Thinking

Thinking through connections between inequality, home prices, schooling, and taxation.

(Thanks to the Policy Tensor for welcoming this guest post.)

 

I have a strong intimation that one of the major drivers of inequality in American society relates to land use. Here is how it works.

Let’s start with labor markets.

We live in a world characterized by extremely high returns to certain forms of educational achievement. (Whether that achievement has to do with ability, or with social/cultural capital credentialing, I do not venture to say.) Individuals who have passed through certain schools and acquired certain degrees have open to them employment in extremely high paying jobs. Indeed not only are the incomes of those at the top high, they are also increasing at a rapid rate, creating an ever-growing gap between those in the highest paying jobs and those in nearly all other jobs in the economy, where wages have stagnated, if not declined.[1]

The increasing returns to those credentials, in a world where their supply is effectively fixed, naturally increases competition for access to those credentials.

Beyond the very top earners, throughout the economy there is a widely documented increase in the premium to education – that is, the wage differential between college graduates and those without a college degree is large and growing. (Autor, 2014) Though I have not seen direct evidence documenting it, this premium must increase markedly with the imputed quality of the college education received, almost certainly proxied by “brand.” Combined with the fact that since 2000 the only sector of the economy in which total employment has increased is the low-wage sector (Autor, 2015; Mishel and Bivens, 2017), it’s easy to account for a sense of scarcity among parents over the supply of future remunerative employment for their children.

In theory it is high school aged kids who are competing for these scarce college placements, and in turn for scarce jobs. But in practice children have very little say over how they perform in this competition. Instead the key factor is their parents.

If parents detect that there are increasing returns to certain forms of credentials, and perhaps correspondingly fear that failure to gain access to those credentials may doom their children to low wages (setting aside for the moment status competition between the parents and their peers, which may account for a great deal), then a rational parent wants to undertake whatever investments in their children’s education will best position them for access to these highly coveted spots.

What are the key investments that parents can make?

Some of the most valuable investments are likely to have been made a long time ago – for example, the parents’ own education, as well as the parents’ health, incomes, etc. But from the time the children are born, one of the most important factors that parents can control is where they send their kids to school. High quality schools correlate with better college placements. (At least I think so – I have not seen direct evidence of this but spend 10 minutes with any parent today and you can be sure that parents think this correlation exists.) Most American children go to public schools, and most of those public schools are in the same neighborhood or school district as the household’s residence (75% in 2007, at least, according to US Department of Education, 2010). Therefore the mechanism by which most parents invest in their children’s schooling is by choosing where to spend the portion of their income that they devote to housing services. Since most American households own rather than rent their homes, this is predominantly a question of where to buy a home. It stands to reason that home prices should be higher in places that have good schools.

Indeed, studies show strong correlations between school quality (measured for example in terms of average test scores, which happens to be the data generally most easily accessed by parents comparing schools) and a premium paid on home prices (e.g. Chiodo et al., 2010; Nguyen-Hoang and Yinger, 2011). Since Tiebout’s famous paper in 1956, the principle way to model home prices has been as a function of a distribution of demand for amenities, including government services. Those amenities that are most valued translate into the highest home prices. Schools are clearly one of them.

The sociologists Reardon and Bischoff (2011) have done some very interesting work showing that as income inequality has increased in the US, so has the residential segregation of affluence. Since income inequality in the US has a pronounced “upper-tail” quality – that is, it has rapid growth in earnings at the very high end – the small numbers of very high earners increasingly bid to live in a small number of highly desirable locales, one aspect of which is the presence of very good schools.

In a 2016 article, the education sociologist Ann Owens makes the striking finding that residential segregation by income in America is increasing – but that the effect is overwhelmingly limited to households with children, which make up only 1/3 of American households. (Owens, 2016) Households without children seem relatively content to stay where they are. Families with children move, and they move in ways that segregate them. In combination with the results of Owens, Reardon, and Jenks (2016), which shows growing income segregation between schools and school districts, it seems clear (and, again, is intuitive to anyone who has spent time with the parents of young children) that parents who intend to enroll their children in the rat race of educational achievement make very careful decisions about where to live so as to ensure that their children go to good schools. They pay a premium to be able to live in such places. The more income inequality there is, the higher the premium to be able to live in the places with the best schools, the more segregated those communities and their schools become, and – and here is of course the kicker – the more that those already successful are able to monopolize access to those public goods which are likely to make their children successful.

So if you are someone who thinks that this is a perverse state of affairs, what types of remedies might be available?

1) Big picture you would want to do something about the organization of the American economy that produces such lopsided, pre-tax and transfer income distribution in the first place. But let’s set that aside for now.

2) If you could not change (1) you would at least want to have a radically progressive tax system such that even a skewed pre-tax and transfer income distribution became less skewed post-tax. If you taxed away much of high earners’ incomes, it would presumably limit the extent to which they could bid up house prices, and this might in turn limit their ability to exclude those who earn less. But let’s even set this aside for now.

3) One thing you might do is build affordable housing (or create large numbers of housing vouchers) for poor and working-class families to be able to move into affluent school districts. This would be a good thing, but as the land in question is already expensive, it would be a hugely costly proposition. If enough housing was built (all of which, incidentally, would have to be built over the screaming protests of the existing residents) it might turn out to be counterproductive, in that some portion of the affluent would choose to flee to further out suburbs, and by taking their property tax payments with them, they could contribute to a worsening of the schools they left behind. Still building affordable housing in affluent communities is almost surely a key ingredient in any overall recipe for reform.

4) Neoliberals (e.g. Glaeser, 2017) believe that one of the most important reforms you can make is to reduce land use restrictions that prevent the high demand to live in certain communities from resulting in the construction of more housing. So do away with local ordinances that require lots to be a certain size or that prohibit the construction of multifamily housing. Something like this could work in tandem with (3).

5) One thing you could definitely do is reform the tax code to reduce all of the provisions that incentivize taking on massive leverage to buy a home. The most obvious is the mortgage interest deduction, which if eliminated would substantially lower house prices. (Harris, 2013) (The Republican tax plan lowers the ceiling from $1,000,000 to $500,000, but only for new purchases. That probably has the effect of raising home prices by discouraging anyone who is currently taking advantage of a large deduction from moving, thus limiting the supply of houses for sale.) The best idea I’ve seen would be replacing the mortgage interest deduction with some sort of equity subsidy (as suggested by Stiglitz, 2014), especially if, as Stiglitz suggests, you just establish a blanket $100,000 income tax deduction for everyone. That would ensure that working and middle class homebuyers don’t lose out. Another thing it would be good to eliminate (again, as long as you have something like a $100,000 flat deduction) is the property tax deduction. If you were not able to write off part of the cost of paying for your children’s education, it should reduce the amount you are willing to pay for a house, and that should also slow home price appreciation.

6) What I am really trying to figure out is if there aren’t more draconian measures one could take to break the connection between where you live and the schools your children go to. There are of course (or, there have been) busing programs of various sorts. In the era of court-ordered desegregation, however, these programs tended to be limited to within-district integration. The result was to contribute to white flight, since parents who could afford to preferred to move out of cities rather than keep their kids in integrated schools. Today, there is the “Moving to Opportunity” program, which gives vouchers to low income families from high poverty neighborhoods to move to more affluent areas and go to school there. (Chetty et al., 2016) This is good for those kids, but does very little to limit the ability of affluent parents to segregate themselves for the purpose of attending segregated schools, which is their main objective.

What if you just ended local control of schools and instead created large, integrated regional districts, large enough that the distance affluent parents would have to move to get outside them created a disamenity so great that it overwhelmed the gains to accessing segregated schools? One can imagine a general equilibrium scenario in which the response to this sort of a change is employers moving jobs really far outside of metropolitan areas in response to the demand of high-skill workers to live in segregated communities. But employers want to attract workers without kids as well as workers with them, and workers without kids want to live in the heart of thriving cities, not in ranch houses 100 miles outside them. So there would be a lot of forces working against an outcome like that. In the meantime, genuinely integrated regional school districts could create a degree of randomization in school assignment. In a “veil of ignorance” type situation, affluent households should support a tax regime that ensures that all schools have adequate funding.

So, those are my proposals for today: build affordable housing in affluent communities; reform the tax code to eliminate those features which incentivize bidding up home prices; regionalize metropolitan schools and randomize school assignment within them.

What am I getting wrong?

[1] Interestingly, the perception itself may be anachronistic. In their recent work on distributional national accounts, Piketty, Saez and Zucman (2016) find that between the 1970s and the 1990s the growth in the incomes of the top 1% of earners was driven by increases in labor income (e.g. salaries). Since 2000 it has been driven by growth in capital income (e.g. primarily earnings on stocks, bonds, and real estate). Some of this may be misleading – for example many high earners are paid in part in stock options and the like, which look like capital, but are in effect labor compensation. Either way it probably does not make much of a difference from the point of view of parents investing in human capital. There are still only a small number of jobs that will pay your children big enough salaries to be able to accumulate the capital assets from which they will then derive capital income.

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