Social Class Is Based on Land Tenure

The Wealth Gap

The greatest fallacy of Modern demand side economics is to define social class in terms of outcomes (I.e. income and wealth inequality) rather than ownership of inputs/real resources the most important of which is real estate. Defining class in terms of outcomes distorts the cause of the inequality.

The biggest wealth gap in America is not between blacks and whites, women and men, rich and poor or immigrants and native citizens but between homeowners and renters. Homeowners have a median net worth of $255,000, most of which is invested in their home with a 401K, Roth IRA or pension on the side, while renters have a median net worth of $6,300 mostly in their car (if they have one) or savings with some stocks, index funds, and bonds in the mix. So the average homeowner has 40x the wealth of the average renter. For comparison, the median white household has 8x the wealth of the median black household. The average man has 3x the wealth of the average woman, the wealth gap between native citizens and immigrants is even smaller and rich & poor are poorly defined terms since cost of living is relative to geography; a homeowner making 30K a year in Missouri is likely wealthier than a renter making 60K a year in California. All other aforementioned demographic wealth gaps are disparities between owning and renting; even small businesses that lease commercial space will have lower profits than businesses that own their building due to the former paying rent and the latter having equity.

Class interests rightly conceived

Homeowners and landlords have a different class interest from renters of all stripes. The former gains equity and higher rents from land value appreciation while the latter loses a greater portion of their wages or profits to rent. These class distinctions are fluid, unlike say feudalism, and are often blurred by homeowners who also lease commercial space for their business.

Problem, reaction, solution

The current solution is to push everyone into homeownership which is why homeowners not only get an income tax deduction for mortgage interest and property taxes, with no equivalent for renters, and also why the FHA only insures mortgages for single family homes and condos with less than 35% commercial space. While single family homes create a plethora of problems mentioned elsewhere (e.g. higher infrastructure and public services costs, more sprawl and deforestation, more congestion and longer commute times and higher housing costs in general) the ease of obtaining one is largely a function of geography. The two poorest states in the union, West Virginia and Mississippi (with median household incomes of around $45K), also have the highest rates of homeownership (78% and 74% respectively) which is easily obtainable wherever land is cheap and freely available. The median home value in Mississippi and West Virginia is $130,000 and 136,000 respectively, which is 45-50k less than the national median home value of $181,000. In contrast, the wealthiest states in the union, New York and California, have the lowest homeownership rates at 53% and 55% respectively. Even though people in these states make 1.25-2x the household income of people in the poorest states they pay 3-6x as much in rent and median home values are well over half a million and closer to a million. These cost of living differences are the inevitable outcome of Ricardo's law of rent. The margin of production will always be much higher in sparsely populated rural areas than high density urban cores. This is why you also find greater income inequality in big cities.

But it's not just wealth that tends to increase as cities grow; the cost of living also increases. So, the authors factored in an adjustment for housing prices. With that adjustment, their analysis showed that, as cities get bigger, the housing costs increase at a faster rate than lower-decile income.

For the lower decile, there is no proportional increase in wealth. So, the city is not increasing economic benefit, but it's not decreasing it either," says Kempes. "However, since costs do go up, the experience of the poorest individuals gets worse.

Rents are also increasing faster than median household income. As mentioned in a previous post about the futility of minimum wage laws:

In the past decade, rents have only risen by an average of 36% which is higher than the 27% growth in median household income over the same period but is not as severe as the average rise in rents for big metros like Seattle (77%) or San Francisco (70%) or Phoenix (71%) or Denver (85%) or Los Angeles (65%). Over the same time period, median household income has only risen 36% in Los Angeles, 55% in Denver, 41% in Phoenix, 61% in San Francisco and 59% in Seattle.

The disconnect for most people unconcerned about rack rents because they own their homes is that they do not realize or are willfully ignorant to the imperative that businesses will charge higher prices for their goods and services if they have to pay more to lease prime commercial space and higher rents will be a barrier to entry for many would be entrepreneurs. These outcomes too are an inevitable result of ignoring the law of rent and the solution to recapture the value created through commerce, development and public services that are captured through the land monopoly.