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This study examined "rental income" as reported in Economic Indicators as well as the Survey of Current Business (SCB). My conclusion is that the figures being reported are highly questionable as a measure of the economic rent of land or the yield of real estate in the United. States. Rental income is therefore being significantly underestimated.

The calculation of rental income by the Bureau of Economic Analysis, U.S. Department of Commerce, underwent two major changes. Beginning with the January 1976 issue of the SCB, a capital consumption adjustment was subtracted from gross rental income. The date for several previous years was recalculated and listed, but data calculated by the previous method is not comparable. The older figures were from 10% to 20% higher than the new ones. The pre-1976 calculations (not used) will be designated series #1, and the subsequent data series #2.

An even greater revision occurred starting with the December 1985 SCB, with allegedly "improved accounting for expenses of home ownership." The revised series, which I will call series #3, drastically reduced reported rental income. For example, the 1984 rental income was $62.5 billion under method #2 and only $8.5 billion under method #3. The 1983 figures are $58.3 and $13.2, respectively, showing that not only are the series #3 figures a small fraction of series #2 during the 1980s, but the annual changes are not proportionate, the series #3 figures varying erratically.

The rental income reported is from real estate. Royalties from oil leases are included, and these can be considered a rental yield on oil land. The details of rental income are published in the July issues of SCB. For 1986, total rental income was $57.4 billion, which included $8.6 billion in royalties, leaving other rental income at $48.9 billion (after rounding). Nonfarm housing was $35.8 billion, farms at $5.1 billion, and nonfarm residential properties at $8.0 billion. The capital consumption adjustment was put at $45 billion, leaving $12.4 as net rental income.

The December 1985 SCB (p. 11) classified the revisions of "rental income of persons" as "definitional," "capitalized residential replacements," and "statistical." The "statistical" revision was the major change. In 1984, for example, it consisted of a "statistical" subtraction of $55.9 billion from the method #2 datum. In the description of the changes on the same page, the SCB stated that, "The revision lowers the level of rental income of persons by substantial amounts through the 1970s and 1980s." This was due primarily from two statistical changes. The first was an expanded list of homeownership expenses, and the second the incorporation of data from the Census of Housing which lowered the estimate of space rent beginning in 1973. "The revisions in the capital consumption adjustment primarily reflect the definitional change for residential replacements."

Rental income under series #3 is reported in current dollars as $15.3 billion in 1960 and $9.2 billion in 1985. In the twenty five years, with GNP growing, the value of the dollar decreasing, and the housing stock increasing, one would expect the income yield from real estate to grow proportionately, yet in real terms it shrank substantially, according to the figures. In 1979 rental income was reported as $5.6 billion, the lowest amount since 1945.

One must conclude that the series #3 figures for rental income have little economic significance. The population of the U.S. increased from 203 million in 1970 to 243 million in 1987, an increase of 20%. Residential capital in constant dollars increased 56% from 1970 to 1986. Yet we have rental income, series #3, at $18.2 billion in 1970, or $38.6 divided by the GNP deflator (1982 -100), and $12.4 billion in 1986, or $10.9 billion deflated. How real rental income declined to 28% of its 1970 level while residential capital increased by 56% is an interesting question.

The lack of economic significance of the rental income data, especially for the current series #3, is important, since rental income shows up as a component of national income. If rental income is understated, are the statistics on national income equivalently understated, or has the rental income been shifted to some other category? Could the expenses of housing have risen so much that they absorbed most of the rental income?

Much of what is reported as interest and dividends in national income is actually rental income. Mortgage payments to banks, net of overhead, are in turn paid to depositors and investors as interest and dividends. But it is not clear that the missing rental income has artificially boosted interest and dividend income as reported in the national income accounts.

Real estate is a major component of national wealth and income. In 1985, residences in the U.S. were valued at $3,502 billion, 32% of the total. stock of tangible wealth (Statistical Abstract, 1986-87, table 754, p. 447). Yet series #3 rental income was put at $9.2 billion.

Another problem, if rent is being understated, may be the effect on economics as a science. Economists today typically relegate rent to a minor role in the economy. Paul A. Samuelson, in his text Economics, assures students that "historically, pure land rent has become a declining fraction of GNP and NNP..." (1980, p. 684n). Certainly, if one believes the national income accounts, one gets this impression.

However, one study based on various data from the U.S. Bureau of the Census and the Federal Reserve Board put the U.S. annual economic rent of land at about $650 billion (Cord, 1985, p. 279). This would have constituted 28% of national income in 1981. Moreover, this is only for land. A study by Alien Manvel in 1968 estimated the land value component of U.S. real estate at about 41% (Cord, 1985, p. 281). The comparable figures for rental income in 1981 are $13.3 billion for series #3 and $42.3 billion for series #2. Even 1981 gross housing product, combining tenant and owner-occupied figures at $279 billion, may be underestimating the economically significant rent, even with corporate rental income added in.

This leaves a large gap for research into the question: is any economic rent missing? If so, where did it go?

This also leads to a third consideration, the "public choice" issue. Public choice uses economic theory to study the political process. If the calculation and publication of statistics is subject to the same types of political influences as other government activities, it would be theoretically possible that the low figures for rental income are a result of what is called "rent seeking," "rents" being profits from legal privileges, with "rent" in this case having an ironic double meaning. Low figures give rental income a low profile and would help minimize the taxation of rent and real estate. Favorable tax legislation would let the owners of real estate keep more of their rents. The fact that the revisions both for series #2 and for series #3 were in a downward direction, and that series #3 has rental income decreasing while the economy as a whole is expanding, is consistent with such a public choice hypothesis.

The mystery of the missing rent awaits resolution.

Appendix

Rental income of persons with capital consumption adjustment is published in Economic Indicators. The figures are also published in the Survey of Current Business National Income table! Revised figures for the series beginning in December 1985 are listed in the February 1986 issue of Survey of Current Business, p. 24.

"Gross housing product," also called "space rent," is also calculated by the U.S. Department of Commerce. It is listed in Survey of Current Business as well as the Statistical Abstract of the United States. It provides for personal consumption for housing measured as the gross rental value of real estate, before deducting for expenses and depreciation, less expenditures for transient dwellings such as hotels. Theoretically, it should be proportional to net rental income, though for series #3 data it is not.

Residential capital figures are published in the Survey of Current Business.

References

Cord, Steven. 1985. "How Much Revenue Would Full Land Value Tax Yield?" The American Journal of Economics and Sociology 44, No. 3 (July).

Samuelson, Paul A. 1980. Economics, llth ed. New York: McGraw-Hill Book Co.

U.S. Department of Commerce. Economic Indicators. Washington, DC: USGPO, various issues.

U.S. Department of Commerce, Bureau of the Census. Statistical Abstract of the United States. Washington, DC: USGPO, various issues.

U.S. Department of Commerce, Bureau of Economic Analysis. Survey of Current Business. Washington, DC: USGPO, various issues.