Thank you everyone for the great questions! There were too many good ones for us to answer them all. Alan will do his own mailbag post in the next few days, and other questions will be the basis for future articles. For example, I’m currently working on an explainer about how housing is accounted for in the consumer price index.
In the meantime, let’s get to it.
How gentrification affects low-income people
Ian asks: “How much of a problem is gentrification in poorer areas if cities start to upzone their neighborhoods?”
This is a difficult question to answer because it’s hard to disentangle cause and effect. New housing construction and rising rents often happen at the same time. But does the construction cause rents to rise? Or do rising rents attract housing developers?
A couple of recent studies have shed light on this question. Kate Pennington, an economist at the University of California, looked at housing that was constructed after a serious fire. Since fires occur randomly (presumably developers aren’t deliberately burning down their own buildings) we can rule out the possibility that these developers were attracted by rising rents. Pennington finds that the construction of a new apartment building after a fire leads to 2 percent lower rents for other apartment buildings within 100 meters.
A 2019 study specifically studied the impact of building new market-rate housing in low-income neighborhoods. This study used different techniques to disentangle cause and effect and found an even larger impact: rents for the apartments nearest the new building were 5 to 7 percent lower than they would have been otherwise.
In short, blocking new construction in a gentrifying neighborhood is counterproductive because new housing actually lowers rents—or at least slows the pace of rent increases.
With that said, I also think it’s a problem that so much housing construction tends to be concentrated in a few rapidly gentrifying neighborhoods. Whether you’re rich or poor, it’s disruptive to have a lot of construction happening in your neighborhood. And people understandably get upset when their neighborhood changes rapidly—even if they aren’t personally forced to move.
In many cities, rich people have figured out how to effectively ban the construction of new housing in the fanciest neighborhoods. Here in DC, for example, there’s very little housing construction west of Rock Creek or in my own neighborhood of Mount Pleasant. In an ideal world, we’d upzone citywide so that a lot of the new housing gets built in neighborhoods that are already wealthy.
I also think local governments in high-cost cities should help tenants whose apartments are demolished by developers find and afford a comparable unit.
The fertility impact of car seat mandates
CeltAdam asks: “Tim, did you buy a minivan when you had your third kid? More generally, I'm interested in car seat economics. That article about how car seat laws reduce third children makes me speculate that, even apart from being anti-natal, those laws are among the most regressive on the books. Is that true?”
I love this question! I remember seeing that carseat study when it came out (it found that people were less likely to have a third child if laws in their state required all three kids to be in carseats) and being confused because we’ve had no trouble fitting three car seats in our vehicles. We have a normal-sized hatchback (a 2017 Subaru Impreza) and a small SUV/crossover (a 2019 Kia Niro).
We didn’t buy special skinny car seats or anything. The baby’s infant seat is smaller than the bigger kids’ car seats. So it’s possible we’ll have a problem once the baby graduates to a full-size toddler seat. But by that point our six-year-old should be big enough to sit in a booster seat that’s not as wide.
The researchers found that the effect was stronger for higher-income households, which I also found confusing. Because honestly, raising a kid is a lot more expensive than buying a new car.
But the researchers did find child seat laws have a significant impact on people’s decisions to have a third kid. Maybe that’s because parents assume a third seat won’t fit without actually trying it. Or maybe a fair number of parents are on the fence about having a third kid, so even a fairly minor inconvenience is enough to deter them. In any event, I’m all for relaxing these laws to allow parents more flexibility.
And if any potential three-kid parents are reading this: you don’t need to buy a minivan when you have a third kid! We didn’t, and it’s working out fine.
Why MMT rubs many economists the wrong way
Gabe asks “Looking through Twitter, there seems to be a dunking of Modern Monetary Theory going on and Alan Cole seems to be weighing in with screencaps and one word tweets like "incredible". For those of us not ready to dive into a 100 paragraph NYT Sunday article - can I get the one paragraph take?”
I’m not sure if this exactly answers Gabe’s question but here’s my short-ish summary of what MMT is and why it’s controversial.
In the US (and most other countries) responsibility over macroeconomics is divided: the Fed uses its control over the money supply to fight recessions and inflation, while Congress makes decisions about taxes and spending.
Modern Monetary Theorists think it’s better to view the government as a single unified entity, with Congress taking the lead on macroeconomic issues. The federal government can print an unlimited number of dollars, so it doesn’t need to raise dollars through taxes before spending them. In the MMT view, the point of collecting taxes is to prevent inflation by pulling excess dollars out of the economy.
In practical terms, MMT economists were among the most enthusiastic advocates of deficit spending during the 2010s. They encouraged members of Congress not to worry about “paying for” spending through higher taxes, which made them popular with more left-wing members of Congress.
All of this left mainstream economists bemused because it’s not like they didn’t realize the federal government could print dollars. In a severe recession like we had in 2008, many mainstream economists favor deficit spending to boost the economy—just like MMTers do. But mainstream economists still think it’s useful to have an independent Fed with primary responsibility over recessions and inflation. These are mainly technocratic problems that frequently require deep expertise and quick responses—qualities the Fed has and Congress lacks.
The rising inflation of recent months has exposed limitations in the MMT framework. That framework seems to imply Congress should deal with high inflation by raising taxes or cutting spending—instead of having the Fed raise interest rates. But it’s hard to imagine Congress doing that in a timely or competent way. And oddly, at least one prominent MMT thinker has denied that the theory calls for raising taxes to fight inflation, despite conflicting statements from other prominent MMT thinkers.
MMTers like to emphasize that inflation is caused by bottlenecks in particular industries and claim that the solution to inflation is to identify and address those bottlenecks. That’s not a bad idea in theory but it’s not clear how to do that—especially in the short run. The federal government doesn’t have a Strategic Microchip Reserve we can use to ease the car industry’s chip shortage, for example. The government can and should invest in infrastructure like ports and highways. But it’s going to take years for those projects to complete. In the meantime, we’re going to have to take conventional steps like raising interest rates.
Noah Smith summed up the view of many MMT critics recently when he wrote that “MMT is not a theory of how the economy works, but rather a set of political memes to push for more deficit spending.” That seems about right to me.
Too loose or too tight?
Reader rwperu34 wants to know “Is current monetary policy too loose, too tight, or just right?”
The honest answer is “I have no idea.” If forced to pick one, I’d say “just right,” but that’s just a guess. Let’s run through the arguments on each side.
In conventional terms, monetary policy seems extremely loose right now. In past business cycles, it was common for the Fed to start raising interest rates in anticipation of future inflation. The Fed didn’t do that this time. With inflation at 7 percent, the Fed isn’t expected to start raising rates until next month.
Moreover, rising inflation means that real interest rates—adjusted for inflation—are at unprecedented lows. So arguably monetary policy has been getting looser even as the inflation rate goes up. That adds up to a strong case for the Fed to start raising rates.
But on the other side, you have to look at the global context. For the last 15 years, there has been a seemingly insatiable global demand for safe assets that have pushed interest rates down to record lows.
As a consequence, central banks have found they have little room to raise interest rates. A series of two 2011 interest rate hikes by the European Central Bank may have triggered a double-dip recession in the Eurozone. In the US, the Fed kept interest rates at zero for seven years, from 2008 to 2015, then only managed to get rates up to 2.25 percent before cutting them again in 2019.
All of which means that it might not take very much for the Fed to bring inflation under control. We seem to be in an environment where interest rate hikes are more powerful than interest rate cuts. The big worry is that the Fed could overdo its rate hikes, trigger a recession, and push the economy back toward the low-interest rut it’s been stuck in for much of the last 15 years.
But it’s hard to be sure. Maybe the massive stimulus spending of 2020 and 2021 jolted the US economy out of that rut and the rules are different now. Maybe the Fed will respond too slowly and inflation will keep rising. I really don't know what’s going to happen next.