear that the most recent period is exceptional. If you draw an exponential trend from 1959 through 1999 (the start of the housing bubble), as shown in the figure below, the current level of housing starts falls right on that trend. And relative to the shortfall in new construction during 2008-2015 is not too much greater than the excess of new construction during 1999-2007. To put it another way, the percentage decline in housing starts per capita over the past 20 years, is not much bigger than the average decline over any 20 year period since the 1950s. 

Of course, this is just one way of looking at the numbers. There are many ways to draw a trend! And one might argue that, historically, the top of a boom should see new housing starts well above trend, suggesting that the recent decline is something new after all. You might also reasonably wonder whether the long term trend has any substantive meaning at all. The political economy of housing the 1950s and 1960s was different from today on all sorts of levels. It wouldn’t be hard to look at the same data in terms of a structural break, rather than — or in addition to — a downward trend.

For macroeconomic purposes, though, it doesn’t necessarily matter. Whether it reflects the ongoing effects of the subprime crisis  or whether it reflects longer-term factors — slowing population growth, an aging population, the end of suburbanization – or whether it’s some mix of both, the decline in new housing construction remains an important economic fact.

Among other things, it is important for macroeconomic policy. Mortgage lending is central to the financial system: Housing accounts for over 70 percent of household debt, and housing finance plays a central role in financial instability. Conversely, residential construction is the economic sector most sensitive to financial conditions, and to monetary policy in particular. So the shrinking weight of housing in the economy may be a factor in the Federal Reserve’s inability to restore growth and full employment after the crisis. Looking forward, if conventional monetary policy works primarily through residential construction, and residential construction is a permanently smaller part of the economy, that is another argument for broadening the Fed’s toolkit.

Housing construction may be down for the count, at least compared with historical levels. But — and this is the second trend – it is not down across the board. The recent decline is limited to single family housing. Multifamily construction has been quite strong, at least by the standards of the post-1990 period. Compared with the two decades before 2007, single-unit housing starts in the past year are down by a third. Multifamily starts are up by a third. Per capita multifamily housing starts are actually higher than they were at the height of the housing boom. These divergent trends imply a major shift in the composition of new housing. Through much of the 1990s, less than 10 percent of new housing was in multifamily projects. Today, the share is more like 30 percent. This is a dramatic change in the mix of housing being added, a shift change visible across much of the country in the form of suddenly-ubiquitous six-story woodframe apartment buildings. The most recent housing data released suggests that, if anything, this trend is still gathering steam: A full third of new housing in June was in multifamily buildings, an even higher proportion than we’ve seen in recent years. In the areas that the Census designates as metropolitan cores, the shift is even more dramatic, with the majority of new housing units now found in multifamily buildings. 

The shift in new construction away from single-family houses is consistent with the decline in homeownership. At 64 percent of households, the share of homeowners is 5 points lower than it was in the mid-2000s. In fact it’s back almost exactly where it was 30 years ago, before the big expansion in homeownership of the 1990s and 2000s. 

To be sure, multifamily housing and rental housing are not the same thing. But there is a very substantial overlap. Over 80 percent of detached single-family homes are owned by their occupants. Less than 20 percent of units in larger buildings are, and the share drops as the number of units in the building rises. While homeownership rates have fallen across the board over the past decade, these relative patterns have not changed. (See the figure below.) So it’s fair to say that the decline of homeownership and the shift toward multifamily developments are, if not the same trend, at least closely linked.The aggregate figures understate the decline in homeownership, because over this period the population has also been aging, and older families are much more likely to own their homes. (For a good discussion of these trends, see here.) For younger families, homeownership rates are lower than they have been in many decades. Compared with 40 years ago, homeownership rates are substantially lower for every age group except those 65 or older. Even compared with a decade ago, there has been a substantial fall in homeownership rates in younger age groups. As a result, the typical homeowner today is much older than in the past. Only a quarter of US homeowners today are younger than 45, compared with nearly half in the 1980s.

The same pattern is visible over the post-housing crash period, as shown in the figure below. Among those aged 30-44 – the ages when most Americans are starting families – the rate of homeownership is nearly 10 points lower than it was just a decade ago. The shift in housing construction toward multifamily buildings reflects the fact that Americans in their prime working years are much more likely to be renters than they used to be. This shift is important for politics as well as the economy. Tenant organizations were once an important vehicle for mass politics in American cities. In the progressive imagination of a century ago, workers were squeezed from one side by landlords and high rents just as they were squeezed from the other by bosses and low wages.   

After World War II, the focus of housing politics shifted away from tenants’ rights, and toward broadening access to home ownership. This shift reflected a genuine expansion of homeownership to middle class and working class families, thanks to a range of public supports — supports, it should be noted, from from which African-Americans were largely excluded. But it also reflected a larger vision of democratic politics in terms of a world of small property owners. Homeowners were expected — not without reason — to be more conservative, more ready to imagine themselves on the side of property owners in general. As William Levitt, developer of the iconic Long Island suburb, is supposed to have said: “No man who owns his own house and lot can be a communist.”

The idea of a property-owning democracy has deep roots in the American political imagination, and can be part of a progressive vision as well as a conservative one. Baby bonds – an endowment or grant given to everyone at the start of their life — are supposed to be a way to broaden property ownership in a way that opens up rather than shuts down possibilities for radical change. Here for example is Darrick Hamilton in his 2018 TED Talk. “Wealth,” he says, 

is the paramount indicator of economic security and well-being. It provides financial agency, economic security… We use words like choice, freedom to describe the benefits of the market, but it is literally wealth that gives us choice, freedom and optionality. Wealthier families are better positioned to finance an elite, independent school and college education, access capital to start a business, finance expensive medical procedures, reside in neighborhoods with higher amenities… Basically, when it comes to economic security, wealth is both the beginning and the end.

Descriptively, there’s certainly some truth to this. And with homes by far the most important form of middle-class wealth, policies to promote homeownership have been supported on exactly these grounds. Homeowners enjoy more security, stability, a cushion against financial setbacks, and the ability to pass their social position on to their children. The policy problem, from this point of view, is simply to ensure that everyone gets to enjoy these benefits. 

One way to keep people secure in their homes is to allow more people to own them. This has been the focus of US housing policy for most of the past century. But another way is to give tenants more of the protections that only homeowners currently enjoy. Outside a few major cities, renting has been assumed to be a transitory stage in the lifecycle, so there was little reason to worry about security of tenure for renters. A few years ago I was a guest on a radio show on rent control, and I suggested that apart from affordability,  an important goal of rent regulation was to protect people’s right to remain in their homes. The host was genuinely startled: “I’ve never heard someone say that a person has the right to remain in their home whether they own it or not.”

There are still plenty of people who see the decline in homeownership as a problem to be solved. But the shift in the housing stock toward multifamily units suggests that the trend toward increased  renting is unlikely to be reversed any time soon. (And even many single-family homes are now owned by investors.) The experience of the past 15 years suggests that, in any case, home ownership offers less security than we used to think.

If more and more Americans remain renters through their adult lives, the relationship with the landlords may again approach the relationship with the employer in political salience. Strengthening protections for tenants may again be the basis of political mobilization. And people may become more open to the idea that living in a place, whether or not you own it, gives you a moral claim on it — as beautifully dramatized, for example, in the 2019 movie The Last Black Man in San Francisco. 

We may already be seeing this shift in the political sphere. In recent years, there has been a resurgence of support for rent regulation. A ballot measure for statewide rent control failed in California, but various bills to extend or strengthen local rent regulation have gotten significant support. Oregon recently passed the nation’s first statewide rent control measure. And in New York, Governor Cuomo signed into law a sweeping bill strengthening rent regulation where it already exists — mainly New York City – and opening the way for municipalities around the state to pass their own rent regulations.

The revival of rent regulation reflects, in the first instance, political conditions – in New York, years of dogged organizing work by grassroots coalitions, as well as the primary defeats of most of the so-called Independent Democratic Conference, nominal Democrats who caucused with Republicans and gave them control of the State Senate. But it is not diminishing the hard work by rent-regulation supporters to suggest that the housing-market shift toward rentals made the terrain more favorable for them. When nearly half the population are renters, as in New York State, there is likely to be more support for rent regulation. The same dynamic no doubt played a role in the opposition to Amazon’s new headquarters in Queens: For most residents, higher property values meant higher rents, not windfall gains. 

To be sure, the United States is not (yet) New York. The majority of American families still live in homes they own. But as the new housing numbers remind us, it’s a smaller majority than it used to be, and likely to get even smaller in the future. Which suggests that, along with measures to democratize property-ownership, there is a future for measures like rent control, to ensure that non-property owners also have a secure claim on their part of our common wealth.


(Figures 1, 3 and 4 are my analysis of series from FRED: HOUST, HOUST1F, COMPUTSA, and POPTHM. Figure 2 is from the Census Housing and Vacancy Survey. Figures 5 and 6 are my analysis of ACS data.)