The best available fix for real wage stagnation

That is the topic of my latest Bloomberg column, here is one excerpt:

In other words, the frontier areas for overcoming wage stagnation are several-fold. First is a greater freedom to build, so that housing supply can rise and prices can fall. That also would enable more upward mobility by easing moves to America’s more productive (but also more expensive) regions. Second are steps to lower the cost of medical care through greater competition and price transparency. Third, American higher education is hardly at its optimum point of efficiency, innovation and affordability.

If those sectors displayed some of the dynamism and innovativeness of that marks America’s tech sector, the combination of declining prices and rising quality could give living standards a boost. And since rent, health care and tuition tend to be higher shares of the incomes of poorer people, those changes would help poorer people the most.

Think of it as a rooftops piece, combined with a discussion of why wages actually have seen slow growth as of late.


"First is a greater freedom to build, so that housing supply can rise and prices can fall"

Exactly what we need: more slums.

Yes we do need more housing that you might call slums.

So that is what we aspire to be: a Third World hellhole where plutocratic tyrants whip their own people!!

Why don't you go to San Francisco and see for yourself what hellhole is:

How about an unlimited amount of additional housing that YIMBY's criticize as "gentrifying?"

End all legal and illegal immigration and send all foreign workers home. Problem solved!

Yep, eliminate all property rights. Let anyone bulldoze your house to make money building a bigger one they sell at a huge profit.

I would note that California City has at least ten thousand buildable lots, but the low real estate prices annd low asset price inflation drives away all housing builders because they can't sell at huge profits.

The same is true for Detroit where probably ten thousand lots are available for prices as low as a dollar, but the prices are so low in Detroit no builder is willing to build housing for the homeless Detroit residents.

The problem is not a lack of opportunity to build, but a lack of opportunity to make huge profits by building and selling new housing that is priced higher than the most recent record sale prices generating yet even higher profits.

Profits, to remind you, is the money not paid to workers.

Bad air. No one wants to live in the valley.

What I posted at Bloomberg

"First is a greater freedom to build, so that housing supply can rise and prices can fall."

More tent cities!

More cardboard homes on the sidewalks!

Get the government out of the way of workers building low cost housing for the workers themselves to own and live in on the public common, just as Locke imagined for America almost 250 years ago!

So that it is. Hoovervilles. I guess that it is what we choose when we elected Biff Tannen president.

Time to post my idea again of the 20 new cities initiative. The basic concept is that the Federal Government selects 20 areas for new cities with land either already in Government ownership or purchased by eminent domain. The areas should have the potential for more than 1 million people and be relatively close to already established major cities. The new cities will be green powered, highly dense, laid out for optimized public transport, including fast railway links to airport and nearby cities. Minimum height is 10 story apartments, but with minimum sizes on apartments. Apartments will be allocated by lottery only to buyers under 40 years old. All apartments will be managed on a coop basis per building, with rules pre-established, but changeable by a majority of apartment owners. This will include eviction of problematic people by a super majority of the owners. Private enterprise will build the apartments, but sales will be managed by the twenty city agency. Of course, the 20 City Agency will have a sunset clause, it will expire after say 20 years.

This might seem a strange proposal from a libertarian but new housing/cities is definitely a coordination problem that needs Government support. A large scale development in an established city requires too many negotiations, and establishing a new city also requires coordination of multiple parties.

Is who is going to move into 20 new 'cities' with no people or businesses in them? And only under 40? So no grandparents to help with the kids?

Your idea is as silly utopian as anything the Communists tried.

People can already find cheap lodging far from actual cities. They don't want it or it wouldn't be so cheap.

This idea is about new cities, not a new dormitory town. So there will be offices and other big city amenities.

You can (try to) build a bunch of apartment buildings and offices (where apparently no one over 40 will be allowed to work unless they want to commute from the nearby real city) but you can't make any money doing so, because no one will be in the offices or apartment buildings.

You build your new city and then what, force Microsoft to open a data center there? Force restaurants to open there and subsidize them until enough residents show up to support them?

You're just doing a utopian thought experiment, with no real world likelihood of working.

Build it and they will come. More seriously people said the same thing about Dubai, or the new Chinese cities.

The new Chinese cities are pretty empty and hellish. As are most of the parts of Dubai they just built out of nowhere. They tried this outside of Tehran too, no one wants to live in those.

The only way to reduce rent seeking is to recreate the suburban out migration of the 1940s-50s due to the wide spread adoption of automobile. Perhaps this time with self driving cars in lanes that can move at 200 mph or smart cities with fully 5G integrated traffic control systems. I don't think the economies of scale due to productivity of talent clusters can be mitigated purely through communication technology.

Really good teleconferencing?

When did you get served your lunch, had your lawn and garden tended, your car towed, tire changed, repaird by a telecommuter?

How many telecommuters have you seen pouring foundations, framing, siding, roofing, doing finish carpentry on new houses, apartments, offices?

This idea that there is some great gulf between bits and atoms seems dumb. Some people telecommute, and even "content create," so that they can have a shop out back. YMMV.

I like this piece, especially we if do not zero in on housing (or invisible hands) as the singular answers.

In other words, the frontier areas for overcoming wage stagnation are several-fold. First is a greater freedom to build, so that housing supply can rise and prices can fall. That also would enable more upward mobility by easing moves to America’s more productive (but also more expensive) regions. Second are steps to lower the cost of medical care through greater competition and price transparency. Third, American higher education is hardly at its optimum point of efficiency, innovation and affordability.

Sure, housing, medicine, and education.

But when we do cross-national comparisons, with say Singapore, don't we see an active hand of government sometimes containing those same costs?

State capacity in Singapore is much higher, regardless of which sector: infrastructure, health, crime, corruption, education...

Healthcare is relatively easy to start with, green cards for all doctors, nurses, lab techs, orderlies etc until the wage falls to European levels.

Obviously housing is just pure rent-seeking. Remove tax free status for municipal/state bonds in areas of states that restrict housing development.

Education is mostly a signaling game, so throwing resources into it is the opposite of what we should do. Remove federal tax-free status of any private or public university in which 90% of the student body cannot pass a federally administered calculus 3 test. Make student loans to institutions that fail also dischargeable in bankruptcy.

That would probably do it.

Calc 3? I thought you wanted to increase the supply of doctors, not eliminate them entirely by shutting down every medical college in the country.

I keep asking this question and keep not getting an answer. If open immigration of physicians is wonderful, why do we have persistent differences of over $100,000 per annum between US states and cities?

For example, the average reported salary for a physician in Milwaukee, WI was $395,363. In Durham, NC it was $266,180. Or checking on some locum numbers, there is currently an offer of $210/hr for a cardiologist in Houston, TX; Dayton, OH is only offering $147/hr.

Physicians are currently free to move from WI to NC or TX to OH. Yet we are not seeing wage equalization.

And these are pretty low opportunity costs. Moving from NC to WI is a lot less costly in terms of connections to family, culture shock, etc. than moving from the UK to the US, let alone something like India to the US.

The fun thing is suppose we just imported the full European physician pay structure. The percent we pay on physician services would increase. The US has 2.6 physician per 1000 Americans. European average is 3.2. Worse, in Europe, the average physician does not pay for their medical schooling on debt (which works out to something like $30,000 per year in long term costs). And of course there are the working hours. In Europe, physicians are limited to 48 hours per week by regulation. In the US the average is well over 50.

At the end of the day, immigration as the solution seems rather dubious given how far from equalization salaries already are within the US and the non-comparability of US and EU physicians' working conditions.

Wage differences will exist under some pricing scheme and cost of living, sure. Janitors make more in NYC than Toledo. That’s not the point. Remove barriers to labor and the price adjusts to equilibrium.

You’re not thinking on the margin, Captain. And who said we’re limited to Europe?

Import as many as we need to until a Doctor in Toledo earns as much as a Doctor in a Polish suburb.

Interesting theory, except for the fact that Dallas, TX has 2% lower cost of living than Dayton, OH according to Google. Per your theory, physicians in Dayton should be paid more than those in Dallas. They aren't.

Physician salaries are determined by how many people want to move there. Dayton is popular thanks to Kettering and Wright-Patterson which have a lot of medical infrastructure that lures in dual-MD couples.

Or how about your Polish doc? Well, Kielce to Durham is a 50% increase of cost of living. Of course Polish income taxes are lower for physicians. Hours worked annually are over 20% less. Lest we forget, physician income includes a healthy amount of insurance costs (thanks to the large minority of private physicians paying for their own healthcare), so this too will be added to the Polish salaries. And then there is the whole thing where Polish docs only train for 6 years, pay a total of maybe $65,000 USD for schooling.

Actually get comparable compensation with a "Polish doc" is not going to massively decrease physician prices. You will being paying a Polish doc a premium for living further from his family. You will be paying him a premium for learning a new language at medical level proficiency (which exceedingly few ESL students have even if they study anything but medicine in English). You will be paying him the same premium to live in Idaho or Kentucky instead of California or Texas.

US compensation for docs is weird. We force docs to train for years longer than the rest of the world. We force them to pay, up front, massive tuition prices on credit. We divvy up the nature of the work based on zero-sum test comparisons. And then we have the docs train for longer at wages that often fail to meet hourly minimum wage levels and have exceedingly high burnout rates with substantial suicide risk. Once we get physicians out of training they still work more hours than those elsewhere. Unlike the rest of the world, we make physicians endure a lot more up front and then backload the total net compensation into fewer, later years.

Maybe you think all of this is silly and we could do better. And I am certain we could.

But this does not change the fact that physicians are literally leaving $100,000 per annum on the table by refusing to move between states. I know I have turned down offers that would give me at least 25% increase in real consumption potential. Yet there are a lot of things I like better about my life now that are worth not getting paid more. Why would I expect Polish docs to be different?

And again, right now there are thousands of student docs studying in Poland and a huge number of them are not even Polish ... yet they will not apply for residencies in the US. Even though they have at least a 50% chance of success. Even though they have actually studied medical English. Even though they are easily eligible for J-1 visa already. Even though they are have already moved. Why not?

There are a lot of opportunities for people to move at far lower marginal cost to themselves right now than you could ever hope for the back half of your proposed cost reduction. And even if we got down to average Polish physician wages as adjusted for cost of living ... we still would not be making even a 5% dent in medical costs.

I focus in on Tyler arguing that the way forward is to turn highly productive regions into low cost regions which are very unproductive.

This is classic free lunch economics straight out of Milton Friedman who argued getting pay raises makes you worse off because your living costs rise, especially taxes which only go to promote growth that increases living costs and higher wages. Like taxes paying for more education justifying higher wages for higher skill labor, transportation and utilities that support larger living spaces and more leisure opportunities, and better health leading to longer lives annd thus more experience justifying higher wages leading to higher living costs.

But in a break from Friedman, who argued for lower incomes to keep living costs low, Tyler's arguing for lower living costs to pay much higher wages and incomes.

Economies are zero sum. Costs minus benefits must equal zero. Wages are costs and the revenue for living costs are benefits from the perspective of the institutions. For workers, wages are benefits, and living is the cost.

Tyler is arguing that more homeless people, the people with the lowest living costs, will boost wages in the high cost cities like LA, SF, Austin, Detroit.

Free lunch economics, what HW called voodoo economics because it violated every assumption about economics from Venus to Holland to London to Scotland and Adam Smith to Keynes, then stopping at Milton Friedman.

It is not a zero-sum economy where regulation is driving up costs. The hope is that significant economy could be derived by improving the regulatory structure.

> Economies are zero sum

Wow, the 1600s called and want their economic theory back.

Tyler is not talking about homeless people, those are besides the point and hyperbolized by people such as yourself who are motivated to find criticisms with large (liberal) urban centers. We are talking about the actual living class being able to pursue economic advancement where it's available, not tent cities.

Shorter anonymous:

How do we keep rich boomer homeowners rich by keeping Hispanic students out of schools. How do we keep brown people out of my neighborhood??

It’s the opposite of Fred Rogers: how do I racistly make sure blacks and browns can’t be my neighbor?? Liberals 2020: “how can blacks not be my neighbor? Zoning !! Vote Biden!! We want segregation but with Biden!! He hates us but has traction with boomers...

heh, expoused.

I hope you aren't done clipping, Tyler. Because in what world does this response even make sense?

Well, since Tyler thinks this is a serious question, let's give it a serious answer.

Deflection by projection. What a world.

“We love minorities, but not in our zipcode.”

Yes, you’re a true paragon of virtue. You oppose black people, but only in your neighborhood! Not “in general.”

Spoiler alert: you’re even more racist than Trump

So in short, if we lower the costs of education, housing and health care people won't care if their wages arent growing? So if I am making $120,000 as a programmer in Silicon Valley I can move to Nebraska (arbitrary state choice) and still make $120,000 plus have lower costs for the things you list? I dont think it actually works that way.

No, by slashing wages to cut living costs, all wages will go up.

No, he argues you move from low productivity Nebraska where you earn $30,000 to high productive SF to live on the street in your car where you earn $40,000, thus lowering the average living cost in SF, and you get a big wage hike.

So... you care more about your nominal income than your real income? It’s more: if we lower cost of living, making 100k in SF allows you to enjoy a comparable material standard of living as if you made 100k in Austin. He’s also arguing that making it cheaper for people to move to where they’re more productive will increase productivity, and therefore real wages, in turn.

If housing, medical care and education cost less but my salary stays the same, that amounts to a substantial rise in my standard of living. Further, all three of those are making the economy much less dynamic--if you cant move where the jobs are or don't dare start a small business because you cant afford health insurance or come out of college with $50K of debt, those things limit your ability to do the things that drive economic growth in the world.

"The productivity performance of the American economy has been subpar for a long time." Compared to what? Other richest countries in the history of the world? Cuz we don't have much data on that.

Real wages actually fell in the 1970s and again in the 2000s. In the past decade, real average hourly earnings have increased 6.5%.

Healthcare costs, more competition and transparency. Yeah, right. Ambulances, E/R visits, urgent around, Tyler. Why not just see the data right in front of you: (despite the fact that you, and most working professionals, have high quality care) the US system has the worst of both worlds: high costs and poor average quality.

This is the one of these three where Tyler is simply off. Among OECD nations the US has the highest share provided by the private sector (non-OECD member Singapore is higher, but has high gov't regulation of medical care, not more "competition," and other nations with higher private share like Guatemala, not role models for anybody). As has become almost boring to hear, it is also the only one of them that does not guarantee universal insurance coverage somehow or other, even Mexico, which is second to US in private share.

So, no, while maybe some more market competition in some parts of the medical sector might help, in general we should probably move towards more state control, although it looks like the most functional systems are mixed private-public for insurance like France, not the single payer models. Of course, full-blown socialized medicine as in UK is cheaper than the others, but few general observers like the WHO rate its system all that highly.

As for housing, yes, build more, and higher ed needs to get tuition and fees down.

Emergency care and ambulance services should be heavily regulated. Life, limb or eyesight emergencies should be covered by Medicaid. If someone shows up in the ER, stabilization and immediate treatment is Medicaid. Every day in the ER/ICU is covered by Medicaid.

In a perfect world 10% of everyone’s income would go to a health savings account every year, and anything beyond that would be paid for by the government but with a 0.1% income copay for every visit. After a family reached $100,000 in savings, they don’t have to add anything.

Also surprise billing: if a person or practice charges more than the OECD average, the tax rate is 120%. Plenty of German anesthesiologists.

Why should we accept that only a few urban areas should have high levels of economic opportunity? That creates hard policy problems around housing, sustainable growth, NIMBYism, etc.

Wouldn't it be easier to find policies that would spread tech jobs, finance jobs, etc. around the country? Perhaps leveraging all these advances in telecommunication that have been made over the last few decades?

We could also eliminate the "city view" and just look at the US as a whole, as in this map.

Expanding the blue is one approach, but so too is shrinking the red.

Interactive maps like that make me regret consuming the internet primary via mobile devices. And I’m too lazy to turn on my PC.

And heads I win, tails you lose.

Yesterday I watched an interview of Gregory Mankiw by Bill Kristol, in which a big part was devoted to wage stagnation and disappointing economic growth. Like Cowen, Mankiw never mentioned the depressed level of investment in productive capital, depressed for decades, depressed even after the Trump tax cut that was sold on the premise that it would unleash an enormous investment in productive capital. In the past, investment in productive capital was considered the sine qua non of productivity growth, wage growth, and economic growth. What happened? Now, it's ignored, or ignored by both Mankiw and Cowen. Are we so drunk on tech nonsense that we can't even consider productive capital?

Housing and medical makes sense. Those areas have enormous regulatory capture.

Regarding higher ed, I think the real solution is not to make it cheaper, but to make FEWER people get worthless degrees and more people getting more useful degrees (and picking up skilled trades).

Degree in Computer Science > plumbing apprenticeship > no degree > degree in gender studies.

We need everyone moving to the left in that scale.

Way too many people following their "passion" (least effort and/or most fun). Not enough people following their contribution.

"Not enough people following their contribution."
Their contribution is the counterpart of what they are paid. Since they are being paid what (the market) deems to be fair, they are contributing what (the market) deems to be fair. That is what an exchange means.

By "follow your contribution", I don't mean "merely do your job". I mean pursue fields/jobs/tasks where you can contribute a lot (and ideally also get paid a lot).

So that is it. "The bourgeoisie, wherever it has got the upper hand, has put an end to all feudal, patriarchal, idyllic relations. It has pitilessly torn asunder the motley feudal ties that bound man to his 'natural superiors,' and has left remaining no other nexus between man and man than naked self-interest, callous 'cash payment.'"

I doubt we need more Facebooks and Juiceros. Apprenticeships and engineering courses can be a good idea. America used to build things, real things. American fortunes used to be made from real, useful things: oil, steel, cars, trains.

Used to? At $2 trillion per year in contribution to GDP, manufacturing is a whole lot of nothing.

Manufacturing has shrank in terms of employment, share of GDP and visibility to consumers but it is still quite large and important in gross terms.

And yet .... "For the first time in 26 years, no metro area saw per-capita incomes fall that year -- the latest available data -- and it was only the fourth time since 1970 that every U.S. urban region experienced prosperity."

Thanks Instapundit

Also 'The $5,003 rise in middle-class incomes is especially impressive given that incomes only rose by $1,200 in the seven years under Obama — after the recession ended.'

+1 Wages have not been stagnant under Trump. The single best way to increase wages is to reduce US corporate tax rates to levels competitive with European corporate income tax rates. Even with the recent corporate tax rate adjustments, however, the US still has non-competitive rates. Although treasury receipts increased under the first round of tax rate adjustments, another round is necessary and any potential decrease in revenue receipts should be offset with tax base expansion, for example eliminating tax exempt status for the education industrial complex and the 501(c)(3) industry.

As long as the Federal Reserve is consumed with the desire to maintain a 2% inflation rate, the American plebs will be chasing their financial tails. The inflation goal, when achieved, doesn't mean very much to management types walking away with $$$$$, it means a lot to some schlep doing a good job at something he understands but only receiving a raise when some other employer tries to steal him.

With respect to housing we need truly mobile homes. So we open up the freeways from 2 am to 6 am every weeknight for double wides to be moved without being taken apart. Divorce land from homes and let companies provide lots with pretax revenue. So in Sun Belt states Walmart or Amazon would provide workers with lots as a benefit much like health insurance. The only other thing necessary would be more charter schools so parents don’t switch schools with every move. So workers with families need greater mobility in order to have more leverage to get higher wages.

I wonder if Libertarians ever wonder why no one ever takes them seriously.

I generally always enjoy Dr. Cowen's Bloomberg pieces. But I have some concerns about this one. I understand housing and medical costs. But the part on college education, without details--and as far as I am aware he has never presented details elsewhere--sounded like when Republicans say cut "fraud, waste, and abuse", which of course means nothing.

Could Dr. Cowen use GMU -- an institution he is no doubt very familiar with -- as an example and tell us how they can improve "efficiency, innovation and affordability".

"The best available fix for real wage stagnation".
Silly me. I thought about people getting paid more. But slums work, too.

I’m not sure what specifically he had in mind, but I think of reducing direct and indirect subsidization of college attendance, and colleges will cut costs accordingly without quality taking a big hit, as it is assumed (I think correctly) that most of the cost increases have not had nearly proportional quality increases, but occur because they are subsidized one way or another.

Supposed to be in reply to RM.

In other words, cut government.

Would the story look differently if wage gains were expressed in actual dollars rather than percents? US real per capita income is about $45,000 today but only $15,000 in the late-60s. So a 1% gain today is $450, the same as a 3% gain in the late-60s. The use of percents seems to assume that indefinite exponential growth is normal, even though that kind of growth is likely impossible. The fact that the percentage rate of growth is slower today than in the past likely just reflects the fact of a larger denominator.

"The use of percents seems to assume that indefinite exponential growth is normal..."

How long have you been hanging around economists?

I think sustained tight labor markets will ultimately result in higher wages. This may require border controls, both on imports and on immigration.

In international markets, nations compete by lowering income shares to labor. Not a pretty game, and not PC to talk about.

Abolish property zoning. Other nations spend half what we do on healthcare and get the same results. Copy one of those nations

Copying another nation would require copying their populations. By the numbers, medical care accounts for maybe 25% of life expectancy. Genes and life choices are much bigger contributors. Given the US's eating, drinking and smoking habits, particularly the effects from earlier decades of such exposures and we are simply going to be more expensive. Add in the costs of having a more highly automobile dependent society and a more violent society and getting another country's outcomes with Americans is basically impossible.

Don't pick your doctor based on the health of her patients. Pick her for how much healthier they are than their friends and neighbors.

Yes, this is called "being downwardly mobile."

Boomers may not understand, but living in old, mediocre, small living spaces close to stuff so you can save on rent and transportation costs? Millennials have been doing it for a while, and it was working pretty well until urban rents starting increasing a few years ago.

Why wait for housing, medical and education? Expand the list of major cities with a $15 minimum wage. Minimum wage currently runs up to $15.00 in several cities which produce twenty percent of U.S. GDP. Address housing, medical and education in parallel.
Minimum wages: Los Angeles $14.25; NYC $15.00; Philadelphia $13.25; Chicago $13.00. Add Houston for 20% of GDP.

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