Wednesday, June 21, 2006

pouring lemon juice on a paper cut

As you probably can guess from the subtitle above, discussions of real estate usually interest me.

And sometimes they irritate me. Ok, most times, but that is because I can get pedantic when it comes to the most-misunderstood business that everyone in the world has to deal with at some point in their life.

So then please allow me to quote from, a popular local real estate blog, in an article titled "Saving the Short-Sighted From Themselves" in regards to the recent landmarking "victory" in Riverdale, NYC.

We knew a hotly-contested decision on landmarking the 250-odd houses that make up the Bronx enclave of Fieldston was imminent, so it was with some relief that we read this past weekend that cooler heads had prevailed and that the City Council had in fact ratified the designation back on April 26... As for the dopes who fought the landmarking, they'll be thanking their neighbors as their property values rise; and if they really miss being able to build some oversized monstrosity, they can cash in and move.
As usual, he has the positions reversed. The folks threatening their neighbors with glorious state-sponsored violence and robbery are the so-called "cooler heads" whom have prevailed, whilst the victims of land-robbery are dopes for trying to preserve their wealth.

But of course, the elitists know what's best for New York, even when they are totally wrong.

Because the Brownstoner blog is not the right setting for a critical discussion of simple economic topics, I was going to write something here on my blog about it, as I have in the past.

The first mistake of course is the implicit assumption that rising asset prices are beneficial towards the aggregate wealth of society. It's not, and counterfactually, it signifies that aggregate societal wealth has actually decreased.

Also, the question of cui bono? goes unexplored.

Who exactly gains from a reduction of available land resources? Certainly you might expect that many land owners will be in favor of landmarking, because a reduction in supply, without a commensurate change in demand (for an inelastic good), will lead to higher prices as the scarce factors are bid higher and higher.

But while the sellers are happier to receive higher prices, the buyers as a whole have lost by that very same amount! (Thank you Bastiat and Hayek.) In short, by their same scalar measurements of interpersonal utility, the sellers have seemingly gained at the expense of the buyers.

But that is not all. The many others that are the 'losers' of this policy are the countless individuals who cannot afford the higher prices and simply seek housing in a different market. In short, such wondrous policies drive the low and middle class from the neighborhood, which you would think make the egalitarian central-planners think twice. But no, they are busy tsk-tsking the "dopes" who opposed the landmarking policy, which is supposedly in their favor as the current owners.

The second mistake is confuse prices, with value. To quote author Paul Tolnai:
Let's look at the housing stock of a country. Within the last few years, many homes have sold for twice the price of what they fetched, say, 5 years ago. OK, so does that mean we can extrapolate these marginal prices to infer that the value of our housing stock has doubled, and hence we as a nation are wealthier? Looking only at the housing stock that existed 5 years ago, has its utility increased? How does wealth relate to prices?

According to the Fed, these price increases are evidence of the robustness and health of the American economy. We are now supposedly wealthier. But isn'’t this like referring to increasing "No Child Left Behind" test scores to answer the question of the day: "Is our children learning?" A given house has a fixed utility. Its utility does not go up simply by having occupied it for the last 5 years. If its price has gone up dramatically, is one dramatically wealthier?

Wealth it seems to me is related to the production of goods (and services) that people want to have (essentially manufacturing) and is not determined by prices, although price movements may be indicative of changes in wealth. If that were so, what would the relationship be? If increasing the supply of goods that people want to buy, whether through importation or domestic production, means more wealth, where would price fit into this picture of wealth measurement? Let's go back to housing.

To some degree, increasing the manufacture of houses would increase wealth, but this would, ceteris paribus, have a depressing effect on house prices. So I reason that falling prices is a good measure of wealth creation (such as the prices of electronics and computer hardware). In the 19th century, there was a slow decrease in the price level over the entire century (excepting the Civil War era - think of Lincoln's greenbacks, which were later declared unconstitutional). It would seem to make sense that with a steady amount of money, individual ingenuity (human action) is going to tweak the production process every year to make it more efficient (less resources for a given output) to produce a given good, which will tend to lower the price. The price reduction for this good will free up capital to produce other, or better goods - all within a framework of falling prices.

Notice I haven't addressed the merits of landmarking, because I don't think there are any to be discussed. I personally feel that piles of stone and dirt, however beautifully arranged, do not undergo a transcendence of any sort, and I wouldn't threaten violence over an owner's personal decision whether to preserve or to destroy them.

I also assume that the owner will do whatever is his best interests to increase his wealth, whether that means voluntarily preserving the structure, or demolishing it. And yet the only way to increase the aggregate of societal wealth, is on that very personal basis.

So in short, its the myopia on the part of the economic-illiterate policy wonks, that destroy societal wealth, escalates and reifies class conflict, and than has the gall to pour lemon juice onto the papercut they dealt you, with their caustic slaver.

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