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Home Prices Drive Migration

Supply-siders Laffer and Moore try to confuse matters by overemphasizing taxes.
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The Laffer curve is the gift that keeps on giving good laughs. According to Stephen Moore: "The idea of the Laffer curve is that lowering the tax rate on production, work, investment and risk-taking will spur more of these activities and thereby will often lead to more tax revenue collections for the government rather than less."

Arthur Laffer and Stephen Moore try to explain everything ad nauseam with the Laffer curve. They recently wrote an

article (subscription required) arguing that businesses and individuals follow the Laffer curve by migrating to more "prosperous" states. Interesting idea, but how can any study involving migration that does not consider home prices since 1980 be taken seriously?

Laffer and Moore wrote a

report for a conservative organization -- the American Legislative Exchange Council -- to offer their views on migration and taxes. The report is full of sweeping generalizations like the following:

At a time when most of America has grown more traditionally conservative, more dismissive of big government command-and-control policy prescriptions, and more economically prosperous, the heavily-unionized, economically exhausted, industrial Northeast has edged ever further to the left.

Polls and statistics do not support these statements. The Republican Party has diminished, not grown, over the past few years, and fewer people have expressed interest in reducing the size of government.

A bigger factor than taxes and labor policy in recent migration trends is home prices. We can survey historical prices in states that Laffer and Moore find are winners and losers in the "war" between states over migration. They use statistics from the U.S. Census Bureau. Winners are: Florida, Arizona, Texas, Georgia, North Carolina, Nevada, Tennessee, South Carolina, Colorado and Washington. Losers are: New York, California, Illinois, New Jersey, Louisiana, Ohio, Massachusetts, Michigan, Pennsylvania and Connecticut.

I turn to the Office of Federal Housing Enterprise and Oversight (OFHEO), which keeps

statistics on home prices

going back to 1980. Looking at the chart, we see that the Northeast, which Laffer and Moore refer to as a vast "black hole," has witnessed massive appreciation in home prices over the past three decades. California kept pace on the opposite coast.

Florida and Washington appear as anomalies. Florida is easily explains itself by a long-term trend of New Yorkers leaving for warmer weather, often heading to retirement communities. Golfing year-round sounds great to me.

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Washington has also long attracted migrants fleeing California. But home prices there started to increase faster in the 1990s when


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starting spewing out millionaires at a rapid pace. This accelerated after former Fed Chairman Alan Greenspan lowered rates in 2001 and 2002.

Old manufacturing states such as Michigan, Illinois and Ohio might come closer to describing the phenomenon Laffer and Moore discuss. But lumping all the losers in together defeats their central point about high taxes and labor laws. And, you will notice that home prices remain more expensive in those states than in Arizona or Texas.

I spoke with William Frey, a demographer at the Brookings Institution. Frey commented, "One has to be careful making one particular factor a major reason to explain migration patterns." He continued: "But 10 years ago, home prices increasingly became a dominant factor."

In fact, Frey has a specific term for the Northeast and California coastal area: "gated regions." Home-price increases created entire regions that excluded new buyers from purchasing in these regions. This explains some of the migration to states such as Arizona, North Carolina, South Carolina and Texas. Frey calls this a "flight to affordability."

Laffer and Moore would be quick to point out that these gated regions have suffered decreases in home prices over the last two years. They have. But they rose higher during the housing bubble and certainly have farther to fall.

What Laffer and Moore should point out is that lower home prices offer a good incentive for both corporations and individuals to relocate. It works just like a tax cut or a pay hike. Medium apartment prices in New York City average $1.1 million. Think you could do better in Arizona or Texas?

Corporations use many matrix to decide on where to locate. Taxes are important, but they also look at having a stable environment for workers, in particular real estate prices. Cheaper housing costs benefit corporations because it removes pressure to pay higher wages. Workers in California and New York have to earn more to live in those states.

There is no doubt that large metropolitan areas in gated regions have very high local and state taxes. Furthermore, these taxes often pay for the higher costs of social programs, such as Medicare and Welfare. It is certainly a big negative. But home price appreciation proves to be a silver lining. If you bought real estate in those areas, it worked out to be a much better investment than in the South or Southwest.

Migration might have an unintended consequence that Laffer and Moore wouldn't appreciate. As more lower- and middle-class families are forced out of gated regions, they move to red states like Arizona, Nevada, North Carolina, South Carolina and Texas. The infusion of liberals from blue states could change voting patterns. Red states might turn purple.

We will find out soon enough.