Thomas Piketty’s book as well as many other arguments recently have pointed out that real estate tends to be where capital accumulates. Think about it – we have this notion that tech geniuses like Bill Gates or Elon Musk invest all this money into technological capital and that’s where the wealth is.
But technology depreciates. Fast. So while obviously technology has a role to play in increasing productivity, it’s not where the wealth is being stored.
Real estate, on the other hand, tends to keep its value. In fact, due in large part to zoning laws, the value can go up, fast, if you’re lucky. But that’s the rub – it’s hardly economically efficient and it sets up some really terrible incentives. Compared to investing in companies, where the savvy investor has to play a role in picking winners and losers and is thusly rewarded for taking careful risks, a lot of real estate investing is being lucky and then hoping the supply stays tamped down.
Which brings us to the second part, particularly wealthy real estate moguls have an incentive to keep that supply tamped down, and they do so in large part by lobbying for zoning laws.
A great example might be a nice nuclear family in the 60’s buying a small ranch style house in Palo Alto for, say, $30K. That house is now probably worth over $1M. While I’m happy for the owners, what exactly did they do to grow the economy? What labor, innovation or risk is being rewarded here?
Then, in a cruel twist of fate, that same family ends up using their new found wealth to make sure that their house stays valuable. As businesses need to bring in more labor, they find they can’t pay their employees enough to afford housing, and so now the guy who happens to have gotten lucky buying a house is keeping tech businesses from growing, all in a protectionist move.
If we look historically, we’ll see almost all wealth has been tied up in land since the Pharaohs. The American 1950’s and 60’s were a weird blip when it shifted more to machines and what we usually call capital. We saw first hand the huge boon this was to society. We have a huge incentive to get back to this – to build things rather than sit on land – and changing our zoning laws is one way to get there.