Bryan Caplan  

Why Inherited Wealth is Getting More Important

Admitting We Were Wrong... Bryan is a Pessimist...

Arnold asks me:

Which would be more valuable to Bryan's children--all his physical possessions, all his financial assets, or a large investment in their human capital?

Probably 90 percent of his physical possessions will be obsolete by the time his children reach 21. Even Bryan's financial assets probably would not make his children feel particularly wealthy compared with what their human capital will be able to earn in the advanced economy of tomorrow.

How about my house?! Is that going to be "obsolete" in 18 years? Even if housing prices go down a bit and my kids are extremely successful, my house will be worth years of their expected wages. And if this NYT article on the future of housing that Alex Tabarrok discusses is right, I may have to let my kids live with me until they're 40. It's a good thing my boys get along so well together, because they may not be able to afford to live separately.

Unless... unless... we see some serious deregulation of construction and land use to make housing affordable again.

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The author at Bayesian Investor Blog in a related article titled writes:
    Several posts on EconLog recently have assumed that human capital will be sufficient for their children to prosper in a Kurzweilian future. That is a very risky assumption. Human capital has historically been a good investment largely because there ha... [Tracked on October 26, 2005 1:27 PM]
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KipEsquire writes:

A house 18 years ago (okay, maybe 36 years ago) would have had no cable television, no satellite dish, perhaps no central air conditioning, inadequate wiring for today's needs, probably an antiquated hot water heater, maybe a septic tank rather than modern sewage lines, no vinyl siding or brickface (or, worse, would have had aluminum siding), thick and heavy and hard to open (and harder to clean) windows, no carbon monoxide detectors (possibly not even a smoke detector), and so on.

Land holds it value, a house does not (at least not automatically).

Steve Sailer writes:

"Unless... unless... we see some serious deregulation of construction and land use to make housing affordable again."

How about if we get control over immigration?

spencer writes:

My son just paid several times his annual income for a house built in 1936 with no air conditioning, etc as you described above.
My daughter lives in a house that is over 100 years old with the above problems.
Of corse, she is only a couple of miles from downtown Boston -- where they wanted to live.
Moreover, the lots in her town were laid out before there was any zoning.

But the economists at Geoge Mason tell me that everyones livings standards are rising sharply and to not include the fact that they have to pay two to three as much of their incomes as I did when I was their age to buy a new house. When I bought my first home the standard rule was you could afford a home price equal to two times your annual income.

anon writes:

Kip, I see you live in NYC so you can't be a stranger to crazy real estate markets. The area that Bryan lives in has more houses > 36 years old that are worth over a million dollars than I could shake a stick at. In fact, I'm willing to bet that in many of these cases you could burn the house to the ground and it would still be worth over a million. A popular trend in the Northern Virginia area is "tear downs". People buy old houses just for the lot, tear the house down and build something twice as large(and invariably in the bastardized colonial/McMansion style. Of all the good things about NoVA, architectural variety isn't one of them).

It's relatively easy to look up tax assessments via someone's last name. If I were Bryan Caplan's child I'd take the house over an education in a heartbeat. Knowing the lot size and location, it might even make sense to take the land even if the house wasn't there.

dearieme writes:

Small Point: "hard to open (and harder to clean) windows" - I used to live in a Georgian apartment in Edinburgh - the windows were very easy to open and to clean, far more so than in any twentieth Century apartment I've lived in, or office that I've worked in. Sometimes technology retreats (especially if it involves architects).

Steve Sailer writes:

By the way, there's a striking correlation between housing inflation by state and voting for Kerry in 2004. Bush won the 25 states with the least housing inflation since 1980 in 2004.

The red state-blue state gap all revolves around what I call "affordable family formation" -- Red states are states where it is cheap to get married and have several kids because housing is cheap. See

for all the details.

Robert writes:

Sometimes land-use regulation is hidden ... for example, when capital gains are taxed more heavily than inheritance, landowners have an incentive not to sell until they are dead, making changes in land use happen quite slowly indeed.

James Bowery writes:

If you want to maximize human capital without sacrificing human reproduction (which would be a contradiction anyway) here's the viewpoint to take:

Since the primary function of government is the protection of non-subsistence property rights, it is sensible to charge a use fee for those rights. Note, I said "non-subsistence" property rights. The point here is that house and tools of the trade are protected from confiscation under bankruptcy law precisely because they are subsistence assets. Where government does not exist, subsistence properties are typically defended by the occupant, whose life is sustained by those assets. Government brings precisely the property rights we associate with civilization -- assets beyond home and tools of the trade.

Given the relatively liquid nature of civilization, it makes sense to define "subsistence" in some dollar value of assets. Various ways of defining the dollar value are all approximately equal:

* The median price of housing a person plus the median price of capitalizing a job.
* The threshold used by the SEC for "qualified investor".
* The level of savings insured by the FDIC.
* Or, for the historically inclined: The market price of 20 arable acres in the Confederate south, a mule, a plow and a small house on such land.

Until a citizen accumulates the subsistence net asset level, they should pay no tax and then pay tax only on the net assets they own above subsistence.

Assessment should be by the owner, thereby establishing a "fair market value" for the exercise of eminent domain. Net assets only would be taxed and would be calculated by subtracting the fair market value of debts against the estate from the self-assessment of the occupant.

Other forms of taxation could be eliminated in a revenue neutral way if net assets, in excess of subsistence levels, were taxed at the risk free interest rate (approximately the interest rate on the national debt).

Indeed, given the centralization of asset ownership that has resulted from the subsidy of non-subsistence property, a subsidy inherent in civilization, it may be the failure to use this tax base is the ultimate cause of the repeated decay of civilizations from ancient times. 1

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