
MIT graduate student says income inequality is actually about housing - adidash
https://medium.com/the-ferenstein-wire/a-26-year-old-mit-graduate-is-turning-heads-over-his-theory-that-income-inequality-is-actually-2a3b423e0c#.8dd6eoir9
======
staunch
He's right about housing being the #1 issue, but it's hardly the only problem
created by America's ruling class.

I bet he's entirely blind to the fact that the only reason his paper is
getting so much attention is that he's an "MIT graduate".

Attending an elite school like MIT is not even a 1%'er thing, it's a 0.1%
thing.

There's probably some poor person, who went to a shitty college, that's even
smarter and has a better theory but we'll never hear about it. Think about
their career trajectories and the inequality of their outcomes.

Of course the 99.9% contains almost all of the smartest people, but they get
almost none of the opportunity. This elitism is absolutely pervasive in
American society.

Microsoft: "Harvard dropout inks deal with IBM"

Google: "A new search engine from Stanford."

Facebook: "The exclusive Harvard social network"

Dropbox: "Google Drive killer coming from MIT Startup".

This paper: "MIT graduate student says income inequality is actually about
housing"

Something like 95%+ of people that get into elite schools graduate. It's not
hard to graduate, it's just hard to get in, and the test for getting in is so
gameable and rigged that almost no one pretends it isn't anymore.

As long as the rich can spend fortunes buying elite credentials for their
children, we're going to have a ruling class and a worker class.

~~~
oldmanjay
Lots of assertions and anger, not much substance. About the only thing I get
from your comment is you have great antipathy for the people on top.

~~~
wfo
It's easy to take nothing from the thoughts of another when you yourself have
nothing to give.

------
nugget
Housing functions like a reverse auction. In the most HCOL areas, demand
usually outstrips supply to such an extent that prices float up to a maximum
ceiling (40-50% of avg income IIRC). Above which people's checks would bounce.
That's NYC and SF. The average person seems to simply pay ''as much as they
can afford'' for housing. In LCOL areas, it's a function of land and materials
prices, and in some super LCOL areas, where demand is flat or shrinking,
prices can even fall below this.

As most/all other areas of life experience deflation (iphones, education,
food, travel, entertainment), HCOL residents will reallocate the savings into
housing, pushing the ceiling and housing prices up. Even despite attempts to
increase supply, I think. The best solution is to redesign the economy to
enable and incentivize the relocation of young people throughout lower tier
cities and rural areas in the US.

~~~
pdonis
_> The average person seems to simply pay ''as much as they can afford'' for
housing._

And the government has made the problem worse, by skewing the mortgage market
with ultra-low interest rates and thereby making "as much as they can afford"
significantly larger.

 _> The best solution is to redesign the economy_

No, the best solution is to stop messing with it. If long-term interest rates
were set by a free market, significantly fewer people would be able to buy
homes, or at least homes of the size they're buying now in the areas they're
buying now. So they would either choose to live in less populated areas, or
they would choose smaller homes, or they would rent instead of buy. All of
those things would reduce the average cost of housing compared to other
things.

~~~
DougWebb
The people getting priced out of a housing market are not _choosing_ to live
somewhere/somehow else. They're being forced out by the wealthier people who
are bidding prices up.

For these same people, moving to less populated areas is probably not an
option because they can't afford to commute long distance to their job(s), and
don't have the kind of job mobility enjoyed by wealthier people.

They probably can't choose a smaller home, because the small home prices get
bid up along with the other homes. (I speak from experience; I recently moved
out of a 'starter' size home in the 'bad' end of town, where the houses cost
$300K - $500K even over the past few years.)

Renting instead of buying might be an option, but even there prices get bid up
in desirable locations.

Where do these people actually wind up? In _undesirable_ locations: places
with higher crime rates, more obvious poverty, worse public services, etc. And
for most of them, and their children who have to be raised in that
environment, it becomes a trap that's very difficult to escape.

~~~
pdonis
_> They're being forced out by the wealthier people who are bidding prices
up._

"Wealthier" in the sense of "can qualify for a larger mortgage". But the
ability to qualify is skewed by the fact that the money that is borrowed is
printed on the spot when the mortgage is created; it doesn't come from actual
savings. If that didn't happen--if the money loaned out for mortgages had to
come from actual savings--the market for mortgages would look very different,
which means the population of people who were looking to buy homes would look
very different.

And not just that everybody would have less buying power across the board--the
people who would qualify for mortgages in a free market would have different
financial habits. For one thing, they would have no incentive whatever to use
"creative" loan vehicles to buy more home than they could actually afford--
which is what many of the "wealthier" people who are bidding prices up in the
current market are doing.

 _> They probably can't choose a smaller home, because the small home prices
get bid up along with the other homes._

But a smaller home in a given area still costs less than a larger home in the
same area. Furthermore, in a free market for loans, where the government
wasn't printing money to finance them, smaller homes would probably be more
common, compared to larger homes, than they are now, which would reduce the
price of smaller homes relative to larger homes, over and above the general
price reduction that would take place if the government stopped printing money
for mortgages.

 _> Where do these people actually wind up? In undesirable locations: places
with higher crime rates, more obvious poverty, worse public services, etc._

This is another example of government failure. If the government spent its
resources on what it was supposed to be doing--ensuring that everyone's rights
were respected--instead of trying to run expensive and damaging experiments
with the economy, there would be far fewer locations that were undesirable in
these respects.

------
stegosaurus
This seems like an odd way to think about the problem to me.

Housing is, to a first order approximation, the only thing I spend money on.

Savings are framed in terms of 'how long could I afford the rent', or 'how
long before I could pay off a mortgage'.

Everything else is.. well, fluff. I would be happy to read books for a
lifetime, I don't need 'fancy' food, but a stable home is pretty important to
me.

A 1 bedroom apartment with a reasonable commute to my job costs £10000pa as a
lower bound. Add on the UK's equivalent of property tax and you're at 11000.

Food? 1-2K. Gas, electricity, water, internet, cell phone? 1K, maybe 1.5K. So
a combined upper bound of 3500.

The only place in which those costs would get to 100% of housing would be in a
depressed economic area. One in which most would struggle to find a job that
paid much more than minimum wage.

So the argument should be flipped, I think. Income inequality only actually
matters at all because people have to buy housing. If everyone had a stable
home then it would matter far less that other people could afford more toys.
It's an issue because having a stable base is such a useful thing - without
that problem, I don't think it matters that some are rich and some are poor,
not really anyway.

~~~
michaelbuddy
when a bunch of people have a "stable home" provided by somebody else, it
results in the extra time on the hands of surprising few to absolutely destroy
the place for everyone. Because value to people. See housing projects across
the United States for more on that.

Oh yeah the added bonus, when the place does get destroyed the inhabitants
find ways to put the blame on the providers to usurp more while taking less
responsibility or ownership over the situation.

~~~
rmxt
The story of public housing in the United States is quite a bit more nuanced
then occupants "biting the hand that feeds," so to speak. There's a history of
disinvestment and bias in the system that has had lasting repercussions
through the present day, up to and including decaying conditions.

Some reading:

[http://archive.law.fsu.edu/journals/landuse/Vol141/seit.htm](http://archive.law.fsu.edu/journals/landuse/Vol141/seit.htm)

[https://books.google.com/books?id=jjX2N9HgmWQC&lpg=PA1&ots=0...](https://books.google.com/books?id=jjX2N9HgmWQC&lpg=PA1&ots=02SnDvlpjF&pg=PA1#v=onepage&q&f=false)

~~~
sanderjd
Also, check out Show Me a Hero[0] or the HBO miniseries based on it, which is
excellent and informative while doing a better job than any book I've read at
evoking empathy with people trying to find a better place to live. Although,
I'm not sure if it's unfair to the existing homeowners, or if they deserve
their portrayal.

[0]: [http://www.amazon.com/Show-Me-Hero-Lisa-
Belkin/dp/0316088641](http://www.amazon.com/Show-Me-Hero-Lisa-
Belkin/dp/0316088641)

------
rkallos
This reminds me of an unfortunate part of history.

When Roosevelt signed the G.I. Bill in 1944, a lot of soldiers who returned
from the war were able to claim benefits in the form of tuition assistance,
low-cost mortgages and low-interest loans. Soldiers coming home from overseas
had the choice of pursuing higher education, purchasing a home, or starting a
business. Another result of the G.I. Bill were Levittowns, newly sprouting
suburban neighborhoods offering low-cost housing to these returned soldiers
($8,000 in 1950, approximately $80,000 in 2015). With the help of the
expanding auto industry and the joining of highways, people began to move out
into the suburbs and build new communities.

The unfortunate bit is that while the G.I. Bill didn't advocate
discrimination, it was interpreted differently for people according to their
race. For example; of the 67,000 mortgages insured by the G.I. Bill, fewer
than 100 were taken out by non-whites.

Now, the heavily-inflated value (example; houses in Levittown, NY are selling
for approximately $350,000) of these post-WWII homes are passed down and
borrowed against or leveraged to send the grandchildren of those veterans to
private schools and expensive universities, while many black families struggle
financially in urban sectors. The racial discrimination of WWII veterans has
been cited as a reason for the increased economic inequality and racial
tensions being experienced today in the United States.

~~~
saryant
Do you have any proof to back up your assertions?

As the grandson of a WWII veteran, they ring awfully hollow to me. I assure
you we did not live high off the inheritance of his mobile home when he passed
on.

~~~
rkallos
Sure thing.

The $8,000 figure for the Levitt & Sons housing can be seen on this ad:
[http://explorepahistory.com/displayimage.php?imgId=1-2-16F7](http://explorepahistory.com/displayimage.php?imgId=1-2-16F7)

The $80,000 figure was from
[http://www.dollartimes.com/inflation/inflation.php?amount=80...](http://www.dollartimes.com/inflation/inflation.php?amount=8000&year=1950)
. I can't vouch for its accuracy, though.

Current prices for ranch-style homes in Levittown, PA:
[http://www.trulia.com/PA/Levittown/](http://www.trulia.com/PA/Levittown/)

67,000 mortgages insured, fewer than 100 to non-whites: A book citation from
Wikipedia;
[https://en.wikipedia.org/wiki/African_Americans_and_the_G.I....](https://en.wikipedia.org/wiki/African_Americans_and_the_G.I._Bill#cite_note-2)

I didn't really explain why this figure is so astonishing, though. According
to
[http://www.shsu.edu/~his_ncp/AfrAmer.html](http://www.shsu.edu/~his_ncp/AfrAmer.html)
black people comprised around 8-9% of the US military. With that figure in
mind, an expected number of G.I. Bill insured loans to black veterans should
be around 5,300, not under 100.

Someone's master's thesis on how the Post-WWII G.I. Bill has shaped modern
homeownership:
[http://www.academia.edu/8352751/The_Homeownership_Gap_How_th...](http://www.academia.edu/8352751/The_Homeownership_Gap_How_the_Post-
World_War_II_GI_Bill_Shaped_Modern_Day_Homeownership_Patterns_for_Black_and_White_Americans)

~~~
saryant
I don't dispute your inflation figures.

But I do find fault with your conclusion. Where is the proof that the children
and grandchildren of WWII vets are living these upper class lives of private
schools and expensive universities?

~~~
rkallos
Here's a selection starting from Page 75 of the above-linked Master's Thesis,
along with her citations for the statements.

P.76: "Homeownership has numerous positive effects on children" -> Dietz and
Haurin 2003

P.77: "homeowners can borrow against their equity at favorable interest rates
in order to make investment opportunities that require substantial amounts of
money, such as home improvements, education, business ventures, or additional
properties, all investments that might provide considerable future returns."
-> Zhu Xiao Di, "The Role of Housing as a Component of Household Wealth"

"[life cycle wealth accumulation] is also largely determined by parental net
worth, which has been shown to be the most important predictor of wealth in
young adults, even over income, savings or investments" -> Conley 1999, p. 50

P.78: Mean lifetime inheritance for white baby-boomers: $125,000. Mean
lifetime inheritance for black baby-boomers: $16,000. (according to the value
of the dollar in 2000)

P.79: "Transformative assets are those gifts provided by parents to adult
children that allow them to maintain a class status that might otherwise be
out of reach. These include the payment of private school and college tuition,
tutoring and extracurricular lessons for grandchildren, gifts of big-ticket
items like appliances and furniture." -> Shapiro 2004, P. 10

Naturally, not all veterans' families share the same story. However, I think
it is hard to argue against the immense advantage of being a homeowner on
accumulating and protecting wealth, and that this opportunity was
unfortunately denied to a large number of black veterans.

------
sytelus
Article doesn't do justice to original paper. In fact I was left totally
confused what it's trying to even say. However after reading the paper, it
feels very profound. Paper basically finds a subtle but important issue in
Piketty's famous argument that people with capital would grow much faster than
rest of economy in current century than any other time (aka rich becomes even
more richer than before). This paper says that Piketty's argument is correct
only because of one component in their capital investment: real estate. In
essence, if you had invested money in anything but real estate you would have
much lower eventual return over very long term with high probability. This
even includes areas that is believed to be gold rush like technology. Not only
nothing beats real estate but the fact _only_ real estate will allow rich
people to grow fastest than any other time in history!

The consequence of this assessment is very stark: People with money will
continue to invest large chunk of their capital in real estate. The money
invested in real estate is essentially "dead" because that money is locked up
doing nothing, it doesn't work to produce goods, innovations or make world a
better place. But real estate is indeed the most rewarding thing for your
investments. So the thing is that behavior of real estate is completely
against at odds with advancement of humanity. Real estate is in essence like
cocaine of economy and there are no DEAs.

If these conclusions are right then it's huge problem. Goverments across the
world should immediately take measure to discourage real estate possessions if
you are not living there. Real estate should be placed in same category as
food and water. We don't let wealthy hog up all the food and water and then
inflate the prices for higher return on their capital. There can be
progressive tax for the real estate properties you own but don't live at.
Further, there should be national movement to aggressively create and
encourage new housing . Without these measures, our economy is living on real
estate cocaine with little productivity. I would wonder if our current limbo
state of economy where nothing grows except real estate is precisely the
manifestation of these issues.

~~~
TheOtherHobbes
You can see this happening in London, which is in the middle of a useless
government-supported property bubble.

Areas with prestige developments of > £20M houses and apartments are being
left almost empty - because they're an investment, not a home.

What you're describing would essentially be a land and property tax. The idea
is so shocking that proponents of both - like Henry George - literally tend to
be written out of economic history.

------
crimsonalucard
It's very easy to see where all the wealth is going and how and why it is
divided unequally in this county. It's a simple observation that is self
evident.

Look at yourself, the average joe. Where is the wealth you generate going?

Let's follow the process step by step.

You work for a company and most of the wealth you generate is for said
company... the company pays you a salary, lets say 10$/h. In order for the
company to afford you, you must be generating more wealth then 10$/h. You're
generating 20$/h of wealth and the company is shafting you by paying only half
of that. It's one of the ironies of capitalism... employment is usually a deal
that is unfair and weighted heavily towards the employer. But hey, it's a
freemarket... you chose to get shafted.

The rest of your money goes to things related to your survival. Unless you own
a house, then the majority of what's left will go to RENT.

So in the end, rent and labor output is what's sucking out the wealth from
underneath you. Where does this wealth go? To the owners of the houses that
are rented to you and the owners of the corporations you work for.

In short owners of both HOUSING and HUMAN Capital is where most of your wealth
getting extracted. Logically if your friends and coworkers are also employees
then the same shit is happening to them and the rest of the population of the
united states.

Simply by observing where most of your own wealth goes, you can see where all
of the wealth flows in this country and elucidate the primary cause of wealth
inequality.

The person who wrote this article seems to think that rich people invest their
wealth in something called "technological capital" which "depreciates." What
is he talking about? Does he think wealthy people are putting their wealth
into warehouses loaded with piles of smartphones and macbooks? Rich people put
their money into real estate and stocks (aka Housing and Human capital).

~~~
tomp
> employment is usually a deal that is unfair and weighted heavily towards the
> employer

I agree with most of your comment, but the sentence above is a bit of a
fallacy. Sure, the employer isn't paying you the whole of the value you
generate, but it works the same in reverse - you're getting paid much more
than you would be if you were working on your own.

Math:

X = what you can produce on your own Y = what your employer can produce
without you Z = what you and your employer can produce together

employment only makes sense if Z > X + Y. In that case, your split of Z is >
X, and the employer's split of Z is > Y.

~~~
crimsonalucard
Z is not what the employer and I can produce together. Z is what I and other
employees produce when working together. The employer itself is just a thin
layer of leadership that gets way more compensation then it deserves.

The reason why employers get an unfair share is due to strategic and organized
negotiation. They utilize the might of the entire organization itself to
negotiate salaries with each individual employee. Unions are designed to
counteract this unfairness.

------
Futurebot
Vox has a much more nuanced analysis of the finding:

[http://www.vox.com/2015/4/1/8320937/this-26-year-old-grad-
st...](http://www.vox.com/2015/4/1/8320937/this-26-year-old-grad-student-
didnt-really-debunk-piketty-but-what-he)

~~~
fernly
Thank you, that was informative. But something seems very wrong to my
uneducated understanding. Quoting the Vox writer,

>The issue here is depreciation. When a firm buys a computer, the value of
that purchase erodes with time. A $2,000 computer bought in 2012 is not worth
$2,000 in 2014. When you take that into account, business profits look less
impressive.

That the resale (or "book" or "scrap") value of a $2K laptop is small after
two years' use means nothing in practical terms. It's a significant item in
the asset-accounting for the business, sure. But the damn laptop is still
working, still being used, still grinding out Excel spreadsheets under Windows
XP, two, five, even seven years after it was bought. The department that
bought it for $2K in 2012 is, bitter employee experience proves, NOT going to
get authorization to replace it with a shiny new one in 2014, nor 2015 either.
So although the $2K capital cost of the laptop might evaporate from the
company's books, the UTILITY of the laptop remains and it replacement cost is
NOT incurred.

This I think would apply with even more force to something like an assembly-
line robot. At least my impression from seeing videos of car and motorcycle
assembly lines is that the robots and other high-tech tools are quite well
built -- better built than the average laptop fer sure -- and although they
might depreciate, they won't stop working. In fact don't they become MORE
valuable and profitable as their book value drops while their productivity
contribution remains steady?

~~~
Futurebot
You're correct that "utility"-type depreciation isn't that fast when it comes
to the day-to-day, but "business profits" don't typically (ever?) take that
into account in the calculation. So it's really two different things. As an
aside, here are the BEA's depreciation rates:

[http://www.bea.gov/scb/account_articles/national/wlth2594/ta...](http://www.bea.gov/scb/account_articles/national/wlth2594/tableC.htm)

None of the above take into account the "utility goes to zero" fact for
certain computer hardware: i.e., if a machine winds up too slow to run the
latest software because of ever-increasing system requirements, the practical
value of said hardware can go from "less than recently calculated resale
value" to "possible resale value of raw parts" or even "zero."

------
wodenokoto
Turning heads?

This message, in the form of a very similar graph, was a Reddit post a few
months ago and ensured a long discussion where people were quoting all sorts
of historical figures who claimed that land ownership was the key to all sorts
of power.

I thought it was a fairly common theory.

~~~
danharaj
A lot of modern liberalism is about hiding the brute calculus that underlies
relations of property ownership. I'd love it if Marx became mainstream again
without all the MLs and Stalinists ruining his ideas for everyone.

------
rhino369
Homes and communities are so intertwined with personal life and family that
people forget it's also a huge investment / market.

So we allow all sorts of behavior towards homes that we wouldn't let happen in
other markets. NIMBY and zoning laws are a form of collusion.

Also since the housing boom people have viewed high home prices as a good
thing.

------
krosaen
This and important issue, but is not original analysis... for instance was
discussed on The Weeds just recently

[http://voxtheweeds.slate.libsynpro.com/are-we-counting-
pover...](http://voxtheweeds.slate.libsynpro.com/are-we-counting-poverty-all-
wrong)

But it's an MIT student! OMG! Time for the front page of HN!

------
fiatmoney
In a lot of areas housing is deeply entwined with the education market.
Uniformly high housing prices aren't a problem, high housing prices and
NIMBYism in particular areas is a solution to keep out the sorts of people
parents believe cause Bad Schools.

------
jcfrei
I doubt this comes as a surprise to most economists. After all demand for
housing is pretty inelastic, universal and the supply in terms of property is
finite. It reaffirms my believe that restrictive zoning regulations are one of
the leading causes of wealth inequality in modern economies. In the Vox
article about the paper they mention that Lawrence Summers supports "an easing
of land-use restrictions" because otherwise they " [...] cause the real estate
of the rich in major metropolitan areas to keep rising in value".

------
rohankshir
So strange. this guy housed me for admitted-student-college-visit-weekend
about 6 or 7 years ago. really nice guy who had the complete genius vibe.

he told me that in high school he didn't care about anything, and then around
junior year he realized that he should give a shit, and self-studied for 22 AP
courses and got 5s on all of them. he also had research papers lying around
everywhere in his room and had also made a ton of money working at Jane Street
and said it was fun but not for him.

------
crdoconnor
This seems more relevant than ever today:
[https://en.wikipedia.org/wiki/Georgism](https://en.wikipedia.org/wiki/Georgism)

This isn't:

>Local housing boards have made it damn-near impossible to build new condos.
After much infighting, San Francisco plans on building up to 50,000 more
units. But, San Francisco’s chief economist, Ted Egan, estimates that that the
city would need at least 100,000 new units to stem increasing costs, let alone
bring prices down to something more affordable.

>If Rognlie is correct and we really care about inequality, it might be wiser
to redirect anger towards those who get in the way of new housing, rather than
rely on taxes to solve our problems.

Millionaire NIMBY homeowners in San Francisco fighting with luxury condo
developers has nothing to do with the rest of us.

There's something particularly distasteful about luxury condo developers
trying to position themselves as champions of equality while trying to gouge
huge profits from this state of affairs.

~~~
jdshutt
An important thing to note is that of those 50,000 units being built in San
Francisco, the vast majority are market rate, which are out of the price range
of most people who want to live in the city. Developers are strong-armed into
building a certain percentage of "affordable" units, but that's defined in
relation to area median income for the city of San Francisco, which is
unusually high.

Take the massive development in Hunters Point. 35% of the 12,500 units being
built are affordable, but affordable is defined as less than 150% of area
median income -- that's AMI for the entire city, not the impoverished Bayview
neighborhood the development is being built in.

150% of AMI in San Francisco is $107,050 for one person, or $152,850 for a
family of four. A new unit that's priced for someone making six figures a year
doesn't really meet the common sense definition of affordable.

And with market rate housing, a lot of it is bought up as an investment
property or vacation property for the ultra-wealthy, which means each new unit
of housing is underutilized compared to a truly affordable unit bought by
someone who lives and works in the city. If a developer builds 5,000 market
rate units, that has less of a supply and demand effect than 5,000 truly
affordable units, since they aren't even really the same kind of asset. Demand
for market rate housing in major cities is largely driven by a need to shelter
money, where truly affordable housing is driven by a need to shelter people.

This means that the statistics for San Francisco are even worse than they
look, since the 50,000 units being built will be unaffordable and
underutilized.

~~~
erikpukinskis
The article addressed this. It said estimates are that 100,000+ units are
required just to stop the inflation. So the solution is simple: zone for way
more than that. Offer financing. The ability to construct for a new high
density zoning change is a huge advantage in the market. City-financed
developments will start eating the margins on the places people are living in
now. With enough density, the cost of new housing can start to approach the
cost of construction.

There's no market reason why the floor should be where it is. It's just
artificial scarcity to benefit property owners.

------
cygx
Something I like to point out when discussing wealth distribution in the US:
[http://i.imgur.com/NRAhNYU.png](http://i.imgur.com/NRAhNYU.png)

data source:
[https://www.census.gov/hhes/www/income/data/historical/house...](https://www.census.gov/hhes/www/income/data/historical/household/2013/h06AR.xls)

------
Steko
Previous discussion:

[https://news.ycombinator.com/item?id=9263107](https://news.ycombinator.com/item?id=9263107)

------
iandanforth
Price controls would be appropriate in this situation. I'd much rather have
money in the hands of tech workers than in the hands of banks or landlords.
Rent-seeking behavior is too often allowed and ignored. The demand/price
correlation is not a natural law or a natural good.

------
x5n1
Incredibly astute observation. Housing does eat most people's income.

------
dschiptsov
It is about land ownership sinse beginning of time.

------
peter303
I look to graduate students for all my personal advice. The have such deep
experience of the real world.

------
bikamonki
An MIT degree to find the obvious? (go ahead downvote me)

