How much did the housing shock drive political polarization?

From Henry van Straehlen, a job market candidate from Northwestern:

This paper studies the effect of economic conditions on political polarization using micro-data on house prices, mortgages, and individual political contributions. I argue that shocks to housing wealth — the largest asset for most households in the U.S. — lead to political polarization. Using the housing market bust of 2007-2011 as an empirical laboratory, I show that negative shocks to housing wealth increase political polarization. The richness of the data enables me to use individual heterogeneity in housing location and timing of home purchase to disentangle changes in personal wealth from other factors that might be at play in determining political polarization. The effect of housing shocks on polarization is stronger during the crisis, and cannot be attributed to reverse causality or changing neighborhood composition. Survey evidence comparing homeowners and renters shows that only homeowners polarize in response to house price shocks, while renters do not — suggesting that house price shocks are not merely a proxy for other economic shocks. Furthermore, extreme politicians benefit electorally from negative house price shocks to their contributor network, whereas moderate politicians are hurt by negative house price shocks. Financial crises destabilize politics, which then can feed back into the crisis. These results provide insight into the difficulty of adopting structural economic reforms following financial crises.

Work in progress by Henry argues: “I show that when the common ownership between two firms increases through mutual fund acquisition of their stock, the firms converge in political donation behavior and lobbying activity.”


'Survey evidence comparing homeowners and renters shows that only homeowners polarize in response to house price shocks, while renters do not'

Wasn't this already mocked in the comments?

Absolutely! One needs to be very careful in examining this kind of data. What is the percentage of homeowners who were 'politically polarized' and why? Certainly those who owned their homes and were not contemplating moving would not have been impacted at all by the crisis. It's also to facile to say that home ownership is a key factor when the resulting financial crisis had much broader implications because of the collapse of equity prices which likely have a much broader impact.

True before 1980, but reagan made using houses as ATM cool, so house prices falling is like both being fired, and the bank failing and creditors taking your savings. Ie, no more money added weekly to your bank account,, higher market price, and banked "savings" being taken away.

Before 1980, you paid off mortgages, except if old enough to qualify for leftist government reverse mortgage by being old and headed to death.

Debt was for buying or building new capital assets, not for existing assets, unless you were an illegal loan shark.

This was a reaction to farmers losing farms to foreclosures circa 1930. Farm debt backed by land became debt backed building crop capital, government insured.

The 80s dismantled both regulations plus culture of becoming debt free as virtue asap.

Yes. Roundly and rightly mocked.

Has anybody thought through the implications of Vanguard eventually owning all publicly traded companies?

Hasn't hurt Japan that much to date, now that the central bank owns over 50% of all index funds and probably the stock market in Japan. Japan is the future for all stagnant, aging, closed border First World countries.

I'm not sure Vanguard is the biggest holder of equities, maybe Black Rock with all their ETF offerings is. In Berkshire-Hathaway's disclosure yesterday it noted that holdings of bank stocks increased and the company might now be one of the largest outside holders of financial companies.

This has been a common question for many years in the Vanguard Bogleheads Forum; what happens when everyone indexes?

In that world, there will be lots of opportunities for stock pickers.

Most importantly, investments in ETF's and mutual funds don't normally carry with them the right to vote the underlying shares. Those voting rights rest with the ETF/mutual fund management. There is not really any effective check on how they vote the underlying shares other than the fact that the (proxy) voting records must be reported to the SEC. So, how do those organizations holding huge numbers of voting share actually vote? A cursory or in-depth review of SEC filings will both reveal that almost without exception those mutual funds and ETF's vote with management. Jack Bogle might have a good story about how he takes the interests of owners of Vanguard's shares into account rather than the management of listed companies; however, the record doesn't bear this out. It is hard enough for a (direct) a shareholder to put resolutions to a shareholder vote; however, when the do, Bogle and his counterparts almost always vote against those shareholder proposals. A good example are the numerous shareholder proposals to require that lobbying expenses be reported. Another is the issue of managment compensation. The idea of "corporate democracy" is a total myth and it is getting worse with each passing year.

I agree with Vivian on proxy voting. Larry Fink of Black Rock has stated that they will be more aggressive in proxy voting but who knows what that means. T. Rowe Price has a statement about how they vote proxies for their mutual fund family but it's so broadly worded as to be worthless.

For my small portfolio I do carefully look at the proxy statements and vote responsibly in accord with my values but with only several hundred shares in each case it's like spitting in the ocean.

There is also an effort underway right now by the Chamber of Commerce to try to limit the effectiveness (if they are effective) of proxy advisor services.

Not mentioned yet at this blog, but housing prices have been falling since this summer. Even potential buyers (i.e., lookers) have all but disappeared. And applies across the country, even in hot housing markets. If the wealth effect is a major contributor to consumption, are we headed for a recession soon? So why the falling prices? One explanation is that potential buyers have been waiting for the election. Another is rising interest rates and buyers/borrowers are waiting for rates to fall. As to the first, did the election actually resolve the issues that contribute to instability? As to the second, do buyers/borrowers not read the newspaper: the Fed has signaled loud and clear that rates will continue to go up. Of course, it's possible that buyers/borrowers know more than the Fed and that the Fed's obsession with inflation is off base.

Well, here is an explanation: uncertainty. Wasn't "uncertainty" the explanation many gave for the great recession? Of course, Cowen presumably prefers "uncertainty", as it encourages more risk-taking and, thus, promotes economic growth. Could it be that millennials, avoiders of risk of all kinds, aren't entering the housing market because of the "uncertainty", thereby contributing to falling housing prices. Being a baby boomer myself, I'm pleased that another generation has come along that can be blamed for everything that is wrong in the world. Damn those millennials!

Hasn't Cowen linked to this study before? I believe my comment mentioned that polarization can be explained almost entirely by race (citing the recent paper by John Sides et al.), and that home ownership by whites is much higher than home ownership by blacks, thereby creating a correlation between falling housing prices and polarization.

So the black vote went from 95% Dem to 92% Dem. Polarization!

Falling home prices are filtered through a racial lens: undeserving blacks were blamed by many whites for the housing crisis. Indeed, the objection to providing assistance to homeowners (which triggered the tea party movement) during the housing crisis was mainly the result of a perception that Obama would direct the assistance to undeserving blacks. Sides, Tesler, and Vavreck, Identity Crisis (2018). Here is an interview of the authors by Ezra Klein:

I'm also getting deja vu about this link

I realize that Hillary's astonishing failure in 2016 has led everyone on the left to pursue wild theories on why people vote the way they do. And led Tyler to cite them all.

But this is just.... dumb.

Look at the imaginary world Trump saw, and campaigned on, in 2016:

My economic plan rejects the cynicism that says our labor force will keep declining, that our jobs will keep leaving, and that our economy can never grow as it did once before.

We reject the pessimism that says our standard of living can no longer rise, and that all that’s left to do is divide up and redistribute our shrinking resources.

Everything that is broken today can be fixed, and every failure can be turned into a great success.

What was broken? Nothing really, we were in a rolling recovery with increasing jobs and profits and GDP.

What's interesting to me, is that those messages are much more relevant and poignant for the block of voters he never tried to attract: the young working millennial. What do retirees care if the general standard of living increases? They're on a fixed income. Older workers are also typically making the most that they're going to make. It's only the young which stand to benefit from increased wealth equity.

So it's ironic that while it is a nice message, he made it to the wrong people.

You are right, there is a more nuanced message that while there was an ongoing recovery (and the broad labor force was growing) there were groups left behind and policies which could assist them.

"the young working millennial."

Ie, he was going to go further than Obama and get all the student loan debt off them quickly!

That's why he appointed DeVos who has delivered like three loan writeoffs to those serving in low wage teacher jobs in Trump States in exchange for student debt forgiveness....

Trump is driving a revival of union membership, taking America back to when unions were powerful and as corrupt as Trump real estate empire.

Do house price increases cause polarization too? I see a lot of young people polarized into the far-left because housing is too expensive, making housing wealth in some parts of the country increasingly a matter of what your parents own rather than what you earn.

Yeah, but it's a free lunch left very similar to the free lunch right, ie, government picked winners and losers, just different winners.

Not the left of FDR-LBJ which did wealth redistribution by paying workers to build assets by forcing workers to pay those workers when benefiting from those assets.

Remember, almost no workers paid Federal taxes directly before FDR - Federal taxes were something you chose to pay by sinning e.g. booze, smoking/chewing, or by gluttony, ie, consuming imported luxuries, wine, silk, lace.

Under FDR, almost every worker ended up paying Federal income taxes, collected passively, thanks to unelected government technocrat Milton Friedman, plus a flat tax paid from first dollar by workers alone, again collected passively and almost invisibly.

The left today has adopted the free lunch economic theory that cutting taxes or eliminating taxes will create so much growth the tax cuts will pay for higher government spending, just like the tea party, freedom caucus.

In part, more spending results from paying lower wages so more money in worker pockets will produce more consumption and thus higher revenue to fund a bigger military for the right, or free health care, on the right.

Ie, the military will be bigger by eliminating waste, fraud, abuse, creating more jobs paying more driven by the higher profits to the private firms replacing government workers.

And Bernie is promising to provide Medicare for All at 60% of current health care costs by eliminating the waste, fraud, abuse that is insurers, as if Medicare and Medicaid don't employ insurers to pay providers, create provider networks, negotiate/set prices, just like "insurers" d for employers, including government, which cover 80% of all workers.

I grew up when both the left and right knew that it took government provide housing. Ie, government needs to seize private land to build roads, utility service to vacant land, plus schools, police, fire, so developers could both build and sell housing to workers.

Today, free lunch economists argue that if you zone a forest or farm field for housing, builders can throw up a thousand homes, sell them to a thousand workers, and by magic, roads, schools, fire, police, water and sewer, will be created by invisible, and "free", hands.

I grew up in crowded schools as Ike's military industrial complex got the spend from tax hikes to build roads that drew factories and workers with families to town, and schools. Every year or two was the debate over hiking taxes for school bonds, or starting more school at 5am and ending at 8pm to support multiple student shifts. That was when HS started a 6:45 and ended at 6:15pm.

Back then, the right would have supported paying illegals low wages to do construction at the lowest cost, while the left supported high wages to support more consumer spending, more housing demand, more tax revenue.

The town I grew up in switched from leaning left to pretty far right, and the population shrank in the next two decades, which cut costs. (Nixon to through Reagan).

I've thought that the 2016 belief that "these are the worst of times" was hangover from the Great Recession. This paper supports that.
Even if the numbers were greatly improved, the lived experience had not really been processed. Leading to the self-damaging idea that all that progress should be "burned down" for dramatic change.

So, yeah.

moderate politicians are hurt by negative house price shocks.

'Moderate' politicians give you cr*p like the Export-Import Bank, tax credits for bran-muffin research and other Cornhusker kickbacks and Louisiana purchases, jerry-rigged half-measures worse than the full monty and worse than nothing, and judges like Anthony Kennedy. Hang 'em.

Nickle and dime stuff.

Not nickle and dime:

"Many companies said they'd use the savings from Trump's tax cuts to create jobs. But the 1,000 largest public companies have actually reduced employment. They've announced the elimination of 140,000 jobs — almost double the 73,000 they said they'd create."

So says the reactionary eccentric.

You say that as if it’s bad!

I see the Mercatus interns are at it again.

The suggestion that reduced inequality (via falling asset prices) creates increased polarization certainly sounds important from a policy perspective.

Many people get pissed off when they lose a lot of money.

Pissed off people say a lot of shit that pisses other people off.

Rinse and repeat.

I wouldn't be surprised if large falls in asset prices were generally correlated to an increase in the use of the F word.


How much did the housing shock drive political polarization?

I try to step back and think big picture on political polarization and it increased after the 2008 Financial Crisis. The simplest answer is everybody after 1999 was over-working themselves to higher house monthly payment and less concerned with politics.

Long term I do believe the Great Recession did have an overall effect on society although it is not to the level of Great Depression and possibly 1974 - 1982 Inflationary Recession.

1) The expectations of family formation is early 30s and we saw the drop in birth rate last year as a product.
2) I do think young people are more focused on politics instead of career. Graduating college in 1992, I do remember bouncing around a couple years in grad school and odd before focusing career in 1994. Young people take 5 - 6 years to get there.

This is beyond silly. Polarization started five decades before the financial crisis with the signing of the Civil Rights Act.

It just got worse when a black man became President.

Common theme there.

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