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San Francisco housing debate: A yimby responds

Phil Price recently wrote two much-argued-about posts here and here on the yimby (“yes in my backyard”) movement in San Francisco. One of the people disagreeing with him is Sonja Trauss, who writes:

Phil makes a pretty basic mistake of reasoning in his post, namely, that the high income residents of the proposed new housing move to SF if and only if the new housing is built.

The reality is that 84% of the residents of new buildings already live in SF (so they’re already spending money in SF etc.) That’s from the SF Controller’s office. Not to mention, no one moves only because they see that a new building is finished. They move for work, or family.

I’m one of the founders of the YIMBY movement in the Bay, so it’s my job to write refutations of essays like Phil’s.

Here’s the response from Trauss:

Last week Phil wrote a post [http://andrewgelman.com/2017/05/14/whats-deal-yimbys/] and a follow up [http://andrewgelman.com/2017/05/17/nimbys-economic-theories-sorry-not-sorry/]. He says he’ll “post again when I can figure out whether or not I really am completely wrong.”

The question is, wrong about what?

A few years ago I had a roommate who brought home a giant rabbit to live with us and the cat, Marmalade. We put the two creatures together wondering what would happen. The rabbit was as big as the cat, would the cat nonetheless chase the rabbit? Answer: No. Marmalade was disgusted by the rabbit. The cat crept around the rabbit at a safe distance, horrified but unable to look away from what was apparently the ugliest cat Marmalade had ever seen. The rabbit, on the other hand, did not recognize Marmalade as a living creature at all. The rabbit made no distinction between Marmalade, a throw pillow, or a balled up sweatshirt, which alarmed Marmalade highly as long as they lived together.

Marmalade was missing critical information that he would have needed to understand what he was seeing. There was nothing wrong with the rabbit at all, it was a normal giant rabbit. Marmalade thought there was something inexplicable about the situation because he started with the wrong assumption.

Likewise, Phil’s question about YIMBYs was sincere. After meandering through a mental model of how population & rents interact, he got to his point,

“Given all of the above, … Why are these people promoting policies that are so bad for them?”

The answer to “why are people promoting policies that are bad for them?” Is always the same thing – the asker has wrong or missing information about the constituency’s (1) material conditions, or (2) values or goals, or else he doesn’t understand the policy proposal or how it works.

Another clue that a question is ill-formed is if it leads an otherwise intelligent person to a self-contradictory or incoherent answer:

…So this is my new theory: the YIMBY and BARF people know that building more market-rate housing in San Francisco will make median rents go up, and that this will be bad for them, but they want to do it anyway because it’s a thumb in the eye of the “already-haves”, those smug people who already have a place they like and are trying to slam the door behind them.”

So the answer to Phil’s question lies with him, not with us – Which of the assumptions Phil made were wrong?

Basically all of them.

The first bad assumption was about the goal of the YIMBY policy program. Phil got the idea somewhere that our policy goal has a singular focus on median rents, in San Francisco. It’s never been true that our focus was only on San Francisco. One of the interesting things about our movement is that we encourage people to be politically active across city and county boundaries. When I started SFBARF in 2014, I lived in West Oakland. My activities were targeted at San Francisco, and I started the club specifically to protect low rents in Oakland.

It’s also not true that that we would measure our success by only or primarily looking at the median rent. Ours is an anti-displacement, pro-short commute & pro-integration effort, which means the kinds of metrics we are interested in are commute times, population within X commute distance of job centers, rate of evictions, vacancy rate, measures of economic & racial integration in Bay Area cities, number of people leaving the Bay Area per year, in addition to public opinion data like do people feel like housing is hard to find? Do people like their current housing situation? If we do look at statistics about rent, median is a lot less interesting than standard distribution.

Prices are a side-effect, a symptom, a signal of an underlying situation. In California generally and the Bay in particular the underlying housing situation is one of real shortage. What is the unmet demand for housing in the Bay? Do 10 million people want to live here? 20 million? Who knows, we can only be sure at this point that it’s more than the 7 million that do live here.

Because the way we distribute housing currently is (mostly) via the price mechanism, the way most people experience their displacement is by being priced out. But distributing housing stock by some other method wouldn’t solve the displacement problem.

Suppose the total demand for housing in the Bay is 20 million people. Currently we have housing for about 7 million people. If we distributed the limited housing we have by lottery, 13 million people would experience displacement as losing the lottery. If we distributed it via political favoritism, people’s experience of displacement would be finding out their application for housing wasn’t granted. Either way it doesn’t matter. If 20 million people want housing, and you only have housing for 7 million of them, then 13 million people are out of luck, no matter how you distribute it.

[If you want to get a really intense feeling for why prices are a distraction, I recommend learning to prove both of the welfare theorems. [http://www.u.arizona.edu/~mwalker/05_Pareto%20Efficiency/WelfareTheorems.pdf] Spend some hours imagining the tangent lines or planes attaching themselves to the convex set, then imagine the convex set ballooning out to meet the prices. Then read Red Plenty.]

Phil believes in induced demand, that feeding the need for housing will only create more need for housing. I don’t think this is true but I also don’t think it matters. The reason I don’t think it’s true is that if regional economies worked like that, Detroit, St. Louis, Baltimore, Philadelphia would not exist in their current state. How can induced demand folks explain either temporary regional slowdowns, like the dot com busts, or the permanent obsolescence of the rust belt? The reason I don’t think it matters is that continuous growth in the Bay Area doesn’t sound like a bad thing to me. The Bay would be better, more livable, a better value with 20 million or more people in it.

The reason the YIMBY movement exists, in part, is that the previous generation of rent advocates were singularly obsessed with prices, like Phil is. They thought, ‘if only we could fix prices, our problem would go away,’ so they focused on price fixing policies like rent control & were indifferent or actively hostile to shortage ending practices like building housing. In fact, hostility to building new housing, and insistence that prices alone should be the focus of activism are philosophies that fit nicely together. The result, after almost 40 years, is that prices are worse than ever, but population level hasn’t changed very much.

So the first answer to “What’s wrong with Phil?” is that Phil thinks prices are the primary focus of our activism, when in fact allocations are what we are interested in.

The second and third problems with Phil are assumptions he made in thinking through his toy model of the SF housing market. This chain of reasoning purports to show that building more housing in SF increases median rent in SF (but decreases it in other parts of the Bay). This is the reasoning that led Phil to think YIMBYs are pursuing policies with outcomes that are counter to our own interests. Of course, as explained above, Phil fully identified “our interests” with “SF median rent” which was already wrong.

The biggest problem with Phil’s model is “…for better or worse I am assuming, essentially axiomatically, that building expensive units draws in additional high-income renters and buyers [to San Francisco] …” who would not have lived there otherwise. The second problem is he imagines that all of their disposable income would be new to the City. Whether these assumptions are actually true or not has a huge impact on the conclusion Phil reaches.

It happens all the time that people make axiomatic assumptions about things they think they can’t know, in order to eventually reason to the outcome that they want. This is a perfectly fine activity, but reasoning from a guess about a state of the word, to the outcome one already believes isn’t social science. It’s rationalization.

Whether N new housing units actually results in N new high income people spending new disposable income in San Francisco is an interesting research question. I would love for Phil to pursue it. I would recommend talking to demographers, economic planners and econometricians.

If pursuing the data seems too labor intensive, then Phil can try to assume the opposite of his axiom about the necessary demographics of population growth, and see if he can still reason to his desired conclusion. If he can, that result should be published at Berkeley Daily Planet, which is a blog for anti-housing ideology.

Alternately, Phil could abandon this particular line of investigation altogether because it’s not relevant to the initial question. We’ve already established that prices aren’t the fundamental focus of YIMBY activism, and Marmalade wasn’t looking at a grotesque cat, but an ordinary rabbit.

I hope you feel your mystery is solved Phil. Next time you have a question you should ask your local YIMBYs at http://eastbayforward.org/.

In my own neighborhood in NY, I’m a yimby: a few months ago someone put up a flyer in my building warning us that some developer was planning to build a high-rise nearby, and we should all go to some community board meeting and protest. My reaction was annoyance—I almost wanted to go to the community board meeting just to say that I have no problems with someone building another high-rise in my neighborhood. That said, much depends on the details: new housing is good, but I do sometimes read about sweetheart tax deals where the developer builds and then the taxpayer is stuck with huge bills for infrastructure. In any particular example, the details have to matter, and this isn’t a debate I’m planning to jump into.

P.S. The cat picture at the top of this post comes from Steven Johnson. It is not the cat discussed by Trauss. But I’m guessing it’s the same color!

100 Comments

  1. Sonja trauss says:

    Standard deviation*

  2. I’m very sympathetic to Trauss’ points. Regular readers of the blog will know that I harp on dimensionless ratios a lot. Rent/Income is one such ratio, and it is the more important parameter compared to simply Rent. I mean who cares if you have to pay $10,000/mo for rent if you are making $100,000 a month or a million a month? $10,000 only seems like an enormous rent because incomes aren’t that high. I always think Japanese prices seem way way too high, and the stuff my grandparents told me about where they’d go to a movie theater for a whole day for a nickel… way way too low. But that’s because CostOfGood/Income is fundamental, and CostOfGood by itself is meaningless.

    It’s clear to me that Phil got the motivations wrong, and I think he’s even acknowledged that in the follow-up post.

    One thing that I am getting mixed feelings about in Sonja’s post is that there is an attitude of “prices don’t matter” or “we don’t care about the price” and I think that’s a politically savvy way to be for Sonja because residents LOVE their rent control and don’t want to talk to anyone proposing to eliminate it, but from an Economics perspective, prices have mattered a LOT.

    Rent control created the problem Sonja is attacking, full stop. In fact Sonja acknowledges this with “In fact, hostility to building new housing, and insistence that prices alone should be the focus of activism are philosophies that fit nicely together.” What she means is, rent control ensures people don’t build rental units.

    Rent control makes it a TERRIBLE investment to build rental housing. In Berkeley as a landlord, your real rent (Rent as a fraction of cost of CPI basket) goes *down* in time until your renter moves out or dies, by law, you can raise rents by a factor of half the percentage increase in CPI. Under those conditions, no-one builds rental properties. (See http://www.sf-planning.org/ftp/files/publications_reports/2014_Housing_Inventory.pdf look at net building rates in SF pre 1999 dot com boom, it was down in the 800 units range) But, Rent-Control is a classic case of concentrated harm, diffuse benefits. No one cares about building owners, and there are too few owners to vote against rent control policies.

    People have built quite a bit of for-sale housing in the bay area, especially in the 2005 boom times, but most of it is pretty far out, Livermore, Pleasanton, etc. In closer, such as SF, or Berkeley, the existing density is high enough that to add units you mostly need to build something like apartments or condos. And yes, the anti-building crowd is all over those meetings arguing against approval. But you know what? Over the past 3 decades, there have been WAY WAY fewer developers clambering to build rental units than there would be in the absence of rent control (and I’m speaking more broadly than just SF, including Berkeley, Oakland, Emeryville etc). Now apparently in SF in the last 20 years units don’t have rent control attached, and you know what? They built a lot more in the last 20 years than they did in the previous 20 years. That really IS very basic Econ 101, if building something gets you more money than otherwise, then more of it gets built than it would have otherwise.

    So, go Sonja, get some housing built, but damn it’d be great if you also get the rent controls ended ASAP. But good luck with that. It’s probably the hardest economic issue facing regional politics.

    • David D says:

      Due to Costa Hawkins, rent control only applies to buildings in California built before 1995, so most of the comment is irrelevant. Rent control is already dead for new construction and has been for decades. Don’t blame rent control for the paucity of new construction.

      • Costa Hawkins prohibits “strict” rent control, so you can reset to market after someone is forced to move out by their death, and it abolishes rent control on single family houses and condos, but local rent control laws can fully apply to lifetime tenants even in brand new apartment buildings

      • Also, several Bay Area cities just passed new rent control laws last Nov that *will* apply to buildings built after 1995. It’s just that after someone moves out or dies you can reset the rent. So rent control is *far* from “dead”

        • David D. says:

          You are incorrect about what Costa Hawkins says.

          1. It is true that CH outlawed strict rent control in all forms for all buildings. It also outlawed moderate rent control for all construction built after 1995. “It also exempted certain kinds of dwelling units from “moderate” rent control — notably, … units with a certificate of occupancy issued after February 1, 1995.” https://en.wikipedia.org/wiki/Costa-Hawkins_Rental_Housing_Act

          2. As a result, the “new” rent control measures passed recently in e.g. Mountain View only applies to buildings built before 1995:
          “Only older apartments are covered by rent control. Under California’s Costa-Hawkins act, apartments first occupied as of Feb. 1, 1995 are exempt from rent control measures.” https://www.mv-voice.com/news/2017/04/05/judge-oks-roll-out-of-rent-control-in-mountain-view

          Rent control is very much indeed dead for new construction in CA and as I said has been for decades.

          • You left out the part about 1 applying only to separately alienable units. Namely condos and single family homes. Apartment buildings don’t apply as I understand it. The Mt view ordinance may have extra restrictions above Costa Hawkins. I’ll read up on it but the larger point still holds. Building would have been much much higher between 1980 and 1995 if rent control weren’t there. In SF after 1995 indeed huge increases did occur

            • gdanning says:

              Daniel, I think you are misreading the law. See CA Civll Code 1954.50 et seq – Costa Hawkins defines “Residential real property” as “any dwelling or unit that is intended for human habitation,” but exempts separately alienable units, real property built after 2/1/1995, and real property which “has already been exempt from the residential rent control ordinance of a public entity on or before February 1, 1995, pursuant to a local exemption for newly constructed units.” (CC 1954.52) So, the ban on rent control re new construction applies to apt buildings, but not to single-family homes and individual condo units. http://leginfo.legislature.ca.gov/faces/codes_displayText.xhtml?lawCode=CIV&division=3.&title=5.&part=4.&chapter=2.7.&article=

              • Thanks, you’re right, and the Wiki page is incorrect. The statute reads:

                “(a) Notwithstanding any other provision of law, an owner of residential real property may establish the initial and all subsequent rental rates for a dwelling or a unit about which any of the following is true:

                (1) It has a certificate of occupancy issued after February 1, 1995. …”

                So yes, I did misread it (or rather, while on my phone’s tiny screen I read the Wiki page and it incorrectly strongly suggests that the 1995 date only applies to separable units), and yes, I see that builders got what they wanted and owners of existing housing just have to take it in the shorts.

                But also note, nothing in the law prevents local groups from forcing builders to accept rent control type restrictions “voluntarily” (ie. in the CC&R) And *affordable housing restrictions* or the like are very much like rent-control. From the same statute:

                “(b) Subdivision (a) does not apply where the owner has otherwise agreed by contract with a public entity in consideration for a direct financial contribution or any other forms of assistance specified in Chapter 4.3 (commencing with Section 65915) of Division 1 of Title 7 of the Government Code.”

                And presumably that also applies to any subsequent owners through transfer via the CC&R.

                Nevertheless. The fact holds that after 1995 a lot more building *did* occur, and in the period 1980 to 1995 very basic economic theory suggests a lot more building *would have* occurred if the rent control wasn’t in place. And, given the law, there will be no conversion of existing pre-1995 large houses to duplex rental units, or creation of in-law units, or the like in SF or other places where rent control still applies to those units. So lots of possible projects that don’t involve large apartment towers etc won’t occur…

                Rent control created the mess, and the elimination of rent control on new construction in 1995 is not a sufficient relaxation to undo the mess, though I agree it helps! Thanks both of you for straightening out my understanding of the law.

              • Also I note, from the Wiki:

                On February 17, 2017, California Assembly Members Chiu, Bonta and Bloom introduced AB 1506,[12] a proposed bill to repeal the Costa-Hawkins Rental Housing Act. Given the preemptive effect of Costa-Hawkins, a repeal would leave the regulation of residential rental pricing entirely to local governments.

                Which to be honest is something I would certainly be expecting to have to deal with as a builder. These people do multi-decade net present value calculations, and they certainly consider the possibility of law changes, so some of this uncertainty is built-in to the sale price of new construction.

    • Jonathan (another one) says:

      “It’s probably the hardest economic issue facing regional politics.” Water is right up there as well (!) in the West.

  3. Jonathan says:

    While I mistrust any analysis that begins by claiming to state what a cat thinks, I have to say that arguments like this are similar to guessing what a cat thinks. There’s a philosophical point in there, something akin to Plato’s Cave in which we guess at what the cat is thinking (which isn’t the same as it being both dead and alive, thank heaven).

    Here’s an anecdote. I live in a neighborhood but when development comes up the topic becomes who gets to define the neighborhood and how. As in I live in x normally but when a building is proposed behind my neighbors, the neighborhood becomes any structure in the immediate area that is significantly smaller than proposed. Across the street from the proposed are 3 larger structures, including one about twice as tall (an ugly, institutional mid-rise) but they’re not the neighborhood. People want to control definitions to benefit themselves so neighbors are also concerned about a potential development on one of the main commercial streets – which is for that proposal now ‘the neighborhood’ – though if that’s the neighborhood then the bigger buildings are the neighborhood. It gets odd: there will be disruption from construction in our neighborhood … except there was a much larger building constructed 2 short blocks away, which is in our neighborhood except when it isn’t. So of course my neighbors are complaining to the larger ‘neighborhood’ that we should revise our zoning code because the deciding authorities don’t listen to the ‘neighborhood’.

    This has mathematical meaning: there is leakage from every definition of the set, something that is common because when we reduce data to some sort of point we’re actually stating – often much more loosely than we think – a scalar that represents a complex matrix so any set is drawn from an interval which is smoother and more continuous than any reduction we can manage. And I believe we often miss an essential point that the leakage, the possibility that this is included or not depending on need, on perspective, can be a statement of low reliability, low repeatability; if you think of the processes by which you decide ‘this is in or out’, these can be very sensitive to changes in ordering, in differing gaps in ordering, etc. so they can flip from in to out and vice versa very easily. In the case of SF housing – or development in my neighborhood – the answer is beats the bleep out of me and any step we take is just as likely to be wrong as right. I think that’s important: we need to recognize more, IMO, that some questions are so easily flippable from 1 to 0 or 0 to 1 that we should stop deluding ourselves that ‘this is the answer’.

    Take development near me. If we don’t build, given the demand pressures of location, etc., that would seem to make existing housing more valuable. And that would mean wealthier people would buy in. And as costs rise in our community, only people with higher income, as opposed to illiquid worth, could afford to live here. But if we build new, new costs more and that means people with more money or people reaching more move in. And more density also means more people literally in the market and that may increase demand simply because more people in means more spots that can be filled and thus more potential presented to the external world. And new has a spillover effect in which people upgrade, in which people buy because they see potential worth creation through renovation, etc. and that means building new increases density but also increases the money in the community. It isn’t that we end up in the same place but that we don’t go in two entirely different directions because we don’t control the market and this is not a closed system (see entropy and the idiot arguments that evolution can’t happen because …). I sometimes joke the solution would be to take areas like mine or SF or the Upper West Side and randomly build utter crap that occasionally falls down in order to ‘balance’ the desirability of the neighborhood with downsides, by which I mean no one has found a way to control leakage, whether described as an externality, as entropy, as complex scalars, as associative sets over an interval, etc.

    Or much shorter tl/dr after the fact: the problem is NP. (And it is not only NP but any algorithmic solution is temporary, which is a separate issue.)

  4. David says:

    As an outsider without a stake in this, but an interest in the logic, I have some reflections on this. My summary would be that Phil and the YIMBY’s are having a “non-argument” in which they agree on much without knowing it, and don’t have much basis for the areas where they disagree.

    As far as I can see, the initial post – if stripped of speculation over motivations and other issues – suggested that new market housing would, at least marginally, increase rents broadly such that other, poorer occupants faced greater pressure to move into the city. So pricing is relevant if it is affecting displacement, which does seem to be relevant to the YIMBY movement. Therefore, the objection that it’s incorrect because it is focused on price seems to misapprehend the issue – price is purely instrumental to a question of displacement in Phil’s thinking, and as such, cannot be answered by “it’s not about price”.

    I don’t see how it’s helpful to cite Rust Belt cities as undercutting a general theory of induced demand for housing, as it is pretty clear that the original post spoke to Bay Area conditions only – if Phil’s argument doesn’t rest on being generally true, it’s not meaningful to find geographies where it isn’t true. Things may be different in San Francisco, and that’s the topic of investigation.

    And similarly, it doesn’t seem to matter if a sufficient volume of housing construction would overcome this marginal effect. It could certainly be true that the “induced demand” process that Phil identified only holds true for the next 500,000 units built at market rates, and then the increased supply will cause rents to lower and reduce displacement. The YIMBY movement may be motivated to achieve large volume increases in housing, accepting limited displacement in the short-term to correct the issue more robustly eventually. That is fine and logical, but then it should probably be stated.

    The only argument I find convincing is the idea that building new, high-cost units would not change the amount of money being spent in the city. If empirically, this is not true (or not to a significant extent – e.g. those moving into the city or moving up and being replaced in almost-as-nice stock already spend most of their income in the city), then it becomes hard to believe that the model applies. As neither side seems to have much data on this issue in the Bay Area, it is not clear how this detail of the dispute can be resolved.

    Overall, this whole debate feels like a lot of sound and fury rather than an effort at reasoning toward learning. Perhaps, most notably, that is a comment on how much Phil’s imputing bad motives to the YIMBY movement, rather than just asking about whether a particular model of new housing worsening the displacement situation through price effects might be true and inviting YIMBY folks to explain how they address that concern, has derailed what could otherwise have been a useful dialogue.

    • Phil says:

      David, you have stated some things very nicely.

      Thank you for emphasizing that I am not making the general claim that providing market-rate housing causes the lower end of local housing prices there to move up. I do not make that general claim, indeed I disavow it. What I think is that in the conditions of the San Francisco housing market, building market-rate housing in San Francisco will cause the lower end to move up. I think many claims that I am obviously wrong, or that I don’t understand even the most basic economics, are based on the inappropriate application of a model under which the current spatial and statistcal distribution of housing prices would not have arisen in the first place. Detroit, St. Louis, Philadelphia… I don’t know enough to comment authoritatively about these housing markets but I doubt regulations are keeping them as far from free-market equilibrium as has been the case in the Bay Aea.

      I agree that if the amount of money spent in SF doesn’t strongly depend on the income of people who move there, my conceptual model is wrong and my argument collapses. I think this is an empirical question. Actually, I think the whole thing is an empirical question. Nobody seems to disagree with the concept of induced demand, indeed it is a major force in ‘gentrification’ in general. What is disputed is whether the increased demand for housing in an area due induced demand is greater or less than the decreased demand for housing in the area due to providing one more house. I don’t doubt that usually the answer is “no”. But I note that some economists who have said this (in comments on my previous posts) have hedged: “it’s unusual for such second-order effects to be larger than the first-order effect”, that sort of thing. “Unusual” is not the same as “impossible”. To me, the conditions of the SF housing market, in which new market-rate housing rents to very wealthy people on average, seem to be the conditions when this unusual phenomenon would occur. Indeed I believe, or at least strongly suspect, that this is the case.

      I agree that my speculation on the motives of YIMBYs was wrong. I apologized at the top of my second post. Going back and removing those comments from my original post won’t help. I’m afraid we can only move forward from where we are, not jump to the state we would have been in if the past had been different (much like the Bay Area housing market!). I apologize again, for all the good that will do.

      • Phil, induced demand is very similar to the phenomenon that pumps up stock bubbles and Tulip Mania and soforth. In those cases people really want something, and that makes the price rise, and then the fast rise itself makes it desirable to buy more of them so that people will in a short time get rich.

        Of course, eventually people begin to think that maybe you can’t get much more expensive, the fast rise slows, and as the fast rise slows the demand falls off, the stinky stuff hits the whirlygig so to speak.

        In that case, at least in the short run, demand is not just a function of price, but also dprice/dt. In your example, demand for housing is not just a function of price in an area, but also dIncome/dt. People imagine that in the short term future there will be a job for them to earn a bunch of money doing and so they can afford to pay more now.

        One thing to note is that because eventually the stuff does hit the whirlygig, bubbles are a *dynamic* process, and in the long term the equilibrium is always well lower than the peak. Standard economic supply/demand equilibrium can’t possibly work when demand isn’t a function purely of price but also of the rate of change of something.

        • Also note, the time scale for which people consider things to be virtually as good as getting them “today” is in some sense the meaning of the interest rate. If you offer to give me 1 dollar at time t, I will think of it as basically exp(-rt) dollars today. When r ~ 0, if you think your income is going to go up a bunch in a relatively short time, you will treat it virtually as if it had already gone up.

          Now the perniciousness of holding interest rates on loans low and then funneling money into the Tech Industry that promises amazing flying cars, fusion electricity, robot maids, and cheap laboratory grown beef for all a few decades out, is that at r=0, exp(r*20) ~ 1 so people can treat it almost as if it had already happened.

          Of course, it’s all pie in the sky bullshit, but it doesn’t stop a dynamic asset bubble occurring in tech stocks and housing markets, and it’s exactly in that dynamic distorted bubble thinking that you’d expect induced demand to act.

          So, it’s clear why the Rust Belt doesn’t have induced demand, there’s no Bayesian expectation of a bright white-hot future to borrow against at zero interest rate.

        • Carlos Ungil says:

          “induced demand is very similar to the phenomenon that pumps up stock bubbles” … “the fast rise itself makes it desirable to buy more of them so that people will in a short time get rich”

          That may apply to real estate prices. But if higher rents make renting more desirable leading to even higher rents only in the sense that a higher price for frappuccinos may make them more attractive allowing SBUX to raise prices.

      • Sonja trauss says:

        It would definitely help to remove them. They’re wrong,

        Re: induced demand being a Bay Area only phenomenon doesn’t make sense. Is social science a science? Does it look for laws of nature that apply to social phenomena generally?

        • Suppose I had an oracle that told the future perfectly and it definitely predicted on March 18th 2018 Google and Facebook and Uber and whatever else all implode in a massive fraud scandal with outright lying having been going on regarding their actual incomes and soforth. The value of all of the 20 largest tech companies drops to 1/100 of their current value. The S&P 500 drops to 0.4 of its current value. Furthermore, banks implode and under Trump’s control the FDIC doesn’t make good on any cash held over the ~$100k limit, so vast swaths of SF Bay tech bubble cash disappear forever. In an effort to avoid a currency debacle, people dump dollars as fast as possible, while Bitcoin and the Chinese Yuan go through the roof. Next, given that the Fed has completely floored it hard with respect to the interest rate for almost a decade, you will find that there is basically NOTHING they can do to keep the SF Bay or any other part of the US from crumbling into chaos. Things look like Venezuela for a while, and violent crime erupts in the streets of san francisco as people literally loot other people’s houses to eat their pets.

          Is it a law now that if I believe in induced demand under current conditions, that I have to believe in induced demand under those conditions? Obviously not.

          But man, that’d make a great movie script!

        • David says:

          Laws of nature can easily apply in selected circumstances and still be general. For example, various birds migrate south from Canada in September. This does not mean that birds must migrate south in September from Argentina, or from Ecuador. Having conditions under which a law applies is still science, and still general.

          Induced demand in the Bay Area is not challenged by lack of induced demand in the rust belt, though it’s certainly fair to ask why he thinks the Bay Area is unusual enough that it does apply (I think Phil laid that out pretty well in his post).

          • Sonja trauss says:

            Phil didn’t make any arguments about why induced demand should apply in the Bay but not in other places.

            Maybe we are talking about different things. I understand ID to be a theory that “nothing draws a crowd like a crowd” with emphasis on _nothing_. That demand for housing is independent or mostly independent of the local or national economy. That building housing, on its own, will make people move to the Bay – not jobs. Or that the existence of people in a certain place will cause more people to move to that place, at an increasing rate, irrespective of whether there is anything about that place that is attractive (like a productive industry, natural resources, advantageous location).

            • He did actually it had to do with the new inhabitants having v high income and being willing to pay for lots of services above and beyond rent.

              • Sonja trauss says:

                What about that argument indicates it only applies in the Bay Area? That was a general argument that if true should apply equally everywhere.

            • Phil says:

              Sonja I tried to make clear in my original post that I think the difference between the income of the newcomers and the income of people already in SF would be very high. I think that’s true in SF because there’s an unusually high premium for living in SF, combined with housing restrictions that have prevented much new housing being built for a long time. In the Bay Area this is further exacerbated by the fact that surrounding cities have also had restrictive policies. Lots of wealthy people have chosen t live as far out as Walnut Creek or north Marin who I think would happily move to SF if they could find a nice spacious sunny place for just a bit less than such places are currently going for. The spatial and statistical distribution of incomes in the Bay Area is very far from the hypothetical free market system.

              I think the last sentence above is one thing everyone agrees on.

              So, no, I am not saying that induced demand exceeds the effect of building new houses everywhere. I don’t even think it’s true everywhere in the Bay Area.

              • Sonja trauss says:

                So you’re not making an induced demand argument at all, you’re saying there is unmet demand.

                Yeah there is unmet demand definitely lol that’s why we are pro-building. The Bay would be better off if those people from Walnut Creek or Marin moved into SF because if they’re high income they’re probably driving.

                As a practical matter though, “spacious and sunny” is not how I would describe SF housing.

              • Phil says:

                No, I am making an induced demand argument.

                There are two effects that work in opposite directions: (1) adding a new unit tends to reduce housing prices (the “law of supply and demand”), but (2) induced demand tends to increase housing prices.

                We are confidently told, and I believe, that in most real-world circumstances the first of these effects is bigger than the second. But in SF, new market rate housing is quite expensive. There is, as you might put it, “unmet demand” for expensive housing. I think this is the right circumstance for the second effect to be bigger than the first.

              • Sonja trauss says:

                Your example isn’t of someone getting the idea to live in SF _because_ the housing was built, that would be induced demand – someone who has no desire to live in SF, no thought of it, no reason to do so until the housing it built.

                Your example is of someone who would like to live in SF, but can’t (or won’t) because of prices/budget constraint. That’s unmet demand.

                If you really think you are talking about induced demand then can you give an illustrative example of it?

                Now – our program of building housing, for your actual friends, it sounds like will neither induce nor meet their demand, because it sounds like your friends have a preference for suburban style living. As long as their priority is living in a low density zone, then they will have to live some distance from the Center. No more suburbs in San Francisco is one of our mottos. Building to meet demand in the Bay is going to mean a lot more apartments.

  5. Will says:

    Andrew, I’ve had a similar experience with neighbors protesting a planned high-rise (and I think we live in the same neighborhood, so it might even be the same one!). I live directly across the street from where it will be built, so people seem mainly concerned that it will cast shade on our gardens/lawn, and possibly also that this will negatively affect property values, available parking, etc. So I’m probably at ground zero for the protestors. I’ve seen the stated justifications for opposing the high-rise evolve to concerns about the “historic character of the neighborhood” and lack of affordable housing in the new building, both of which seem more than a little cynical to me considering that we live in tall, ugly buildings, and that relatively recently the co-op voted to change from having low maximum resale prices to market rate.

    • Kyle C says:

      I don’t live in Manhattan anymore, but I love it and might return, yet I know that, by all logic, in 100 years Manhattan should be built up to something like the density of Hong Kong. Build, build, build, I’m serious.

  6. Joe Wolf says:

    From Sonja’s response:

    ” … The reason the YIMBY movement exists, in part, is that the previous generation of rent advocates were singularly obsessed with prices, like Phil is. They thought, ‘if only we could fix prices, our problem would go away,’ so they focused on price fixing policies like rent control & were indifferent or actively hostile to shortage ending practices like building housing. In fact, hostility to building new housing, and insistence that prices alone should be the focus of activism are philosophies that fit nicely together. The result, after almost 40 years, is that *prices are worse than ever, but population level hasn’t changed very much*.

    For the extreme version of the concluding point, look south.

    Population of San Mateo County, between San Francisco and Silicon Valley:

    1990 Census – 650,174
    2000 Census – 708,272 (up 9% from 1990)
    2010 Census – 719,951 (up 1.4% from 2000)

    The wealthy Peninsula towns have been much more efficient/ruthless than SF at shutting out The Other. Shame on them.

    • Phil says:

      I think shutting out “The Other” is not the goal, just an inevitable consequence of the goal. Shutting out people of a lower economic class isn’t their aim. What they want to do is to preserve their quiet neighborhoods of single-family homes, and this has the consequence of shutting out people who aren’t as rich as them. (And not everybody who lives in San Mateo County is rich — plenty of non-rich people who bought homes there twenty or thirty years ago are still living there).

      I’m not saying there aren’t classists. I’m not even saying the people of San Mateo County shouldn’t be ashamed! Perhaps they should. But I think their goal isn’t to “shut out The Other.”

      This reminds me of the discussion about ‘intent’ that took place on this blog six years ago.

      • Sonja trauss says:

        Intent in politics is irrelevant. For that matter also in life, especially once the outcome of the behavior or policy is known. It’s plenty obvious by now that the outcome of anti-building policies is to shut out the other. Given that, anyone who continues to advocate anti-building is morally responsible for that outcome.

  7. Lord says:

    A more cogent case. There are many reasons to support more construction that don’t involve lower prices. It is better to use them than cases that can’t be made.

  8. Matt says:

    So, can someone explain to me what it means to say “Suppose the total demand for housing in the Bay is 20 million people” without mentioning a price?

    • I think this is shorthand for “at the current market price”

    • Ok, going back to the actual wording of the article, I’m in agreement with you, that’s a confusing thing to say. But I will try to interpret it as generously as possible.

      We know that lots of people would like to live in the SF area more than lots of other places, all else equal. Many people may be failing to come to SF Bay not because the prices are too high, but because the supply of housing isn’t there, and because the supply of housing isn’t there, prices are increasing dramatically. They are not in equilibrium. More specifically, it takes time and effort to move, and you need a place to stay and a job, and so even if you think you’d like to go there at current prices, and you think it’s a good idea to look for jobs there, etc it will take you some time, and in the mean time, the price rises fast enough that you’re priced out before you can arrange to move…

      Now, in this scenario, if we could somehow hold prices fixed and just make lots of houses at some very fast rate, we could imagine that the equilibrium would occur after a while where people get their act in gear and find that job and call those movers and identify one of the new houses to live in etc… at 20 million people.

      It’s a thought experiment, but it gets at the importance of *dynamics* in this market.

    • Sonja trauss says:

      What’s the confusion? The meaning is straightforward.

      If you want something- a fresh pressed juice – but then you see it’s $10.50 and you say to yourself, “the f I will spend $10.50 on a juice.” It’s not the case that you don’t want it. You do want it, and if the clerk says, suddenly, “sale on this juice!! It costs $2.50” then, since you want it, you buy it and have it.

      It’s true that from a store’s point of view, it’s hard to see unmet demand. Do the people passing by the shop only want soda? Are they not thirsty? Or do they want juice, at a different price? The store can’t tell. But unmet demand being hard to see doesn’t mean it doesn’t exist. People manifestly continue to want or not want things, independent of price.

      • Sonja, how many people want to live in san francisco when the city gives you free rent and $100k/yr income just to live there?

        • Sonja trauss says:

          Why are you introducing a salary just to live there?

          • Matt says:

            He’s highlighting the absurdity of your claim that you can talk about demand for living in SF without specifying prices. Honestly, it’s surprising that can you be in charge of the YIMBY movement and think this way. If you talked to an economist, they likely wouldn’t understand what you mean when you say “unmet” demand. There is no such thing if prices are free to adjust.

          • Because it makes the “price” negative and I was hoping you would realize that demand at negative price would be very much larger than 20M and then be able to clarify what you were thinking when you said what Matt quotes

            • Sonja trauss says:

              Definitely demand would be larger than 20 million if you got a salary to live in the Bay. If we lived in centrally controlled economy, where rent was free and the central planner designated the Bay as the area with the quantity of interesting, comfortable and high social status jobs that it has, in addition to the level of cultural amenities, access to the ocean & culture of acceptance of alternative lifestyles, my guess is that between 20 and 40 million people would put in applications to be transferred to the Bay. But that’s just a guess. The actual number is irrelevant.

              Matt you should read a very famous book called “the general theory of Employment, Interest and Money,” or if it’s too long for you, at least read a book review:
              https://en.m.wikipedia.org/wiki/The_General_Theory_of_Employment,_Interest_and_Money

              • Perfect, so you’re claiming that there’s a demand for 20-40M people to live in SF *at zero price*.

                Now, my claim is that this demand is probably upwards of 6 billion. I mean, most places are more expensive than zero, and SF is hardly a place to hate. The population of the world is 7.2 Billion, why should more than 17% of the world dislike it so much they need to be paid a negative rent to consider living there?

            • Sonja trauss says:

              It won’t let me reply to your comment at the bottom:

              I dont think it’s 6 billion because the scenario is that there is a centrally planned economy, which means that the price to live *everywhere* is zero, because there are no prices.

              In that case, believe it or not, there are in fact many many places all over the world that all different kinds of people find attractive. There are other centers of economic activity and culture and there are quite a few places that are far more beautiful. There are also billions of people that don’t speak English and don’t care to learn. There are people that think their home culture is superior to any other and have no desire to leave.

              In any case it doesn’t matter. As long as we agree that the # of ppl that want to live here is more than the amount that live here now, then the decision about whether to build any given new housing proposal is clear – if it adds residential capacity, then yes, build it. That’s all we need to know for the decisions in front of us.

              • No, it matters, because *the number of people who want to live here* is *not* a NUMBER, it’s a function of the price. And the price is what makes it so we don’t need to run a lottery, and we can’t build apartments without paying for some stuff to build them with, and even if we ran a lottery…

                You know what? Some people will win the lottery to live in Punxsutawney PA, and they’d rather live in SF, and maybe someone in SF would want to live in Punxsutawney because then they’d be near their sister… and so they could trade… if only there were a way to organize things around trade but after winning the lottery it’s pretty much static isn’t it… maybe we could have an intermediate stable good that is currently accepted everywhere as a way to defer choices and facilitate trades involving multiple exchanges…

                I give up. I just, I can’t do it anymore, not right now anyway.

              • Glen M. Sizemore says:

                Daniel said:

                “…maybe we could have an intermediate stable good that is currently accepted everywhere as a way to defer choices and facilitate trades involving multiple exchanges…”

                GS: Yeah…damn good idea! But what? If we lived in operant chambers we could collect illuminated LEDs that could be “exchanged” for a variety of other things that have actual biological importance…such a stimulus would be a conditioned reinforcer but would not require specific conditions of deprivation and satiation to function as a reinforcer…a conditioned generalized reinforcer! I know! We could have small pieces of metal or slips of paper that would “acquire” reinforcing efficacy by virtue of their use in exchanges…nah…it would never work…for one thing, those that are able to acquire a bunch of the stuff could exert behavioral control over others, possibly to their (the controlees’)detriment. But…no one would use the stuff for their personal aggrandizement at the expense of those with less…would they?

                http://europepmc.org/backend/ptpmcrender.fcgi?accid=PMC2741768&blobtype=pdf

                Sorry…couldn’t resist…

      • Matt says:

        You need to look up what a demand curve is. This is nonsense. If you aren’t willing to pay for it, then you don’t want it. By this logic, you see no difference between someone willing to pay 100$ for a juice, and 1$ for a juice? The guy willing to pay $100 doesn’t “want it” more, in your world? You can’t detach demand from the price. I think what you are thinking is “suppose that price was equal everywhere in the US, how many people would want to move in to SF?” But even then I’m not sure that makes sense or is even worthwhile thinking about.

        • Sonja trauss says:

          If you’re right, then why is there a displacement crisis? Why would anyone ever say anything is “too expensive?” If something being expensive makes a person not want it, then why is congress debating health care? Why do we have welfare or social insurance programs?

        • Sonja trauss says:

          Oh yeah re: your two juice guys.

          The $100 guy might want it more, but if his cash wealth is more than 100 times the cash wealth of the $1 juice guy then the $100 he pays for the juice is actually less, from his pov, than the $1 price.

          For a more practical example, if someone taking home $2000/ mo paid $1000/ mo to live in SF, that could be evidence that they want to live in SF more than someone taking home $10,000/ mo who is paying $3000/ mo rent.

          Or it could be the case that the $10,000 would pay $5000/mo if he had to, but found a good deal.

          I hope that helps explain one reason you can’t just look at what people pay, but also how what they pay compares to their overall budget.

          I feel like you’ve never maximized subject to a budget constraint before.

          • Matt says:

            Fine, let’s do away with the word “want”, and just talk about demand. Demand is defined by the number of people willing to pay at a given price. To talk about demand without specifying a price seems very odd. I’m not saying it’s the only relevant factor, but it’s pretty relevant.

          • Matt says:

            Also, “I feel like you’ve never maximized subject to a budget constraint before.” – a bit ironic coming from the person who just said we can talk about demand without talking about prices, no?

      • Matt says:

        Define precisely what it means to “want” something in your world.

      • Martha (Smith) says:

        “But unmet demand being hard to see doesn’t mean it doesn’t exist. People manifestly continue to want or not want things, independent of price.”

        This seems to oversimplify reality as I know it — we don’t necessarily continue to want or not want specific things; our wants often change with circumstances or are dependent on experiences. For example, someone might want to live in San Francisco at a particular time, but can’t afford it, so settle for living somewhere else — and then find they love the place where they ended up, and lose any interest in moving to San Francisco.

        • Sonja trauss says:

          Oh it’s absolutely true that people are very good at adapting to their circumstances. In fact, sanity requires it.

          It is also manifestly true that people have desires that they can’t presently or perhaps ever fulfill given their budget constraints. That’s why displacement is such an intense political issue. People want to continue to live in certain neighborhoods, and if rent is too high for them to be able to do that, they become angry. The rent precluding the option doesn’t make them want it any less, at least in the short term, as you point out. In the long term, healthy people manage to find happiness wherever they are.

          I don’t think that the incredible ability of the human psyche to be able to eventually tolerate a wide variety of outcomes is a good reason to not attempt to improve outcomes where we can. And I also think it’s important that even if eventually people can settle in & accept their circumstances, It takes some amount of time, and they experience stress in that interim.

          • Martha (Smith) says:

            I agree that “the incredible ability of the human psyche to be able to eventually tolerate a wide variety of outcomes” is not “a good reason to not attempt to improve outcomes where we can”, but there are always the questions of whether or not outcomes are really improved (e.g., are the “improved outcomes” the ones that best mitigate displacement) and “at what expense?” In particular, displacement is something I would like to see reduced (ideally, eliminated — but that is regrettably very pie-in-the-sky). But, to the best of my understanding, I’m not convinced that the “Yimby” or other “growth” or “development” proposals I’ve seen are very good at reducing displacement, and they often bring costs such as incrased environmental problems and reduced quality of life (e.g., destruction of existing communities; I have in mind, for example the “gentrification” that is going on in East Austin, seriously eroding the cohesion of the African American and Hispanic communities there.)

            • I think it makes sense to step back from the problem of “displacement” and think more about the bigger problems that lead to displacement.

              The cause of displacement is differential economic growth and opportunity amongst people. If prices double for everyone and wages double for everyone, price/wage stays constant, and no one needs to move out of their house. But if prices double and wages rise only in one small slice of the economy, then the people in that slice out-compete everyone for resources and they get whatever they want, everyone else has to suffer.

              Now, what is driving differential growth in rents in SF? My model for that is very simple, The Fed buys 3 or 4 trillion dollars in bonds from banks, and manufactures new money in their electronic accounts (called quantitative easing). Banks briefly consider lending to everyday people to buy houses, and then after 2010 they decide it makes more sense to lend to venture capital and soforth. Furthermore the extremely low interest rates this whole thing causes drive the discount curve way out into the future, so that any pie in the sky possibility to eventually produce huge profits… looks as good as if it were already in your pocket. The result is, price/earning ratios on tech stocks that promise amazing futures move into the 30 to 50 year range (and yes, price/earnings is in dimensions of [time] because price is dollars and earnings is dollars/time) footnote*. In essence this means that all of us who are dumping money into our 401ks hoping to retire one day, are giving it to companies without really expecting to get anything back in terms of dividends etc for 30 to 50 years. Now since even a 20 year old is going to retire before 50 years, this is honestly a bad idea. But it’s basically free money for tech companies.

              Tech companies pay tech workers, a tiny slice of the US, and finance companies, who borrow at zero price and lend at 3-5% pay finance workers, and employ around 5% of the US population. Tech concentrates in SF and some in Seattle, and Finance concentrates in Manhattan. Notice that these are the two real estate markets we’ve been discussing the most.

              So if you want to eliminate displacement and decohesion of american communities, the place to look is not necessarily “more building” but rather “stop simply printing out and giving money to finance who loans it at ridiculously low rates to tech and tech venture capital”

              Note, it was Tech mania in the dot-com era that made us print money which got us into the Mortgage debacle, and then, the mortgage debacle got us into the current Tech Debacle. Once the current tech debacle crashes, what do we do next?

              There are reasons to print money after the housing debacle. If quantity of money declines, prices of goods decline and holding cash becomes a way to get rich! That leads to what happened in the Great Depression. So we don’t want that.

              What else can you do? My own personal preference is to simply give out a universal basic income to everyone with a social security number. Forget buying bonds from finance companies. If you want to manufacture money, then give it equally to each person in the US. The reason this is a good idea is basically information theoretic, it diffuses knowledge about demand throughout the economy, and creates liquidity in the entire market for production of what *people* care about, not JPMorganChasigroupFargoofNewYork

              Pushing real estate “development” is a natural narrow response to a housing crisis caused by a much deeper money crisis.

              * A selection of P/E ratios as of today off finance.google.com
              FB: 38 years
              MSFT: 31 years
              GOOGL: 32 years
              BIDU: 50 years
              BABA: 50 years
              QIHU: 36 years
              TWTR: Losses
              Uber: Not yet IPOed but loses 2 billion + per year

              Compare to finance which is getting the QE government funds directly:

              C: 12.4 years (citi)
              WFC: 13 years (wells fargo)
              JPM: 13 years (JPMorgan)
              PNC: 16 years (PNC Bank)
              BK: 14.6 years (Bank of NY/Mellon)
              MS: 12.6 years (Morgan stanley)
              BLK: 20 years (Blackrock)

            • Sonja trauss says:

              Not building can’t prevent the kind of gentrification you’re talking about in East Austin.

              Building near job centers should be better for the environment. If you’re talking about building sprawl, then, yeah, that’s environmentally harmful, but the point of density & infill is to make sprawl less necessary.

              The question when you’re thinking of building or not building is always, “what’s the alternative?” If the potential residents of the new building will move into existing housing in a low income neighborhood, if the building isn’t built, then it’s better to build it. If the alternative is they’ll move into sprawl, then it’s better to build it.

              • ‘The question when you’re thinking of building or not building is always, “what’s the alternative?”’

                Yes, this is a great question in all of economics! Because there is no absolute, it’s always tradeoffs.

                If the potential residents of the new building will move into existing housing in a low income neighborhood, if the building isn’t built, then it’s better to build it. If the alternative is they’ll move into sprawl, then it’s better to build it.

                You say this as if it were a fact of life, but as the great Jeff Bridges said: https://www.youtube.com/watch?v=XVCtkzIXYzQ

                I note that in all the options you consider, the conclusion is “it’s better to build it”

                Are there any circumstances where you think it’s better not to build?

              • Martha (Smith) says:

                Sonja: You’ve given one question to ask when thinking of building or not building. There’s another that’s often relevant when talking about gentrification (and about the Austin situation more generally): What will happen to the people who are dislocated in order to build? In some cases, they will end up living under bridges, or sleeping in homeless shelters on nights when they can make it to the line before others do.

                And there’s another factor at play in Austin: Explicitly encouraging new companies to locate here — and focusing on high tech companies that recruit mostly people who want high-end housing.

              • Sonja trauss says:

                Martha that is a good point. In SF we have already made it illegal to tear down existing multifamily housing in order to build more housing – and multifamily includes duplexes! So I forget that not all cities have already put in this policy.

                I definitely suggest that reformers in Austin and everywhere institute a policy like this one.

                Even in land limited SF we have found that by upzoning owner-occupied single family zones, disused light industrial, one story commercial strips, and making more efficient use of parking lots there is plenty of potential zoned capacity without also having to tear down existing multifamily housing.

                The problem is political. Although the gold standard for development without displacement is allowing owner occupiers of single family housing to tear down their own house & rebuild a small apartment building in its place, that proves to be the most difficult zoning change to make. That said, reformers in Seattle & Vancouver are especially having success in this area. The results in CA are very uneven.

      • Phil says:

        I think the differences here are semantic rather than conceptual.

        I like Sonja’s juice example. I see the juice as having a certain benefit to me (delicious and nutritious!) and also as having a cost to me ($10.50, are you out of your fricking mind?). Changing the cost doesn’t change the benefit. In Sonja’s parlance, how much I “want” the juice doesn’t depend on the price, but there is only a certain amount I am willing to spend in order to satisfy that want.

        It seems some of you are interpreting “want” in a different way. You’d say that if I’m willing to spend $2.50 on the juice, but not $10.50, then I want the juice at $2.50 but not at $10.50.

        How about this: the perceived value I have for the juice does not depend on its price, but my willingness to buy the juice does depend on its price. I think we all agree on that?

        I think that when people say “I really want to live in San Francisco, but I can’t afford it” they mean something like “the perceived value I have for living in San Francisco is very high, but the price of living there is even higher, so I won’t or can’t pay it.” I think this is a perfectly reasonable thing to say (in either phrasing). I certainly would not say that “everybody who wants to live in San Francisco is already living there”, which would seem to be the logical conclusion of the interpretation some of you would prefer!

        • There’s always a tradeoff between juice and all the other things you might get (a smoothie, a bottle of water, a pack of gum, an AK47… whatever) there are literally something like 10^15 goods or services you could consume today.

          At zero price, you would consume some quantity of basically *all of them* *and a pony*.

          Wanting something in economics always means *at a price* because if it were free you wouldn’t need to trade it off one thing vs another.

          • Phil says:

            Again, you’re talking about the meaning of the word “want.”

            Sonja (and I) would say that it doesn’t matter how little or how much the juice costs, I want it the same. What changes is my decision on whether to actually buy it. The “want” stays the same, but the cost/want ratio depends on the cost.

            You (and Matt) would say that you want the juice at $2.50 but not $10.50.

            In normal speech the definition of “want” is a bit fuzzy. Really it can have any interpretation between the two given above. I think people usually mean something like “if conditions were slightly different from what they actually are, I would buy it”, which is neither the one nor the other.

            You seem to say that economists use a definition of “want” that means that if you “want” something you are willing to pay the price for it, and if you don’t pay the price this indicates you don’t want it. I won’t say that definition is wrong but it is in conflict with common parlance. An economist might say “everybody who wants to live in San Francisco already does”, but nobody else would.

            It’s not unusual for terms in specialized areas of study to differ from their plain-english meanings. Statisticians have “significant”, physicists have “spin”, I guess economists have “want.”

            • The thing is want is free and unlimited. Absolutely I want to travel the world living in one enormous beautiful historic palace after another with an Entourage and a helicopter and nannies, and fine single malt scotch and a ubiquitous gigabit network connection *and a pony*.

              Want is irrelevant to economics in exactly the way that pork is irrelevant to kosher cooking, it’s just not part of the question. Demand isn’t the same as want but it *is* an economic variable precisely because it’s affected by price.

              • Corey says:

                Well, eventually you’ll face opportunity cost trade-offs with your time budget… but yes, absent certain complications related to existing as an embodied being, I want everything if it costs nothing.

              • Come join me on our 150 ft sail boat with crew in the Bahamas, we can discuss it over a dinner cooked by Fritz the chef from Rex Stout’s Nero Wolfe novels. And I’ll throw in a ride in a submersible and a couple of cases of Pappy Van Winkle’s Family Reserve to take back home.

              • Sonja trauss says:

                How is “want” irrelevant in economics? What do you think a utility function encodes? ?????

              • Sonja, want is unlimited. No amount of economic activity will ever give me “everything I want” so I need to decide which are more important. A utility function encodes “preferring one set of things over another”. Price is the means by which that becomes computationally feasible, as dollars are exchangeable for anything. So the question isn’t “do you want x” its always “do you want x more than whatever else you would do with the money x costs” do you prefer x to all other y you could get for p dollars

              • jack pq says:

                I think Sonja & Matt are both right: part of the disagreement is about what is lim–>0 D(p). Matt is right that Demand is always a function of price. (For non-econs: demand is a function. If you mean a number, that’s quantity demanded at a specific price.) But Sonja is right that there is unmet demand, and moreover there is no reason that lim–> D(p)=+infty. Yes it could be +infty. But many demand functions used in the urban econ literature are such that this limit is a finite number, and not just because of the finite population of Earth. Most people on Earth could not move to SF if they wanted to, even for free rent.

              • jack pq: whether the limit of the demand at p = 0 is 6 Billion or 40M is actually irrelevant to the question though, because the cost of making even 40M homes is enormous, and so no one is ever going to do it for free without a political dictator going all “Joe Stalin” on the whole situation.

                What is relevant and pointed out by ZC below: http://andrewgelman.com/2017/05/25/san-francisco-housing-debate-yimby-responds/#comment-494146

                is the quantity that we could make at current demanded prices… but that’s only relevant if that demand stays constant, as you filled in denser and denser whether demand would rise or fall depends also on whether wages or expectations for wages at least are rising enough to make up for the fact that the amenities are disappearing (believe me the traffic in the bay area is WAY worse now than in 1995, so the amenities do disappear).

                All of these questions are like the difference between doing differential equations and being able to describe what would happen for very very small changes in the variables, and having a complete fixed function, and being able to describe what would happen no matter what the input variables are.

                Far away from the achievable changes, it doesn’t matter what the function looks like theoretically, and my worry is that Sonja is taking “how many people would want to live in SF if it cost nothing” as an important input to the political movement she is involved in.

                One problem with building the crap out of the area is that the demand is (my opinion) primarily driven by Fed inflated BS Tech Bubble. So if in 9 months that crashes, in 3 years we could have enormous empty towers full of unfinished “tech apartments” etc. It happened in 2008 in areas where building was going crazy, it could happen again easily.

                From an efficiency standpoint, the first thing to do is dramatically *relax* rent control (say a state level law allowing landlords to adjust prices by change in CPI + 7 percent). This would avoid the problem of people occupying way more housing than they would at market prices. At the same time ramp up the allowable building, and let the prices set the efficient allocation. If there is still enormous demand, THEN build.

            • Corey says:

              Phil, implicit in your notion is the price at which a person is indifferent to the exchange of the money for the thing. You’re not actually achieving any distance the notion of demand as a function of price…

              • Phil says:

                Corey, I am not trying to get away from the notion that demand is a function of price!

                I’m just responding to the argument Sonja and Matt were having — maybe still are — about whether there is a distinction between things you want and things you are willing to pay for. In common parlance, this distinction exists: you can want something without being willing to pay for it. If someone says “I want a Tesla, but I can’t afford it”, I know more or less what they’re saying. I certainly don’t think they’re talking nonsense. But Matt seemed to be saying that that statement is nonsense.

                I’m not disagreeing with any of the notions, in other words. I’m just suggesting that they find other language to describe the notions, since they seem to be wrangling about the definition of “want” rather than discussing their substantive issues.

              • Right, “I want a tesla” means “there exists a price greater than or equal to zero at which I’d decide to buy a Tesla”. If the price is below zero, it means “You’d have to pay me to take a Tesla” meaning “I don’t want it, you’d have to give me something in exchange for the service of taking the Tesla off your hands”

                So, when Sonja says “20M people want to live in SF” she’s implicitly comparing to “price zero” and then changing the subject of saying “in an ideal world where central planning exists and nothing costs anything anywhere” which is totally changing the subject. In our actual world, if SF socialized all the housing and widely disseminated the fact that you could apply for a lottery ticket to get a free infinitely long lease on one of those houses, I guarantee you more than 20M would apply. Like I said, 6B is probably closer to the truth.

                So, I feel like I’ve gone as far as I can, Sonja is correct that we need to build more housing, but basically by accident, she seems to be in a fantasy world by the way she’s reasoning about it.

                The REASON we need to build more housing is that *the cost of building it is less than the rents people are willing to pay to get into it*

                until that equilibriates, build!

              • Andrew says:

                Phil:

                I agree. I don’t want a Tesla at all! I mean, sure, I guess I’d take a Tesla if it were free, or given to me below market price, because then I could sell it. But that doesn’t really count: that’s just saying I want the money. I don’t actually want the Tesla: if I had it, I’d just sell it or give it away.

              • Phil says:

                Andrew,

                I probably have all of the details wrong — hey, I am famous for having no memory, I’m lucky to know this story at all! — but you can correct those. We were walking home from high school one hot day, and I said “I could kill for a Coke.” We were walking past that Lord of the Flies diner, the one that grudgingly gave you a tiny dixie cup of water when you asked for some water, and you said “if you really wanted to kill for a Coke, you probably could!”, so that gave us something to talk about while we walked. The funny thing is, I might have the roles backwards: either of us could have said either of these. I might also have the location wrong. And the circumstances. Perhaps none of it is all true, but it’s truthy enough.

                It’s a bit like Galileo. You know, the guy who dropped the cannonballs from the Leaning Tower of Pisa; the first person to suggest the earth orbits the sun; the guy who said “eppur si muove” when condemned by the Church. He didn’t actually do any of those things, but if someone lists them when asked who Galileo was, it would be absurd to say “I guess you don’t know.”

        • Glen M. Sizemore says:

          “I think the differences here are semantic rather than conceptual.”

          GS: Conceptual issues *are* semantic issues. Always be afraid when someone tells you that an issue is “merely semantic.” That almost always hides “assumptions” (are they “assumptions” if the person is unaware of them? – hence the quote marks) that the speaker cannot, or does not want to, address…anyway…maybe I’ll have something to say about “wants” later…that issue seems to keep coming up…go figure!

          • Martha (Smith) says:

            “Conceptual issues *are* semantic issues” — Agreed.

            “maybe I’ll have something to say about “wants” later…that issue seems to keep coming up” — Yes, that is something that needs to be discussed.

            • Conceptually, from an economics perspective. If I want something, it could mean that I wish the price would come down to the point where I would be willing to buy it. In other word my demand function is positive for some values of price smaller than the current price. If I demand something it means the price is already low enough that I’ll buy it today, my demand function is positive at today’s price. If I don’t want something, I won’t be checking its price because my demand function is zero for all prices.

              As far as I can see, that pretty well captures the common usages.

              • Martha (Smith) says:

                This seems like an important distinction to make; the labels “want” and “demand” seem to fit well.

              • Glen M. Sizemore says:

                Hi Daniel. It is interesting that you claim (if I am understanding you correctly) to give an “economic definition” of “wants” in terms of demand functions…although you seem to be making a distinction be “wants” and “demand” (an ill-chosen term on the part of economics, in my opinion). But…they (“wants” and “demands”) are just two points on an individual’s demand function. Of course…you did introduce “wishes.” Not clear where that fits in…

                One thing that you are quiet on is whether or not the term “want” is a useful scientific term – that is, I am not sure whether or not you are eliminativist concerning “mental entities” or if the demand function is, as it were, an “operational definition” of “wants.” But I don’t think I’ll wind up saying too much more on that topic – but I have not yet discovered what I have to say here…
                The reason I piped in here (it’s always to make trouble, in general, though), when I wasn’t even following this thread that closely, was the persistence with which “wants” kept coming up, raising both philosophical/conceptual questions and related empirical/theoretical questions WRT “wants.” That’s the sort of thing that is interesting to me – you know, since “wants” are so closely tied to ordinary language terms relevant (in a manner of speaking) to the principle of reinforcement (you know, as in “operant behavior”). Other such ordinary-language terms that “point to” the Law of Effect are “intent” and (relevant to econ) “goods” to name a few. One point here is that, if “wants” are relevant to economics (and here you mentioned an individual so it is micro), even if only in an eliminitivist sense, then behavior analysis is relevant to economics. I would say, in fact, that microeconomics is, or really should be, a specialized area of behavior analysis. Anyway, I had planned on saying a lot more but this portion of the thread is old, and I’ll just pass this along for what it is worth…

    • ZC says:

      She mentions the welfare theorems in her post–a charitable reading is that it’s the population of people who value SF housing at or above cost. (i.e., everyone who it’d be efficient to allocate SF housing to in a 101 S-D framework)

      • This seems very charitable given that she (he?) Invokes a centrally planned economy above. But I agree that this is a meaningful way to describe “unmet demand”. Equilibrium is not achieved instantaneously. Right now the reason people aren’t building is regulation not prices for materials and labor

    • gdanning says:

      +1

      This entire conversation would benefit from a little more clarity re definitions. In standard economic parlance, “demand” is the range of quantities of an item that consumers are willing and able to buy at different prices — eg, 100 coffees/day at $2.00, 75 at $3.00, etc. “Quantity demanded” is the amount demanded at a particular price. So, when one says “demand for housing is 20 million,” that must refer to quantity demanded, not demand.

      However, the claim, “total demand for housing in the Bay is 20 million” might be meant as a policy claim, rather than a purely economic one. For example, if we want a public policy that 20-somethings and older can each can afford to live in their own apartment rather than in their parents’ house, and we define ‘affordable” to mean X percent of income, then it might make sense to say “total demand is 20 million” – ie, there are 20 million people who would like to live in their own apartment in the Bay Area, at a price equal to X percent of their income or less. If there are fewer than 20 million housing units in the SF Bay area, then that means we should either build more units or adjust our policy goals (eg: maybe living at home is not so terrible after all). Now, some might say that the Bay Area would be a terrible place if 20 million people lived there, and maybe that is true. But that just shows that there are competing policy goals. (which is of course a big part of the NIMBY v. YIMBY issue).

  9. NatashaRostova says:

    For what it’s worth, I loved Phil’s original post. It’s often demoralizing reading this blog and seeing all these brilliant statisticians/physicists etc, and bemoaning a world so unfair to not give me that level of analytical talent. But every once in a while when they try to analyze an area where I’m an expert, I see that I have some abilities that they don’t! With exception of our dear author, who seems capable of everything.

  10. jack pq says:

    @Corey @Phil above: (could not reply directly)
    Demand is a function of price, while utility is a function of what I consume. You could write a demand function such that lim–>0 D(p)=+infty, but that’s not necessarily the case. For example, my demand for strawberries increases as price decreases, but at price zero my quantity demanded could be finite because I don’t have the time to eat infinity strawberries. Or, because I reach a satiation point. Relatedly, my utility from consuming strawberries is increasing and concave in strawberries consumed, but it’s reasonable to assume past a certain point it becomes decreasing.

    • Phil says:

      Thanks Jack.

      I’m not defending an absurd statement like “total demand for housing is X” with an implied independence on price! I also understand that you really want to have one place to live, but once you have one the marginal utility for a second one is diminished (plus, of course, since you are paying for the first one you have less money to spend on a second one). Got it.

      All I was trying to do was to curtail what seemed to me to be a silly discussion hinging on what it means to “want” something. One contingent was using “want” in its plain-English sense, the other in a slightly different sense, and I was just trying to point that out. Sorry I got involved!

      • No, Phil, your point was well taken. The concept of “I want a Tesla” translated (by me) into “there exists a non-negative price at which I would buy a Tesla” and at least for me that kicked off a better understanding of some of the confused ideas floating around this thread. Don’t apologize, you were right!

    • Strawberries aren’t a good example compared to houses, once planted in fertile soil, they manufacture themselves at rates beyond our control (controlled by weather and sunlight etc), so it’s possible to have so many that you’d give them away, and the demand function at or very near zero price has *some* real-world relevance. New houses on the other hand typically cost something like GDP/capita times 2 to 10 years to construct (today ~100k to 600k) and so they aren’t ever going to be given away at price 0, especially in CA, not even close.

      The only question of real-world relevance is what’s the demand in the vicinity of construction cost. now suppose construction costs (Materials, Labor, and Interest on construction loans, as well as ongoing property management costs) are equivalent in present value to $2000/mo rent. In SF you could build quite a bit and be able to rent it at above $2000 *under current market conditions*. But in 2010 that wasn’t the case, my data on rents in SF: http://models.street-artists.org/2017/05/17/injecting-data-into-the-sf-rent-discussion/ in the title of the graph you’ll see median rent was $1150

      Now according to CPI $1150 in 2010 is $1289 today in terms of nationwide average consumer costs. So I ask you, suppose that in the next 1 to 2 years SF declines to its 2010 conditions, where building a $2000/mo apartment building over the next 9 months gets you $1300/mo in rent and a nice bankruptcy.

      In the midst of rapidly rising prices driven by the Fed giving out free money, Economic theory would give you an expectation of a lot of non-productive investment based on a false sense of assured profit in the future. Some amount of caution is warranted because the medium term future of SF (1 to 4 years) most likely doesn’t include a lot of $7000/mo rents

      If you were some kind of massive real estate developer (like KB homes or something) and you wanted to analyze the prospects for building in SF with a high quality Bayesian model of future possibilities, you should definitely include in your model the possibility that SF rents decline into the $1300 range and stay there for a decade, while interest rates on your variable rate loan rise from say 4% to 8% and you take an enormous bath.

      Speaking of that, here’s Tokyo Land Prices and Tokyo Condo Prices from a big report on Tokyo. One thing that is clear is that a lot of building occurred in Tokyo (see condo supply) but also, prices fell from 6000 to 4000 units (on right axis). Now if cost of building is 5000 units, it looks like you should build a lot at 6000 units prices but after you’ve allocated a lot of resources to get it done, if prices are 4000… you walk away in the middle of construction.

      It is very hard to figure out what efficient allocation of resources to SF building (ie. avoiding wasted materials, avoiding wasted labor building abandoned apartment towers…) would be in the presence of rent control on 80% of apartments in SF, *and* a tech bubble. But it’s particularly misleading to imagine what the demand function would be at zero price and think that this should guide how many units you build.

      • Jack pq says:

        @Daniel,
        Here and earlier you confuse supply and demand. How strawberries and houses are produced are a question of supply. They have nothing to do with demand. As well earlier you refer to cost when saying my point about demand at price zero was irrelevant, but once again, cost is a supply concept not demand. It’s important to distinguish the two concepts before getting into more serious modelling.

  11. Sam Bailey says:

    I’m disappointed the hedging phrase “…absent certain complications related to existing as an embodied being…” doesn’t show up more often in academic journals.

    People seem to be using the phrase “induced demand” in different ways. It looks like it was originally meant to explain why building more roads doesn’t cut down on congestion. People have an almost perfectly elastic demand for driving, so if you cut the “price” (here commute time), more people will move in until the congestion is as bad as it was before. (As far as I can tell, this itself isn’t a bad thing–the commute time is the same but now more people can drive to work. The bad part is, of course, the cost you pay to drive isn’t the actual cost of building the road, not to mention the externalities associated with more cars on the road.)

    In Phil’s case, though, it sounds like the thing he is worried about is not perfectly elastic demand for housing but that once people move into the new housing, they will want to hire more masseuses than are currently in San Francisco. The “induced demand” in this case is the demand for housing from the masseuses. It sounds like Daniel is arguing “induced demand” is a bubble phenomenon, where people want to move in because they see prices rising, and this itself makes prices rise even more. I’m not saying these phenomena aren’t real, just that I don’t understand how they connect with each other or with the traffic sense of induced demand.

    • Yes, perhaps you’re right that the terminology is problematic. Note that it was Noah at Noahpinion who brought the “induced demand” terminology into the discussion: https://noahpinionblog.blogspot.com/2017/05/the-nimby-challenge.html

      I wasn’t trying to argue for a different phenomenon than what Phil was suggestion, just trying to argue that the mechanism of Phil’s “demand for masseuses” is basically a situation in which dIncome/dt is quite high for masseuses (or whatever) and this drives them to demand more housing in SF now because it’s where all the hottest Tech-Masseuse *growth* is, and that wages themselves need not necessarily be high. In other words, when the rate of change of masseuse income is large in a region, it drives people into the region even before the absolute wage comes up. If there are lots of unemployed masseuses this can occur for a while while spot prices for wages stay constant because going from unemployed to giving $35/hr massages is a big increase in wage while the spot price of hiring a masseuse stays at $35/hr

      Regardless of what the terminology is, I think Phil’s point about driving up demand for service workers is valid, and I think it should be expected especially when you have conditions that lead to bubbles.

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