Economics 101: The Importance of Productivity

Posted by on Thursday, September 24, 2015 · Leave a Comment 

If you can find 30 minutes of free time I recommend you watch the video featured above, a tutorial on basic economics. If you have any stake in the housing discussion going on in this city, it’s worth getting a grounding in simple economics. The thing I like most about this video is that the creator, Ray Dalio and investor and businessman worth billions, points out that the economy is all about cycles. It’s hard for us, and for Councilmembers especially, to understand that things will change with the economy. Whether the economy is doing well or doing poorly, however we measure that, it will get better or worse. But we’re on that line on the graph that’s moving up and down, so we forget that.

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Mike Scott sounded the first note of what might become a longer song about the peak of the housing market in Seattle. In a post earlier this week he pointed out,

Rents are cyclical. Sometimes investors forget that. They shouldn’t. Since 2000, rents have gone up, down, and flattened out, resulting in an increase of just 2.8% compounded annually, excluding the distortion caused by new construction.

I actually e-mailed Sanjay Bhatt to complain about the fact that the Seattle Times chose bury the news about Dupree + Scott’s report about slowing rent to the business section. Had Scott announced rents were higher, that would be front page news.

Hi Sanjay,

Love how this story, Rent increases slowing for older Seattle apartments, is buried in the business section. I know that had the numbers been the other way it would have been front page news. 

Please, report the slowing and lowering of rents with the same fanfare as the increases. If rents going up is front page news, why on earth is the opposite trend not news?
I know. I’m so pleasant aren’t I? But I think the editors and reporters at the Times should watch this tutorial and decide to report all the swings on the cycle the same. When the Times makes these kinds of editorial choices, it actually influences the cycle. City Councilmembers, regardless of what they might say, care about headlines in the paper. When the headlines on the front page of the Times scream that “Rents Are Skyrocketing!” it reenforces conventional wisdom and hardens political positions that ignore the cyclical nature of price.
Which brings me to the final point: Dalio highlights the importance of production. I believe him. And if you watch the video it makes sense. The one thing local government can do is relax regulation and truly incentivize housing. It’s the logical sensible thing to do, especially when the market is heating up. We want to extend that part of the cycle as long as possible, because when the downturn happens, we’ll be insulated with lots of housing stock. But the City Council makes policy without regard to the inevitable cycles. Unfortunately political cycles don’t track very well with reality.

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