Output is abundance is affordability

Why new houses and new cars should be unaffordable

Output, abundance and affordability all mean roughly the same thing. But they have very different connotations. Output codes vaguely center-right and is the term that I prefer. Abundance codes center-left and is slightly tainted by being a euphemism, but the term is almost as acceptable as output. Affordability codes both left and right wing populist and is a counterproductive way of thinking about output.

Matt Yglesias has a recent post entitled:

“Affordability” is just high nominal prices

It begins as follows:

After a full year of factional infighting, Democrats of all stripes have coalesced around the idea of running on affordability. This is great on three levels:

1. It clearly resonates strongly with voters.

2. It’s a conceptual container that can hold a lot of different kinds of policy ideas.

3. It lets people who want Democrats to change their position on divisive cultural issues, and those who don’t, feel like they’re winning the argument.

Something that I’ve learned in my career as a disagreeable writer who loves to draw fussy distinctions is that effective practical politicians are really good at coming up with formulations that smooth over disagreements and sidestep inconvenient choices.

[Yglesias’s follow-up post is also excellent.]

At the risk of annoying Yglesias, I’m going to try to read his mind and tell you what I think he actually believes:

1. Affordability is not just high nominal prices. But most voters are not well educated and think of a lack of affordability as high nominal prices. (I think that’s why he uses the scare quotes.) Therefore, the ongoing rise in prices offers Democrats a golden opportunity to develop a winning political argument that is more popular with voters than defund the police or trans rights. Dems should talk about high nominal prices, not output.

2. There’s no reason to feel guilty about doing this, because the appropriate policy recommendations (YIMBYism, etc.) are good ideas that promote desirable objectives such as more output/abundance.

3. Democrats should not try to promote “affordability” by using anti-output ideas such as rent freezes, free buses, tariffs on Canadian lumber and deporting law-abiding undocumented workers who have been here for 20 years.

In other words, I have no problem with Yglesias’s essay if viewed as useful political advice. But in this post, I’d like to discuss the actual issues at stake, not the politics. Put simply, societies become progressively richer by producing lots of stuff that rich people like—things that are “unaffordable” to average people. Places that understand this (Switzerland, Singapore, UAE, etc.), do much better than places that obsess with producing lots of stuff for poor people. If you don’t want to gentrify slums, then you’ll end up with lots of slums.

There are actually two problems with the term afford. One problem is that it doesn’t have a precise meaning. When someone says they cannot afford to buy a certain car or eat at a certain restaurant, they often don’t mean it literally. They might well have a stock portfolio large enough to buy a $250,000 car and yet view a Rolls Royce as “unaffordable” in the sense that it would be unwise to devote a huge share of their life savings to one car. Demand curves don’t slope downward because expensive items are unaffordable, they (mostly) slope downward because rational consumers respond to high prices on X by buying more of Y.

The second problem with the term “afford” is that it conflates prices and real incomes. Yglesias is correct that most people think of affordability in terms of nominal prices. But it’s equally true that at a deeper level it is real income that people care about. Yes, there’s some money illusion out there (I’d be the last to deny that!), but surely people preferred the 1960s (rising prices and even faster rising nominal incomes) to the 1930s (falling prices and even faster falling nominal incomes.)

Indeed, the term ‘afford’ sort of implies prices relative to income, otherwise people would just say “inflation”. Again, politicians may wish to focus their rhetoric on rising prices. But if they wish to be re-elected they may want to steer clear of policies that impoverish our country by reducing output, such as price controls. Jimmy Carter was not re-elected, and gas shortages probably weakened Nixon’s ability to survive Watergate.

So why do I say that new cars and new houses should be unaffordable? I recently read that the average price of a new car has now surpassed $50,000. But lots of people (including me) buy used cars, which average just over $25,000. Let’s suppose the average sale price for all cars (new and used) is $35,000. In that case, the average new car is “unaffordable” to the average car buyer, who spends $35,000. And that’s as it should be, because new cars are better than used cars.

[Technically, I should have used median car prices in this example but couldn’t find them. Also note that I use scare quotes for “unaffordable”, as we’ve seen that the term lacks a clear definition. I mean unaffordable in the sense that a $50,000 car is an unwise extravagance for an American with a median income. The median income shopper should either buy a quality used car or a small new car for no more than $35,000.]

There’s an even stronger argument for new houses and condos being unaffordable. If America is going to progress to ever higher living standards, then we need to gradually replace the housing stock with better and better homes. To some extent this can be done with remodeling older homes and adding additions. (Recently, I was startled to see how much the housing stock in older parts of Madison, Wisconsin had been upgraded since I was a child.) But mostly we improve the housing stock by replacing older homes that get torn down with newer homes that are of higher quality.

The so-called “affordability crisis” in housing reflects a lack of construction of luxury homes. If you build them they will (mostly) be occupied. As a first approximation, we consume as many houses as we build. Populists try to deny this by pointing to the fact that a few homes are unoccupied at any given time, while others are bought by foreign investors. That’s like claiming there is never a labor shortage as long as the unemployment rate is above 0%.

America has roughly 8 times as many jobs as Canada because we have roughly 8 times as many people. And that’s true even if 5% of our workforce is unemployed. Bring in 10 million more workers from overseas, and we’ll end up with roughly 10 million more jobs and still have 5% unemployment. Similarly, even if 10% of homes are empty or owned by foreign investors, if you build another 10 million homes, you’ll have roughly 10 million more homes occupied by American residents. Gimmicks like rent control and 50-year mortgages don’t solve the problem, you need more housing output.

Many cities require developers to set aside a certain percentage of new housing units for “low income” buyers or renters. These regulations are effectively a tax on new construction and reduce the output of new homes. Because output equals abundance equals affordability, housing affordability mandates effectively make housing less affordable.

I’ve never believed the claim that living standards have completely stopped improving. But you can make a reasonable argument that the growth rate of real wages has stagnated during recent decades, compared to the middle part of the 20th century. Pundits often try to explain this situation by focusing on factors affecting wages—the decline of labor unions, import competition, etc. But that’s not the main issue. Living standards depend on output.

I see two major factors slowing real wage growth:

1. NIMBYism has reduced construction of housing and infrastructure.

2. Subsidies have encouraged the production of output that is not highly valued by average people. At least 1/3 of health care and education output is (at the margin) of very little value.

Supply-side economics got a bad reputation during the 1980s because its proponents were seen as being overly obsessed with the Laffer Curve. But a true supply-side agenda is the only feasible way of improving our society. I see the center-left abundance types as trying to rebrand supply side economics, while also moving the focus away from marginal tax rates to the problem of government regulatory barriers to increased output. And that’s fine. To voters, abundance sounds better than output. And to progressives, abundance sounds better than supply-side economics.

Pundits on the left often lack an understanding of the extent to which “affordability” is little more than output. Progressives are increasingly focused on antitrust issues, but they fail to understand that private sector restraints on trade have only a trivial impact on output growth. When even the Financial Times is citing leftist myths, you know we’re in trouble:

Policymakers also need a more systemic understanding of the housing market. I was encouraged by a recent profile of New York’s newly elected mayor Zohran Mamdani, which indicated he might have a more sophisticated view than I had previously thought. In 2020, Mamdani told a reporter, “What I’ve seen in my work is, it’s not tenant versus homeowner.” The affordability crisis is, rather, “tenant and homeowner versus financial speculator and investment bank portfolio”. Housing should be about shelter first and foremost — not investors’ profits.

Even the progressives’ strongest argument—egalitarianism—can only do so much. It’s far easier to raise median living standards by raising output than by redistributing output. France’s government spends 57% of GDP while the Swiss government spends 32% of GDP. In which country are median living standards higher?

Photo by Saad Alfozan on Unsplash

I’m not sure what to say about America’s conservatives. There are still a reasonable number of thoughtful people on the right. John Cochrane clearly understands all the points I’m making here. But then you look at where the energy is, you look at the direction that once respected think tanks like Heritage are moving, and it’s easy to become pessimistic about the future.

Critics of democracy often point to the fact that individual voters lack an understanding of basic economic principles. And it is true that many foolish “populist” ideas are quite popular. But these pundits often underestimate the extent to which voters hate failure and are willing to defer to experts if they think the technocrats will bring prosperity. The Argentine voters that recently boosted Milei presumably noticed what happened in neoliberal Chile and what happened in socialist Venezuela and drew the appropriate conclusions. I doubt whether anti-capitalist populists would do well in Switzerland or Singapore. I’m not willing to give up on democracy.

And even when anti-immigrant populists win elections, they face the problem of governing countries where many people do care about abundance (including many conservative business owners.) Georgia Meloni campaigned on limiting immigration but is now discovering that Italy’s economy needs more workers, and recently approved work visas for another 500,000 foreigners over three years.

PS. Janan Ganesh has an excellent piece on Britain’s bleak prospects. Labour was elected on a promise to get Britain moving again, and once in office decided that no, they don’t wish to do that.

PPS. Richard Hanania has some perceptive observations about the New Right:

The Libertarian-to-Racist-to-Socialist Pipeline

It’s notable that when the race question in the US was thought of in terms of blacks and whites, right-wing populism supported Ronald Reagan and the Tea Party. The welfare state was seen as taking from whites to give to undeserving minorities. But as people woke up to demographic change in the 2010s — some of it due to liberal gloating in the aftermath of the 2012 election — the old arguments wouldn’t do. Immigrants usually come here to work. Some benefit from welfare, but the nativists couldn’t ignore the fact that this didn’t apply to newcomers above a certain skill level. It also for the most part doesn’t apply to illegal immigrants, who are barred from many kinds of government benefits. So if your worldview is shaped by racial resentment — and this has always been the heart of right-wing populism — then you had to come up with a new theory of economics. Before, people who didn’t work were freeloaders. Now, those who have jobs are hurting others because they’re competition in the labor market. . . .

Immigrants therefore commit harms both when they work and when they don’t. Complaints that they compete for housing coexist with gripes that they build too much of it. There’s nothing new arrivals can do to make nativists happy other than stay out. I think switching the focus on racial issues from blacks to immigrants made right-wingers sympathetic to economic statism more generally, and even more hostile to ideas like individual liberty and personal responsibility.

Here’s how many on the right view “responsibility”:

1990s: Black people becoming unemployed and dying from crack cocaine? What’s wrong with their culture?

2020s: Working class whites becoming unemployed and dying from fentanyl? China is to blame.

Here’s JD Vance:

We talk about the value of hard work but tell ourselves that the reason we’re not working is some perceived unfairness: Obama shut down the coal mines, or all the jobs went to the Chinese. These are the lies we tell ourselves to solve the cognitive dissonance—the broken connection between the world we see and the values we preach.

That’s almost perfect, but wouldn’t this be more accurate:

We talk about the value of hard work but tell ourselves that the reason we’re not working is some perceived unfairness: Obama shut down the coal mines, or all the jobs went to the Chinese. These are the lies I tell the voters to solve the cognitive dissonance—the broken connection between the world we see and the values we preach.