The Asset Divide

Below is a recent article explaining the growing wealth inequality based on asset ownership and control. This shouldn’t even be phrased as a question as our easy credit policies, massive RE debt leverage, and favored housing policy has created an almost insurmountable wealth divide between the asset-rich and the asset-poor. Who and what policies do we think those left behind are going to be voting for? Non-gender bathrooms? See also Thomas Edsall’s article in the NYT.

Is Housing Inequality the Main Driver of Economic Inequality?

Richard Florida

Apr 13, 2018

A growing body of research suggests that inequality in the value of Americans’ homes is a major factor—perhaps the key factor—in the country’s economic divides.

Economic inequality is one of the most significant issues facing cities and entire nations today. But a mounting body of research suggests that housing inequality may well be the biggest contributor to our economic divides.

Thomas Piketty’s influential book, Capital in the Twenty-First Century, put economic inequality—and specifically, wealth inequality—front and center in the global conversation. But research by Matthew Rognlie found that housing inequality (that is, how much more expensive some houses are than others) is the key factor in rising wealth.

Rognlie’s research documented that the share of wealth or capital income derived from housing has grown significantly since around 1950, and substantially more than for other forms of capital. In other words, those uber-expensive penthouses, luxury townhomes, and other real estate holdings in superstar cities like London and New York amount to a “physical manifestation” of Piketty’s insights into wealth inequality, as Felix Salmon so aptly puts it.

More recent research on this topic by urban economists David Albouy and Mike Zabek documents the surge in housing inequality in the United States. Their study, published as a National Bureau of Economic Research working paper, charts the rise in housing inequality across the U.S. from the onset of the Great Depression in 1930 through the great suburban boom of the 1950s, 1960s, and 1970s, to the more recent back-to-the-city movement, the 2008 economic crash, and the subsequent recovery, up to 2012. They use data from the U.S. Census on both homeowners and renters.

Over the period studied, the share of owner-occupied housing rose from less than half (45 percent) to nearly two-thirds (65 percent), although it has leveled off somewhat since then. The median cost of a home tripled in real dollar terms, according to their analysis. Housing now represents a huge share of America’s total consumption, comprising roughly 40 percent of the U.S. total capital stock, and two-thirds of the wealth held by the middle class.

What Albouy and Zabek find is a clear U-shaped pattern in housing inequality (measured in terms of housing values) over this 80-year period. Housing inequality was high in 1930 at the onset of the Depression. It then declined, alongside income inequality, during the Great Compression and suburban boom of the 1950s and 1960s. It started to creep back up again after the 1970s. There was a huge spike by the 1990s, followed by a leveling off in 2000, and then another significant spike by 2012, in the wake of the recovery from the economic crisis of 2008 and the accelerating back-to-the-city movement.

By 2012, the level of housing inequality in the U.S. looked much the same as it did in the ’30s. Now as then, the most expensive 20 percent of owner-occupied homes account for more than half of total U.S. housing value.

Data by Albouy et al. Design by Madison McVeigh/CityLab

Rents show a different pattern. Rent inequality—or the gap between the cost of rent for some relative than others—was high in the 1930s, then declined dramatically until around 1960. Starting in about 1980, it began to increase gradually, but much less than housing inequality (based on owner-occupied homes) or income inequality. And much of this small rise in rental inequality seems to stem from expensive rental units in very expensive cities.

The study suggests this less severe pattern of rent inequality may be the result of measures like rent control and other affordable housing programs to assist lower-income renters, especially in expensive cities such as New York and San Francisco.

That said, there also is an additional and potentially large wealth gap between owners and renters. Homeowners are able to basically lock in their housing costs after purchasing their home, and benefit from the appreciation of their properties thereafter. Renters, on the other hand, see rents increase in line with the market, and sometimes faster. This threatens their ability to maintain shelter, while they accumulate no equity in the place where they live.

***

But what lies behind this surge in housing inequality? Does it stem from the large housing-price differences between superstar cities and the rest, or does it stem from inequality within cities and metro areas—for instance, high-priced urban areas and suburban areas compared to less advantaged neighborhoods?

The Albouy and Zabek study considers three possible explanations: The change over time from smaller to larger housing units; geographic or spatial inequality between cities and metro areas; and economic segregation between rich and poor within metro areas.

Even as houses have grown bigger and bigger, with McMansions replacing bungalows and Cape Cods in many cities and suburbs since the 1930s (as the size of households shrunk), the study says that, at best, 30 percent of the rise in housing inequality can be pegged to changes in the size of houses themselves.

Ultimately, the study concludes that the rise in both housing wealth and housing inequality stems mainly from the increase in the value of land. In other research, Albouy found that the value of America’s urban land was $25 trillion in 2010, roughly double the nation’s 2016 GDP.

But here’s the kicker: The main catalyst of housing inequality, according to the study, comes from the growing gap within cities and metro areas, not between them. The graph below shows the differences in housing inequality between “commuting zones”—geographic areas that share a labor market—over time. In it, you can see that inequality varies sharply within commuting zones (marked “CZ”) while it remains more or less constant between them.

In other words, the spatial inequality within metros is what drives housing inequality. Factors like safety, schools, and access to employment and local amenities lead individual actors to value one neighborhood over the next.

Data by Albouy et al. Design by Madison McVeigh/CityLab

All this forms a fundamental contradiction in the housing market. Housing is at once a basic mode of shelter and a form of investment. As this basic necessity has been transformed over time into a financial instrument and source of wealth, not only has housing inequality increased, but housing inequality has become a major contributor to—if not the major overall factor in—wealth inequality. When you consider the fact that what is a necessity for everyone has been turned into a financial instrument for a select few, this is no surprise.

The rise in housing inequality brings us face to face with a central paradox of today’s increasingly urbanized form of capitalism. The clustering of talent, industry, investment, and other economic assets in small parts of cities and metropolitan areas is at once the main engine of economic growth and the biggest driver of inequality. The ability to buy and own housing, much more than income or any other source of wealth, is a significant factor in the growing divides between the economy’s winners and losers.

 

A Day Late and a Dollar Short?

Central Bankers Hone Tools to Pop Bubbles

From the WSJ (full article here).

An interesting article about how to address the most obvious cause of bubbles and busts: excessive financial leverage amped by easy credit. That only took a generation of asset bubbles and busts to figure out.

The Vatican’s Calls for Global Financial Reform

The bishops are right on the money (!) with their diagnosis of the problem, but seem a bit off in advocating for centralized authority over globalization. Seems to go in exactly the wrong direction. We need more democratic and market transparency and accountability. (Admittedly, not the Church’s strong point.)

From Foreign Affairs:

The Future of the Church in the Financial Order
Samuel Gregg
February 7, 2012

Last October, a bold proposal to reform the global financial system came from an unexpected source: the Catholic Church. As the eurozone teetered on the brink of economic chaos, the Pontifical Council for Justice and Peace — a body of the Roman Curia that advises the pope on economic justice, peace, and human rights — issued “Towards Reforming the International Financial and Monetary Systems in the Context of Global Public Authority” (more simply called the “Note”). The Council’s goal in publishing it was explicit: the Church wanted to attract the attention of world leaders as they assembled to discuss ongoing turmoil in financial markets at the G-20 Summit in Cannes and to add its voice to those arguing for capital controls (such as the “Tobin tax”) to discourage international financial speculation. Then, early last month, during his keynote speech for the New Year to diplomats accredited to the Holy See, Pope Benedict XVI reinforced the call for ethics in the global economy. The Pope’s words echoed the Note’s urgent call for new, even radical thinking about the rules and institutions governing the global economy.

The Note argued that the root cause of today’s economic woes is the growth of excessive credit and monetary liquidity in the past few decades, which, in turn, inflated asset bubbles and set off a succession of debt and confidence crises. It also held that the lack of regulatory controls on international finance exacerbated the problem — in other words, that the pace of economic globalization has been out of control. The resulting instability and economic inequality means that the world now requires “a system of government for the economy and international finance.” Once world leaders recognize, the Council argued, that increasing global interdependence is forcing countries to move beyond a Westphalian, or state-based, international order, they will be more prepared to cede their own sovereignty in the interests of global humanity’s common good.

On the one hand, the Church advocates a world authority that manages globalization in the interests of economic justice. Yet it is equally committed to open markets, also as a matter of economic justice. Reconciling these two commitments will be a major test for Catholic social doctrine.

Considering the Church’s history and its social doctrine, its call for a supranational authority is hardly a surprise. The Church has long viewed nation-state sovereignty as a challenge to its autonomy. Historically, it was far more comfortable operating in more fluid internationalized settings, such as during the Holy Roman Empire or Medieval Christendom. The devastation of World War II convinced senior European Catholics that the power of nation-states had to be tamed. This helps to explain why the Church was such an advocate of European unification. Indeed, prominent Catholics such as the former French Prime Minister Robert Schuman were central players in the processes set in motion by the 1957 Treaty of Rome. Six years later, Pope John XXIII endorsed the idea of a world authority, a call reiterated in all subsequent popes’ social teachings. The Church has avoided identifying such a body specifically with the United Nations. And it has tended to describe such an authority’s functions in very general terms such as “coordination.” But the logic is that if the conditions that facilitate human flourishing increasingly transcend national boundaries, the modern state’s claim to be the highest political authority capable of coordinating such conditions is unwarranted. In practical terms, some Church officials calculate that a world authority would be easier for the Church to navigate than a global order of sovereign nation-states.

Yet a world authority could pit the economic interests of Catholics in developed countries against those in developing nations, creating challenges for how the Church presents its teachings about economic issues to Catholics throughout the world. Many countries throughout Latin America, Africa, and Asia are in a fundamentally different economic and geopolitical place from those of the ailing EU. The Church must thus deepen its appreciation of how the global operation of economic factors such as comparative advantage, incentives, and tradeoffs has different impacts upon Catholics living in very dissimilar economic circumstances. But this also has implications for the Church’s position concerning the economic functions to be assumed by a world authority. Such responsibilities, for example, could primarily concern promoting greater economic integration through removing obstacles to trade. This, however, would be incompatible with the Note’s theme that a world authority’s economic functions should be focused upon securing greater control over the pace of change through international regulations that, if implemented, would significantly impede the free movement of people, goods, and capital.

While the Church’s senior leadership is disproportionately European in composition, the Catholic Church’s epicenter in raw numbers has shifted to the developing world. According to statistics contained in the Vatican’s 2011 Annuario Pontificio, European Catholics now account for just 24 percent of the world’s 1.18 billion Catholics. In 1948, the equivalent was about 49 percent. Today, almost 50 percent of all Catholics live in the Americas, and most of them south of the Rio Grande. Demographically, the European Church has stagnated for three decades. But its expansion in Africa, Asia, and Latin America in the same time period has been staggering. Between 2005 and 2009 alone, the number of African Catholics grew from 135 million to approximately 158 million.

These realignments parallel changes in the economic path pursued by many of the developing nations in which most of the world’s Catholics live. In recent years, economic growth has taken off in many developing countries at a pace that dwarfs European growth rates. Over the last three decades, many such countries (Chile and Brazil being prominent Catholic examples) have gradually moved away from top-down economic planning toward greater openness to global markets as a primary way to diminish poverty and spur economic growth. Within Catholic social teaching, there is considerable support for such market-oriented paths. Since 1991, Catholic social doctrine has re-emphasized that developing nations have a right to freely access networks of global exchange. The free trade and anti-protectionist implications of this principle were spelled out in John Paul II’s encyclical Centesimus Annus and reiterated in Benedict XVI’s 2009 Caritas in Veritate. How this fits, however, with the Church’s ongoing emphasis on the need for a world authority — and, more immediately, with the Note’s call for capital controls — needs to be clarified.

Moreover, the Church’s teaching on these matters is grappling to accommodate the growing divergence between the immediate economic expectations of Catholics in developed European nations and those living in emerging economies. For Catholics in developing countries, economic globalization is a way out of poverty. This helps explain why some traditionally Catholic countries such as Colombia, Guatemala, Mexico, and Panama have pushed for free trade agreements with the United States, while others, such as Brazil, have pursued trade agreements within Latin America. Likewise, African countries with large Catholic populations, such as Kenya, Rwanda, Tanzania, and Uganda, have pursued regional trade agreements as steppingstones to wider entry into global markets.

By contrast, many Catholics in Western Europe see the same forces released by economic globalization as creating pressures to lower their countries’ regulatory barriers, reduce their wages, phase out subsidies, and rethink the high tax levels needed to pay for strong welfare states. Not surprisingly, many Europeans are reluctant to go down paths that represent a departure from postwar policies.

The tension between these two groups presents the Catholic Church with three significant and interrelated challenges. First, it must ensure that its emphasis on supranational institutions as a way of managing globalization is not interpreted as reflective of a desire to protect EU states from increasing competition from developing nations. Any appearance of protecting wealthy Europeans at developing countries’ expense would be considered inconsistent with the Church’s stated commitment to social justice and would risk alienating many Catholics in developing nations.

Second, the Holy See will increasingly find itself lobbied by European leaders as well as those of developing nations to lend its influence to the realization of incompatible economic objectives. What stance, for example, should the Church adopt toward agricultural subsidies? Many Europeans see subsidies as ways to protect European farmers from economic extinction. Africans and Latin Americans, however, are inclined to view the same EU subsidies as measures designed to blunt developing countries’ increasingly competitive edge in agriculture. In such debates, who will the Church end up supporting?

Third, the Church’s leadership faces an intellectual challenge. On the one hand, the Church advocates a world authority that manages globalization in the interests of economic justice. Yet it is equally committed to open markets, also as a matter of economic justice. Reconciling these two commitments will be a major test for Catholic social doctrine. Open global markets certainly need rules. But how would a world authority engage in top-down global economic management without significantly compromising the competition that flows from open economic and financial markets?

The Catholic Church is not in the business of exercising “hard power.” But it certainly shapes people’s minds, whether through the daily preaching of thousands of Catholic clergy, the formation imparted by its countless educational institutions, or the unique bully pulpit it possesses with the papacy. This is no guarantee that predominately Catholic countries will simply fall into line with the Church’s teaching on global economic governance issues. The Church is, however, in a position to shape millions of people’s attitudes. In an increasingly global public square, the influence exercised by a Church whose name means “universal” and which, as a religious organization, possesses an unrivaled worldwide presence means that when it makes pronouncements about global economic reforms, it should consider making requests that are consistent with its own future.