Monday, June 28, 2010


On Wed, I am having the screening procedure that Katie Couric so vividly demonstrated some years ago. Basically the story is that if you have this procedure at age 50, any colon cancer that might be detected will be at a sufficiently early stage for it to be quite curable. So because I have good health insurance, I can be sure I will not die of colon cancer.

Those without insurance are not so fortunate. Such patients can only get the screening if they pay out of pocket ($2000-$3000) or, if they are patients at places like the LA County hospital, if they are symptomatic, which means the cancer might not be caught early. For the median family, $2000 is a lot of money; for those who occupy the netherworld of having too much money to get medicaid but not enough to afford health insurance, it is even more so.

I hope the new health care system rectifies this. Under the old system, this difference in service delivery was unjust.

[Updates: First, I misspelled "colon," which shows that I should never write things while being reflective at midnight. Second, it is worth saying something about cost benefit analysis and screening--according to this source, the cost per life year is about $45,000, which seems like a good deal to me].

One more take on Kartik Athreya's critique of economics bloggers

Athreya is arguing that the blogosphere's various critiques of modern macro are being made by insufficiently expert bloggers using insufficiently rigorous arguments. As is often the case, the best rejoinder comes from Mark Thomaand I suppose I don't have much to add myself. (I would link to the essay, but it seems to be broken right now)

But George Akerlof did [have a lot to add], way back in 2006, during his American Economic Association Presidential Address. which was entitled "The Missing Motivation in Macroeconomics." I remember finding the piece enthralling (I know, we economists aren't supposed to use such emotion laden words), because it made the very simple but devastating case that when the foundations of modern macro (the independence of consumption and current income (given wealth); the independence of investment and finance decisions (the Modigliani-Miller theorem); inflation stability only at the natural rate of unemployment; the ineffectiveness of macro stabilization policy with rational expectations; and Ricardian equivalence) are tested against data, they generally fail the test. I remember at the time that some economists thought that Akerlof had taken leave of his senses (and some friends of mine thought I had taken leave of mine because I so admired the address).

But in the end, we should be respecting evidence more than clever theoretical edifices. And yes, Kartik, while I am not an expert in macro, I did have to slog through lots of OLG models and rational expectation models and real business cycle stuff in graduate school, and pass prelim questions on them, so I have at least some idea of what it is that I find intellectually unsatisfying. Akerlof's view, expressed before we had the financial meltdown, that we really need to start over with modern macro, has, I think, largely been vindicated.

Thursday, June 24, 2010

Hard to believe

I was on the radio the other day, discussing the future of Fannie and Freddie, when another guest said that all we had to do was fully privatize the mortgage market for all to be well. I know that I can't expect everyone to be aware of the 1920s, but the period 2002-2006 was a period in which the "pure" private sector took away substantial market share from Freddie-Fannie, and look how well that turned out.

Of course in the end there is no such thing as a pure private market, because when large financial institutions get in trouble, the government comes to the rescue, either through an injection of funds or through extremely low interest rates. We are all GSEs.

Jack Guttentag found that mortgage rates in the 1940s were in the low fours.

Here is the link. [update: of course these were typically 20 year loans, so the comparison is not perfect].

Lisa Schweitzer on time-service quality trade-offs for transit and autos

She writes:

..People tend to like to separate travel time and service quality based on the arguments, like Litman uses, that the time in transit or walking is more pleasurable and productive than being in a car. But they are only right for people whose preferences align with theirs. For other segments of the mobility market, they are wrong. Moreover, it’s wrong to assume that these are the only things being traded: yeah, you hate to drive and you’d be happier not driving, but the extra half an hour that transit takes you means a half an hour you’re not with your kids, cooking, drinking wine with your spouse at home, watching the game, or any number of things you can’t do on transit, either. So yeah, I’d prefer to get the exercise walking than driving, but I prefer to spend the time cooking so that my kids aren’t sitting around hungry after school more than I prefer the exercise.

As she wrote this yesterday, I couldn't help thinking about it yesterday during my transit trip home. I take transit in LA every now and then, in part because that it the sort of guilty liberal I am. But yesterday, when all the stars were aligned (I arrived at bus from USC to Union Station at exactly the time in left; I only had to wait a minute or two for the Gold Line connection from Union Station to Pasadena), it took me just less than one hour to get from my office door to my front door. When I drive to work in the morning (at a strategic time), it takes me 20 minutes. When I return home in the afternoon (using surface streets until Hill or Figueroa meets the Pasadena Freeway), it rarely takes more than 35, and never more than 45. So my worst days in the car free up about an hour relative to transit. In case you are wondering, it is 11 miles from home to campus.

But don't I find driving unpleasant? Not really, I can plug my i-pod into my car stereo, or listen to NPR or the BBC, or a CD...In the morning, when traffic is clear, I get pleasure from driving my car at freeway speeds. I do miss the walk that I get when I use transit.

To some extent, the problem is that the street system in Los Angeles, with lots of redundancy, works too well. In Washington DC, Metro was a viable alternative to driving--it would often get me to work faster than taking my car. The street lay-out in Washington, set as it was in the late 18th century, was not designed to keep auto traffic moving. Metro is also very good--when people in DC complain how how awful it is, I want to laugh.

At the same time, I don't think a transportation system whose principal mode is people driving alone is sustainable. We need to think about some system in between driving alone and fixed route transit. It seems eminently doable to me, but it will take some imagination to make it work.

Tuesday, June 22, 2010

One more point about fixed-rate mortgages

They seem to be safer. From the Mortgage Bankers Association of America:

On a seasonally adjusted basis, the delinquency rate stood at 6.17 percent for prime fixed loans, 13.52 percent for prime ARM loans, 25.69 percent for subprime fixed loans, 29.09 percent for subprime ARM loans, 13.15 percent for FHA loans, and 7.96 percent for VA loans. On a non-seasonally adjusted basis, the delinquency rate fell for all loan types.

The foreclosure starts rate increased for all loan types with the exception of subprime loans. The foreclosure starts rate increased six basis points for prime fixed loans to 0.69 percent, 17 basis points for prime ARM loans to 2.29 percent, 18 basis points for FHA loans to 1.46 percent, and eight basis points for VA loans to 0.89 percent. For subprime fixed loans, the rate decreased nine basis points to 2.64 percent and for subprime ARM loans the rate decreased 39 basis points to 4.32 percent.

Some of this may just be that people who take less risk select themselves into fixed-rate loans, but even so....

Monday, June 21, 2010

Bob Hagerty blogs about Patrick Lawyer on Fixed Rate Mortgages:

He writes, in part:

Allotted only about 10 minutes to share his vision, Mr. Lawler....first made the obligatory statement that he was expressing his own views and not those of his federal agency. Yeah, right, I thought, and reached for my triple espresso.
But then Mr. Lawler launched a frontal assault on the most sacred element in U.S. housing-policy dogma: the 30-year fixed-rate mortgage loan, providing the right to refinance at any time, with no prepayment penalty. If more members of the audience had been fully awake at this moment, I feel sure that their gasps would have been audible.
Now, Americans are very attached to their 30-year fixed-rate freely prepayable mortgages. They like not having to fuss about the possibility of 28% interest rates in 2032, even though most of us will move or die long before then. They love to refinance every time rates drop and then brag to their neighbors about how much they are saving per month.
What they don’t stop to realize often enough is that they are paying a very large price for that privilege– twice.

The context is important.  One of the reasons the 30 year fixed rate mortgage is ubiquitous is the United States may be the existence of Fannie and Freddie.  If we do away with FF, we may also do away with the 30-year fixed rate mortgage.  So let me defend the 30-year fixed a bit with something I wrote about 3 years ago:

The problem with advising people to use adjustable rate mortgages, however, is that ARMs give households liabilities that have short duration--that is, liabilities whose market value remains close to face value at all times. This is because the rates on ARMs by definition change to meet market rates on a regular basis. Houses, on the other hand, are assets with lots of duration. The services they give to homeowners (shelter and a set of amenities) is pretty much invariant to market conditions. Consequently, house values change with market conditions, such as changing interest rates.

Good financial management practice suggests that to minimize risk, the duration of of assets and liabilities for any institution, including households, should be matched. In the case of houses, this means that households looking to minimize risk should use a fixed rate mortgage to finance their house. There are exceptions--if one buys a house and expects to sell it in five years, a five year ARM makes lots of sense, because the duration of the asset (housing services over five years) and the liability would match.

This is not to say there is anything wrong per se with people getting ARMS, so long as they explicitly understand the risk embedded in them. But a principle I have been pushing for years is that if people can't afford a house with a fixed-rate mortgage, they probably shouldn't buy a house. It is one thing to have the option of the FRM, and then decide to take the risk of the ARM anyway. One of the nice things about the United States is that FRMs are easy to come by--this is not true in most countries around the world. It is something else to be forced into taking a risk in order to buy. Under these circumstances, buying probably isn't worth it. 

Everything involves real estate: music edition

I went to hear the Concertgebouw Orchestra in the Concertgebouw last Friday night.  There is no experience like it--the hall is remarkably intimate, and the sound washes over listeners without being blurry.  Bass notes in particular both rumble and have great pitch definition.  Not even Symphony Hall in Boston, Orchestra Hall in Minneapolis, or Disney Hall here in LA (all of which are terrific venues) compare.  One of the reasons the orchestra has a consistent and unique sound (beyond, of course, the magnificent players) is its building--real estate creates sound character.

Yet buildings need to be renovated from time to time, otherwise they just wear out.  Yet any change to the Concertgebouw--the upholstery, the wood on the stage, maybe even the paint--has the potential to change those special acoustics.  What does one do to preserve such a place?

p.s., a young woman name Susanna Malkki took over from an ill Jansons.  She was really, really good.  Perhaps I saw an early performance from a future superstar?

Detroit has not had the largest peak-to-trough decline in percentage terms among American large cities

Although it is getting close.  Detroit has lost about 58 percent of its 1950 population; St. Louis has lost about 59 percent.  And Detroit's population is much bigger than it was in 1900; St. Louis has lost about 30 percent of its population since 1900 (just prior to the 1904 World's Fair, when 20 million people visited St. Louis).

Detroit Shrinking

The New York Times has a good story about it this morning.  It reminds me of the Talking Heads song Nothing but Flowers:

Where, where is the town

Now, it's nothing but flowers
The highways and cars
Were sacrificed for agriculture
I thought that we'd start over
But I guess I was wrong

Once there were parking lots
Now it's a peaceful oasis
you got it, you got it

This was a Pizza Hut
Now it's all covered with daisies
you got it, you got it

I miss the honky tonks,
Dairy Queens, and 7-Elevens
you got it, you got it

And as things fell apart
Nobody paid much attention
you got it, you got it

I dream of cherry pies,
Candy bars, and chocolate chip cookies
you got it, you got it

We used to microwave
Now we just eat nuts and berries
you got it, you got it

This was a discount store,
Now it's turned into a cornfield
you got it, you got it

Don't leave me stranded here
I can't get used to this lifestyle

Saturday, June 19, 2010

Does The Greatest Trade Ever produce evidence of prospect theory?

There is a statement in Gregory Zuckerman's terrific book that really struck me: he notes that people hate negative carry, and far prefer positive carry (I don't had the book in front of me right now, so I need to paraphrase).  In Paulson's context, he was able to buy credit insurance very cheaply--this limited his downside risk in a way shorting would not, while allowing him to invest consistent his bearish views on the housing market. But it also meant he was paying out cash flow and not gettting anything in return until subprime mortgages and other instruments began failing.

To some extent, there is a discounting issue here: if investors take losses on the negative for several periods, the gains they receive in the future will be discounted.  But still, it is an interesting question whether investors discount negative carry trades too much--whether the typical Wall Street investor sold Paulson insurance that was, under reasonably discounting, an ex ante positive NPV bet for Paulson.  I am not sure how one would go about testing this, though....

Sunday, June 13, 2010

A line in Clark Hoyt's final column bothers me

He writes:

There is also no question that The Times, though a national newspaper, shares the prevailing sensibilities of the city and region where it is published. It does not take creationism or intelligent design as serious alternatives to the theory of evolution.
This is not sharing "prevailing sensibilities."   This is simply reporting overwhelming scientific evidence.  It is no more about sharing sensibilities than not taking flat-earthers seriously is about sharing sensibilities.


Friday, June 11, 2010

How to punish universities without punishing students

I understand that when universities violate rules (NCAA or otherwise), they need to be punished, so that rules have credibility.  But it seems unfair to punish current students for past misdeeds.  In the current context, a fair sanction would be to allow current students to play in bowl games, but forbid the university from taking any money for them.  Just a thought.


A reporter yesterday asked me to name some keys to successful downtown redevelopment. Two places I have lived provide some clues (Sorry for being a homer).

When I moved to Madison in 1984, the downtown there wasn't much--despite the fact that it has lots of worker density from state government and the University of Wisconsin. But the city--and in particular its chief planner, George Austin--had the sense to see that Euclidean zoning was not compatible with downtown redevelopment. Downtown zoning was essential replaced with Planned Urban Developments. Ironically, I remember some environmentalists--people who want transit oriented development--opposed some of the plans on the grounds they would bring too much density to downtown. Oh well.

In any event, the transformation of downtown Madison has been astonishing. It now has very attractive condos, and a restaurant scene that is remarkably strong (I was going to add the caveat "for a city of Madison's size," but the caveat is actually unnecessary). The area is now lively, with people strolling even in cold that is now, well, beyond my personal limit of tolerance (I have gotten soft since leaving). The city also built a beautiful Frank Lloyd Wright inspired convention center that provides an anchor to the south end of downtown. Unlike many such places, it was designed to be a gathering place for the community, and it has worked magnificently.

When I first saw Pasadena in the early 1980s, it was actually a pretty unattractive place, with dilapidated commercial areas and an under-maintained housing stock. The air quality was terrible--I remember my nostrils stinging the whole time I was there--and I wondered why anyone would live there.

Two important changes have since happened. First, the air quality, while still not good enough, is much, much better. I can see the San Gabriel Mountains pretty much every day now; in the 1980s, it was hard to know that the place even had mountains. My colleague Chris Redfearn maintains that once air quality improved, people began reinvesting in the very beautiful pre-World War II houses that make up a good chunk of Pasadena (more evidence that environmental regulations that target real externalities are economically beneficial).

Second, the city set up a business improvement district in Old Town that operates much like a mall operating agreement. This allowed anchors such as Crate and Barrel to internalize some of the external benefits that they create by being a draw. An advantage regional shopping malls have had over traditional downtowns is that mall operators can create lease structures such that anchors can recover benefits from the traffic they generate for other stores. This is why anchors pay lower rents than in-line stores. In general, local government subsidies to businesses are not wise, but subsidies for anchor department stores may be an exception. Ideally, governments will set up districts in which merchants whose traffic is driven by anchors will subsidize the anchors, but to get downtowns started, governments themselves might need to give the subsidy.

BP Spills Coffee

I get as frustrated as anyone when government performs poorly. But could we please stop the narrative that the private sector always does better?

Monday, June 07, 2010

How New Urbanist Jeff Speck would fit into the Bush Adminstration

My colleague Lisa Schweitzer points me to Jeff Speck's screed against those who would question some of the tenants of the New Urbanist movement.  This line stands out in particular:

To this group [libertarians], which is quite skilled at mustering facts in support of its utterly counterintuitive claims, the only rebuttal is to revert to common sense and a single question: How, by any possible stretch of the imagination, could it be considered efficient, healthy, or even acceptable to have spent the better part of a society’s wealth constructing a national landscape in which most citizens require a one-ton, poison-belching prosthetic device to satisfy their daily needs? (Slap forehead and continue … )
Yes, Jeff, let us ignore facts and respond to them with common sense.  The most recent administration didn't like facts much, and clearly neither do you.  If you don't like the evidence, just ignore it.  Because we all know that like George W Bush, Duany knows all, and can't be bother with facts--such as the fact that people all over the world really, really like their cars.

Why do high income people feel so put upon?

A mystery to me is why households earning $250,000 per year seem to resent being called rich.  This income is roughly five times the median US household income.

So it occurred to me that perhaps the marker basket upon which high earners spend has risen in price more rapidly than the CPI.  So for fun (and only for fun--this is not a systematic price index), I looked at four items: income taxes, the price of a BMW 3-series, houses in Los Angeles, Santa Barbara and New York, and Harvard tuition, all going back to 1988.

It is hard to do an apples-to-apples comparison on taxes, but based on the NBER Taxsim Model, wage income for high earners is taxed at about the same level, and capital income is taxed less relative to 1988.

CPI has not quite doubled since then.  While the BMW 3-series is not the same car as it was in 1988 (it is almost certainly better), its price has not quite doubled.  House prices in the California are about 2.7 times higher than in 1988; in New York they are 2.2 times higher (these are MSAs--Malibu and Manhattan are probably different stories).  Harvard tuition is three times higher.

People really notice how much they are paying for their houses and how much it costs to put their kids through school.  So while I continue to think it is silly for people who earn five times the national median to feel anything other than extremely well off, it is possible that those right at the 250k level perceive their living standards to be no better than they were 20 years ago.

D-Day...Landing On Omaha Beach: Should have posted yesterday

: Should 

Tuesday, June 01, 2010

When does a regulatory taking become a physical taking?

Slate has a piece today on Jay Bybee's 9th circuit opinion that rent control is per se unconstitutional.  The reporters argue that the opinion is silly--that the courts have long upheld the right of municipalities to regulate land use (Euclid v Ambler being the iconic case that enshrined the rights of communities to zone).  But the Supremes have also maintained that when a regulation deprives owners of property of all economic value, it consitutes a taking under the 5th amendment and thus is either impermissible or must be accompanied by compensation to the property owner (Lucas vs South Carolina Coastal Commission).

It is pretty clear that rent control (something that I dislike based on both equity and efficiency grounds) is consistent with the ability of communities to regulate property for a public purpose.  On the other hand, if rent control were set at zero, then it us pretty clear that it would amount to a regulatory taking.  The question is the level at which rent control would require a taking.  For instance, if cities told landlords that they had to cut their rents by 50 percent, I think one could make a pretty good case that the takings rule would apply.  But this is a legal issue and not an economic one--I am not sure whether one could draw a bright line at which a regulation consistutes a taking.