Thursday 30 May 2019

Killer Arguments Against Citizen's Income, Not (21)

This one keeps rearing its ugly head:

"If we pay out a universal Citizen's Income at a flat rate to all adults, this will go straight into higher rents so landlords will be the only beneficiaries"

Clearly not true as it ignores the basic rent setting process (and it ignores the real world, in which UBI would be a straight swap for many existing welfare payments and tax reliefs, a few winners and losers, most households break even to within £10 or £20 a week).

(Clearly, a UBI, like nearly any type of government spending, good or bad, ist best funded out of LVT but that is a side issue.)
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1. The main driver of rents is the extra income you can earn for a similar amount of effort by moving to a higher wage area. If you do not understand or accept this, go to jail, do not pass Go, do not collect $200. This is easily observable in the real world, what it boils down to is that the net disposable income, after paying rent, is pretty much the same all over the country.

This must be true, or else what's stopping everybody from moving to higher wage areas? Answer: the equal and opposite force of higher rents!

2. In the lowest wage area, the location rent is always nil.* There are vast swathes of land/housing, even in developed countries where the location rent/site premium is £nil i.e. where you can buy a house or flat for less than it would cost to build, or where some homes/shops have been abandoned. This is easily observable in real life.

That is our fixed point, call it Town A, where average wages are £10,000 (or those in work earn £15,000 but one-third of adults are unemployed, for example).

People in Town B have average wages £11,000 (could be higher wages or lower unemployment/more jobs, doesn't matter).

People in Town A would like to earn that extra £1,000, so they are willing to move to Town B, provided the extra rent is no more than £1,000.

People in Town B would like to save rent by moving to Town A, but they know that wages are £1,000 lower, so they expect rents to be at least £1,000 lower in Town A (and at least £1,000 higher in Town B).

So the equilibrium point is where the rent in Town B is £1,000 more than in Town A, the same as the difference in average wages between the two.

This applies to all areas up to Town Z, with the highest average wages in the whole country.
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OK, so let's imagine the government pays the UBI out of thin air, like some new royalty income (oil, 3G 4G 5G licences etc), so requires no change to taxation which would confuse the discussion.

Town A is still the least desirable area, so location rent is still nil. That is a fixed point.

Average wages (even including UBI) and rents in Town B are still £1,000 higher than in Town A, i.e. unaffected.

The incentive to move from Town A to Town B (higher wages) and to move from Town B to Town A (lower rents) are unchanged and still in the same equilibrium as before.

This applies all the way up the chain to Town Z, the highest wage area in the whole country.
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* Imagine an outdoor concert with so many rows of seats that there are more seats available than the number of people with even the slightest interest in seeing the show.

The front row seats will go for £100, the second row for £95, the price/value will drop slightly for each row further back, and so on until the seats are so far back that people aren't willing to pay anything for them (not even the price of the bus ticket to the venue) and the promoter can't even give them away.

The marginal location is the last row where people want to sit, even for free. Their location value is £nil. Any further in, and you'd have to pay at least £1. Any further out and there are no takers at all, as the last few people with an interest in the show have already taken a free seat in the back row.

14 comments:

benj said...

Rent is all about difference. UBI is about people getting the same. Ergo UBI has zero effect on rent.

ThomasBHall said...

Good explanation- thanks. This is actually one I have occasionally confused myself over... Housing benefit putting a floor on rents/ UBI putting a floor on rents. Can be a bit counter-intuitive.

Mark Wadsworth said...

BJ, yes.

TBH, housing benefit exaggerates rent differentials, UBI does no such thing.

Lola said...

TBH. HB is an extra benefit. UBI replaces all sorts of benefits and tax breaks. Subsidy it ain't. And we all know 'that subsidies always end up in rents' done't we?

Dinero said...

What about property/location characteristics of desirability other than wage diffentials. Is it possible that those properties/locations higher rents coul be the wage differential plus extra.

Mark Wadsworth said...

L, agreed.

Din, clearly you can plus minus for schools, parks, sea views. Wages are the main (but not only) factor.

Dinero said...

It is not relative wages it is absolute wages. Within a wage area there are dwellings with a hierarchy of quality. The rents are bid up by the wages of the people who live in that area. The rents of dwellings of comparable quality across different wage areas are different for different wage areas. And so for all areas it is the absolute wage levels that affect the rents.

Mark Wadsworth said...

Din, exactly. That's what I meant.

benj said...

@ Din

Nice one.

Its all willingness to pay at the end of the day. Lots of things, including access to better paid jobs, makes one location more productive than another.

Rolls Royce locations vs Mini Metros.

UBI doesn't effect anyones willingness to pay relative to each other regarding access to nice locations. LVT however is the complete opposite,

Dinero said...

@ Benj
Not willingness relative to each other, but i suggest all recipients would be willing to spend some of it to posses occupancy of the property they desire, if there are one or more other bidders, as in a case of wages higher by the same amount in all areas.

benj said...

@Din

Why would those on lowest incomes spend more when they'll always be outbid to where rents are free anyway?

As you know a LVT cannot be passed on in higher rent. That is only true because it is paid out as a UBI. If it were used to reduce other taxes, rents would indeed rise.

Mark Wadsworth said...

Din, I have no short rebuttal for that. Suffice to say, replacing existing cash non-housing related welfare payments/tax reductions with a UBI, and no changes to the tax system would have naff all effect on rents or selling prices.

L fairfax said...

Personally I think UBI would be negative on rents in expensive areas as people who currently get masses of housing benefit - would have less money and move somewhere else - maybe pushing rents up there.

Mark Wadsworth said...

LF, agreed, that's another bonus.