Isegoria

Restrictions on the supply of housing are not a simple transfer from renters to homeowners or from young to old, Matt Yglesias explains:

They are an incredibly value-destroying leaky bucket of redistribution that makes people a lot poorer on average.

Most people in Washington, D.C., myself included, own plastic snow shovels that are lightweight and good at moving large quantities of snow relatively quickly. These shovels are also completely useless against the large blocks of ice that have besieged the city over the past couple of weeks. As a result, metal shovels — including shovels that were designed for gardening rather than snow removal — have become a scarce quantity in high demand. Within a couple of days of the storm, it was not only impossible to buy a metal shovel at any Ace Hardware, Home Depot, or Lowe’s in or near the city, but they were also out of things like pickaxes too. I got the last crowbar from my neighborhood hardware store two days after the snow fell and have been using it ever since to smash ice.

I don’t know exactly what the secondary market for these implements looks like. But I guarantee you that under these conditions of intense scarcity, a person with a spare metal shovel could sell it for a lot more than he bought it for. Anyone who happens to have anything that’s good at smashing ice has seen a nice little bump in their wealth as a result of the temporary scarcity.

So maybe we should pass a law prohibiting (or strictly limiting) the manufacture and sale of new metal shovels, pickaxes, crowbars, and similar implements. The snow will melt soon enough and this particular ice crisis will pass. But these kinds of tools have enduring use. If you restrict the supply of new ones, then over time more and more people will find themselves wanting to buy used ones from the people who already own them. There will be future ice storms and future demolition jobs. People will want to dig holes in gardens. And through the magic of supply constriction, something like my trusty ice-smashing crowbar can be transformed from a slowly depreciating durable good into an appreciating asset — an investment commodity that builds wealth over the long term.

Notably, nobody proposes that we do anything like that or believes it would be a sensible way for a country or a city or a state or a region to proceed.

We even saw a real world example of this during Covid, when production of new cars was temporarily curtailed, which led the price of used cars to soar. Most Americans own cars (often more than one car) so in some sense the car shortage was a financial windfall that caused the net worth of many to soar. But, again, nobody proposed permanent quantitative limits on the sale of new cars in order to bolster car wealth. “Ban cars” is a semi-joking slogan of urbanist ideologues, not a wealth-building strategy.

The same even applies to financial assets. Like most Americans, I have some savings in the stock market, mostly in index funds that own shares of existing large companies. In some sense, the fact that people found new companies and those companies sometimes grow and become successful is a threat to the profitability (and therefore share price) of the large, existing companies that are in my 401(k) fund.

But I’ve never heard anyone argue that we should bolster the value of Americans’ existing stock portfolios by making it impossible to found new companies.

Obviously companies lobby to protect themselves against new competition all the time. But nobody believes that giving in to those pressures is a reasonable strategy for bolstering retirement funds.

The point, in both the trivial case of banning new crowbars and the dramatic case of banning new companies, is that these moves would be bad for economic growth, and people generally benefit from a growing economy.

Of course, growth isn’t the only thing that matters. People care about distributive issues and fairness and environmental protection and all kinds of other things. But they do also care about growth. It might be worth accepting slower growth to advance some other social aim. But this really only works when the benefits are large and the growth impacts are small.

Banning new companies would obviously be an economic disaster, so (fortunately) no one proposes that.

The car thing, though, strikes me as a fairly close analogy to housing. One big problem with restricting new car production in order to increase car owners’ car wealth is that to actually realize that wealth, you’d need to sell your car. Most people own cars because cars are useful, so if they ended up carless they would either need to go buy another one (at now-inflated prices) or else they’d take a big hit to their well-being. Lots of very old cars would stay on the road much longer despite poor performance, bad features, and worse fuel efficiency. A larger share of social resources would be sucked up by trying to repair old beaters and keep them on the road. Safety would get worse. Governments would start various programs to help young people afford car ownership — some outright subsidies, but mostly a lot of subsidized credit to help people get cars so they can get jobs — but ultimately those programs would just end up further inflating the value of the existing fleet of used cars.

That’s the dilemma you’d end up with: a “wealthier” society in terms of the paper value of its stock of used cars but in all practical terms a poorer society in which the average quality of people’s access to transportation services declines.

Something like a ban on new metal shovels would make this even clearer. Random old tools would obtain more financial value, but life would be worse: the actual act of shoveling would become harder.

And the more you repeated this exercise, the worse things would become. First you ban new shovels. Then you extend the ban to pickaxes and crowbars to create even more wealth. Then you’re banning hammers. Next it’s all hand tools. Eventually it’s cars too. Heck, maybe we even restrict the supply of new smartphones to enhance the trade-in value of the phones that people already own.

What you’re doing here is entering a degrowth spiral.

Politics is nothing but an ocean of hyperbole, Bryan Caplan reminds us, as he cites this passage from Edward Banfield‘s 1974 classic, The Unheavenly City Revisited:

A great part of the wealth of our country is in the cities. When a mayor says that his city is on the verge of bankruptcy, he means that when the time comes to run for reelection he wants to be able to claim credit for straightening out a mess that was left to him by his predecessor. What he means when he says that his city must have state or federal aid to finance some improvements is (1) the taxpayers of the city (or some important group of them) would rather go without the improvements than pay for it themselves); or (2) although they would pay for it themselves if they had to, they would much prefer to have some other taxpayers pay for it. Rarely if ever does a mayor who makes such a statement mean (1) that for the city to pay for the improvement would necessarily force some taxpayers into poverty; or (2) that the city could not raise the money even if it were willing to force some of its taxpayers into poverty. In short, the “revenue crisis” mainly reflects the fact that people hate to pay taxes and that they think that by crying poverty they can shift some of the bill to someone else.

[…]

That we have not yet been willing to pay the price of solving, or alleviating such “problems” even when the price is a very small one suggests that they are not really critical. Indeed, one might say that, by definition, a critical problem is one that people are willing to pay a considerable price to have solved.