Saturday, December 31, 2011

Buses are another matter

From Matt Turner:


First, two commonly suggested responses to traffic congestion—expansions of the road and public transit network—do not appear to have their desired effect:  road and public transit expansions should not be expected to reduce congestion.  Second, traffic levels do not help to predict which cities build roads. Therefore, new roads allocated to metropolitan areas on the basis of current rules are probably not built where they are most needed, which suggests that more careful reviews of highway expansion projects be required. Third, reductions in travel time caused by an average highway expansion are not sufficient to justify the expense of such an expansion. Whether or not other benefits of these expansions may justify their expense remains unresolved. In any case, expansions of the bus network are more likely to pass a cost–benefit test than expansions of the highway network

No wonder he can't understand benefit cost analysis.

In his advocacy for California High Speed Rail, Will Doig can't even get the population of California right.    He says during the century, the population will more than double from 25 million to 60 million.  Well, at the beginning of this century, the census population was around 34 million.

Of course, you can find this out in thousands of places.  He might start here--at the Census web site.  But of course, it is a lot easier just to make stuff up, which is something that rail advocates enjoy doing.  They are about as reliable as the intelligent design people--just cuddlier and not as dangerous.


Choice words from William Black (h/t Rik Osmer)

He writes:

If one had to pick one person in the private sector most responsible for causing the global financial crisis it would be Wallison.  As I explained, he is the person, who with the aid of industry funding, who has pushed the longest and the hardest for the three “de’s.”  It was the three “de’s” combined with modern executive and professional compensation that created the intensely criminogenic environments that have caused our recurrent, intensifying crises.  He complained during the build-up to the crisis that Fannie and Freddie weren’t purchasing more affordable housing loans.  He now claims that it was Fannie and Freddie’s purchase of affordable housing loans that caused the crisis.  He ignores the massive accounting control fraud epidemics and resulting crises that his policies generate.  Upon reading that Fannie and Freddie’s controlling officers purchased the loans as part of a fraud, he asserts that the suit (which refutes his claims) proves his claims.

The piece is long, but worth reading in its entirety. 

Stegman as Geithner's Advisor on Housing

The news that Michael Stegman will be taking a leave from MacArthur to advise Tim Geithner on housing is very good.  It is important for three reasons: (1) Mike has been a leading sensible voice on housing issues for at least 30 years; (2) Treasury has recognized the importance of having an in-house housing person at a senior level; (3) Mike will remind Geithner than users of housing are at least as important as those who lend for housing.


Tuesday, December 27, 2011

Jeremy Stein for Fed Governor (reprise)

Personally, I am a big fan of Stein's work. The shortest way to explain why is to list the titles of his five most cited papers:

  • Herd Behavior and Investment
  • A Unified Theory of Underreaction, Momentum Trading and Overreaction in Asset Markets
  • Rick Management: Coordinating Investment and Financing Policies
  • Bad News Travels Slowly: Size, Analyst Coverage and the Profitability of Momentum Strategies
  • Internal Capital Markets and the Competition for Corporate Resources.

Stein has spent his career trying to figure out how capital markets really work instead of pledging fealty to models that don't work very well.  I can't think of a better intellectual qualification for a Federal Reserve Board member.

Sunday, December 25, 2011

Joe Nocera nails it

He writes:

...Peter Wallison, a resident scholar at the American Enterprise Institute, and a former member of the Financial Crisis Inquiry Commission, almost single-handedly created the myth that Fannie Mae and Freddie Mac caused the financial crisis. His partner in crime is another A.E.I. scholar, Edward Pinto, who a very long time ago was Fannie’s chief credit officer. Pinto claims that as of June 2008, 27 million “risky” mortgages had been issued — “and a lion’s share was on Fannie and Freddie’s books,” as Wallison wrote recently. Never mind that his definition of “risky” is so all-encompassing that it includes mortgages with extremely low default rates as well as those with default rates nearing 30 percent. These latter mortgages were the ones created by the unholy alliance between subprime lenders and Wall Street. Pinto’s numbers are the Big Lie’s primary data point.

Two things: First, Pinto and Wallison's definition of "subprime" is any loan that goes to a neighborhood they wouldn't live in or  to a person they wouldn't have lunch with.  According to the American Housing Survey, there were around 52 million mortgages outstanding in the US in 2009.  This means that according to Wallison and Pinto,  the median borrower is a subprime borrower.  I guess this means they think that that half of homeowners with mortgages should be renting in Potterville.

Second, Nocera should in his piece put quotes around the word "scholar."

Friday, December 23, 2011

Simon Johnson underlines a problem..that could point to a solution.


He writes:


Santa Claus came early this year for four former executives of Washington Mutual, which failed in 2008. The executives reached a settlement with the FDIC, which sued them for taking huge financial risks while “knowing that the real estate market was in a ‘bubble.’ ” The FDIC had sought to recover $900 million, but the executives have just settled for $64 million, almost all of which will be paid by their insurers; their out-of-pockets costs are estimated at just $400,000.
To be sure, the executives lost their jobs and now must drop claims for additional compensation. But, according to the FDIC, the four still earned more than $95 million from January 2005 through September 2008. This is what happens when financial executives are compensated for “return on equity” unadjusted for risk. The executives get the upside when things go well; when the downside risks materialize, they lose nothing (or close to it).
Just thinking aloud here, but if bank executives were compensated based on return on assets (i.e., the returns to both debt and equity), rather than return on equity, a lot of the misaligned incentives in their pay packages would go away.  Among other things, it would discourage races to the bottom.


Why Fannie and Freddie will likely last

I was talking with SF Chronicle columnist Kathleen Pender yesterday, and she shared a trenchant observation:  now that Congress has figured out a way to use the GSEs to raise revenue (via raising G-fees), it will always have an incentive to keep them.  Specifically, Congress has now tied itself to the GSEs, because it will take awhile for increased G-fees to repay the cost of the payroll tax cut.


Wednesday, December 21, 2011

Why to worry about Chinese house prices.

Getting good data from China is problematic, but it is pretty clear house prices there are falling (see here, here and here).  At first blush, this shouldn't cause too much worry, because the Chinese use far less leverage to buy houses than Americans, and so the probability of being upside down there remains pretty low.

The problem, however, is that municipalities in China have lots of debt.  The actual amount is controversial, but the fact that it is a lot is not.  Chinese municipalities service debt using land sales.  So if property values fall a lot.....

Saturday, December 17, 2011

It is possible to hold the following two views at the same time

(1) The executives for Fannie Mae and Freddie Mac should be held to account for their contributions to the crisis; and

(2) Compared with banks, shadow and otherwise, Fannie and Freddie were pikers in their contributions to the crisis.


Thursday, December 15, 2011

Why don't economists have more influence in the White House?

I was talking to someone who was an official in the adminstration about this.  The person told me the problem is, in part, that economists have poor social skills.  Maybe as part of grad school there should be a one credit charm school elective.

Thursday, December 08, 2011

Wednesday, December 07, 2011

Who would pay a 73 percent income tax? Not necessarily the rich.

A paper which is receiving considerable attention (see here, here and here) is Diamond and Saez's Journal of Economic Perspectives piece on optimal marginal tax rates.  They put the rate at 73 percent, and declare it an optimum because it would maximize revenue that could then be used for other things.  In particular, they argue that the utility lost to the rich would be much less than the utility gained by lower income people via government programs.  I do believe that many government programs leave people better off, but I am skeptical about whether the optimal size of government is that which is supported by a revenue maximizing income tax.

In any event, one aspect of the paper bothers me: if one searches for the word "incidence," it is not found.  Incidence reflects who really bears the burden of a tax.  If one taxes a person or a business, they might absorb it, or they might pass it on to someone else.

The formula for the incidence of a tax on those who demand a taxed good is (Supply Elasticity)/(Supply Elasticity - Demand Elasticity).  (I apologize for not having elegant formulas--I don't know how to paste them into Blogger).  Because demand curves are generally downward sloping, demand elasticity has a negative sign, so in a sense, the incidence reflects how relatively elastic supply is relative to the sum of the absolute values of the elasticities of demand and supply.

Now let's think about supply elasticity at the revenue maximizing point.  It is exactly one, in that the reduction in labor offered exactly offsets any increase in the rate.  To illustrate, let us just assume for a moment that demand elasticity is -1.  Then half the incidence of the tax is on the supplier of labor or capital (a.k.a. the rich) and half the incidence is on the demander.  This means that the burden on the rich person is 36.5 percent, not 73 percent.

What we do know is that as tax rates fall, the supply elasticity of the wealthy falls.  Why?  Because we know at lower tax rates, raising rates raises revenue-the supply response to an increase in taxes is smaller.  Let's assume that at a 50 percent marginal tax rate, the elasticity of labor supply for the rich is .25.  Now the incidence on demanders is .25/1.25, or 20 percent of the tax burden; it is 80 percent on the rich.  hence with a 50 percent tax rate, the effective tax on the rich is 40 percent, or higher than it would be with a 73 percent rate!

These arguments all depend on assumed elasticity parameters, and so it is important to estimate them as best as possible.  I should also note that I am all for raising taxes, including on myself, to pay for the many government services that I do support.  Somedays I think that if I could change the tax code, I would just raise my own taxes by ten percent and then have policy that assured that everyone with income greater than mine would pay an effective tax rate no lower than mine.


Tuesday, December 06, 2011

Is it gloom, or is it underwriting?

More depressing house price numbers from Core logic this morning, with prices falling 1.3 percent month-over month.  The National Association of Realtors says buyer traffic is down.

The fundamentals for buying right now are actually good.  Trulia's most recent calculation of the cost of owning vs the cost of renting shows that in 74 percent of cities, the cash flow cost of owning is less than the cash flow cost of renting, and I don't think this takes into account the tax benefits of owning.  One city where the price to rent ratio is out of whack--New York--has such a strange housing market that it is hard to know what to make of it; the other outlier is Fort Worth, and I really don't know what to make of that.

Since the Trulia calculations were released, rents are up a bit, house prices are down a bit, and mortgage interest rates have fallen, so buying should be even more attractive relative to renting.  To bring things a little closer to home, I am currently refinancing my house, and should I get the new mortgage, there is simply no way I could rent my house for less than the cost of owning (and I am including "hidden" costs of owning, such as maintenance).

So why aren't we seeing a surge in buying?  The first possibility is that people expect rents, and therefore house prices, to fall.  I think falling rent in the near future is unlikely--multifamily vacancies have dropped a lot, and there has not been much new construction. The second is that people are gloomy about their income prospects, and don't want to be caught up in an illiquid investment like a house.  This is likely.  And third, there may be households who want to buy--who might have even qualified to buy in the years before the subprime nonsense--who simply can't get a loan.  Until lenders are more forward looking, it is hard to imagine housing getting off the floor. 

Sunday, December 04, 2011

Mark Thoma on the Ec 10 Walk-out

I really liked this:


I was going to stay out of this, partly because I don't find this particular expression of the protest very compelling, but I'll add one thing. A big part of the problem is what we are not supposed to talk about in economics, the politics that surrounds the profession and, in particular, policy prescriptions (and don't let Mankiw kid you, through the things he chooses to link, say on his blog, etc., he plays the political game, and plays it fairly well). The fact that one introductory class at Harvard has this much power to affect the national narrative is part of the problem not the solution. It is yet another reminder of just how concentrated power is in this society, and where it lies. Would a protest at a typical state university have gotten as much publicity? Nope. But when it's the institution that educates the rich and powerful, suddenly we are supposed to take note. And we do.

I started blogging in part because I was fed up with the way in which economic issues were presented at CNN and other mainstream news outlets prior to the Bush reelection. Those with the power to get on the air would make claims that were supposedly based upon economics, but were clearly false or at least highly misleading, and they would do so without an effective challenge from the hosts/anchors or other guests. It clearly had an effect on the national conversation, but it was all based upon using economics as a political rather than an analytical tool. So I don't think the problem is what we teach in economics courses, though we could certainly improve in some dimensions. Most courses are careful to cover market failures, etc., and how those problems can be solved through various types of interventions. The problem is the way economics is used by those with a political agenda. If the powerful had an interest in promoting ideas about market failure and the need for government to fix the problem, we'd hear about these ideas endlessly in the media. But those with power want the ability to use it unconstrained by government or any other force, and it should be no surprise that anti-government, anti-regulation, and anti-tax ideas come to dominate the conversation.
One strange thing about introductory economics: it emphasized the virtues of competitive markets.  Yet if markets are competitive, agents can't earn economic (i.e., abnormally large) profits.  Consider the implications of this as certain members of the political class praise the "job-creators."

Friday, December 02, 2011

New rule: if you are going to call yourself an economist, you need to know the meaning of a confidence interval

I was listening to NPR on the drive in to work this morning, and a heard a man who was labeled "an economist," say that the job growth numbers were disappointing, because measured job growth in November was 120,000, whereas the consensus forecast for job growth was 130,000.

The Bureau of Labor Statistics puts the 90 percent confidence interval of the monthly job growth estimate for the estalishment survey at 100,000.  This means the standard error of the estimate is about 56,000, so the difference between the BLS estimate and the consensus forecast number was less than .2 standard errors, which is essentially zero.  I suppose Mr. Economist would be happy had the number come in at 140,000, which would have been above expectations.

One needn't have a Ph.D. in economics to understand confidence intervals--one undergraduate course in statatistics will do the trick.  Yet week after week, I hear people who call themselves economists yammering on about small movements in numbers that are as likely noise as anything else.