Economic Facts and Fallacies 2/x

Thomas Sowell

Part 1.

Housing

  • US: in 23 out of 26 areas with the cases of “severely unaffordable” housing the government policies were to blame. [MK: it looks like a global phenomenon where the government intervention with either the builders’ or the banks’ interests in mind area leading to 50% and higher share of housing costs in the entire family budgets.]

  • In particular, the issue is about the zoning laws, i.e. how much land can be used for which purposes, thus constraining the supply of dwellings.

  • There are many restrictions that can be looked at from various perspectives, like the height restrictions. One side of the argument is that “let’s build as high as we can sell”, but there are aesthetics constraints, too, that these people completely disregard. The unconstrained “anything goes” approach in Moscow, Russia in 1990-s has led to a bunch of ugly out-of-place high-rises spoiling an otherwise beautiful skyline of the city.

  • The book makes a liberal argument that the lack of restrictions leads to increased supply and more balanced house prices since there’s always choice. This argument ignores two realities: a) real estate game is the game of collusion and price fixing; b) while the supply of land is virtually infinite (thanks to no restrictions), not all land was made equal: there are differences in views from the window, infrastructure, schools, air quality and so many other things making each building unique.

  • Where the book is correct is that the government-mandated “affordable housing” quotas in new buildings can and do lead to the negative net outcomes: the tenant composition may make the building less attractive, and the “affordability” is directly subsidized by the rest of the homeowners who had to pay for their place plus a portion of the other guy’s place. Socialism doesn’t look too attractive now.

  • Zoning laws are substantially set by the wealthy landowners who don’t want to be bothered by more people around or hindered views – precisely what makes the property prices very high (keyword: exclusivity). The landowners are not too much against selling – they just want the top dollar for their property, and then some.

  • Establishing “open spaces” (i.e. the government buying land around existing communities) is an indirect wealth transfer from the government to landowners who enjoy the free upgrade of their communities.

Urban Economic Activities

  • Cities reduce certain costs per capita (spreading them out across larger populations) and make production factors (labour, parts, logistics) more accessible and available. However, catering to larger populations increases certain other costs (like waste disposal where the alternative is making nature do its decomposing cycle, or water management where one can’t simply take as much water from the river for self-sustainability).

  • Crime control is more costly in a city because of the higher degree of anonymity of people [MK: luckily, this is changing with ubiquitous cameras and face recognition, whatever the luddites think] and the lack of willingness of a witness to come forward or even intervene when a crime is being committed.

  • An interesting observation is that grocery and other common goods prices in low-income neighbourhoods are higher (like-for-like) than in the more affluent ones due to the lack of economies of scale and the lack of large-scale retailers. [MK: it’s also important to factor in the increased % of theft forcing sellers to increase prices accordingly to make up for the loss.]

  • The cost of land is an important factor, too, as the parking lot sized are directly associated with the foot traffic in the shops, and as a result it doesn’t make much sense to place large malls in poor neighbourhoods, because: a) the land prices are still higher than in the suburbs with no purchasing power of the community to offset them, and b) car ownership in these communities is much lower.

  • Riots and property destruction make reopening the shops less appealing, directly leading to the reduction of variety and higher prices to account for the potential risks.

  • MK: The book is very vocal (correctly so) that urban planners who don’t know neighbourhoods and have no stake in the outcome are likely to make decisions with long-term negative effects to these communities.

  • The government initiatives to destroy slums to reduce crime and move people out invariably failed, because the slums are not the cause of the crime but the effect of it.

  • Also, many slums are not what they seem to be, where there’s positive interpersonal relationship dynamic between the inhabitants. Destroying slums leads to the destruction of the social ties (mostly – the safety net based on mutual support).

  • When it comes to mandatory redevelopment (and mandatory property acquisition by the government), small businesses are disproportionally affected as they lose their clientele (for whom proximity was a major factor) and the intangible things like the “vibe”.

  • There’s a huge unchallenged assumption that social problems and crime can be reduced by putting people into “better” (according to the planners) physical surroundings. Sadly, the new environments turn into slums quite rapidly at the terrible expense to the (usually) middle-class people who vouched with their dollar to live in a safe community with a certain vibe.

  • Parents can be displeased by the dropping average grades in their local schools (having made a financial decision to relocate close to their chosen schools) due to the influx of children with incompatible values towards education.

  • The “smart growth” is a phenomenon where government planners tend to ignore the desires of the existing communities and apply a grand plan for the forecasted future development. [MK: the book for some reason ignores this, but the “smart growth” plans conveniently turn a blind eye to the large mansions of political donors and their territories nearby.]

  • Another argument of the book, which I kind of agree with, is that the protection of the farmland can sometimes be irrational, as there’s chronic overproduction, and farmers don’t need to produce as much. Add to the mix the simple fact that agri tech is a fast-growing industry with the key benefit of producing more, sustainably and on smaller land size – and it does indeed look like some fertile land doesn’t need to be preserved.

  • There’s always been an assumption that “urban sprawl” means more driving, hence higher pollution. The latest trends of jobs moving close to the people as well as (thank you COVID) remote work are challenging this long-held assumption. MK: I challenge you to Google “death of downtown”.

  • MK: Ahh, I’ve finally found the thing that’s been bothering me with all this “anything goes” approach of the book. The book makes a broad stroke assumption that people act as independent individuals with rational choices. The fact of life is (and I’ve reviewed a bunch of books on economics) that growing real estate prices boosted by low mortgage rates and the fear of missing out causes people to buy-buy-buy borrowing to the brink and becoming hostages to their incomes and employers. The purchase of real estate where people intend to live is anything but rational, especially when interest rates are so low that any other use of savings seems to be akin to watching an iceberg melt. I’d also throw the “living like the Joneses” phenomenon into the mix, where the physical possessions of one family must match the ones of a “model” family. The schools define the “status” of the children, the community defines the “social status” of the parents, etc. I love to criticise the books where authors make this obvious mistake.

… to be continued