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Will be posting there from now on.About a year ago, state and local governments in the United States began urging residents to adjust their work, school and social lives in response to the spread of a novel coronavirus first identified in China.Īmericans could agree on a few things at that early stage of the U.S. Home prices will keep going up so the house can always be soldĮveryone else is buying mortgage backed securities/offering laxer loan termsĪ really excellent, very human telling of this story from the perspective of all players can be found in the This American Life episode, The Big Pool of Money. Due to the lifting of regulations, lenders likewise take this to the limit.Ī gamble with a high probability of small gain and a low probability of significant lossīuying the more expensive house, risking not being able to afford the mortgage.īuying mortgage-backed securities that offer higher rates of return but greater risk.Įxponential (feedback loop) rewards based on slight relative gains ("winner takes all")īetter schools which have an exponential effect on future generations' successīetter fund performance which attracts more investors, providing greater opportunities There is a symmetric story on the side of the lenders, where competition incentivizes fund managers to make riskier and riskier investments. One difference between the 1950s (the beginning of America's recent prosperity) and the early 2000s is that lending rules became laxer (no/low down payments, for example), which allows home buyers to stretch to the very limit of what they can afford. Bidding wars result in home prices way above their value as shelter (this can be measured as the ratio of home prices to rental prices). In addition, the best public schools are found in richer neighborhoods, and due to the growing importance of eduction, it's rational for a family to try to live in the most expensive house it can afford.īut what's good for one family is bad for society as a whole. Much of the motivation for this is as a display of social status (that is, consumerism in general). There is growing competition between people to buy more expensive houses.
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The relevant recent example is the rise and fall of the housing market in the US. In many cases this is true companies compete to produce a higher quality product, or the same product for a lower price, resulting in value for the society as a whole.įrank's essays focus on situations where this assumption breaks down. But there is a hidden assumption that improvements in relative value result in improvements in absolute value. I find the metaphor of an arms race most compelling.Ĭapitalism is all about competition (relative gains are rewarded). In athletics, one can gain an edge by taking steroids that may have some small probability of health risk, but if everyone takes the steroids, then everyone has the same relative standing but now all have the health risk. Some examples of "smart for one, dumb for all" situations: at a stadium, one can get a better view by standing up, but if everyone stands up, then everyone has the same view as before but without their comfy seats. The theme seems to be that government, and policy makers in general, have the imperative to eliminate or mitigate "smart for one, dumb for all" incentives. Spurred by some links from Economist's View and some conversations with Yang about a highly progressive consumption tax, I have been reading some of economist Robert H.