September 10, 2015
If you have been worried about the demographic crisis leaving us with too few workers or the technological revolution leaving us with too few jobs, my friend Noah Smith now warns us of the crisis of too little land. The problem is that we have too much money going to owners of land, who are not entirely accurately referred to as “landlords” by Noah.
There are a few problems with this story. First, the trend for an increasing share of income to go to land owners is less clear than he suggests. In the United States (I know Noah is referring to the OECD as a whole, but if the U.S. can be an exception, it’s not a law of capitalism) there was no trend for an increasing share of income going to land owners until the eighties. This makes it at least a shorter term story here than the one dating from the 1950s in Europe.
In the U.S. the rise in property values relative to GDP has coincided with a sharp drop in interest rates over this period. This is exactly what we would expect. Land prices rise when interest rates fall, just as the price of a bond or any other asset that provides an annual payout rises. The point is that it is far from clear that we are staring at some inexorable trend.
The second point is the logic of ever rising land prices is far from clear. Yes, there are economies of agglomeration, people benefit from clustering in or near cities. But this has always been true. What has changed is the ability to quickly communicate over long distances has increased enormously. The fact that we have the Internet, while not eliminating the benefits of agglomeration, surely has to reduce them.
This can allow many businesses to develop and thrive outside of New York and the Silicon Valley, in places like Detroit. To paraphrase a noted anti-capitalist of years past, we can have one, two, many Detroits. There are thousands of dying industrial cities around the OECD that could potentially be revitalized with new industries taking advantage of cheap land and cheap housing for their workers.
The third issue is that Noah perversely uses the term “landlord” throughout his piece. This is perverse because the vast majority of people who benefit from high land prices do not think of themselves as landlords, they are homeowners. This is important for a political reason, a majority of the population, at least in the United States, thinks of themselves as benefiting from high land prices.
It has been painful to read politicians, often cheered on by the reporters writing the news stories, boast about rising house prices. This boasting continued even as house prices recovered from their 2011 lows and rose above their long-term trend levels. Even some advocates of low-income housing joined this cheering of what can be termed an unaffordable housing policy.
The point is that politically, there is little understanding of which way is up in this story. Noah (and I) want to see lower house prices. That would be good for the country. Let’s hear one of the presidential candidates pick up that theme.
Finally, let’s get back to those problems about too few workers and too few jobs. Okay, both lines are silly for reasons that I have written about elsewhere, but the fewer people story is certainly a plus for those worried about rising land prices. In other words, if the population of the U.S. and other wealthy countries stagnates or declines, we can expect to see declining pressure on land prices. That’s all to the good in my view, but those who think it’s important to have many more people may want to consider the impact of a growing population on land prices and income distribution.
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