The Role Of Housing In The Capital To Income Ratio

From The Economist Housing in the twenty-first century: "In my view, for example, one of the main contributions of the book is a mental framework, scrutable to the layman, for assessing how particular economic changes might influence the distribution of wealth......Part of the attraction of Mr Piketty's framework is that it leaves one free to make up one's own mind about what is likely to happen.....
The question I have raised is whether the importance of housing to Mr Piketty's story is a strength or, as some critics suggest, a weakness, possibly fatal. The housing critique, if I've understood it correctly, is as follows. Quite a lot of the recent rise in the ratio of national capital to national income can be attributed to growth in housing wealth; in some economies, like France, housing is basically the whole story. What's more, quite a lot of the rise in housing wealth is down to growth in housing values, and quite a lot of the growth in housing values can be attributed to restrictions on housing supply growth. What we're left with, then, is a mechanism for rising wealth inequality that does not seem to have much to do with the rate of return on capital r holding steady as the economic growth rate g falls.....Over the last few decades technological changes have greatly increased the return to locating in large cities filled with skilled people. Being in such places makes workers more productive and raises the income they are able to earn. But skilled cities have not allowed housing supply to expand to meet rising demand. Housing has therefore been rationed by price, pushing less productive workers toward cities where housing supply growth is higher and housing cost growth is lower. As a result, fewer people live in the most productive places, and quite a lot of the gain from employment in productive places is captured by landowners earning rents thanks to artificial housing scarcity. This may mean lower overall productivity, more income inequality, and more income flowing to capital rather than labour....I think economists want to read the book, and particularly its analytical framework, much more narrowly than is appropriate. They want the mechanics to be pinned down by a particular set of equations that can be understood to contain the entirety of the book's argument. But the book is a sweeping narrative about the relationship between wealth and labour over very long periods of time! There is a reason he didn't just scratch out a few equations and submit it to a journal for publication. "
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