The US is at a crossroads right now. The focus on social injustice and inequality, of trying to right past wrongs and trying to level the economic playing field with the heavy hand of government are issues which will reverberate through the policies created for the next few decades.
During the financial crisis of 2008-2009, the Tea Party was born out of the backlash to government bailouts. Those bailouts totaled over $800 billion, and many have forgotten that the loans to banks and insurance companies were actually paid back with interest to the government. The figures look quaint now in comparison to the numbers that are regularly bandied about Washington. Numbers in the multiples of trillions are being discussed to do things like upgrade our infrastructure or provide benefits to those in need or suffering from climate change. Modern Monetary Theory even provides an academic basis for spending unlimited sums on anything the government deems necessary.
Some may say that we are doomed to repeat the mistakes of the past and spend to oblivion until some crisis forces the government’s hand and hard times ensue. Yet out of all the spending policy debates and clamoring for more money and more taxes, I would argue there is a case for optimism for the ideas and the creativity that is being born to reinforce capitalism and the rights of the individual.
New Ideas Are Born
Some of the greatest challenges facing the social fabric include economic inequality and distortions of asset prices brought on by zero interest rates for extended periods of time. These low rates have produced bubbles in various areas of the economy. We see them in home prices, crypto speculation, the stock market and now NFT’s. While much of the mainstream media focuses on human interest stories of a lucky few who went from a rags to riches in crypto or Tesla stock, please be aware these are not representative of 99.99% of people and they create something called an availability bias.
This means that we think these cases of rags to riches are more common than they really are because we aren’t provided context. This context being that most people likely came into crypto or NFT’s within the past year when prices were already high. The information available is that of rags to riches stories which is the easiest available knowledge. Yet these stories hide the probability of many people getting rich going forward, which is likely now much lower. They also make people think these stories are much more common than they really are. People take huge risks every day but no one writes a story on the person that lost it all on GameStop puts or Tesla calls this year.
The real winner in these monetary conditions are those that already hold valuable assets. Those that have been holding stocks since before the pandemic. Those that held crypto before it was popular and those that were already homeowners. These groups of people are usually already likely to be wealthy or at least middle class. The median net worth of a homeowner in the US in 2019 was $255,000 while that of a renter was $6,300. Some renters may be benefitting from a moratorium on rent collection but millions of homeowners have benefitted from home price increases and the studies of the future will likely show that monetary policy has worsened the divide.
Yet there is awareness and foresight from many, including the wealthy who realize their wealth partially depends on the social stability and the general economic prosperity of the country. Inequality leads to extreme politics which doesn’t bode well for those with money to lose. Only now are we starting to see some ingenious ideas materialize that actually wouldn’t cost as much as some of the programs being considered currently. Among these I have often cited the proposal from hedge fund manager Bill Ackman to create a trust for every newborn American child and place $6,750 in it. This would then be placed in an index tracking the stock market and wouldn’t be available until they were 65. This would make every child a future millionaire (if long term equity growth rates hold up) and provide every American a stake in US capitalism and corporate profits. It would cost about $26 billion at current birth rates.
This solution wouldn’t solve the upcoming problems of the cost of social security or Medicare but it would ease their burden down the line, at a minimal cost to the government. This who die early and never collect could have their funeral costs deducted so families don’t have to struggle to pay and leftovers could be split among children or relatives.
Solving For Home Prices
I have pointed out in previous posts that housing per square foot cost is actually little changed over the past 40 years but homes are getting larger and adding amenities. Yet this just creates more room and more home for those that can afford it but more and more left out in the cold.
Many economists and countless studies have pointed out that the solution lies in greater supply of homes. In the rich world housing construction has lagged population growth by 50% since 1964 and in the US, housing growth has not kept up with population growth for the last 20 years, indeed it has fallen by 55% since 2006.
There is also the problem of gentrification. Gentrification pushes out lower income residents in favor of those with higher income who push up prices. It’s a sensitive matter here in New York intertwining race, class and privilege but the issues may be with the lack of imagination on how to solve the problem from our leaders.
One of the more intriguing proposals that I came across however was that of how to solve the problem of housing costs which could also be used to ease the affects of gentrification on those it displaces. Policy Exchange, a British think tank, crated a detailed proposal for granting development rights to current homeowners. The homeowners would form associations street by street and they would vote on whether to allow new development on their street. This could come in the form of adding new levels to current low block housing or from demolishing a current home and building a larger more densely populated new one.
As it currently stands, only homeowners would benefit from the proposal. Yet if renters and current residents were to also be given a stake in the development they could be compensated through a piece of equity ownership in the development or from selling their share of the rights to developers. This doesn’t compensate for the changing social dynamics of your neighborhood but it’s better than simply being pushed out.
Yet more dense housing solves only part of the problem of incentivizing current homeowners to not say no to any new development. It’s also local government that needs to be incentivized. With a denser population comes new problems, there will need to be more schools built and parking may be come an issue. The town or city will have to bear much of the cost of this while much of the tax revenue goes to the state or Federal government. The solution proposed by the authors of the study is to allocate some of the local profits through a special tax, to stay with the local government of the town or city. This would allow them to focus on the infrastructure issues relevant to the denser population.
In fact something like this has already been tried in Israel. A plan known as Tama 38 allows developers to remodel and add amenities for current tenants and even pay for their rent elsewhere while they wait for construction to finish. In this US News article, it explains how one family was temporarily displaced but their current rent while they are displaced was paid for by developers. Their new building will add amenities for them but create space for 18 apartments as opposed to the 6 that were there previously. Yet the flaw in this program is that it didn’t take into account the public services that needed to come with the denser population and due to a knee jerk reaction from politicians, is in danger of being canceled.
These are not problems without solutions and we aren’t doomed to having unaffordable homes or having the poor displaced at their own cost for the one sided benefit of others. What is needed is more ingenuity, new ideas like those from Policy Exchange on how to tackle these sorts of problems. The proposed housing solution just involves creating smart programs, not necessarily taxing and spending more. Rather than take the pessimistic view that these problems are too big and involve too many vested interests to be solved, optimism and smart policy within the current framework may show us that the tools towards a more equitable outcome are already within our grasp.
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