Robert McCarthy’s rundown of the impact of gentrification on the DC mayor’s race is interesting, if a bit under-proven, but I think he ends on an analytical mistake:

Ironically, gentrification won’t be a pressing issue in the first part of the next mayor’s term, because the recession has stalled real estate development in the city. However, as soon as the business cycle turns up again, gentrification and demographic transformation will return to the top of the agenda. The social and economic trends are unstoppable. People increasingly dislike the suburbs because commutes are so long, and many young people coming to the region prefer a lively, urban lifestyle.

The association in people’s minds between real estate development and the kind of gentrification in which “working-class citizens, mostly blacks, are concerned that rising rents will drive them from the city” is a classic case of people confusing correlation and causation. If a given location becomes more desirable—because of new transportation infrastructure, because of improved schools, because of reduced crime, because of changing tastes—then two different things happen. One is that rents in the area increase. The other is that because housing in the area is now more valuable, real estate developers act to increase the supply of housing. Both the new development and the increased rents are driven by the same thing—the increased desirability—but the development doesn’t cause rent increases, it tends to mitigate them.

The problem for urban areas experiencing quality of life improvements is that it’s generally impossible for the market to respond to increased demand for housing in Neighborhood X by dramatically increasing the supply of housing in Neighborhood X. Limits on density and other practical and regulatory barriers mean that you see some new housing and also some big increases in rent that tend to “push” people into other neighborhoods. If a global financial crisis comes along and increases the practical impediments to large-scale real estate development by tightening the availability of credit for entrepreneurs interested in long-term mildly risky undertakings then that’s going to make the problem even worse.

I think it’s important for people to understand this correctly, because poor people in supply-constrained areas are currently caught up in a kind of perverse catch-22. They and their children lack economic opportunity because they live in communities with bad schools, high crime, and few jobs. But if the schools get better and crime goes down and more businesses open, instead of enjoying improved opportunity they face rent increases and need to move someplace with a lower quality of life. If you want to improve the situation facing poor city-dwellers, you need to pair efforts to improve living conditions with efforts to ensure that increased demand is met mostly with increased supply rather than mostly with higher rents.

Carmen & Vincent Reinhardt have a paper (PDF) about an empirical survey of what happens in the wake of big financial crises. It’s all bad news—you’re looking at about a ten-year span of deleveraging and reduced growth on average, and it’s not rare for per capita income to remain below pre-crisis levels at the end of that period. Near the end they express some agnosticism as to causation:

What we observe, of course, is an association. Growth falls and the
unemployment rate remains high after a severe economic dislocation. That observation, itself, is not informative as to the balance between changes in aggregate demand and
aggregate supply.

The outcome could materialize as a consequence of the failure of policy makers to
provide sufficient stimulus after a wrenching event in an economy where rigidities give
ample scope to demand management. An important role for credit in supporting
spending might imply that an associated collapse in financial intermediation lengthens
and deepens the downturn (with the unavailability of credit serving as the propagating
mechanism discussed in Bernanke, 1983). In such circumstances, slow growth might be a self-fulfilling prophecy produced by timid authorities who neither supported spending nor dealt with the capital-adequacy problems of key financial institutions.

I think their data actually sheds more light on this question than their analysis suggests. Negative shocks have both real and nominal elements. If governments tend to respond to big shocks with too much stimulation of demand, we should see higher-than-usual inflation as a result. Conversely, if governments tend to respond to big shocks with too little stimulation of demand, we should see lower-than-usual inflation as a result. And Reinhardt & Reinhardt show that unusually little inflation is the typical result:

And:

So that seems pretty clear-cut to me. Like the United States today, most governments faced with big financial crises in the postwar era engage in a quantity of demand-stimulation that’s insufficient to offset the purely nominal impact of the negative shocks. That’s not to deny that real shocks are also present or that limits exist to what demand-stimulation have accomplished, but simply to point out that government usually don’t test those limits and thus end up inflicting avoidable suffering.

Will Wilkinson smartly observes that whether or not you favor homeownership subsidies they’re as American as apple pie and this reality undercuts the notion that there’s some inherent opposition to public sector activity in the American psyche. Indeed, I think the problems with current housing policy just highlight the problems with these kind of arguments from tradition.

After all, it seems to me that one of the reasons the country became so enamored with housing-driven industrial policy in the postwar years was the idea that this was somehow continuous with 19th century homesteading. And it’s true that if you ignore the interests of Native Americans (also as American as apple pie) that the USA was largely settled through a hugely successful big government program. First the government seizes a huge swathe of land from its owners and forcibly resettles them on much-smaller and less-desirable patches. Then the government gives large tracts of land away to railroad companies to subsidize infrastructure creation. And then it gives away modets patches of land to anyone who wants to farm them. Thus the American dream of homeownership.

But as a public policy matter, the fact that this land was confiscated from Native Americans is really important to the analysis. The details of how a state distributes the gains from a natural resources windfall are important (I’d much rather live in Norway than Equatorial Guinea) but you can’t just ignore the fact of the windfall. Policies like making home mortgage interest tax deductible—unlike the subsidies of the 19th century—don’t transfer valuable resources from foreigners to Americans. Nor do they on balance transfer resources from rich Americans to needy Americans. Instead they tend to simply shift resources away from the non-housing economy and toward the housing sector. In other words, we have bigger and fancier houses than we otherwise would have, and less of other goods and services.

I don’t believe that this was an important factor in driving the financial crisis, but there’s no good reason to do it and talking about “the American Dream” and tradition tends to obscure what’s actually at issue.