Markets

It’s Econ 101!

You know what phrase you never hear in defense of an argument? “It’s Psych 101!” Or, “It’s Sociology 101!” Or, “It’s Music Theory 101!” You know why? These are all introductory courses. Attending these classes in no way confers even a wisp of expertise on the student. Maybe it’s me, but if I’m having surgery, I want a doctor who has completed medical school, an internship, a surgical residency and years of actual experience in my particular procedure, not just some guy who sat through Biology 101.

Yet I cannot count how many times I’ve heard someone defend a trinket of conventional economic wisdom by rolling their eyes and exclaiming, “It’s Econ 101!

Yawn.

Tell me “It’s Econ 486 (Econometrics II)” and you might give me pause, given that I lack the math chops to make heads or tales of advanced econometrics. But Econ 101? Really? That’s your guide? I know our nation’s economic policy sometimes looks like its been designed by beginners, but that’s not exactly something we should strive for.

So please, stop trying to explain to me how markets work based on your cursory understanding of an introductory text that you read (or skimmed) 30 years ago between bong hits and keg-stands.

Haggen Slashes Hours Because It Can

Bosses! Amirite? (Image courtesy of marcolm at FreeDigitalPhotos.net.)

Bosses! Amirite? (Image courtesy of marcolm at FreeDigitalPhotos.net.)

Free marketeers often dismiss stagnant wages and growing income inequality, because markets! Workers are paid what the market determines their labor to be worth, conservatives sneer, no more, no less. Period.

Of course it would be ridiculous to counter that markets don’t play a major role in setting wages. But it would be equally ridiculous to ignore the role played by the staggering imbalance of power between employers and employees:

Geiger, the union spokesman, said Haggen originally added worker hours after taking over the former Albertsons and Safeway stores. But he said that in the past few weeks, some people who had worked 40 hours a week “for years” were ending up with less than 20 assigned hours.

Likewise, several staffers who remain officially employed haven’t been assigned any weekly hours in the past few weeks.

Think about that. If you just announced to your boss, “I’m not coming in for the next couple weeks,” or “I think I’m only going to work half-days through end of the summer or whenever I feel like it,” you’d probably be fired. But it’s perfectly acceptable for your boss to do the equivalent to you while expecting you to remain on call to accommodate his scheduling needs, or else, you know, you’re fired.

In fact, it’s not just acceptable, it’s the norm. Even for unionized employees.

Conservatives argue that wage floors, overtime standards, labor unions—these all hurt the economy by “distorting the market.” But there is no pure market for labor, and never has been, because employers enjoy a natural power advantage that exists external to the value of labor.

That’s why they get to tell you what to do, and not the other way around. They’re in charge. If you don’t like it you’re free to quit, but you’ll starve long before your employer does. That’s the nature of wage labor.

If it wasn’t, shit like this would never fly.

It’s the Land Value, Stupid (or Why Seattle’s Affordable Housing Debate Shouldn’t Really Be About Making Houses More Affordable)

Source: King County Department of Assessments

Source: King County Department of Assessments

What with Seattle Mayor Ed Murray dramatically backtracking from HALA recommendations that would have allowed denser housing in many single-family zoned neighborhoods, I thought I should take a moment to elaborate on a point I made in my recent affordable housing post regarding the impossibility of making single-family detached housing affordable. “We all need to give up this fantasy that every middle class family can own a bungalow and a yard,” I insisted. And the table above helps explain why.

That’s the past 15 years of tax assessment records for my own bungalow and yard, copied and pasted from the King County Department of Assessments website. And assuming the total appraised value in the righthand column comes anywhere close to tracking the actual resale value, I’ve earned a surprisingly modest return on my “investment” over the past decade and a half: an average of only 4.29 percent a year, just twice the rate of inflation (Consumer Price Index) over the same period of time.

Thanks, Great Recession!

But that righthand column only tells half the story. The truth is, adjusted for inflation, the house itself has actually decreased in value over the past 15 years. Which makes sense. Depreciation. My house is old. It’s the value of my land that has figuratively gone through the roof.

According to King County, the land value of my 6,800 sq ft lot increased by almost 10 percent a year, from $54,000 in 2000 to $224,000 in 2014. That’s a fourfold increase—threefold even after adjusting for inflation. And unless our population growth projections are totally wrong, there’s no reason to expect Seattle land values not to continue to grow faster than the local economy as a whole.

Why? Because the supply of land in Seattle is finite. We can build more housing, but we can’t build more land. In fact, as the HALA recommendations acknowledged, to address our housing needs we really need to reduce the amount of land in Seattle restricted to 5,000-plus sq ft lot single-family detached houses. The mayor’s decision to reject these recommendations may or may not be good politics, but it’s certainly bad policy. Though either way, homeowners like me ultimately win.

If we do nothing to loosen density restrictions, then the value of my land continues to increase as demand for bungalows with yards increasingly outstrips supply. If we rezone my lot to accommodate greater density, then the value of my land probably increases even more, as it could then hold two or more $255,000 homes where it now holds just one. But either way, my land value goes up.

Of course, economics is a lot more complex than that. “Supply and demand” isn’t a law, per se; it’s more like economic shorthand. But while there are many factors that could alter demand, the supply of in-city land can never increase.

Early growth skeptics would have found it hard to imagine the era of the $1 million bungalow,” Lesser Seattle booster Knute Berger recently bemoaned on Crosscut. But I don’t know why—it was inevitable. For you can build as many duplexes, triplexes, apartments, and condos as you want, and the iconic Seattle bungalow would still remain in short supply.

I dwell on this point to emphasize that when we talk about affordable housing, we’re not really talking about making houses more affordable—at least not those of the single-family detached variety. We’re mostly not even talking about affordable homeownership, what with renters bearing the brunt of the affordability crisis. And yet the pundits and policymakers driving this debate—as well as the reliably voting constituents most politicians tend to answer to—are disproportionately single-family detached homeowners like me.

Which I think tends to color the debate with a glaring lack of perspective.

Look, I love both my bungalow and my yard. And I’m very happy to have been born early enough to be able to afford it on less than a six-figure income. But unless she strikes it rich, I know full well that the only way my daughter is going to own a house like the one she grew up in is if I die in it. So if I really care about keeping Seattle affordable for my daughter’s generation then I know we’re going to have to radically change our expectations about what housing will look like for Seattle’s future middle class.

Seattle needs to grow denser and taller. And if we want to adequately address affordability, we need to grow denser and taller throughout the city. That doesn’t mean eliminating zoning. And it doesn’t mean eliminating single-family zoned neighborhoods entirely. But it does mean making smarter use of the limited land we have as we grow into a city that lacks the space to house the majority of residents in single-family detached homes. All options should be on the table.

So fight to preserve these neighborhoods if you want (politics is an adversarial process, after all), but understand that you are ultimately fighting to preserve these neighborhoods for the relatively well off. And please don’t pretend that there is anything we can do to keep the iconic Seattle bungalow affordable.

[Cross-posted to Horsesass.org.]

Seattle Has Three Affordable Housing Crises, and They All Require Different Solutions

This is my single family detached house (circa 1935), which definitely makes me part of the problem.

This is my single family detached house (circa 1935), which definitely makes me part of the problem.

I’ve recently been drawn into a Twitter feud with a self-proclaimed “urbanist” who insists that the only solution to Seattle’s affordable housing crisis is to free up developers to build whatever they want wherever they want. Really. I don’t want to mention him by name—because why drive attention to his extremist libertarian views?—so for the purposes of this post, I’ll just call him “Ben.”

When I asked Ben if it would be okay to build 30 stories on my 6,800 sq ft single family lot, he said, “Of course!” When I elaborated, “How about an office tower, or a Hooters … or a rendering plant?” he countered that a rendering plant wouldn’t pencil out with our land values, but “sure.”

And when I pressed on, “So you’d argue for no zoning and no Growth Management Act …?” Ben was unequivocal: “It is very likely that today we would get better enviro and affordability outcomes with no zoning, including no GMA,” Ben replied.

Okay.

I largely share Ben’s vision of a taller, denser, more walkable, bikeable, and transit-rich Seattle, and to this end I support substantial up-zoning and other regulatory changes. But anybody who argues that the market alone can solve all our problems is simplifying Seattle’s housing crisis to the point of absurdity.  In fact, I’d argue that we actually have three distinct housing crises, each requiring its own set of solutions: homelessness, workforce housing, and middle class housing.

Homelessness is at once the easiest and most difficult crisis to address. The most obvious solution is to just give these people homes—problem solved, and most likely at a price well below the real financial, human, and societal cost of allowing the problem to fester. Yet housing alone cannot address the mental illness, addiction, and domestic abuse that leads many people to the streets.

Even those who find themselves homeless due to mere misfortune are almost by definition destitute to the point of being outside the ability of a rational housing market to serve. Thus, one thing we should all be able to agree on is that homelessness is not a problem that can be solved by the market: there is simply no way to profit from building safe housing affordable enough for people who have reached such a level of desperation. How and how much we address homelessness is mostly a matter of how much taxpayers are willing to spend.

Likewise, our workforce housing crisis also cannot be solved by the market, as given the fixed costs of land and construction, there is no way for developers to make a sufficient profit building units within Seattle aimed at renters and buyers earning substantially below Area Median Income (AMI). In fact, the market is busy exacerbating our workforce housing affordability crisis by renovating or tearing down older buildings that have served lower-income Seattleites for decades.

Yeah sure, low-income Seattleites could always double and triple or even quadruple up with roommates in order to pay ever rising rents, and many already do. But as Hanna Brooks Olsen explained on Seattlish a couple years back, the math is truly awful. Add a child or two to the equation and awful becomes impossible.

Free-marketeers like Ben argue that eventually all this new upscale housing becomes affordable when, you know, it becomes old and rundown. Maybe. Or maybe Seattle’s ever-rising land values dictate an accelerated cycle of renovation and renewal? But even if true, eventually doesn’t help people living in the here and now. In the meanwhile, show me the private developer going to bankers with plans to build to 50 percent of AMI. Betcha you can’t.

It’s hard to see how any amount of deregulation can entice developers to build to this market without substantial public subsidies; and subsidies cost money. Whether that money comes from linkage fees or a property tax levy or a citywide income tax, it has to come from somewhere if we’re going to make an honest effort to address this crisis.

Of course, our growing middle class housing crisis is something that the market can chip away at (depending on your definition of middle class)—but that doesn’t mean we’re better off leaving it to the market alone.

We need to change our zoning to allow Seattle to grow taller and denser. We need to allow (even encourage!) accessory dwelling units throughout the city, relax costly car-centric requirements that new developments provide off-street parking, and yes, we need to substantially reduce the amount of land in Seattle that is restricted to detached single family housing. Seattle needs townhouses, row houses, triplexes, micro-housing, and many more two and three bedroom apartments suitable for families with children. And much of it needs to be built on land currently restricted toward low density use.

We don’t need to eliminate zoning the way Ben advocates, but we do need to zone smarter. And we all need to give up this fantasy that every middle class family can own a bungalow and a yard. Our population (demand) is growing while our land mass (supply) cannot. Barring an economic collapse (or a dramatic shift in housing tastes), single family detached housing will increasingly become a luxury that fewer and fewer Seattleites will be able to afford. Nothing can change that. Not the council, not socialism, and certainly not the market.

To be clear, I’m not anti-market or anti-developer. But this idea that the market, free from zoning and other regulations, will fix our entire housing crisis, is magical thinking. The market cannot touch homelessness. The market cannot come close to addressing our shortage of workforce housing. And while a unfettered market might well build a lot more housing than it’s building now, it will build it in a chaotic way that will surely piss off a lot of Seattleites—and because we are in competition with much higher priced cities like San Francisco, the market would still have a helluva time keeping up with demand.

The real decision facing Seattleites is whether we have the vision, the empathy, and the will to really address these problems? Are we willing to spend the money necessary to address homelessness by building more shelters and temporary housing, and by providing the costly wrap around services necessary to get the homeless off the street and back on their feet? Or are we comfortable enjoying the benefits of our economic boom even as homeless encampments sprout beneath our city’s freeways?

Are we willing to spend the money necessary to fund, build, and maintain the subsidized housing necessary to sustain a culturally diverse city—the culture that made neighborhoods like Capitol Hill so desirable in the first place? Are we willing to even consider a modest program of rent stabilization as a short term solution? Or do we want to become a culturally sterile city of haves by virtue of driving out the have-lesses and have-nots for want of affordable housing?

And do we want to broadly slow skyrocketing housing costs for the middle class, but only to the extent that the market delivers? Or are we willing to use the bonding capacity at our disposal to build thousands of publicly owned, non-subsidized middle class housing units a year that would grow more affordable over time by keeping them outside the rent seeking impulses of the for-profit market?

At the very minimum we have three separate housing crises, at least two of which require public money, and all of which require public will. Solving them won’t come easy or cheap. But if we choose to solve these crises they can be largely solved.

The Bens of this world insist that we only have one choice: To let the market do its magic, and live with the Seattle the market begets. But that’s not really a choice at all. It’s an excuse for failing to make the hard choices and sacrifices necessary to build a more humane, more diverse, and more affordable city for today’s Seattleites and for generations to come.

[Cross-posted to Horsesass.org]

When Wages Go Up, Employment Goes Down (Microsoft Style)

Microsoft CEO Satya Nadella

Microsoft CEO Satya Nadella: “My package is this big.” (image source: Microsoft)

The most common rejoinder to any proposal to raise the minimum wage (or pretty much any labor standard) is that when wages go up, employment goes down. “When you raise the price of employment, guess what happens? You get less of it,” US House speaker John Boehner once told reporters in dismissing President Obama’s call to raise the minimum wage.

Which would be a pretty compelling argument against raising the minimum wage… assuming there was at least a shred of evidence to back it up.

Unfortunately for the trickle down crowd, there’s not. According to the U.S. Department of Labor, “a review of 64 studies on minimum wage increases found no discernable effect on employment.” And contrary to popular belief, relatively large minimum wage hikes like those recently passed in Seattle, San Francisco, and Los Angeles are not unprecedented. Of course, correlation does not equal causation, but when it comes to demonstrating an inverse relationship between wages and jobs, the best I could come up with was Microsoft CEO Satya Nadella’s $84.3 million compensation package correlating with the company’s largest round of layoffs ever:

The Redmond software company announced in July that it would eliminate 18,000 jobs, 14 percent of its workforce. Chief Executive Satya Nadella said the goal was to streamline the company and integrate its newly purchased phone-hardware business. Rounds of layoffs were carried out in July, September and October, and Microsoft said the process would be complete by June 30 of this year.

So there you have it. With his promotion to CEO, Nadella’s wages went up and Microsoft’s employment numbers went down—both quite dramatically. Not sure that’s exactly what Boehner had in mind, but it’s the closest I could come to proving his thesis.

Time to Reregulate the Airline Industry, If Only Just a Little?

Oh god, I hate flying. (Source: Port of Seattle | Don Wilson)

Oh god, I hate flying. (Source: Port of Seattle | Don Wilson)

Longtime readers know that I’m not much of a fan of the modern airline industry. I’m old enough to remember when the airlines didn’t just treat passengers like those things they pack into the area above the cargo hold. Airline deregulation combined with the stupidly useless inconveniences and humiliations of our post 9/11 security theater have helped transform a mildly uncomfortable and tedious experience into an anxiety-provoking Darwinian struggle for elbowroom and overhead bin space on a plane that may or may not get you to your destination anywhere near on time. There is no other industry that routinely treats customers paying hundreds, even thousands of dollars with such utter disrespect, bordering on contempt.

Yes, I know, flying is so much cheaper than it was during the days of heavy regulation—though not nearly as cheap as it used be, and not as cheap as it would’ve been had ticket prices continued to fall at the same rate they’d been falling during the 30 years prior to deregulation. So now that 80 percent of domestic air travel is controlled by just four major carriers—eliminating much of the market competition deregulation promised—isn’t it time to start talking about reregulating the airline industry, if only just a little?

Seriously. It’s not like the airlines aren’t already colluding to keep supply down and prices high:

At this week’s meeting in Miami of the International Air Transport Association, the annual meeting of the world’s top airline executives, the buzzword was “discipline.”

… “Discipline” is classic oligopoly-speak for limiting flights and seats, higher prices and fatter profit margins. This year, that discipline seems to be working: the I.A.T.A. projected this week that airline industry profits would more than double this year to nearly $30 billion, a record.

So if the airlines are already capable of this level of coordination, why not require them to cooperate in one more key area: tariffed fares for rebooking passengers on competitors’ flights.

There once was a time if you missed your flight or connection for any reason—mechanical problems, weather delays, stuck in traffic on the way to the airport—your airline would rebook you on the next available flight out, even if that flight was operated by a competing carrier. They could do this because fares were regulated, costing the same across all carriers operating on the same route. Pam-Am would happily accept a TWA ticket, and vice versa. It was very efficient and very customer friendly.

But nowadays, if you miss your United connection in Chicago you could sit there for a day or more waiting for another United seat to open up, as other airlines fly on to your destination with dozens of open seats. That’s just plain stupid.

My simple suggestion is that the feds require airlines to rebook you on the next flight out, just like in the old days, while imposing a formula for fair compensation between the airlines. I mean, if the airlines are going to voluntarily cooperate on keeping seats scarce, they should be forced to cooperate on ameliorating some of the inevitable consequences of this intentional scarcity.

It wouldn’t be a huge burden. In fact, the added cost may even be offset by the more efficient allocation of seats across airlines. And while it’s maybe not the sort of big idea one expects from the Skunkworks, it would certainly take some of the unnecessary anxiety out of flying.

Because Free Trade Isn’t Free

Port of Seattle

The free trade crowd likes to roll their eyes at critics of the Trans-Pacific Partnership trade agreement as if we’re a bunch of idiots who just can’t (or won’t) understand the way markets work. But here’s the thing about “free trade” as defined by agreements like the TPP: it doesn’t create a free market.

Sure, goods are free to cross borders under TPP. And financial capital sure is free to cross borders. And since goods-plus-capital equals jobs, the TPP frees more jobs to cross international borders.

But you know what’s not free to cross borders? People. And since under TPP and NAFTA jobs are mobile and labor isn’t, free trade agreements like these end up distorting the economy in a way that advantages capital and disadvantages labor.

I’m not making shit up here. The same neoclassical economic theories that argue for free trade will tell you that if capital is free but labor mobility remains constrained, then the labor market can never reach a state of natural equilibrium. Capital can (and will) arbitrage the price difference between various labor markets, artificially suppressing wages for all.*

Good for profits, not so good for workers.

Of course, that doesn’t mean we can’t have free trade. We could open our borders to all comers, and vice versa, allowing people to move to where the good jobs are. Or, we could all openly acknowledge that trade agreements disadvantage labor, and insist that they come with policies designed to ameliorate the harm and redistribute the profits more broadly. You know, if we actually gave a shit about workers.

But let’s not pretend that, on their own, free trade agreements are good for American workers. TPP is great for the owners of capital, and it may be good for the economy broadly—if you broadly define the economy as GDP. But it will further weaken the relative power of labor in the United States, and thus push down wages for many workers.


* Not to be construed as an actual endorsement of neoclassical economic theory.