The baleful curse of the American Dream

When I get around to it, one subject of my PhD research is going to be labor mobility. I want to answer the question: Why do people not move away from an economically dying region? I started thinking about this question as soon as I moved to Michigan, driving through the decaying forests of boarded-up buildings that scatter the Rust Belt. "Why don't they all just move?" I thought. "Is it just because of their friends and families in the region? Or is there some economic force keeping them rooted to the land?"

If there are such forces, homeownership has got to be one of them. An article in this week's Economist explains how this works:

[T]hroughout history, Americans have dealt with economic shocks by picking themselves up and moving on. Their mobility underpins America’s flexible, dynamic labour market. Now it faces two threats.

One is the housing bust. House prices have collapsed by 27% since their peak in 2006. By December last year a fifth of homeowners with mortgages owed more than their homes were worth. Such people are only half as likely to move as those whose homes are above water, estimate Joseph Gyourko and Fernando Ferreira of the Wharton School of business.

Some cannot sell their homes at all. Others could, but don’t want to take a big loss on an investment they thought was safe as houses. Either way, they are stuck. If a good job comes up in another town, they cannot take it. This effect is partly offset by the impact of foreclosures. Last month alone 291,000 homes received a foreclosure notice. The newly evicted are not merely free but obliged to move. This is unfortunate, but although jobs are in short supply nearly everywhere, being mobile at least increases the odds of finding one.

A decade ago Andrew Oswald of the University of Warwick in Britain argued that excessive home-ownership kills jobs. He observed that, in Europe, nations with high rates of home-ownership, such as Spain, had much higher unemployment rates than those where more people rented, such as Switzerland. He found this effect was stronger than tax rates or employment law.

If there are few homes to rent, he argued, jobless youngsters living with their parents find it harder to move out and get work. Immobile workers become stuck in jobs for which they are ill-suited, which is inefficient: it raises prices, reduces incomes and makes some jobs uneconomic. Areas with high home-ownership often have a strong “not-in-my-backyard” ethos, with residents objecting to new development. Homeowners commute farther than renters, which causes congestion and makes getting to work more time-consuming and costly for everyone. Mr Oswald urged governments to stop subsidising home-ownership. Few listened.

America subsidises more than most. Owner-occupiers typically pay no tax on capital gains and can deduct mortgage interest from their income-tax bills.

This basically sums up what I'm going to try to represent with a formal model. But the upshot is easy to understand: encouraging homeownership is encouraging Americans to tie themselves to a point on the map, at a time when the economic map is changing faster than ever.