A recent article on the state of the global economy got me thinking about our own local housing economy and how fragile it may actually be. It also made me think that there may be ways that we can design interventions in our local housing market that are more responsive to the push and pull of market forces that are truly beyond local control so we’re better prepared for a downturn. The problem with the typical Seattle approach to solving housing price issues when the economy is hot is, ironically, to make it harder to build housing by imposing taxes, fees, rules, and controls that end up squeezing supply. Then, when the economy slows down, everyone moves on to job creation and the “safety net” to help people suffering from the downturn. Housing and land use is forgotten until the next upturn. Maybe there is a better way.

The article in The Telegraph, HSBC fears world recession with no lifeboats left, lays out in great detail why one of the world’s largest banks thinks the global economy is sailing toward trouble without many options if the ship springs a leak. The typical intervention the article is referring to is the lowering of interest rates, a dial that governments use to either slow or speed up an economy. When an economy starts moving faster the result can be inflation, when it’s too slow, prices drop. In the first case, governments want to protect people’s savings and investment from being consumed by inflation and in the second, they want to prevent widespread unemployment when prices fall. But the problem is that governments have the interest rate dial set at just about zero, meaning that if demand falls, prices drop, production slows, and unemployment goes up, there isn’t any way to encourage more borrowing by the private sector to generate more goods and services, boosting supply and demand by lowering the cost of money.

Locally, we feel a drop in global demand because some of our biggest employers are global suppliers; Boeing’s airplanes, Amazon’s stuff, and Microsoft’s operating systems and programs. That line of brogrammers a the food truck some Seattlites whine about, could easily turn into an unemployment line — or a line on freeway ramps and airport gates as those people leave our region for jobs elsewhere.

The Seattle City Council can’t control interest rates, but it does have a form of monetary policy: land use regulation. The dial the City has on our economy is largely the value they allow to be created by the development of more housing and office space. Now, generally, there are two limits to what will and can be built in our city. The first of these limits is economic, the rate of return that can be generated, for example, from a mixed use building versus a parking lot or a high rise apartment building. If there was no limits on land use we would not see Hong Kong style density as a result; there simply isn’t that much demand to create that kind of density. But there is enough that in places like South Lake Union there would be more units built in response to demand.

The second limit on our local economy is the way that the Council constrains what the market is signaling builders and investors to do. When the economy is hot, a particular site that previously a poor investment for housing can suddenly turn into a great place to build housing because the demand for housing is increasing. But if the Council has imposed a myriad of limits on that site, either the building won’t happen (see Dan Bertolet’s post on what will happen if linkage taxes are passed) or fewer units than the market would allow will be built. Either way supply is slowed down and, in the face of rising demand, prices will go up too.

But the study of economics is often criticized by the left as not being a “hard science,” a field that is part social science and part divination, and in practice nothing more than guesses by people with a financial interest in the outcome. Here’s an example from the comments on my recent post about rent control in Publicola:

The proof is in the pudding. The results of 40 years of screwing United States Citizens in order to enrich a cadre of wealthy individuals from around the globe.

“Economists” are frauds, and hucksters for the wealthy.

“Economics” is not a science, but “economists” try hard to get people to believe it is. More fraud.

Yep. It’s all fraud. The left usually adopts this Lysenkoist position because to do otherwise would force them to change their preferred brand of economic intervention, price controls and taxes. And while regulation is critical to shape the economy, it is not an either or proposition. The truth is that an economy is like the weather, it can be studied and we can manage our response to it. But we can’t control it. But two Councilmembers seem to think they can control the outcome of our local economy, and oddly, they both should know otherwise. Councilmember Mike O’Brien holds an MBA and Councilmember Kshama Sawant is a Ph.D in economics. Yet, Councilmember O’Brien is proposing interventions that would lower land value and add costs to the production of housing when we need it the most, while our local economy is humming. Councilmember Sawant want’s to impose inflationary price controls at the same time.

When the economy does hit that ice burg and demand drops and we start to feel it here, we’ll still be left with the dials of local land use set to slow a hot housing economy, largely because of worries about “developer profits” and displacement. It’s kind of like holding down the breaks on your bike as you go down a big hill, but then not having the sense to let up on them when you get to the bottom and have to climb the next one; without the momentum climbing that next hill will take a lot more work.

If we had a sensible approach to housing economics our dial would be permits and housing subsidies; when demand was skyrocketing, we’d turn that dial up as high as we could, to the point where the local housing market might even be overbuilt.We’d take the many taxes and fees (yes, developers already pay millions into the City’s treasury) and turn up the subsidy dial.  If you really want to harm developers, let them build too much inventory — let them overshoot the market. When demand starts to fall, so will prices and the motivation to build. At that point, the subsidy dial could be turned down because prices would drop or it could be diverted to, yes, pay developers to build more housing that makes no financial sense to build otherwise. Maybe vacancy rates would climb, but that would be great for housing prices.

Interestingly, it might be that the bogus theory of induced housing demand might actually become a reality, with housing prices in Seattle so low and enough jobs in the construction world that people, and companies, would start coming back to Seattle and we could have a local recovery.

But for all this to work Councilmember O’Brien would have to combine what he must have learned in economics, riding bikes, and paddling his kayak. In economics there are price cycles that are driven by supply and demand. When you’re riding a bike down the hill you break just enough to keep enough energy and momentum to make taking the next hill faster and easier. And when it comes to kayaks, you need to know how get yourself and others out of trouble, and that means being well trained and prepared.

But, locally, if we are to get though the next down turn we need to think ahead, stop fearing change, worrying about developer profits and pay attention instead to using our land use code and housing policy to create as much housing as we can now, and when things start to turn down, use subsidies to keep housing production moving as far beyond the cycle as possible. If we do that, we may not need a life boat since we could deploy our well trained flotilla of kayaks. Lots and lots of kayaks.