The second group includes workers who, though they may not be poor, have experienced stagnant income for several years and can no longer preserve the middle-class standard of living they used to enjoy. This group has been abandoned by the state. The minimum threshold for income tax eligibility could be increased and if that were not enough, some of these workers could be included in EITC. This would be a good way to reduce the massive levels of income disparity without generating distortions in the economy. The middle class spends most of its income on consumption, so the positive impact on the economy would be immediate.
This program could be implemented in several countries. In addition to being easily enforceable and effective, it can easily be expanded during periods of economic hardship. In a world where technological change will only further widen the income gap, these types of programs will start to become more relevant.
It is important in designing these programs that they not to lose their focus on individual human dignity. In my opinion, there should only be three welfare plans. The EITC, which helps those who do work but do not earn a sufficient income; an unemployment subsidy for those who are unemployed but want to work; and a disability pension to help people who unfortunately cannot work due to their physical condition. Anything else is state control and feeds a complex state technocracy.
HOME SWEET HOME
California, with its sunshine, organic food, massive tech companies, the Golden Gate Bridge, Hollywood, and so much more, is the most populated state with the largest economy in the United States. It is the state that has contributed most momentum to the American and global economies in past decades thanks to major technological advances achieved by its tech companies. It is also the most liberal state, with progressive laws and a population deeply committed to addressing climate change. However, not all is like the movies. It is also the state with the largest population under the poverty line in the United States, and one many choose –or are often forced– to emigrate from.
Since 2011, the US Census Bureau began to publish the Supplemental Poverty Measure (SPM), a poverty index that accounts for other factors related to the cost of living in each state such as the cost of housing, gas, food, payments from the state, and medical expenses, among others.
What is interesting about this indicator is that when poverty rates are measured through the traditional index, which only takes into account family incomes, not the cost of living in each state, Louisiana and Mississippi appear as the states with the highest poverty rates in the country, standing at 19.8%. (15) However, when we take the SPM indicator, which accounts for the cost of living in each state, the state with the second-highest poverty rate in the country is California, with 18.1% of its population below the poverty line. This is mainly due to the high cost of housing, which greatly reduces the middle and lower classes’ available income, many of whom spend more than half of their income on rent. Other relevant factors in California are the high cost of gas and electricity due to bad planning and new environmental regulations. According to the traditional measurement, California has a 12.5% poverty rate, but the relevant figure is the one provided by the alternative index. (16)
Buying a house in the United States is more expensive than ever before. In 1970, the average price of real estate measured in current US dollars was $50,222, in early 2020 that number was $327,000, almost five times more. (17) During that same period, the average family income grew by 37%. (18) It is no coincidence that the two states with the lowest poverty rates according to the SPM are Iowa (6.7%) and Kansas (7.8%), whose properties are among the cheapest in the US (43 and 44 ranked nationally).
The high real estate prices on the West and Northeast Coasts are driving significant migration to states such as Arizona, Idaho, Colorado, Texas, North Carolina, South Carolina, and Florida. (19) Homeownership is a middle-class symbol, and people’s inability to access housing speaks to a system that is not working properly.
In cities like San Francisco, Los Angeles, Paris, London, Moscow, Milan, Lisbon, Munich, and Rome, you need more than 15 years’ worth of average income to buy an average piece of property. Hong Kong sits at the top of the Asian ranking, with 47 yearly incomes needed to buy a piece of property. In Latin America, Buenos Aires tops the list with 26 years, followed closely by Bogota with 25 years of income needed to buy a home. (20)
The cost of housing is central to the issue of inequality because it is what those who earn the least spend the majority of their income on. It is also one of the main complaints of young people, and a crucial matter in the Pandemial Uprising. Homeownership plays a central role in the social order of many countries, tipping voters toward center and center-right parties and away from left-wing ideologies. In France, where the net average salary is 2,000 euros per month, the cost of a 30-year mortgage to purchase a 300,000 euro, 40-square-meter apartment is 1,183 euros. If we add in the cost of power, gas, water and property taxes (which add up to an additional 300 euros per month), this person is left with 517 euros a month to spend on groceries, transport, and any other expenses, which is clearly not enough. (21) This person has two alternatives: get married quick (assuming they will not get a divorce) to split the mortgage or rent a small apartment for 600 to 800 euros a month. In an unstable job market where freelancers are gaining increasing relevance, few people can commit to a 30-year mortgage for such large amounts.
The housing market is like any other. If there is demand but no supply, prices go up. Too many urban regulations prevent the construction of several floors and maintain single-family zoning districts. Also, in many states like California, environmental impact-related permits can delay new constructions for several months or even years. According to estimations by The Economist, the rate of construction of new homes in the United States is half of what it was in 1960. (22)
After World War II, governments intervened in the housing market by building millions of homes, which paired with new constructions by the private sector allowed families to acquire relatively accessible properties in terms of their income. In the United States, the construction of the interstate highway system initiated by President Eisenhower (for national security reasons) in 1956, and which continued until the 1990s, made possible the development of city suburbs. This caused a major rise in construction around cities. However, during the 1980s, with gradually less available land, the supply of properties became increasingly limited, significantly driving up prices. In many cases, the supply of homes is inelastic, meaning that a rise in prices does not necessarily mean a rise in supply, especially in cities with strict city codes.
Let us take a look at Germany: a very good example of a country where the housing market works properly. There, the government guaranteed a wide supply of new properties through regulations that promote construction. The rate of homeownership is low, a mere 50%, but thanks to long-term rental incentives and young people not feeling pressure to buy, (23) all these measures contributed to the price of properties being –on average– similar to 1980. (24) For instance, in 2018, Germany built twice as many houses as England, despite having a population only slightly higher and a lower demographic growth. (25) (26) In 2019, the city of Berlin decided to go even further by freezing rental prices for five years. (27)
At the other extreme are cities such as London, with some of the highest housing prices in the world. It is still surrounded by a green belt with strict building restrictions even though young people struggle to access property. (28) Increasing the supply of property in this city by clearing areas for new construction and rolling back certain urban restrictions could generate a strong impulse for the British economy at a time when it is reeling from the pandemic and its exit from the European Union (Brexit). It would also reduce traffic jams and the use of public transport by allowing people to live closer to their work.
In many major world capitals, very strict regulations protect an existing elite of property owners by preventing the construction of tall buildings demanded by the modern economy and needed by young people. We are witnessing a clash between urban aesthetics and the needs of the economy. Residents tend to get upset with the construction of new building complexes that increase the population of their neighborhoods. But unfortunately, we need more homes. We are no longer 3.7 billion people in the world like in 1970, but almost 8 billion people; more than double. And these 8 billion people need