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This bit really struck me: “Matthew Rognlie—then a doctoral student, now an assistant professor at Northwestern—took up that line in even greater detail in an

This bit really struck me: “Matthew Rognlie—then a doctoral student, now an assistant professor at Northwestern—took up that line in even greater detail in an article that eventually appeared in the Brookings Papers on Economic Activity, to which he added that the rising capital-to-income ratio in Piketty’s data is disproportionately the result of the price appreciation of certain scarce stores of wealth, primarily housing and the land it sits on, not the quantity accumulation of productive capital that is the subject of the neoclassical theory of economic growth.” I find that a compelling explanation because it fits with a bunch of the deep problems in the way urban development changed in the 20th century, which in turn have created the frustrating housing situation today. It’s difficult to summarize this, but in short, modern zoning, the suburban development pattern, and auto dependency, create an economic vicious cycle which tends to polarize economic outcomes, where Places trend toward either the Bay Area or Detroit. (Some reading linked below) This is most true in the US, but also to varying degrees in many other parts of the world. In other words, if Rognlie’s quote is true, then it would mean Picketty’s observations are better explained by the bad housing and infrastructure policies of the last 80 years than by “r > g”, and if that’s true then it completely changes what we should do about it. Some expansion on the development pattern problems: https://www.strongtowns.org/journal/2016/10/23/portland-housing-prices https://www.strongtowns.org/journal/2016/10/23/portland-hous... https://www.strongtowns.org/journal/2018/9/17/austins-codenext https://www.strongtowns.org/journal/2018/9/17/austins-codene... https://www.strongtowns.org/the-growth-ponzi-scheme https://www.strongtowns.org/the-growth-ponzi-scheme

mcguire 8y ago
I have some problems with that same quote. The "disproportionate price appreciation of housing and the land it sits on" seems to me to be primarily a factor only in some (maybe most) large cities; outside those cities, price appreciation, perhaps excessive price appreciation, has occurred, but it's nothing like that in those few cities. My feeling is that, sure, the effect of real estate prices are large in real terms, but compared to the rest of the economy, they are limited in effect by their limited distribution. (I haven't looked at Rognlie's research; I could be wrong.) Further, my feeling is that real estate appreciation is an effect, not a cause. Consider the 2008 event ("circumstance?" "shenanigan?"): it was purely driven by the financial industry. It had, really, nothing to do with real estate at its core; it was caused by bad financial behavior, and the failure of the real estate market was simply how it was translated out of the finance world into the rest of the economy. Likewise, my impression of the situation you describe is a result of the growth and success of the financial industry and the pursuit of a very limited class of real estate assets by that resulting block of money. Tl;dr: High rents in San Francisco? Caused by the venture capital industry---a purely financial operation---and its insistence on having all of its investments physically co-located with where it wants to live.
- rcpt 8y ago
  Unless all the startup funding in the valley is going to pitch decks about real estate I don't see how your tldr follows.
  - mcguire 8y ago
    Let's see a hypothetical: Patrick Gonnagle went to Stanford and really likes living in the Bay area. He also invented the idea of facebook for dogs and made a crap-ton of money in the dotcom era. Nowadays, he spends most of his time trying to out-do his peers in the nuevo-crap-ton-o'-money crowd with his extensive collection of Pia Zadora's underpants. The rest of the time, however, P-Gon (as he likes to be called) finds smart, idealistic, entertaining, and attractive young people, mostly from Stanford, and gives them large sums of money in exchange for a significant share of any future large sums of money their idealistic and entertaining activities will bring in. The idealistic and smart people like to get advice, recognition, and affirmation from P-Gon, and he likes to keep an eye on his investments (not to mention the advantage of showing off his cadre of minions to his peer group). So, they all have to live, work, eat, etc. in close proximity. P-Gon lives at the top of the Transamerica pyramid (literally; he built his 12,000 sq ft bedroom on the very pointy top of it). Fortunately, the I&S folks are being showered in cash (well, not literally; P-Gon has a swimming pool full of giant tapioca balls and $1000 bills that he makes them do laps in (hence "funding round")), so they have plenty of money to pay for suitable hovels. Lather, rinse, repeat for a couple of generations and you discover that rents are stupid ridiculous in the area of the giant fountain o' money. Which theoretically could be somewhat remedied, maybe, except that P-Gon doesn't want horrible brutalist high-rise apartment complexes blocking his view of the Tenderloin.
- TheTrotters 8y ago
  But then you have to ask yourself why this surge in demand for real estate in urban areas hasn't been met by a corresponding surge in supply? Why aren't developers building new apartment complexes as fast as they can to cash in? The answer is primary that regulation by local governments prevents them from doing that thereby keeping real estate prices high.

mcguire 8y ago

I have some problems with that same quote. The "disproportionate price appreciation of housing and the land it sits on" seems to me to be primarily a factor only in some (maybe most) large cities; outside those cities, price appreciation, perhaps excessive price appreciation, has occurred, but it's nothing like that in those few cities. My feeling is that, sure, the effect of real estate prices are large in real terms, but compared to the rest of the economy, they are limited in effect by their limited distribution. (I haven't looked at Rognlie's research; I could be wrong.) Further, my feeling is that real estate appreciation is an effect, not a cause. Consider the 2008 event ("circumstance?" "shenanigan?"): it was purely driven by the financial industry. It had, really, nothing to do with real estate at its core; it was caused by bad financial behavior, and the failure of the real estate market was simply how it was translated out of the finance world into the rest of the economy. Likewise, my impression of the situation you describe is a result of the growth and success of the financial industry and the pursuit of a very limited class of real estate assets by that resulting block of money. Tl;dr: High rents in San Francisco? Caused by the venture capital industry---a purely financial operation---and its insistence on having all of its investments physically co-located with where it wants to live.

rcpt 8y ago
Unless all the startup funding in the valley is going to pitch decks about real estate I don't see how your tldr follows.
- mcguire 8y ago
  Let's see a hypothetical: Patrick Gonnagle went to Stanford and really likes living in the Bay area. He also invented the idea of facebook for dogs and made a crap-ton of money in the dotcom era. Nowadays, he spends most of his time trying to out-do his peers in the nuevo-crap-ton-o'-money crowd with his extensive collection of Pia Zadora's underpants. The rest of the time, however, P-Gon (as he likes to be called) finds smart, idealistic, entertaining, and attractive young people, mostly from Stanford, and gives them large sums of money in exchange for a significant share of any future large sums of money their idealistic and entertaining activities will bring in. The idealistic and smart people like to get advice, recognition, and affirmation from P-Gon, and he likes to keep an eye on his investments (not to mention the advantage of showing off his cadre of minions to his peer group). So, they all have to live, work, eat, etc. in close proximity. P-Gon lives at the top of the Transamerica pyramid (literally; he built his 12,000 sq ft bedroom on the very pointy top of it). Fortunately, the I&S folks are being showered in cash (well, not literally; P-Gon has a swimming pool full of giant tapioca balls and $1000 bills that he makes them do laps in (hence "funding round")), so they have plenty of money to pay for suitable hovels. Lather, rinse, repeat for a couple of generations and you discover that rents are stupid ridiculous in the area of the giant fountain o' money. Which theoretically could be somewhat remedied, maybe, except that P-Gon doesn't want horrible brutalist high-rise apartment complexes blocking his view of the Tenderloin.
TheTrotters 8y ago
But then you have to ask yourself why this surge in demand for real estate in urban areas hasn't been met by a corresponding surge in supply? Why aren't developers building new apartment complexes as fast as they can to cash in? The answer is primary that regulation by local governments prevents them from doing that thereby keeping real estate prices high.