What if we dramatically reduced the cost of living?

+ Baumol's cost disease (and taxes).

Next:Economy Newsletter Cropped image by taxrebate.org.uk on flickr   Let's dramatically reduce the cost of living Last week, we pointed to Brink Lindsey's "Envisioning the Next Level" post. In this follow-up essay, he argues that "attaining the next level in social development will require big strides of technological and social progress." In Lindsey's view, "the most promising strategy for achieving mass enrichment is to focus on dramatic reductions in the cost of living." And while things like cheap clean energy can go a long way toward meeting that goal, an obvious target is housing. Why has housing spending stayed so high? Part of the answer lies in a stunning and mysterious failure of American capitalism: decade after decade of apparently negative productivity growth in both residential and commercial construction. It's hard to exaggerate how bizarre this is: the data seem to show that we're going backwards, unlearning how to build things in a cost-effective manner. This clear divergence between performance in the US housing sector and in the rest of the economy is mystifying, but Lindsey suggests the most likely culprit is loss aversion . Loss aversion affects housing costs through restrictive zoning and land-use regulation and construction regulation, driving up prices through artificial scarcity. This scarcity (and the resultant continually rising prices) created the perception of housing as an investment—you expect most of your physical belongings to depreciate, but you expect your 40-year-old house to be worth more than when you bought it because housing prices continually rise. Investors see the profits and snap up housing, creating more competition and rising prices. "Treating housing as an investment commits the entire society to a gigantic Ponzi scheme," Lindsey says. He proposes "a comprehensive liberalization of land use to eliminate artificial housing scarcity, a broad turn away from the 'housing as investment' philosophy that incentivizes artificial scarcity, and new greenfield developments that are given the regulatory flexibility to experiment with entirely new designs, materials, and construction methods" to substantially reduce the cost of living. + "Maybe Treating Housing as an Investment Was a Colossal, Society-Shattering Mistake."   Can taxes pay the price of Baumol's cost disease? We'll need to change the way we think about things in other sectors as well. Here's a thought-provoking exchange we discovered in Matt Yglesias's Slow Boring mailbag. Reader Polytropos wrote: Baumol['s] cost disease—a side effect of growth that drives up the expenses of low-productivity industries as they have to compete for inputs with higher-productivity counterparts—seems to fall particularly heavily on public or publicly-funded sectors like education, childcare, healthcare, and law enforcement. If these sectors remain as stubbornly labor-intensive as they've been over the last forty-odd years, governments will have to spend more and more on them to provide the same level of service. If improving productivity in these areas remains an intractable problem, how should elected officials deal with the messaging challenge of explaining why services are getting pricier to a public whose members will mostly either fail to understand Baumol disease or find it emotionally unsatisfying relative to blaming amorphous social villains? Matt responded: I don't think there necessarily is an alternative to getting people—both the mass public, but also elite political actors—to understand the basic underlying dynamic that you are pointing toward. Maybe one way to think about it, though, is that there's always a lot of public anxiety about the idea that technological progress is going to eliminate jobs. That, of course, is another way of saying that technological progress can raise productivity. Productivity is good. Loss of jobs is bad. But as far as I can tell, there's lots of ongoing demand for human-provided nurses, cops, and kindergarten teachers, and that's likely to continue to be the case even as technology advances. But you need a mechanism to shift money from one sector to another, and the name of that mechanism is "taxes." This message was sent to alexvarboffin.abbb@blogger.com. You are receiving this because you've signed up to receive email from us. Privacy Policy | Unsubscribe From All | Unsubscribe From Next:Economy O'Reilly Media, Inc., 1005 Gravenstein Highway North, Sebastopol, CA, 95472 (707) 827-7000