Sometimes I get it right

If you pay attention to dates it is clear that "The Economist" is reading this blog and using it for ideas. My most recent post criticizes the American People for their reluctance to move. Well, apparently thats not just hot air. This article from March 19, 2009 not only reiterates the points that I made, a) Americans do not move as much as they used to and b) that mobility is an important aspect to a free labor market, but they go farther and explain why those things are happening. Apparently home-ownership has a negative side you may never have thought about, it lessens your mobility.

http://www.economist.com/world/unitedstates/displayStory.cfm?story_id=13331109

Labour mobility
The road not taken

Mar 19th 2009 | WASHINGTON, DC
From The Economist print edition
Americans used to move to where the jobs were. But now home-ownership and health insurance freeze many of them to the spot

NEELY WHITES bought a former crack house in New Orleans and fixed it up. It was looking really nice when Hurricane Katrina struck. In the storm’s aftermath the neighbourhood where she lived turned even rougher than before. Weary of drive-by shootings, Ms Whites moved to Long Beach, Mississippi, and bought a house there in September 2006.

It was not the best timing. The property market promptly crashed. After fleeing a city that was literally under water, Ms Whites is now stuck in a home that is figuratively so. She would like to move closer to her new job as a financial consultant, cutting the daily commute from an hour each way to something less onerous. But she cannot sell her home. A nearly identical one on her street has been on the market for ages at $125,000 and found no takers. Ms Whites’s mortgage is over $160,000. To make matters worse, she is in the middle of a divorce. Not being able to sell the house prolongs that painful process.

Mobility is part of the American dream. In “The Grapes of Wrath”, when Tom Joad’s farm in Oklahoma was repossessed he packed up his family in a sputtering truck and set off for California. Things didn’t work out so well for John Steinbeck’s hero. But throughout history, Americans have dealt with economic shocks by picking themselves up and moving on. Their mobility underpins America’s flexible, dynamic labour market. Now it faces two threats.

One is the housing bust. House prices have collapsed by 27% since their peak in 2006. By December last year a fifth of homeowners with mortgages owed more than their homes were worth. Such people are only half as likely to move as those whose homes are above water, estimate Joseph Gyourko and Fernando Ferreira of the Wharton School of business.

Some cannot sell their homes at all. Others could, but don’t want to take a big loss on an investment they thought was safe as houses. Either way, they are stuck. If a good job comes up in another town, they cannot take it. This effect is partly offset by the impact of foreclosures. Last month alone 291,000 homes received a foreclosure notice. The newly evicted are not merely free but obliged to move. This is unfortunate, but although jobs are in short supply nearly everywhere, being mobile at least increases the odds of finding one.

A decade ago Andrew Oswald of the University of Warwick in Britain argued that excessive home-ownership kills jobs. He observed that, in Europe, nations with high rates of home-ownership, such as Spain, had much higher unemployment rates than those where more people rented, such as Switzerland. He found this effect was stronger than tax rates or employment law.

If there are few homes to rent, he argued, jobless youngsters living with their parents find it harder to move out and get work. Immobile workers become stuck in jobs for which they are ill-suited, which is inefficient: it raises prices, reduces incomes and makes some jobs uneconomic. Areas with high home-ownership often have a strong “not-in-my-backyard” ethos, with residents objecting to new development. Homeowners commute farther than renters, which causes congestion and makes getting to work more time-consuming and costly for everyone. Mr Oswald urged governments to stop subsidising home-ownership. Few listened.

America subsidises more than most. Owner-occupiers typically pay no tax on capital gains and can deduct mortgage interest from their income-tax bills. Fannie Mae and Freddie Mac, two government-backed mortgage firms, have squandered a fortune promoting home-ownership among the uncreditworthy.

The other threat to mobility is health insurance. A company can buy health insurance for its employees with pre-tax dollars; an individual can buy it only with after-tax dollars. So although soaring premiums are prompting many firms to drop or restrict coverage, most Americans still get their health insurance from their jobs.

This makes it hard for anyone with a sick child to quit and start a new firm. It also makes it harder to switch jobs, despite a law helping employees to stay in company plans for 18 months after they leave. Scott Adams of the University of Wisconsin-Milwaukee found that married men with no alternative source of insurance were 22% less likely to switch jobs than those who, for example, could get covered by their wife’s employer.

Tying health care to a job can tie people to jobs they hate. Gerry Stover, who now runs a doctors’ group in West Virginia, recalls a time when his wife was pregnant and he couldn’t get health insurance at a private firm. He became a prison guard. As a public employee, his family was covered. But the job was neither pleasant nor a good use of his talents. “You have a radio and you’re put in a room with 70 criminals and told: ‘If they get you round the neck, press the [panic] button’,” he says. Some people even get stuck in bad marriages because they need their spouse’s health insurance. As Alain Enthoven of Stanford University puts it, this gives new meaning to the word “wedlock”.

The recession seems to have slowed internal migration. Only 11.9% of Americans moved house between 2007 and 2008—the most sluggish pace since records began in the 1940s. But not everyone has been immobilised. The postal service helps employees move by buying their homes and selling them at a loss. A postmaster in South Carolina recently sold his pad to his employer for $1.2m. “No wonder stamps cost so much,” grumbles a blogger.