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Locating Equality

For years, wealth and income inequalities have been rising within industrialized countries, kicking off a broader debate about technology and globalization. But at the heart of the issue is a fundamental good that has been driving social and economic inequality for centuries: real estate.

MUNICH – Inequality is the leading political and economic issue of the current era, yet debates about it have long suffered from a degree of imprecision. For example, the standard measure of inequality, the Gini coefficient, reduces a country’s entire income distribution to a single number between zero and one, and is thus highly abstract. Similarly, while inequality is rising in many parts of the world, there is no simple correlation between that trend and social discontent or unrest. France is much less unequal than the United States, and yet it has similar or even greater levels of social polarization.

Today’s inequality debate effectively began in 2013 with the publication of French economist Thomas Piketty’s Capital in the Twenty-First Century, which found that the rate of return on capital tends to outpace the rate of growth, thereby causing inequality to increase over time. Specifically, appreciating real-estate values seem to be a fundamental driver of rising inequality. But here, too, one encounters a degree of imprecision. Real estate, after all, is not a homogenous good, because its value famously depends on “location, location, location.” There are elegant castles and palaces that now cost less than small apartments in major cities.

Wealth stirs the most controversy where it is most tangible, such as when physical spaces become status goods: the corner office is desirable precisely because others cannot have it. More broadly, as major cities have become magnets for a global elite, they have become increasingly unaffordable for office workers, policemen, teachers, nurses, and the like. While the latter must endure long, tiresome commutes, elites use global cities as they see fit, often hopping around from place to place. Large swaths of Paris and London are eerily shuttered at night. Manhattan now has nearly a quarter-million vacant apartments.

Whenever violence and revolution have consumed unequal societies, real estate has been a focus of discontent. In the later years of the Western Roman Empire, vast estates catered solely to an aristocratic elite. In a famous homily from this period, St. Ambrose of Milan, reflecting on the Old Testament story of Naboth’s vineyard, decries elites for making “every effort to drive the poor person out from his little plot and turn the needy out from the boundaries of his ancestral fields.”

Likewise, the French social historian Marc Ferro has demonstrated that many urban Russians were driven to the Bolsheviks in 1917 not out of ideological zeal, but because the old regime and the new constitutional parties had proved incapable of providing food and housing. Over the course of World War I, Petrograd had developed an enormous munitions industry, manned by peasant labor conscripted in the countryside and brought to the newly expanded factories. But production planners had neglected the question of where these workers would be housed, and in 1917, the worker committees (soviets) offered an answer: apartments would be confiscated from the aristocrats and bourgeoisie.

A similar pattern played out in other cities where rapid, unplanned wartime industrialization had occurred (Budapest, Munich, Turin). Today’s equivalents are the centers of the new economy, such as Silicon Valley and its high-tech imitators in Europe and Asia. These cities have produced many jobs, but they have utterly failed to accommodate the people who actually live there. As a result, even middle-class professionals are living in cars, vans, and trailers.

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And this malaise is not limited to the global cities themselves. Support for Brexit in southeastern England owes something to the perception that London and its immediate surroundings have become unaffordable as a result of too much immigration, international financial activity, and tourism – in short, globalization.

Needless to say, the political response to the real-estate problem has so far been inadequate, even counterproductive. Some large European cities are introducing rent controls, despite the poor track record of such policies. When New York tried similar measures in the twentieth century, the open market dried up, and property was hoarded or traded at a premium on the black market. When the UK rolled out a fiscal subsidy for first-time homebuyers, home prices rose accordingly, offsetting any potential benefit.

Removing tax privileges – as the US did recently by imposing a $10,000 cap on the state- and local-tax deduction – is a slightly better approach. But it will not solve the fundamental problem of supply. Not surprisingly radical, even Bolshevik-style, proposals are making a reappearance. A popular initiative in Berlin, for example, would socialize the holdings of large-scale real-estate owners (those managing more than 3,000 apartments).

The obvious solution to the supply problem, of course, is to build more housing. But new construction can conflict with environmental protections and a city’s architectural heritage, and is often opposed by existing property owners, who do not want the value of their own property to fall.

Sometimes, new construction can create alternative urban magnets, such as when the Spanish city of Bilbao was transformed by the addition of a Frank Gehry-designed Guggenheim Museum. But many declining industrial cities have already tried this solution, and only a few have succeeded. Those that have failed are still run down, and now have the added burden of maintaining new arts infrastructure.

Eventually, the cities and urban areas that are driving the bulk of new wealth creation will provoke a counter-movement. If they price out or otherwise exclude those who earn less, they will have sacrificed the openness that made them attractive in the first place. So, if they want to survive and thrive in today’s egalitarian political climate, they will need to come up with bold solutions.

During a previous period of urban-based dynamism, in the early sixteenth century, rich merchant families built low-rent housing that was then allocated to the poor. One such project, the Fuggerei complex in Augsburg, Germany, still provides low-rent social housing to this day.

If enough such housing cannot be supplied, might a lottery allocation of public accommodation help to stem the encroaching homogeneity of today’s global cities? It is certainly worth a try.

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