Economics
Economic geography
Moving toward stagnation, cont.
Dec 22nd 2011, 3:40 by R.A. | WASHINGTON
I JUST wanted to add one additional, brief thought on yesterday's post on migration, productivity, and job growth. It was pointed out to me on Twitter that federal government transfers are not the only mechanism through which value generated in productive, tradable-oriented cities is redistributed to less productive, non-tradable-oriented cities. Profits that accrue in one location but which are spent elsewhere might have the same effect. Or consider this example:
As technological progress raises the productivity of skilled, coastal cities it raises the demand to live in those cities and, because housing supply is limited, the price of housing in those cities. Much of the economic value of working in those places is capitalised into local home prices. With increasing frequency, older workers are leaving the workforce, cashing out of their expensive homes in productive places, and moving to the Sunbelt. Having relocated from, say, San Jose to Phoenix, the retiree can afford a grand home at a fraction of the price, and the rest of the gain from relocating becomes a stream of income used to fund consumption, including an expanding array of health services. That, in turn, bids up the wages within the non-tradable sector, making it difficult to produce tradable goods in a cost-effective way. And once again, national employment in tradables expands no faster than the pace of housing supply growth in highly productive cities. Value added can continue to rise in those cities, however, but much of it is redirected to employment growth in lower productivity non-tradable sectors. And so we get a couple of decades of stagnation in tradable employment and median wages.
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Furthermore that high housing costs are exclusionary makes them self-sustaining. Higher skilled (and thus higher-compensated) workers seek many benefits for their advanced labor--one of which is to be free of the burden of living among the less fortunate. One can argue many reasons why this might be true, but it explains why investment follows the investors not the other way around.
This is the most thought-provoking post on the economy I've read this year! I've learned a few things from your analysis (this post and the previous). Thank you!
"...And once again, national employment in tradables expands no faster than the pace of housing supply growth in highly productive cities."
It's true that housing is a huge factor contributing negatively to the population growth in highly productive cities. On the other hand, taking silicon valley as an example, the most important factor restricting the growth of the EMPLOYED population is the lack of qualified people. Take a walk on the Stanford or Berkeley campus, pay attention to students around the engineering, material science, math, physics, statistics...department, you will find the vast majority of the students are from other countries. In graduate schools, the situations are even more dire for Americans. If you sample the people working at telecom, hardware, commercial software companies in the valley, you will see roughly more than half of them are non-American born. The rapid expansion of the silicon valley in the past two decades has been disproportionally powered by talent from overseas. I'm inclined to think that, in silicon valley, employment in tradables expands no faster than the pace of talent supply growth. Housing cost is notoriously high in the San Francisco bay area. But if one works in the high-tech industry, the cost is acceptable with regard to one's salary. Pointing this out to complement your analysis not to refute it.
I do not have data to back up the following, however.... Having seen excellent graduates with PhDs in engineering, mathematics and the sciences from more that one research university struggle to find employment, I really don't think you theory that there 'is the lack of qualified people' is true at all.
I'm beginning to think Free Exchange should occasionally cross-post at DiA.
Having relocated from, say, San Jose to Phoenix, the retiree can afford a grand home
I'm not sure of local prices, but if one relocated before the bubble burst then they had high prices and now an underwater mortgage. And if more retirees move to Phoenix, the price rises due to more bids on the same amount of housing stock.
Higer prices means those with homes who work in either sector can - and probably will - borrow against that increased wealth and consume. (We "are" talking of Americans, correct?)
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In order for clarity, I am using the word "service" for "non-tradable" and "manufacturing" for "tradable".
(Even though we trade debt instruments - cash, debit card or credit card swipes - for both.)
That, in turn, bids up the wages within the non-tradable sector, making it difficult to produce tradable goods in a cost-effective way
Seeing wages rise in the service sector, the rational man will find a way to move from the wage stagnant manufacturing sector. This increase in workers will exert a downward pressure on wages in services and an upward pressure on wages in manufacturing.
Services are pretty much local, but globalization exerts a downward pressure on wages in manufacturing. Other states may poach a manufacturing plant, and sometimes a small part of the service sector (Ohio offering up to $400 million to Sears vs. Illinois' $100 million).
Higher wages could occur in the manufacturing sector if the product is niche, and productivity enhancing machinery is used which requires an educated person to operate and maintain the equipment.
I think your Twit probably never read Marx.
Regards
Are you sure that retirement income is spent differentially on non-tradable services? It seems to me that a good deal is spent on home improvements and gizmos that people now have time to use - as much so as people in work anyway.
And to the extent that older people use more health services they would be likely to do so anyway, even if they stayed in San Jose. Of course US health services are absurdly overpriced anyway compared to European ones - which tend to deliver just as good, or even better, health (contrary to US beliefs).
I'm glad at least one other person notice the fallacy in the theory put forward. Cities are not economic agents. People living inside them are. Their basic needs and willingness to work don't change regardless of where they live. A retired person is retired in San Jose or Phoenix. Living in a "productive city" isn't going to make him produce stuff. He's retired! Cities might contain within their borders productive means unavailable elsewhere, but they aren't black boxes into which you can shove people and money and then get a corresponding amoung of desired output.
I would disagree. First, you although an individual may have education and work experience they can only be as productive as their employer allows them to be. That is a function of amassed capital, the density of other highly educated workers, infrastructure, venture capital etc. This exists in abundance in the Bay area and New York and very little in Phoenix AZ.
That's a nice way to end a completely incoherent analysis.
Our hero begins his journey with the conviction that migration from productive coastal cities will lead to stagnation. Then comes--behold!--a twit bearing wisdom from the Great Unknown. The little bird whispers into his ear thus: rising house prices are another transfer mechanism. Boldly, our hero steps in front of the migrating horde and command it to go the other way.
"Let your demand come! Let your demand come and raise the price of land! This land!"
Promptly does the median home price grow wings and leap skyward. Joyously do old sages living near the sea reap a miraculous bounty. Upon seeing his prophecy thus fulfilled, our hero makes an offering of tradable goods to his god of the Visible Hand.
THE END
The Northeast and California have made tight housing markets worse with Byzantine regulations such as rent controls, strict zoning, political foot-dragging, and general NIMBYism. A few states such as MA have laws that basically say, if a municipality has less than X percent affordable housing then a developer who is willing to subsidize some of its units can override local zoning rules. Such laws are intended as crowbars to pry open local rules that block construction of affirdable housing.