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Scott Alexander lately argued that constructing extra housing in a given metropolis causes housing costs to go up in that metropolis. He acknowledged that earlier research had discovered the other relationship, however instructed that he was extra impressed by the robust optimistic correlation between inhabitants and costs when there are huge modifications:
Matt Yglesias tries to debunk the declare that constructing extra homes raises native home costs. He presents a number of research exhibiting that, at the least on the marginal street-by-street degree, this isn’t true.
I’m nervous disagreeing with him, and his research appear good. However I discover searching for tiny results on the margin much less convincing than searching for gigantic results on the tails. While you do this, he has to be fallacious, proper?
I additionally imagine that wanting on the tails (huge modifications) is usually extra revealing than a lot of small modifications. However provided that you’ve acquired causality proper. And on this case, Alexander hasn’t essentially finished so.
Right here’s an analogy: Suppose you wished to check the mainstream view of financial coverage (elevating rates of interest is deflationary) with the NeoFisherian view (elevating rates of interest is inflationary.) So that you centered your consideration on instances the place there have been actually large will increase in rates of interest—say to twenty%, 30% or 50%. In nearly all of these instances, inflation shall be very excessive when nominal rates of interest are very excessive. That appears to help the NeoFisherian place. (I’m wondering how Alexander feels about this debate.)
However this form of correlation doesn’t tackle the problem of causation, and thus most economists reject the notion {that a} excessive rate of interest coverage is inflationary, regardless of the clear correlation. They see this for instance of “reasoning from a value change.”
In my analysis on market reactions to coverage information through the Thirties, I argued that huge modifications have been particularly revealing. However in these kinds of “occasion research” the course of causation is evident—coverage information results in instant modifications in asset costs.
Massive modifications don’t assist if the home value mannequin you’re criticizing can be per the stylized incontrovertible fact that greater cities are usually dearer. That stylized truth can be true even when constructing extra homes diminished home costs on the margin.
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