I just did a presentation at the Eastern Economic Association meeting on “Lessons for the Green New Deal from the Economic Mobilization for World War Two.” Here are my slides.
The paper itself should becoming out from the Roosevelt Institute in the next month or so.
I just put up a some new notes on my teaching pages, a brief handout on capital and capitalism.
The goal of this isn’t, of course,to give a comprehensive overview of what capital means or what capitalism has been historically. I just want to introduce students to the basic terms and concepts that they’ll encounter in the sort of Marxist and Marx-influenced historians I assign in my economic history class — Sven Beckert, Immanuel Wallerstein, Fernand Braudel, Ellen Meiksins Wood, Eric Foner, Mike Davis, and so on.
That said, I’ve tried to write it in clear, non-technical language and keep it focused on the most fundamental concepts, so if you are looking for an eight-page introduction to how Marxists think about capital and capitalism, perhaps this will do.
If you are a teacher yourself and think this is useful, feel free to use it in your own class. And if you have thoughts about ways it could be improved or expanded, I’d love to hear them.
Books I read in 2019. I’m sure I’m forgetting one or two.
Novels and stories
Transit. This is a lovely short novel by the German communist Anna Seghers, which I stumbled across on my parents’ shelves. Set, and written, in World War II France, it tells the story of various refugees waiting in Marseilles to work through the interminable bureaucratic process of acquiring the exit and transit visas they need to leave the country. It’s a beautiful evocation of the mix of unsettledness and bureaucratic stasis that is the life of the refugee, but it’s also got the tight construction of a classic 19th century novel, where the plot unfolds with a retrospective inevitability. There was apparently (and coincidentally) a movie based on it that came out this year.
Jews without Money, by Mike Gold. The classic autobiographical novel of the early 20th century Lower East Side ghetto, which I was shamed into finally reading by my friend Ben. It is, obviously, a socialist realist novel, which walks through, with unconcealed anger, all the deprivations, petty and not-so-petty humiliations, pointless tragedies, and self-defeating compensations of being poor in a rich city. (“It’s better to be dead in this country than not to have money,” says the narrator/author’s father in his final defeat, when he fails even at selling bananas. “Promise me when you’ll be rich when you grow up, Mikey!”) But it’s also and even more a novel of the intense emotions and heightened contrasts of the world seen through a child’s eyes – what it reminded me of most was Bruno Schultz’s magical realist stories of his Polish childhood.
Overthrow. A novel of Occupy, or more precisely the period immediately after Occupy was shut down, by my Brooklyn neighbor Caleb Crain. It’s the very rare novel of graduate school and radical politics that takes its protagonists seriously. The plot revolves around a post-Occupy working group, and their frictions and collisions with each other and, eventually, with the security apparatus. The working group is focused on something like ESP or telepathy, whose status is never quite resolved – it appears variously as a metaphor for the alternative forms of collective action and decisionmaking that Zuccotti Park was an experiment in; or a metaphor for sociality itself (as in Ursula LeGuin’s story “Solitude,” where any kind of social relationship is understood as a form of magic); or as a literalization of hacking and surveillance and the various other intercepted signals of our world; or as the kind of shared imaginary object that holds together any community; or at face value, in which sense it functions as the McGuffin that keeps the story moving.
I am very much the target audience for this novel —8 years ago, a very pregnant Laura and I were running away from the cops after a brief reoccupation of Zuccotti Park, and a bit later our now-emerged son’s first political action was a rally in support of striking grocery workers organized by Occupy Kensington, a post Occupy working group not unlike the activists Crain writes about. So take my opinion with a grain of salt, but I liked this book very much.
Cloudburst, Tom McGuane. A greatest-hits collection of stories by the author of Gallatin Canyon and Crow Fair, both of which I liked very much. The stories are mostly set in Montana, among more or less downwardly mobile people. Not having spent any time in that part of the country, I can’t say how realistic they are, but to me they feel true to life.
Books I read for teaching (do these even count?)
Modern Macroeconomics: Its Origins, Development, and Current State, by Snowdon and Vane. Delivers what it says on the tin. Randy Wray used to use this to teach macroeconomics at UMKC.I tried it for the first time this year, and I thought it worked pretty well.
Data Visualization, by Kieran Healy, and Quantitative Social Science, by Kosuke Imai. I used these two for my research methods class in the John Jay MA program. They worked ok.
The Book of Why, by Judea Pearl. I would never have made it through this book if I hadn’t assigned it — the early chapters are full of over-the-top auto-hagiography, as if the author were the first person to ever think about how statistical evidence could be used to answer questions of cause and effect. But if you persevere, there’s actually quite a bit of interesting stuff in here on how to think rigorously about causality.
Books I read with Eli, age 7/8 (missing some for sure here)
What If and How To by Randall Munroe, the xkcd guy. These are genuinely good books about applying physics concepts and quantitative reasoning to interesting real-world problems. How To is the better one.
The Hobbit. I’d forgotten how charming and light-hearted and funny this book is. It was wonderful reading it with my son, but it didn’t leave me with any desire to move on to Lord of the Rings.
A Short History of the World, by Enrest Gombrich. This is really nicely done. I highly recommend it to anyone with kids aged six to 12 or so.
Peter Pan. This is a much weirder book than I had realized – Barrie did have some ideas about mothers. But it kept Eli riveted.
The Pushcart War. On of those wonderful New York books everybody should read.
How to Invent Everything. Another pop science book. The joke ratio is a little high for my tastes – I don’t see why you would write a book about science if you don’t think the science is interesting enough to carry it on its own. But there is a lot of good practical science mixed in with the jokes. before I read it, I didn’t know what coppicing was, or how charcoal is made. Now I do.
Crossing on Time. The latest from the prolific David Macaulay, author of City, Cathedral, How Things Work, etc. (We probably read some of those too this year, come to think of it.) This combines a history of passenger steamships with the story of the particular ship he and his family sailed on when they immigrated to the US in the 1950s.
Books read for professional reasons
Austerity: When It Works and When It Doesn’t. See review here.
Open Borders, by Bryan Caplan. Caplan is a right-wing libertarian who I don’t agree with about much. But I do agree with him that there is a clear economic and moral case for unrestricted immigration. I reviewed this book for the publisher, and while I did suggest some changes — some of which were incorporated into the final draft — I had no reservations about recommending it for publication.
Books by friends
Never a Lovely So Real. A biography of perhaps my favorite novelist, Nelson Algren, by my neighbor Colin Asher. (Our kids are in the same karate class. It’s Brooklyn!) It’s a beautifully constructed book — when I’d finished it, I wanted to start it over again, just to see better how the story fit together. I don’t know how much people read Algren today — I used to have the habit, when I went into a bookstore, of looking for Never Come Morning on the shelves, and seldom found it. But in my opinion he should be in the first tier of the American canon, ahead of Updike and Hemingway and whoever else people read in high school. “The son of a Polish baker and mulatto pigsticker crouched across the canvass,” begins the final chapter of Never Come Morning; that’s more of humanity than you’ll find in the collected works of Saul Bellow. The book gets that, and it gets his writing, which combines lyricism and social realism in a way I don’t think anyone else has managed.
It also gets his politics, and how those politics were essential to the art. Like his friend Richard Wright, or like Mike Gold, Algren is someone who never would have become a novelist if it hadn’t been for the Communist Party. A major contribution of the book is to document, based on FBI files among other evidence, how the inexplicable stalling-out of Algren’s career after The Man with a Golden Arm was the country’s best-selling book and a movie starring Frank Sinatra, is fully explained by McCarthyism. Algren’s friends may have thought he was falling into paranoia, but he really was being followed on the street, his house was being surveilled, his mailed opened, his calls listened into. The publishers who rejected his books, and the editors who spiked his essays, were doing so on the advice of the FBI. It’s a huge loss for humanity: As Laura says, the cost of McCarthyism “is not only those imprisoned or deprived of their livelihood: it is the unions never organized, the books never written, and the films never made.” Algren, who knows, might have had a whole shelf.
The People’s Republic of Wal Mart, by Leigh Phillips and Michal Rozworski. The fact that production under capitalism is organized not by markets but by the conscious plans of corporations, is one of those facts that is completely obvious when you think about it, but still somehow radical and controversial. I don’t, to be clear, mean plans for for world domination, I mean the routine plans of getting input a from the warehouse here via a truck driven by this person, in time for that person to combine it with this other input using those tools. These tasks are all assigned by planners. A huge number of people cooperate in the production in all of the worldly goods around us, and essentially none of this cooperation is organized through markets. (Which doesn’t mean that markets are not an important feature of capitalism, they just don’t coordinate production.) Phillips and Rozworski make this case clearly and pointedly for the world’s largest corporation, and draw the natural conclusion that there’s nothing utopian about a planned economy – the raw materials are all around us. In large part it’s framed around the “calculation debate” of the 1920s. This is possibly not the most direct way of approaching the topic. But it does pass through some interesting territory, like Project Cybersyn, the precursor to the internet developed in Chile under Allende, which I had never heard of before.
Capital City. A short book on the politics of real estate and of urban planning by Sam Stein. Sam is a graduate student in geography at CUNY, and the book is very much written from that social position — animated by an expansive vision of the possibilities of urban planning, and by fresh anger at the ways it instead functions as an adjunct to the landlords’ lobby. Arguably the book’s strengths would have been better communicated if it were presented as a book about city planning, rather than a book about cities. (I don’t imagine it would have gotten nearly as many readers that way, so Sam and Verso probably made the right call.) One of those strengths is his perfect ear for the cant of really existing planning. Here’s Amanda Burden, Bloomberg’s planning director, describing black neighborhoods as effectively uninhabited: “We are making so many more areas of the city livable. Now young people are moving to neighborhoods like Crown Heights that 10 years ago wouldn’t have been part of the lexicon.” Here’s her successor in the de Blasio administration, Carl Weisbrod, explaining that what’s good for the landlords is good for New York: “There are very few industries where the self-interest of the industry and the fundamental interests of the citizens are so deeply intertwined as the real estate industry.” And here’s Mayor SUV himself, with one of his classic but-what-can-I-do? shrugs: “I think there’s a socialistic impulse, which I hear every day, in every kind of community, that they would like things to be planned in accordance to their needs. And I would, too. Unfortunately, what stands in the way of that is hundreds of years of history that have elevated property rights and wealth to the point that that’s the reality that calls the tune.” Sure, it would be nice to organize the city to meet human needs, says our progressive mayor, but landlord profits come first and that’s just the way it is. If quotes like this fill you with anger and you’d like to experience more of it, you should definitely pick up this book.
Other nonfiction books
The Racketeer’s Progress, by Andrew Wender Cohen. Nathan Newman has been telling me to read this book since forever and I finally did, mostly on a couple of long plane flights. The subject is the labor movement in Chicago in the early decades of the 20th century. It’s in the service of a very specific argument: that we misunderstand the historical labor movement if we think of it like today’s, as bargaining on behalf of employees of a specific employer. Rather, he argues that turn-of-the-last-century unions saw themselves — and were at least intermittently accepted — as sovereign governments of their crafts or industries. Membership as such didn’t matter, it was about establishing rules that everyone in an industry had to follow. Employers went along, at least sometimes, partly because the unions enjoyed broad popular legitimacy; partly because they had the power to make their rules stick; and partly because, at least in industries exposed to national competition, workers and businesses had a shared interest in excluding outsiders. There were, for instance, major and successful strikes to enforce the principle that only Illinois milk could be sold in Chicago, and only local electrical components could be installed in Chicago’s skyscrapers.
Why “racketeer”, tho? It’s true that Al Capone got his entree into Chicago labor thanks to this system of craft governance — not, as you might expect, as an enforcer of it, but rather as the publicly-announced guarantor of local employers defying union authority. (It was dry cleaners specifically who enlisted the mob to enforce their property rights against labor.) The term “racketeering” meanwhile, was coined specifically to describe union activities aimed at a form of sovereignty rather than at narrowly-defined economic interests. The term from its beginning, in other words, was intended not describe a legitimate activity corrupted by the presence of organized criminals, but to suggest that unions as they existed were inherently corrupt. The idea that unions historically represented the interests of an industry or occupation as a whole, and not of a particular employer, suggests that the historical model of American unionism may be more, not less, relevant, in the gig economy.
Turtles as Hopeful Monsters, by Olivier Rieppel. The best book I’ve ever read about evolution is Mary West-Eberhardt’s Developmental Plasticity and Evolution. This isn’t that, but it’s the best book I’ve read on evolution in a while. And it makes the same basic argument: Evolution, at the macro level, is more than natural selection. It isn’t just differential reproduction of randomly varying organisms, but rather depends on a set of specific mechanisms that generate useful variation in body plans, and that conversely ensures that the random genetic variation generally gives rise to a functional organism. The genes, in other words, are just one input to the developmental process; or to put it another way, the capacity for evolution on a more than bacterial scale is something that itself had to evolve. The specific issue with turtles, in this context, is not just their shell; it’s also the distinct but related fact that their shoulders are inside their ribcage, rather than outside it as in all other vertebrates. Like the double-jointed jaw in a handful of snakes — the original “hopeful monsters” — this is a feature that can’t have developed incrementally but had to arrive all at once. The question then is what it says about evolution that such leaps are possible, and what it says about the study of evolution that there’s been such reluctance to acknowledge them.
Warfare State, by James Sparrow. A nice history of domestic policy during World War II, or more precisely, how the scope of government in American life expanded during the war and how people reacted to it. The book draws heavily on reports from the Office of War Information, the 1940s-era propaganda and morale agency, and that shows in its choice of topics — there’s a bit more than strictly needed on the PR side of the war effort. But there’s also lots of interesting, well-organized material on policy around labor, housing and so on during the war, as well as on the more radical but unrealized proposals of people like Walter Reuther, which are arguably one of the great roads not traveled in US history. I read this in the course of putting together a Roosevelt paper on the war mobilization as a model for the Green New Deal, which should be coming out soon.
Previous editions:
What oft was thought, but ne’er so well expressed1:
The lack of realism in microeconomic value theory has been overcompensated by an unquenched desire for `real’ figures. Idealism in the concepts of theory has resulted in a plethora of empirical concepts for real value, and the development of index number theory is thus characterised by an inventive sequence of euphemistic terms. We have an `ideal’ index, a `true’ (cost of living) index, an `exact’ index, a `superlative’ index and, last but not least, a `hedonic’ index.
At the same time, the word `real’ is employed in more than one sense in economics. It can mean the opposite to `nominal’, in other words a value figure corrected for a change in the value of the currency unit through a general price index. It can also mean `volume’, which is correction by means of a price index specifically tailored to the aggregate under consideration. It may mean `material’ as in `real’ assets rather than `financial’ assets, or the `real sector’ which produces such assets, as opposed to the `financial sector’, which deals with non- produced assets. In none of these uses is `real’ opposed to `fictitious’, but to the layman the difference is nevertheless unclear. The very act of `speaking in real terms’ conveys the idea that one has happily left behind the cloudy and unreliable world of bookkeeping and institutional regulations, and settled safely in the world of tangible objects. …
But the operational issues stirred up by using these terms have not been adequately addressed. To obtain such real variables, nominal figures are simply divided by some notional price index without regard to the ways in which this index is produced and the change in meaning it may imply for the resulting aggregate. …
In this [book] we make every effort to convince the reader that nominal values are real values in the sense of `actual’, and of what is observable as a statistical fact, while real values, as conceived by economic value theory, are constructs. They are imputations in the proper sense of the word… The dual character of the national accounts, distinguishing between institutional units and transactions on the one hand, and functional units and product flows on the other, provides the theoretical background for this view.
From Utz-Pieter Reich, National Accounts and Economic Value
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.
(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.2) 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.
(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.
I was in DC today at an event for legislative staffers organized by the Congressional Progressive Caucus, on fiscal policy and government debt. For anyone interested, the slides I used for my presentation are below.
fiscal policy slides for 11-5-19
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.
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.3 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.4
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.
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.)