Why the economy isn't working, revisited

I recently wrote about updated IRS income estimates. One thing the 2022 income updates allow me to do is extend my estimate of income growth before and after rent.

I previously wrote about that using 2021 income estimates. That estimate was a little dodgy because Covid and the related market and federal reactions to it appears to have created a temporary boost to income inequality - raising top incomes more than low incomes. Or, at least raising reported adjusted gross income at the top more than the bottom.

So, the 2022 update gets us past that and gives a more realistic trend for the top line number. But, the rent expense effect remains the same.

There is an understandable reaction among some economists to say that we are better off than we’ve ever been, and that people should have some perspective and quit complaining. I would normally affiliate with that line of thinking. But, it isn’t actually true these days.

You could say that we are clearly better off than we were 40 years ago because even homeless people have smart phones. But, I think I’d give up my smart phone if the deal was to choose between a home and a phone.

We really are creating a massive amount of suffering.

There are attempts to measure incomes more exactly by using inflation indexes that reflect regional differences or that reflect differences in the basket of goods and services that individuals consume.

But, the housing crisis is unique. It creates rent inflation that differs by neighborhood. Before 2008, it mattered a lot whether you lived in Los Angeles or Atlanta. But, since 2008, rent inflation has been similar across regions. Within every city, it has tended to be about 20% higher in the poorest neighborhoods than in the richest.

Figure 1

This is a double whammy because poor families spend more of their incomes on rent and the rent inflation is high on their homes. Those two factors combined mean that families with the lowest quintile incomes, on average, did not experience any income growth from 2015 to 2022.

Figure 2

(I should clarify for new readers, this data uses the rental value on all homes, whether they are renter or owner-occupied. The long-term issue is the same, either way. First, most renters have below-median incomes, so the left end of the chart is mostly renters. Second, homeowners are basically pre-paying the rental value of their home, so in the long-run their cost of living is also affected.)

The updated income numbers have a more realistic top line. Adjusted gross income across all ZIP codes averaged about 10% over this time.

Real adjusted gross income in the lowest income quintile of ZIP codes averaged about 9.5% growth and real adjusted gross income after rent expenses averaged -1.9%. For the highest income quintile, it was 12.1% before and 11.9% after rent.

Imagine you’re making $4,000/month and pay $1,850 in rent. At the end of the year, you get a raise to $4,150/month and your rent goes up to $2,000. And this happens year after year after year.

I think this is a big factor in the inflation complaints. Everyone is debating how important inflation is to voters. The debate presupposes that voters give undue attention to inflation. But, a big part of this is that in many cases their inflation is higher than your inflation. Inflation has robbed them of all of their income gains for a decade.

The average inflation rate may have been 2% over the past decade, but for many families, real, actual, lived inflation has been more like 4% for a decade. Year after year after year.

It’s so bad they’ve thrown their support toward fascism, and we still have to debate whether there is even a housing shortage. It’s long past time to fix this. But people can’t even agree on plain truths. In a way, it’s understandable. This condition is novel. Our standard statistical data isn’t even set up to capture it.

Trump has offered immigrants, foreign countries, and the broader bureaucracy (though, so far, not specifically tightened mortgage standard regulations or zoning board bureaucracies) for blame. If the Democrats decide that the problem is billionaires, private equity, and rent setting software, we aren’t gonna make it, folks. The Abundance agenda that is suddenly getting a lot of attention has it right, at a deep, fundamental level. Will the Democrats move in the right direction in time?

This isn’t a Bootleggers and Baptists sort of political dynamic. It’s the ends of the political horseshoe who keep sharing the same political means to different ideological ends. It’s Orthodox Baptists and Reformed Baptists.

That’s how we got 2008 and the subsequent housing depression. Both Elizabeth Warren and Rand Paul (and basically everyone in between) considered Figure 3 to be just fine. The Tea Party and Occupy Wall Street wanted the same basic outcome. And they were both angry. They both wanted someone to pay. They just disagreed on who. They both wanted collateral to fail. The Tea Party wanted families to be ruined and Occupy Wall Street wanted bankers to be ruined. (Lord, how I wish that was hyperbole, and not just a direct description of their rhetoric and goals.)

Figure 3 - Mortgages Outstanding by Credit Score

On the right end, they want to protect the suburbs for natural born citizens. On the left end, they demand affordable housing, not luxury housing and they demand that we obstruct new building that would alleviate regional displacement in order to avoid local displacement. They all agree, in practice, that we shouldn’t build cities.

On the right end, they think high home prices are from low interest rates, unqualified borrowers, and irrational exuberance. On the left, they think it’s predatory lenders and income inequality. They agree that we should stop households from earning or borrowing the capital to buy homes at their current market prices.

On the right end, they don’t want renters in the neighborhood. On the left, they don’t want landlords in the neighborhood. They agree that we shouldn’t approve rental housing.

This is the Abundance movement’s moment. We are at a breaking point. The richest country in history has a worsening homelessness crisis. The undereducated are turning to fascism and the overeducated are turning to Marxism. Moderate liberalism has to somehow defeat both wings.

The debate for progress seems to be happening within the Democratic party. But Progressives are more aligned with MAGA (in means if not in ideals) than with Abundance liberals.

None of these outcomes were caused by rental consultants, institutional investors, or corporate landlords. The Progressive insistence to obsess on corporate power has reached absurdity when rising home prices are blamed on institutional buyers who own 1% or 2% of homes. Or when they blame a lack of home construction on industry consolidation when the industry lost half its revenue base and labor pool and struggled to avoid bankruptcies for a decade.

At the other end of the spectrum, it’s recently become popular to claim that some foreclosure forbearance programs at the FHA are pushing up prices. The ends of the horseshoe are strapped to their scapegoats and will both be actively unhelpful.

The Abundance agenda must win the day. The battle is against this guy:

Not this guy:

Or this guy:

I think there is a pretty simple heuristic here. Instead of thinking left or right, more regulation or less, more public spending or less, the question we have to come to terms with is “yes” or “no”. We spent a century accumulating “no”s on both the left and right. We need “yes”s. Yes, you can build homes here. Yes, you can come live here. Yes, you can be a citizen. Yes, we can build highways and train stations and allow auto-piloted cars and e-bikes. Yes, buildings can be 40 feet tall. Yes, grandma can live in the back yard casita. Yes, you can profit by providing a basic human need.

We have devolved. Humans have built cities for centuries. It’s a known process that exists over millennia of human progress. But, we can’t now. When some of us try, some of us get really, really mad about it.

There have been 2 parties of “no”. And the result is that working class Americans have lost a generation of economic progress.

A lost country is an angry country. The hopeful have to outvote the angry, and it’s a two-front war. I doubt there is another policy goal that comes close in terms of creating a more equitable, hopeful, forward looking culture and economy than raising residential investment.

Every home we can build pushes up the left end of that blue scatterplot in Figure 2. The trouble with emergent solutions is that the beneficiaries don’t know who helped them. But rest assured, every home we can get built lifts up the least of us. It’s truly the Lord’s work. In 1975, building an extra home just created a marginally nicer stock of homes. Today, it still does that, and it extracts income transfers back from rent-seekers, raises the incomes of our most vulnerable neighbors, reduces the number of economic refugees, reduces homelessness, reduces rent stress, gives young adults freedom, and allows young couples to start families. And, all we have to do to again realize all these benefits of civilization is let people do a thing that every society of free people has ever done.

The first Revolution was fought in the streets of New York City, Boston, and Philadelphia. The second Revolution is the result of devolution. In the 250 odd years since, we managed to make those very streets illicit.

We might as well have made metallurgy or footwear illegal. It’s time to slap ourselves awake again. This is America, dammit.

America has always been a place where, in spite of our follies and faults, the world’s aspirational poor voted with their feet and traded up. We were the dream. Every U-Haul heading east out of Los Angeles or south out of New York City, with families that would have preferred to not make the move; every family spending half their income on rent because they don’t know what they would do if they lost their last foothold in Phoenix or Portland or Atlanta, is a moral failure against the duty of our birthright.

Addendum.