House prices as leaky bucket

The Resolution Foundation says (pdf) that the typical pensioner now has a higher income, after housing costs, than the typical worker. Which poses the question: do younger people have a legitimate complaint here? I think the answer’s yes.

First, though, let’s see what their grievances are not.

They can have no complaint about rising pension incomes because of the triple lock. Quite the opposite. The power of compounding means this will benefit tomorrow’s pensioners – ie today’s youngsters – more than it helps today’s old folk. (Those who complain that the lock won’t last ignore the fact that it is as sustainable as we want it to be.)

Nor can they complain about high pensioner incomes to the extent that these are due to more pensioners having jobs; the number of over-65s in work has doubled since 2005.  There isn’t a lump of labour, so pensioners don’t displace young workers, any more than immigrants do*.

And whilst they do have a legitimate complaint about low pay, this is not a generational issue but rather one about macroeconomics and class.

Instead, youngsters’ legitimate beef is about house prices. A big reason why pensioners are better off than them is that many pensioners live mortgage-free in houses they bought cheaply years ago, whilst young folk must pay a fortune in rent or (for a lucky few) mortgage payments. As David Willetts wrote in The Pinch, this is in effect a transfer of wealth from young to old.

The issue here is not merely that the old did nothing to deserve this wealth: no, stoking up bubbles and restricting supply doesn’t count. It’s that this transfer is inefficient.

Arthur Okun said (pdf) that transferring income from rich to poor was like carrying it in a leaky bucket. Because of administrative costs and adverse effects upon incentives, he claimed, transfers reduce aggregate incomes.

But there’s also a leaky bucket when the young transfer their wealth to the old. This is because there are good reasons to think that high house prices are bad for growth. For example, they impede labour mobility or force people to take long commutes which reduces their productivity. They encourage nimbyism and so delay infrastructure spending. They divert resources towards sectors with low productivity growth and so reduce overall growth: if youngsters didn’t spend so much on rent, they’d have more to spend on other things, which would help promote innovation and entrepreneurship. In encouraging high debt, they increase the risk of financial crises which have long-lasting adverse effects on growth. And then there’s the longer-term cultural effect: if people can get rich by sitting on their arses and seeing their house price increase, they’ve less incentive to work, save or set up new businesses.

Granted, there’s a potential offsetting effect: rising house prices create collateral which allows some people to borrow to set up new businesses. But I think it plausible that, net, high house prices are bad for growth.

Which means that the transfer from young to old is a negative-sum one. Okun was happy to use a leaky bucket to transfer cash from rich to poor. The case for using one to transfer from young to old is, however, far more questionable.  

To this extent, youngsters do have a real grievance, as they are on the wrong end of a redistribution which is bad for the aggregate economy.

* This poses the question: why do people complain about immigrants taking their jobs but not pensioners?

Comments

[Lord]

This is likely backwards. Poor growth is good for housing prices. It lowers interest rates and raises asset values.

[Dave Timoney]

A quibble. I'm not sure you're correct to say that young people cannot "complain about high pensioner incomes to the extent that these are due to more pensioners having jobs". While there is no lump of labour, there is a different dynamic at work with pensioners compared to immigrants added to the labour supply.

Pensioners who push back their effective retirement age will often do so by staying in existing jobs, even if at reduced hours. This incumbency means lower employment churn, which has the effect of reducing the number of better-paid vacancies that open up for the young because we are living in an era when newly-created jobs tend on average to be more poorly-paid than established ones.

More working pensioners means more aggregate demand and thus more new vacancies elsewhere, but if those new jobs are of a lower calibre then we can legitimately say that pensioners working longer (as incumbents) is detrimental to the young without invoking the lump of labour fallacy.

[Shiney]

LVT as a replacement for the worst taxes (Say NI first followed by VAT, SDLT, Telly Tax etc) plus a Citizens Basic Income at the level of the current tax free allowance would be the solution I s'pose.

[Steven Clarke]

I agree with most of this, but it ignores a lot of variation within generations. A more explicit fiscal transfer could redistribute from the richer young to the poorer old.

[David Br]

From Arse To Elbow is right to say that "Pensioners who push back their effective retirement age will often do so by staying in existing jobs, even if at reduced hours. This incumbency means lower employment churn, which has the effect of reducing the number of better-paid vacancies that open up for the young"

It is far from uncommon, in my experience, for firms to prefer to keep on Old Joe who has done the job for years, knows it inside out, likes it and is good at it - and who fancies supplementing his pension - than to take on Young Josephine who would require training and have to learn on the job for a good while. Leaving Josephine looking for work and denying the voluntary sector the skills and time of Joe.

Ending the retirement age was, along with allowing two incomes to count against a mortgage, one of the most counter-productive moves - socially and econmically - ever conceived.

[Blissex]

«There isn’t a lump of labour, so pensioners don’t displace young workers, any more than immigrants do*»

Funny I always have the same "discussion" with the "Sandwichman", another political economist who blogs, where he makes the opposite argument, that there is indeed a lump of labour.

My argument is better than both: that there is indeed no lump of labour, but there is instead a lump of wages, a completely different thing.

In the long run the lump of wages *may* expand, but far less quickly than immigration can pour in. For several fairly obvious reasons.

The "classicals" spoke of the Iron Law Of Wages, and the fixed size of the wage fund, so that any rise in unit wages would reduce, *ceteris paribus*, the number of hours worked, and that was not quite right, but there is a lot of inertia in the size of the lump of wages, especially when workers have weak negotiating power.

«This poses the question: why do people complain about immigrants taking their jobs but not pensioners?»

They do, and they also complain a lot about pensioners keeping house prices up, as in the widows-in-mansions story, and they complain a lot also about immigrants driving rents up.

[Blissex]

«Ending the retirement age was, along with allowing two incomes to count against a mortgage, one of the most counter-productive moves - socially and econmically - ever conceived.»

The overriding political problem of the 1970s and 1980s was how to smash the trade unions, which had indeed become overbearing guilds in some cases, and in other were run by syndicalists cliques.

One of the means to that was to wreck the industrial sectors and regions where the unions were strong, thus reducing the demand for labour, and another was to boost the supply of labour with women, pensioners and immigrants. Another was to social-engineer the middle and upper-middle classes into ravenous rentiers with ever doubling house prices

It all worked pretty well.

[reason]

"high house prices are bad for growth."

Fume!! High LAND prices!

[Dave Timoney]

@Blissex,

I wouldn't say that Tom Walker (Sandwichman) argues that there really is a lump of labour but that the fallacy is a strawman that is usually employed to undermine labour movement demands for reduced working hours.

The broader point is that labour is rarely perfectly fungible, hence an experienced worker retained beyond the state retirement age is not the same as a young worker, as David Br notes (the lump of labour has impeccable micro-foundations, being demonstrably true at the level of the firm).

While this may be a wash in terms of aggregate demand, it may exacerbate intergenerational inequality.

[reason]

I'm now officially launching a campaign - drive out misleading terms. When you buy a house in a big city, most of what you are buying is land. A house is just a big long lasting consumer durable.

[George Carty]

Or to be even more accurate, most of what you are buying is *location*.

[Shiney]

@Reason and @GCarty

Agreed.

And since location value is created by society as whole it should be taxed via LVT and taxes on the productive economy (wages and profits) reduced... thereby fixing the problem.

Next....

[Tynnie Todgers]

- "There isn't a lump of labour"

There pretty much is a "lump of labour" in a demand-constrained economy where >90% of firms produce - and therefore employ - well within capacity because they anticipate having to drop prices in order to gain market share. There pretty much is a "lump of labour" in any economy where the term "market share" is even meaningful. .

[joe]

Really?
This does not apply to my family and many other family circumstances at all. We moved from Cornwall to London to seek the quality of careers only on offer there - same problem today. Renting? - yes - We had to save 3 years with a Building Society before we were even considered for an offer of a mortgage. It did cost - my mortgage doubled and we had a couple of decades near to the breadline. We did pay off the mortgage after 25 years but that asset still has to be maintained with no money coming in from the theoretical gain in the house value. Our pensions are still taxed - some at double rates. My elderly mother is in a care home and fees are £35,000 a year out of taxed income. My children both needed help to fund a mortgage deposit. One is divorcing and we have to pay off one parent's equity of £45,000. The other has needed funding for a new roof and boiler as they are 2 income JAMS with a young daughter. Our generation actually is absolutely transferring wealth at a rapid rate both to the older and younger generations. The present younger generation may not even be able to do any of that so we eventually have to sell our home to pay for care fees as there is no one else left with any cash.

In the 1950's UK built up to 400,000 good quality new homes each year. Good room sizes and ample gardens. Houses were built on farmland at compulsory purchase agricultural prices. A family could live well on just one wage coming in. Later the Conservatives stopped the ability to buy land cheaply (farmer friends)- lowered the minimum quality standards (developer friends) - made Councils give away most of their housing stock assets and forbade them to build new stock (hatred of working class). Conservatives stopped the training levy each contractor paid to increase the supply of skilled building staff (contractor friends). The removal of stock meant low paid workers could not move by using council house swops.

There is one big culprit here and that is successive Conservative Governments.