Thursday, August 09, 2012

Wasted Talent and the Middle Class

-- Posted by Neil H. Buchanan

Late in the Spring of this year, I posted some thoughts challenging the common presumption that government employees are all unhelpful bureaucrats, while private companies' employees are the essence of efficient, responsive servants of the customer (who is, of course, always right). Upon even a moment's reflection, all of us can think of examples of private bureaucracies and individual private bureaucrats who are worse than anything we might find at the Department of Motor Vehicles or the Post Office (to cite the two bogeymen of anti-government zealots). Name your health insurer, and you have almost certainly also named the least responsive bureaucracy that you will ever face.

As part of that post, I noted that there are also (unsurprisingly) many very good and talented people working in both public and private bureaucracies. These people often make things happen through sheer force of will, and with great effort and application of creativity and knowledge, for no immediate gain to themselves. For lack of a better term, we might even say that these people have -- gasp! -- pride in their work. From a purely economic standpoint of individual maximization, this is not easy to explain (unless one simply cheats and says that "pride in work" is part of an individual's utility function, which tautologically explains away the mystery that these people are acting in ways that do not appear to have any connection with classic economic incentives).

The dramatis personae in the particular story that I was telling back in May were the people whose job it is to process mortgage applications and complete the sales of houses to private individuals. This includes a very large number of people, from the mortgage originators themselves, to the various bank employees who have to coordinate with the mortgage companies to exchange sensitive financial information, to the people at the credit rating companies (the villains in my particular story), to the various house inspectors, to the real estate agents, to the people who handle all of the paperwork at the closing. And those are only the people with whom a buyer actually has contact. There are surely many others who are also hard at work every day as part of the house-buying industrial complex, but who are invisible to the public.

This army of dedicated people is, to a very significant degree, the people who still make up the middle and upper-middle classes in this country. Realtors, especially those who work in upscale suburbs, are probably well above middle class, but not truly wealthy (other than the owners of some agencies). The others are all doing jobs that require (and make good use of) college educations and beyond, because the transactions are complicated and need to be processed in ways that are required by our legal system. It is not rocket science, but it is still very skilled, specialized work.

As regular readers of Dorf on Law know, I have been writing extensively over the last few years about the downsides of our obsession with individual ownership of houses and condos. (Most recent post here. My original post, four years ago this month, is here. Other posts are too numerous to list.) For reasons that I have described at length elsewhere, my bottom line is that there is a great deal of waste (and needless financial risk to middle-class people) caused by the over-investment in house purchases by individuals.

What is the alternative? As a broad matter of long-term social planning, it is almost certainly essential to de-suburbanize America -- or, at least, to stop further sprawl. There is now plenty of evidence that urban environments can offer an extremely high quality of life, and people are moving back into cities in large numbers. As an immediate matter, however, I have offered the observation that it is quite possible to have a non-ownership approach to housing, even when the housing stock consists mostly of detached, single-family homes with yards.

The basic idea is that management companies could buy up single-family homes and rent them out to people who might otherwise buy houses or rent apartments. (The Obama Administration has, in fact, issued calls for proposals to encourage such purchases of the abandoned and foreclosed homes that still sit empty, years after the housing bubble burst.) Those management companies would then run consolidated office and maintenance operations, allowing people to rent houses for less than it would cost to own and maintain a home as an individual. (One would also hope that these rental arrangements would include contractual terms that will involve a wider range of choices than most current rental contracts provide. Probably the most important change would be to offer leases of more than two years, so that people could have the same level of planning certainty that ownership currently provides.)

Why are these office and maintenance operations likely to be much less expensive than individual ownership? For the rather straightforward reason that most of the bureaucratic infrastructure in the house-buying industry is ultimately so unnecessary. Title insurance is only the tip of that iceberg. Realtors themselves, of course, also represent a rather large "economic rent" that would all but disappear in a rental-based economy. Much of the rest of the private and public bureaucracy supported by home purchases would also become unnecessary.

Even the operations that would still be necessary under a rental-based system would be subject to economies of scale. In a recent post, I offered a quick look at some of the crazy wastes of time and money that owners of houses endure, which could be handled much more easily by, for example, having one office send out plumbers as needed.

As we learn in elementary macroeconomics (based on even more elementary accounting principles), however, one person's cost is another person's income. Therefore, reducing costs means reducing incomes. The well-educated people who, in this view, are wasting their talents processing individual mortgage applications will be eligible to apply for "non-wasteful" jobs in management offices of rental companies. They should not, however, expect to earn nearly as much money as they currently earn. Reducing costs (and thus incomes) is the whole point of the exercise.

To a large extent, therefore, we are looking at another example of the "big box store" effect. There used to be small, family-run hardware stores. (If you are old enough to remember that Howard Cunningham's hardware store provided the middle-class lifestyle enjoyed by Marion, Richie, Joanie, and (for one season) Chuck, raise your hand.) Now, those stores have been almost completely obliterated by the big-box stores, which pay their employees low wages and minimal benefits.

Many economists like to believe that the talents of the educated, displaced workers will not ultimately be wasted. The hollowing out of the middle class over the past generation or so, however, suggests that this might not work as well as the textbooks claim. Surely, other important factors are at play here, especially the assault on organized labor since 1980. Even so, evidence is accumulating that suggests (to say the least) that we should be hesitant to destroy middle-class jobs without knowing where those people will land, and how much they will earn.

It is, therefore, at least possible that my personal holy war against individuals owning their houses is misguided in a very broad sense. It seems perverse to say that we need to tolerate "inefficiency" in the name of protecting the middle class. Yet that might well be the case. It might even be a good reason to question our notions of what constitutes efficiency itself.

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