I can’t say I’m much of a Twitterer, but I did recently Tweet a very interesting paper by Enrico Moretti on how variation in the cost of living across metropolitan areas might change our picture of consumption inequality.
I show that from 1980 to 2000, college graduates have increasingly concentrated in metropolitan areas that are characterized by a high cost of housing. This implies that college graduates are increasingly exposed to a high cost of living and that the relative increase in their real wage may be smaller than the relative increase in their nominal wage. To measure the college premium in real terms, I deflate nominal wages using a new CPI that allows for changes in the cost of housing to vary across metropolitan areas and education groups. I find that half of the documented increase in the return to college between 1980 and 2000 disappears when I use real wages.
Matt Yglesias, a far more prolific blogger than yours truly, than offered his thoughts on Moretti’s findings.
The way I read this research result, if we take a bunch of money away from rich people it will cost them relatively little in welfare since almost half of the excess income of the rich is going to bidding up the price of housing in the kinds of places where rich people can find jobs. If they all had less money, they’d all live in equally good houses; the houses would just be cheaper. But the money acquired through taxation could be used to provide services—better transportation infrastructure, better teachers, healthier food, more medicine—that have real value to the middle class and the poor.
There is, of course, another way to approach the stylized facts: the high cost of housing is to some extent an artifact of severe land-use restrictions. By easing these land-use restrictions, we might lower the price of housing. And in doing so, the affluent will have more resources that they can save and invest, or that they can spend on in-person services. I tend to think that somewhat more public investment on infrastructure and early childhood education and health could be money well spent, but we have to mindful of the need to achieve some kind of balance. (One of the best ways to encourage density, incidentally, would be to embrace a strong form of school choice that would encourage middle-class families to settle in urban jurisdictions.)