CAPITAL, HOUSING AND INEQUALITY IN THE 21ST CENTURY.
Duncan Maclennan and Julie Miao[1][2]
- Shifting Fortunes, Changing Housing Policies.
Thomas Piketty’sCapital in the Twenty-First Century (CTFC)(Piketty, 2014)has highlighted rising wealth and income inequalities in many of the advanced economies. Ithas caught the attention of the press and public, permeated policy debates and stimulated a flow of academic writing on the political economy of capital accumulation and inequality. The merits and limits of CTFC have been dissected (Kunkel, 2014), critiqued (Bonnet et.al.2014: Mankiw, 2015), and defended (Piketty,2015a, 2015b). Major policy statements about the costs of inequalities and measures to combat them have also been developed (Stiglitz et.al. 2015; Atkinson, 2014).
Piketty’sexplanations of changing wealth inequalities have a direct relevance for housing researchers and policymakers. It has been long understood that wealth and income inequalities underpin many of the spatial segregations and segmented socio-economic structures that are manifested within housing systems. CTFC, however, gives an even greater significance to housing systems and outcomes.Housing market outcomes play a central role in Piketty’s analysis as a major reinforcer of wealth and income inequalities in advanced economies.
Remarkably, given the significantroles that housing systems are seen to play in shaping inequality outcomes both within CTFC and emerging housing research ( for example, Searle and Koppe, 2014; Ronald and Forrest, 2014), there has been relatively little discussion of Piketty’swork in published housing research. Housing policymakers in the advanced economies still show little sign of engaging with the insights and conclusions of CTFC.
Housing is oftennow side-lined in debates about economic growth (Maclennan et.al. 2015) and there are current tendencies, discussed below, for contraction and fragmentation in housing policies in many advanced economies.In contrast, this paper starts with the perspective that a wider understanding of housing systems is required to make sense of how global capitalism has developed since the 1980’s and is likely to evolve in the future. Further, it starts from a ‘stylised fact’ that emerging housing policy commitments across many OECD countries are now lagging behind the growing housing needs arising from increased inequalities. In some instances, housing policies may now be exacerbating rather than reducing income inequalities.
Piketty’s findings, if they are accepted as robust,imply that the role of housing systems and the efficacy of housing policies are central to shaping more effective forms of capitalism. The analysis and findings of CTFC are central to understandingboth why and how housing policies in many of the advanced economies should be fundamentally rethought.Piketty’s insights matter not just in housing research but to policy-making for market systems.
This exploratory paper aims to frame some of the key, possibleconnections between housing outcomes and Piketty’s findings and to highlight the housing policy issues that arise.The next section (2) of the paper considers the ways in which inequality and growth aspects of housing issues, outcomes and research, have become side-lined in contemporary policymaking and why this is problematic. Section (3) then sets out the key features and achievements of Piketty’s work. It is a far from complete review and it is intended as a prompt to a wider debate on its implications for emerging housing research and policies. Major points of debate about the empirical and theoretical work are then discussed (section 4) and the limitations of Piketty’s policy responses set out (section 5). The final substantive section (section 6) of the paper draws out major issues about housing capital in the twenty-first century.
- Placing Housing: From Centre Stage to Sidelined
Economic Growth, Urbanisation and Housing Policies.
Active housing policies emerged in Europe in the later decades of the nineteenth century (in what Piketty refers to as the Belle Époque)amidst growing urbanisation, industrialisation and historically high inequalities, (Hall, 1998). These inequalities pricked the consciences of literary giants (Krugman, 2014) and opened the hearts, and pockets, of paternalistic capitalists (Glennerster et.al, 2004). Income inequality was quickly perceived as providing ‘cruel habitations’ (Gauldie, 1974) for the poor and blighting their prospects for health, happiness and social progress. Private poverty was also quickly transformed into public squalor and more affluent households faced the adverse health and other outcomes that flowed, often literally, from poor neighbourhoods. It was these spillovers that often drove major cities to initiate active housing policies.
This change, as the Belle Epoque evolved into post-war Europe, saw better housing provision for poorer households become, for half a century at least, a core goal of governments and a central issue in political debates and choices. In welfare, corporatist and market societies alike there was long a recognition of the importance of housing issues. To different extents, through different means and with sometimes changing ends, housing policies to address the wellbeing of the least advantaged mattered for much of Piketty’s ‘Short Twentieth Century’. In very broad terms, in Western Europe and the Anglos Saxon countries, proportions of national income committed to housing policies in the decades 1950 to 1980 ran at triple the rate of the period since. Since the 1980’s the modern suite of housing policies (replacing dwelling subsidies with person related assistance, shifting public housing to non-profit ownership, moving towards inflation related or market rents, promoting home-ownership, deregulating mortgage markets and preferring tax expenditure supports) has emerged in a context of growing wage inequalities, sustained increases in real house prices and falling budget support for housing. There are stark contrasts in how governments have sought to support housing capital in the main Piketty periods.
Housing Policies after the Austerity
There is wide agreement that future economic growth is likely to continue the patterns of the last quarter century and be associated with growing wage and income inequalities and be primarily urban, and thus confront relatively inelastic housing supply systems where demand is set to grow most. The interaction of these wage and housing price/cost effects have been demonstrably important in many OECD cities for at least the last two decades and they have shaped both the wealth patterns Piketty observes and the problems of delivering ‘affordable housing’. The ‘modern’ housing policy response to them in so many advanced economies has been, at best weak, and in some instances perverse. There has been a failure to recognise that persistent, significant house price inflation may have corrosive systemic effects on economies akin to the damaging effects of wage inflation in the period from the1960’s to the1980’s. Arguably housing policies have paid little attention to either the equality or productivity/growth effects of housing market outcomes (Maclennan et.al, 2015).
Housing researchers generally work with intellectual frameworks that recognise the interdependence of growth and income distribution as well as housing roles within these processes. But are these perspectives widespread? Do they penetrate the core debates in social and economic disciplines and policy-making? Are active housing policies, recently fattened up to deliver stimulus post 2008, now blighted not just by prevailing fiscal austerities but are, in a more fundamental secular sense, withering away? Piketty’sframework, it is argued below, provides new ways to connect housing market outcomesto growth and to consider how housing policies might be changed to both reduce inequality and secure better growth and productivity for the long term.
Ignoring Inequality: the Worms Turn
There are now encouraging convergences in incomes across countries (Sachs, 2008). This involves a wider sweep of Asian, South American and African countries sustaining faster per capita income growth than ‘The West’ in this millennium. Recent (post 2013) global slowdowns are broadly preserving that shape of change, albeit at slower growth rates. However, income and wealth inequalities within nations are not falling but rising and in some of the OECD economies, such as the US, inequalities are rising back to the peak inequality levels of the later Belle Epoque.
Economics has, for almost half a century, paid little attention to detailed income distribution processes and outcomes. Paul Krugman (2014) notes that ‘Some economists (not to mention politicians) tried to shout down any mention of inequality at all: “Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution” declared Robert Lucas Jr. of the University of Chicago, the most influential macroeconomist of his generation, in 2004’.
Economics education until the 1980’s required an understanding of welfare economics (Nath, 1971; Dobb, 1965; Little, 1949) that recognised the importance of the value judgments’ embedded within the major ‘technical’ models of the discipline. For instance Samuelson’s (1948) early exposition of the desirability of Pareto optimal outcomes highlighted that they were contingent on the appropriateness of the prior income distributions that drove ‘free’ market choices and ‘competitive’outcomes. However Lucas’s remark is an acute example of how economics has come to focus upon modelling, indeed reifying, theoretical market processes and simply accepting the embedded value judgments’ rather than reflecting on distributional outcomes and whether they matched widely acceptable value judgments’ about preferred social outcomes and choices.
Since the start of this millennium several major economists have broken ranks with the distributional disregards of the mainstream and have built upon the longstanding conceptual and empirical foundations of scholars such as Sen (2010) and Atkinson (2012). They have sought to fashion a renewed interest in the patterns and costs of inequality, especially within poorer and emerging economies. Stiglitz (2006; 2012) and Sachs (2008) have prised the top from a Pandora’s box of distributional issues in emerging and poor economies. Piketty has now shattered that lid, and at least temporarily, the complacencies of economics as a discipline. His sustained empirical work (Piketty, 2011:Piketty and Saez, 2013: Piketty and Zucman, 2014) on changing patterns of wealth and income in the more affluent economies has now been supplemented by his compendium of that evidence and the development of a theoretical framework and associated policy programmes in Capital in the 21st Century (2014). A shortened, volume reviewing evidence has been re-issued in mid-2015 (Piketty, 2015c). His suite of studies sets a new context for addressing distribution and growth in the decades ahead.
The rising inequalities of the last thirty years are now widely established and there is emerging evidence of what has driven their growth. But how do the patterns and processes involve the housing sector? Will the new interest in inequality fashion stronger housing policies? These housing issues can be usefully set within the framework of Piketty.
- The Broad Approaches
Capital in the 21st Century is a volume rooted in, but by no means restricted to, applied economics. Within it there lie sound microeconomic principles and linkages that range from the individual to the macro economy and that work at the interface between issues of growth and the distribution of income and wealth. Whilst thoroughly modern in its economic techniques, and Piketty spares general readers much more detailed mathematical theories of growth and distribution by leaving them to more detailed publications (Piketty 2015b and 2015c, for example), the work harks back to three earlier traditions in economics. The focus on property of all kinds, including land and housing, makes a connection to the classical economists and is in marked contrast to the capital-labour emphases of modern growth models.es. The approach of using major empirical findings to serve as the ‘stylised facts’ underlying the specification of high level growth concepts is more akin to the 1950’s growth modelling of Myrdal (1956) and Kaldor (1966) than to contemporary growth economics. And above all, by giving explicit emphasis to values and judgements in discussing system outcomes and their policy relevance Piketty restores the perspective of political economy to centre stage. Economics, as discussed below, is (still) not yet a science (Eichner, 1983) but wrapped in the language of maths and econometrics (to which the authors have no objection) particular (Pareto) value judgements about individual and outcomes pervade what is presented as ‘science’ and ‘fact’ in much contemporary economic debate.
These approaches alone would have made the work interesting. But what makes it central to contemporary debate is both the focus, wealth and income distributions, and the approach, extensively and rigorously researched historical time series of change. Perspective, focus and detailed content all underpin this major work.
The next three sections of CTFC are essentially a melding of empirical and analytical approaches. These are, in turn: theoretically informed reflections of the interrelations, for any particular economy, between income distributions and the economic growth rate; the more historical, empirically oriented approach is evident in ‘The Dynamics of the Capital/Income Ratio’ which, for a number of countries, tracks changing patterns of inequality through centuries of emergent and established capitalism and across the twentieth century; ‘The Structure of Inequality’ then provides strong empirical evidence about now strengthening inequalities in the advanced economies. The final substantive section, ‘Regulating Capital in the 21st Century’, is where the political economy perspective prevails and Piketty outlines policies to address growing wealth inequalities and their adverse consequences for modern democracies.
Kunkel (2014) in his review succinctly notes that in addition to being a major exercise in measurement ‘Capital in the 21st Century is many things, among them an engaging historical narrative, a well-deserved scolding of his fellow economists for their intellectual narrowness, a dystopian forecast about the future’. The work has implications for how we address issues of growth and inequality in political economy, history, measurement, theory and policy. The main contributions of Piketty are set out, in this paper, in the Section below and critiqued in Section 5.
- Piketty in Perspective.
1) Restoring Political Economy
In assessing Piketty’s penchant for political economy Kunkel (2014) notes that ‘The story of modern economic thought can be told as the shift from political economy to the discipline now simply called economics’. Kunkel, echoing the earlier observations of Eichner(1983), labels modern economics as a quasi- scientific approach that ‘lent itself to constructing mathematical alibis for capitalism, whose real behaviour it studiously ignored.’ He further observes that the ‘the notion of economic life as a matter of individuals harmonising their preferences, as opposed to classes wrestling for control of shop-floor and government, has filtered into common sense’. These observations contain two critiques, one about the technical approach of the discipline and the other about its embedded, hidden moral values.
The mainstream economics approach to growth and distribution issues is located in core neoclassical models that start from a presumption of well-informed individuals in competitive markets that are, at worst, moving towards some dynamic equilibrium. Kunkel, in positioning Piketty, is relentless in his critique, and continues ‘In general, economists favour mathematical modelling of axiomatised exchange relations over economic and other kinds of history; concentrate on individuals rather than classes or groups as economic agents; emphasise the preferences freely expressed in transactions rather than restrictive social circumstances; and describe self-sustaining equilibria of supply and demand when capitalist economies are striking for their growth and instability.’
An argument can be made that less extreme versions of the model, with more realistic modelling restrictions, can cast useful light on aspects of market processes, including wage determination. That is a matter of modelling perspective. But what cannot be denied is that such models take the existing distribution of income as appropriate, that individuals are the best judges of their own welfare and that human emotions that lie outside such frameworks, love or jealousy for instance, are unimportant.
Piketty’s strong commitment to a political economy approach is clearly stated in the introduction to CTFC and it has pervaded his work over the last decade (Piketty, 1997; Piketty, 2015). For instance in reviewing the work of Tony Atkinson (2015), Piketty lauds the that way Atkinson placed the question of inequality at the centre of his work while making it clear that economics is both a moral and social science.
Piketty provides a useful summary to different perspectives, including Marxian and neoclassical views, on income distributions. He dismisses the appropriateness of both and whilst seeking to retain the quantitative rigour of current economics he rejects neoclassical marginal productivity notions of the determination of returns to factors of production and stresses how norms and power may shape rewards. In doing so, in marrying empirical work and recast conceptual models, he creates a new space for debate within economics on the political economy of inequality. One also wonders whether such an emphasis will open up useful interchange between different disciplines. Kunkel notes that we have a crisis in our economy, and in inequality, just as we have a crisis in economic thought. In this paper our focus is on the real inequality debate, rather than the crisis in thought, viewed through the lens of political economy.