Richard's Real Estate and Urban Economics Blog

Better graph with more recent data

2012-01-24T08:12:00.000-08:00

In comments, a complaint was lodged that I used a graph with a linear y-axis for demonstrating change in income over the past 40 years. The problem with such a graph is that if everyone has the same percentage income growth, the slope for high income earners will still look higher.

So here is a graph where the y-axis is logarithmic. It also contains more recent data:

The point doesn't change: from 1969 until 2010, income at the top of the bottom quintile essentially hasn't moved (it changed from 26,289 to 26,685). Income at the bottom of the top five percent has moved quite a lot (from 121,516 to 200,354) .

A modest proposal for tax reform

2012-01-24T07:19:00.000-08:00

Let's just start by designing a code that requires that as adjusted gross income rises, the effective tax rate may not fall. That way taxpayers would be able to look at their own effective rate, and know that everyone with higher incomes would pay at least as high a rate.

The banal moderateness of Thomas Friedman.

2012-01-22T10:12:00.000-08:00

In his paean to conventional wisdom this morning, the ever so serious Mr Friedman writes:

Second, I want to vote for a candidate who is committed to reforming taxes, and cutting spending, in a fair way. The rich must pay more, but everyone has to pay something. We are all in this together.

But how over the past decades have we all been in this together? In 2007, those in the bottom quintile had the same income they had in 1998, and a bump of little more than 11 percent since 1969; those in the top five percent had seen incomes rise by 74 percent since 1969.

Source: Alan De Smet plot of US Census, Historical Income Tables - Families, Table F-1.

Sure, if everyone had benefitted from the policies of the past 40 years, then everyone should sacrifice now.

But for the time being, lets begin by asking for sacrifice from those with the means to do so.

FWIW

2012-01-18T14:24:00.000-08:00

I refinanced for the second time in the last year--the process was a little less painful. So if one wishes to infer a trajectory, there is a fixed effect, but with no degrees of freedom.

Immigration laws provide no benefits - Forum - The Daily Northwestern - Northwestern University#.TxXEh65feMV

2012-01-17T12:05:00.000-08:00

Hannah Green: Immigration laws provide no benefits - Forum - The Daily Northwestern - Northwestern University#.TxXEh65feMV

Two brief thoughts that MLK day inspires about income inequality

2012-01-16T17:17:00.000-08:00

(1) Income inequality is still very much a legacy of differences in how government defended the property rights of people from different races. The US government has been pretty good at defending the property rights of white people for a long time; in the case of other races, not so much. Even if the government now defended all property rights equally, it would take many generations before differences in wealth across races would disappear.

(2) I have heard business people, to the extent they complain about income inequality, complain about the outrageous incomes earned by athletes and entertainers. Yet I venture to guess that Lebron James and Beyonce have much higher marginal products than the vast majority business people, including CEOS and investment bankers.

Hannah Green sends me to Nadeem ul Haque on development in Pakistan

2012-01-16T16:14:00.000-08:00

From Radio OpenSource:

Nadeem ul Haque introduced himself with a bit of bluster as Pakistan’s official “growth” strategist, then began blurting out his frustrations. There’s no growth to speak of in Pakistan, he said — less than inflation anyway, and nothing like India’s 8-percent boom. The government he came home to serve in Pakistan is going nowhere. And then the line that spun my head around: “This is the country that can kill the world,” he said. “And your country hasn’t the foggiest idea what you’re doing here. Find a way to educate youth in Pakistan — 90 million under 20 — or don’t sleep at night. You haven’t got enough bullets to kill them… We can do without the Beltway Bandits and even the billions of dollars in what they call aid. What America should be sending Pakistan is C-SPAN and National Public Radio, and then reopen the USIA libraries… What you send is Raymond Davis and Blackwater… Are you out of your …. minds?”

The conversation we recorded a few days later is a slightly tempered version of that first burst at a farewell party in Islamabad for an American aid official. We’re getting Nadeem ul Haque’s heartfelt version of the Post-Colonial Blues. First, fond memories of the British and American cultural centers and mentors in the 1950s and 60s who propelled him to the London School of Economics, the University of Chicago and a career at the World Bank. Second comes the the appalled realization that a new native elite had slipped into the palaces, polo grounds and clubs of the old colonialists with, if anything, less interest in the mass of the population. And third, a rough critique of a distant and disdainful American connection with Pakistan: bullet proof cars for aid workers when they get out of the office at all; “they don’t use our toilet paper,” he says; and nobody, but nobody, knows where the other-than-military money goes.

Maybe the reason Tim Tebow does option plays...

2012-01-12T15:12:00.001-08:00

...is that he is high variance.

My colleague Dowell Myers says, “'Show me your papers' should be replaced with 'Welcome to English class.'”

2012-01-12T09:35:00.000-08:00

He has a lovely op-ed in the New York Times:

How do we change course and begin treating immigrants as a vast, untapped human resource? The answer goes to the heart of shifting from an immigration policy to an immigrant policy.

For starters, the billions of dollars spent on border enforcement should be gradually redirected to replenishing and boosting the education budget, particularly the Pell grant program for low-income students. Some money could be channeled to nonprofits like ImmigrationWorks and Welcoming America, which are at the forefront of helping migrants assimilate.

Second, the Departments of Labor, Commerce and Education need to play a greater role in immigration policy. Yes, as long as there remains a terrorist threat from abroad, the Department of Homeland Security should have an immigration component. But immigration policy is all about cultivating needed workers. That means helping immigrants and their children graduate from high school and college. It means that no migrant should have to stand in line for an English class. It means assistance in developing migrants’ job skills to better compete in an increasingly information- and knowledge-based economy.

Thanks to our huge foreign-born population (12 percent of the total), America can remain the world’s richest and most powerful nation for decades. Shaping an immigrant policy that focuses on developing the talents of our migrants and their children is the surest way to realize this goal.

Chicago: if not back to the city there, then where?

2012-01-11T09:32:00.000-08:00

The ASSA meetings were in Chicago this year. Even though the meetings take place in January, I always look forward to their return there, because I enjoy visiting Chicago more than any other American city. It helps that my daughter goes to school there, but I also find Chicago's urban landscape to be uniquely appealing. It is somehow dense without feeling overcrowded, the art and restaurant scenes are remarkable, and the architecture is world renowned. Few things for me are as life-affirming as a walk down Wacker Drive.

Chicago also has decent transit and, for a beautiful large city, is inexpensive. The median price of a house in Chicago is around $200,000, and even at the peak, prices remained more or less sane.

Yet between 2000 and 2010, Chicago shed seven percent of its population. This was not just because the region in which it sits grew slowly; Cook County outside of Chicago gained slightly, and Lake and Kane Counties grew smartly. Employment in Cook County has fallen more than 10 percent over the past ten years.

I like cities and I root for them. Yet even in an era when sprawl has become a pejorative, more people leave some of our most appealing cities than move into them. I suspect a lot of the problem is school quality, and I give Congress for New Urbanism president John Norquist a lot of credit for recognizing this fact. But many people like living in detached houses on spacious lots. In the absence of policy interventions such as higher gasoline prices, I don't see this changing anytime soon.

If Commercial Real Estate Investors Avoided the Nine Vernon Martin Traps, We would all be in Better Shape.

2012-01-04T17:29:00.000-08:00

In 1988, an appraiser named Vernon Martin III published a six page paper in Real Estate Review called Nine Abuses Common in Pro Forma Cash Flow Projections. They are:

Over-inflated expected income
Under-inflate expected expenses
An assumption that tenants will always pay expenses
Failure to examine individual leases
Underestimation of vacancy and collection losses
Forgetting that tenant improvements and lease brokerage fees are real expenses
Going-out cap rates that are lower than the going-in cap rates
Ignoring sales expenses
Understating the discount rate.

Thanks to Argus, people are pretty good now at looking at individual leases. But they don't always do a great job of avoiding the remaining abuses.

The Fed writes a white paper on the GSEs

2012-01-04T13:52:00.000-08:00

The conclusion's opening paragraph:

The challenges faced by the U.S. housing market today reflect, in part, major changes taking place in housing finance; a persistent excess supply of homes on the market; and losses arising from an often costly and inefficient foreclosure process (and from problems in the current servicing model more generally). The significant tightening in household access to mortgage credit likely reflects not only a correction of the unsound underwriting practices that emerged over the past decade, but also a more substantial shift in lenders’ and the GSEs’ willingness to bear risk. Indeed, if the currently prevailing standards had been in place during the past few decades, a larger portion of the nation’s housing stock probably would have been designed and built for rental, rather than owner occupancy. Thus, the challenge for policymakers is to find ways to help reconcile the existing size and mix of the housing stock and the current environment for housing finance. Fundamentally, such measures involve adapting the existing housing stock to the prevailing tight mortgage lending conditions--for example, devising policies that could help facilitate the conversion of foreclosed properties to rental properties--or supporting a housing finance regime that is less restrictive than today’s, while steering clear of the lax standards that emerged during the last decade. Absent any policies to help bridge this gap, the adjustment process will take longer and incur more deadweight losses, pushing house prices lower and thereby prolonging the downward pressure on the wealth of current homeowners and the resultant drag on the economy at large.

Back with commentary in a bit.

Bob Shiller supports a tax credit to fix a housing mess

2012-01-02T21:37:00.000-08:00

He writes:

We used to talk a lot about helping homeowners in trouble.
Instead, the bankers were bailed out - and now we hardly talk at all about aiding ordinary Americans.

Yet the problems facing homeowners today are even bigger than they were in the dark days of the financial crisis. According to the S&P/Case-Shiller 20-city Home Price Index, home prices have fallen 13.2 per cent since Lehman Brothers collapsed in September 2008. Over the same period, of course, unemployment has climbed.
In other words, more homeowners are underwater on their mortgages - and more Americans are out of work. And home prices are still falling.

So we need to overcome the sense that real help is impossible - and to think about approaches that might be politically feasible. Despite concern over our national debt and a general distaste for spending taxpayer dollars on people who may have been less responsible, there are some potential solutions.

The piece continues....

Buses are another matter

2011-12-31T16:12:00.000-08:00

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.

2011-12-31T15:59:00.000-08:00

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)

2011-12-31T08:06:00.001-08:00

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

2011-12-31T07:48:00.000-08:00

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.

Jeremy Stein for Fed Governor (reprise)

2011-12-27T13:24:00.001-08:00

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.

Joe Nocera nails it

2011-12-25T07:44:00.000-08:00

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."

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

2011-12-23T12:50:00.000-08:00

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

2011-12-23T07:51:00.000-08:00

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.

Why to worry about Chinese house prices.

2011-12-21T11:03:00.000-08:00

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.....

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

2011-12-17T10:07:00.001-08:00

(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.

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

2011-12-15T08:13:00.000-08:00

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.

I really don't understand what the President is thinking today.

2011-12-08T17:15:00.000-08:00

I do not understand his definition of "common sense."

High rates of births to very young mothers has been a scourge of central cities. Young mothers are less likely to finish high school than girls who don't have children, as are the children of young mothers.

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

2011-12-07T10:14:00.000-08:00

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.

Is it gloom, or is it underwriting?

2011-12-06T08:36:00.000-08:00

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.

Mark Thoma on the Ec 10 Walk-out

2011-12-04T19:28:00.000-08:00

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."

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

2011-12-02T09:45:00.000-08:00

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.

I now work for the Sol Price School of Public Policy as well as the Marshall School of Business at USC

2011-11-29T21:58:00.000-08:00

The Price Family gave a $50 million gift for the USC School of Policy, Planning and Development to be remained the USC Sol Price School of Public Policy. Mr Price was an alum of USC, as is his grandson.

Mr. Price was the force behind Price Club, which later merged with Costco. He was known for paying his workers well, treating his customers well, and not overpaying his executives. He was ahead of his time with respect to racial integration and urban renewal. Sometimes I feel an internal tension, because I admire both success in business and care a lot about social justice. If all successful people in business were like Mr. Price, I would feel no such tension. His obituary in the San Diego Jewish World contained the following:

“Most of life is luck,” he said in an 1985 newspaper interview. “Obviously you have to have the will and intensity, and in my case discipline and idealism had a lot to do with it. But if you move back a step, even that is luck."

I can't think of a better way to look at life. And whether you need mustard or Johnny Walker Black, there is no better place to go than Costco. I am proud to now work at a school named for him.

Why I think Raphael Bostic is more likely right about FHA than Joe Gyourko/AEI/WSJ

2011-11-29T19:36:00.000-08:00

A healthy debate has taken place between HUD Assistant Secretary Raphael Bostic and Wharton Professor Joe Gyourko on the financial future of FHA. While FHA is thinly capitalized, Raphael argues that will likely survive, while Joe thinks a large taxpayer finance bailout is looming. In the interest of full disclosure, I should note that Raphael is a colleague of mine at USC, but Joe invited me to be a visiting faculty member at Wharton for a semester. I think highly of them and am grateful to them both.

I have two reasons to bet on Raphael's view:

(1) At the time the dumbest mortgage business was being done, FHA was out of the picture. While FHA's market share is typically in the neighborhood of 12-15 percent, during the period 2003-2007, its market share ranged from 3.77 to 9.66 percent. FHA did not lower its underwriting standards to that of the shadow banking sector (a sector that was not subject to the Community Reinvestment Act, by the way) in order to keep market share--the government insurance program was far more disciplined than the private sector.

FHA's market share increased dramatically in 2009 and 2010, in large part because the private sector abandoned the low downpayment market. In 2010 in particular, FHA gained market share despite raising its prices and tightening its underwriting. FHA was also ramping up its market share after house prices collapsed. While house prices have not been robustly rising since late 2008, they have not been falling precipitously either. One could argue that the private sector has been backward looking, while the public sector has been more forward looking.

(2) The second reason I have is more speculative, and is something that I am currently in the middle of researching, but I want to put it out there as a hypothesis (and a hunch). I suspect that there is such a thing as "burn-out" in default--if a household goes through a difficult time without defaulting, it becomes decreasingly likely to default. Part of the reason for this is amortization, but that is a small reason. More important, people who refuse to default even when their measured characteristics suggest that they should have revealed that they are "different," and in a manner that is unobservable.

Now again, in the interest of full disclosure, I should note that I did not forecast the size of GSE losses, so maybe I shouldn't be taken that seriously. But I think my first argument will stand up, and as I do more research, I will know more about the second.

Does slowing people down slow down the economy?

2011-11-26T17:15:00.000-08:00

As my family and I were traveling back to LA from my parents' place in Arizona this weekend, we had to stop at three checkpoints. Each stop delayed us--I would guess the average delay was 5-10 minutes. One check point bragged that it had arrested around 100 people--about 70 for immigration violations and 30 for crimes--over the course of 2011.

According to this web site, one of the highways I travelled on carries 10,000 cars per day. Let's say the average stop takes five minutes, the average car has 1.3 people in it, and the value of people's time averages $15 per hour. This means that each arrest costs a little under $60,000; perhaps there is a deterrent effect as well. Is this worth it? I really don't know.

But I can't help but notice that over the last ten years, the US, as a matter of security policy, has really gummed up the ability of people to get easily from one place to another. Is it a coincidence that the economy has underperformed over this time? Perhaps. I can't think of a way to run a regression to test the relationship between ease of travel and economic performance--but that doesn't mean that someone else can't.

Remembering the date

2011-11-22T20:55:00.001-08:00

In the long history of the world, only a few generations have been granted the role of defending freedom in its hour of maximum danger. I do not shrink from this responsibility—I welcome it. I do not believe that any of us would exchange places with any other people or any other generation. The energy, the faith, the devotion which we bring to this endeavor will light our country and all who serve it—and the glow from that fire can truly light the world.

More four year degrees won't solve the current problem

2011-11-21T10:47:00.000-08:00

David Brooks and Thomas Friedman have recently taken to arguing that the solution to our income distribution woes is to encourage and enable more people to go to college. I want to leave aside for a second the fact that our educational problems are much deeper than that--that our high school graduation rate is declining is to me the most alarming education statistic.

Rather, it is worth looking at what has happened to earnings by educational attainment over the past eight years. The census has put out data for 2002-2010, and here is what it (Table A-6) shows:

Median earnings for men with a high school degree fell 12.1 percent between 2002-2010; earnings for women with a high school diploma fell 8.5 percent between 2002-2010; for men with college degrees, it was a fall of 8.0 percent; for women with college degrees it was flat. So yes, education is increasing income inequality in that those with college degrees are losing less than those with high school diplomas.

I am the sort of person who would be fine with a GINI of .5 (a number the reflects lots of inequality) if it meant that the people who are materially worst off can live at a decent standard of living. But currently, those who play by the rules (and I mean really play by the rules) are seeing their living standards erode. Homilies about sending more people to college are at the moment pretty much beside the point.

Raphael Bostic takes on Joe Gyourko

2011-11-19T12:08:00.000-08:00

The Assistant Secretary of PDR (and USC colleague) writes:

This week, HUD released its annual report to Congress on the financial status of the Federal Housing Administration (FHA) Mutual Mortgage Insurance (MMI) Fund. The report demonstrates the long-term strength of the Fund while not shying away from the challenges it faces in the near-term due to ongoing stresses in the housing market. While the independent actuary reports older books of business underwritten during the bubble years of 2000-2008 are expected to produce losses of more than $26 billion, it also finds that FHA has a very strong platform going forward, with insurance on loans booked since January 2009 posting an estimated net economic value of $18 billion. Indeed, the actuary reports that the Fund still retains positive capital, and that it should be able to rebuild capital to the statutory requirement of two percent of insurance-in-force very quickly once housing markets across the county exhibit sustained growth.

Notwithstanding findings of the independent actuary that the FHA MMI Fund retains positive capital four years into the worst housing crisis since the Great Depression, a report commissioned by the American Enterprise Institute (AEI) suggests that FHA both lacks an actuarially sound program and is in current need of a significant capital infusion.

Read the whole thing. It has actually stunned me how well FHA says done relative to AEI's paragon of virtue, the private market. Of course, it was the private labels security market that drove down FHA's market share during the worst of the lending market. FHA loans actually always required underwriting; underwriting in the private sector often disappeared.

Read CRL on Disparities in Mortgage Lending

2011-11-17T15:25:00.000-08:00

The Center for Responsible Lending's research team of Carolina Reid (who has been working tirelessly at developing data on subprime mortgages for some time now), Roberto Quercia, We Li and Debbie Grunstein Bocian has produced Lost Ground, 2011: Disparities in Mortgage Lending and Foreclosures. They argue

1) The nation is not even halfway through the foreclosure
crisis. Among mortgages made between
2004 and 2008, 6.4 percent have
ended in foreclosure, and an additional 8.3 percent are
at immediate, serious risk.

(2) Foreclosure patterns are strongly
linked with patterns of risky
lending.
The foreclosure rates are consistently
worse for borrowers who received high-risk loan products
that were aggressively marketed
before the housing crash, such as
loans with prepayment penalties,
hybrid adjustable-rate mortgages
(ARMs), and option
ARMs.
Foreclosure rates are highest in
neighborhoods where these
loanswere concentrated.

(3)The majority of people affected
by foreclosures have been
white families. However, borrowers of
color are more than twice as
likely to lose their home as
white households. These higher
rates reflect the fact that African
Americans and Latinos were
consistently more likely to receive
high-risk loan products, even
after accounting for income and
credit status.

It is really striking how African-Americans and Hispanics were steered into crappy loans, even controlling for income and credit history. Beyond all this, the web site accompanying the report has really nicely organized data on severely delinquent loans and loans in foreclosure by state, race, ethnicity and MSA.

Holmen Jenkins makes me spit out my coffee this morning.

2011-11-17T11:08:00.000-08:00

He spins this scenario:

Take this case: Workers in a rail yard see men in suits prowling around. Rumors fly the company is being sold. One worker buys call options on his employer's stock and, because the rumors turn out to be right, is hauled up on insider-trading charges. Had the rumors been wrong, had the worker lost money, had the men in suits been federal railroad inspectors, think the feds would have filed a case?

The natural lesson we draw from this little piece of fiction: if Spencer Bachus buys a short position after he meets with Ben Bernanke, it's ok.

Sometimes you have to hold your nose

2011-11-15T21:56:00.000-08:00

Reporter Jim Puzzanghera of the LA Times asked me today whether I would restore conforming loan limits in certain high cost areas to their pre-October 1 729,250 level. He wrote:

Although he'd like to see more data, Green thinks it's probably a smart move to increase the loan limits. And he agreed that the move was unlikely to hurt the FHA's finances.

"My gut answer is, I'd probably raise it back right now," Green said. "The downside of not raising it is potentially pretty bad."

I really dislike the idea of subsidizing mortgages that only households earning more than $200,000 per year can afford. At the same time, however, Nick Timiraos last week wrote:

Potentially more revealing is this data point from California, which has a higher share of markets affected by the declines: applications for purchase loans with balances between $625,500 and $729,750 were down by 25% from September and by 33% from one year ago. By contrast, overall purchase-loan applications in California were down by just 12% and 3%, respectively.

Housing is still very weak and many borrowers are underwater. I wanted to see if lowering loan limits would lead the private sector to step in--I am not seeing any evidence that it is. Beyond the data cited in the Timiraos story, flow of funds data show that private lending in other sectors of the economy remains moribund.

Maybe it is worth waiting for another month of data before the old limits are restored. But it is not worth worsening things in the market to make a point.

Harry Frankfurt and Herman Cain

2011-11-15T07:07:00.000-08:00

The Washington Post sends me to a Milwaukee Journal-Sentinal interview with Herman Cain on Libya.

Watching the cringe inducing answers reminded me of one of may favorite books of the last decade or so: Harry Frankfurt's On Bullshit. I am writing this from my house, and my copy of the book is in my office, so let me pull a quote from the book that is featured in a Slate review:

Both in lying and in telling the truth people are guided by their beliefs concerning the way things are. These guide them as they endeavor either to describe the world correctly or to describe it deceitfully. For this reason, telling lies does not tend to unfit a person for telling the truth in the same way that bullshitting tends to. ...The bullshitter ignores these demands altogether. He does not reject the authority of the truth, as the liar does, and oppose himself to it. He pays no attention to it at all. By virtue of this, bullshit is a greater enemy of the truth than lies are.

I am not naive. Among my favorite presidents, three--FDR, LBJ, and Bill Clinton--were excellent liars. They were not, however, bullshitters. Herman Cain is.

David Barker writes that Congress is indeed subject to insider trading laws

2011-11-14T14:53:00.001-08:00

He points me to a paper by Donna Nagy. I will be curious to see if a prosecutor does anything with it.

Why on earth is Congress exempt from insider trading rules?

2011-11-14T13:41:00.001-08:00

Just asking.

Tyler Cowen channels Mr Potter

2011-11-14T13:16:00.000-08:00

Tyler Cowen writes about how more income inequality will lead to more hard work and discipline.

Mr. Potter agrees.

The Prescience of Rudiger Dornbusch

2011-11-13T09:42:00.000-08:00

As events have unfolded in Europe over the past year, I keep thinking back to an article written by Rudiger Dornbusch in Foreign Affairs. The summary:

The battle for the common currency may be remembered as one of the more useless in Europe's history. The euro is hailed as a solution to high unemployment, low growth, and the high costs of welfare states. But the deep budget cuts required before integration are already causing pain and may trigger severe recessions. If the European Monetary Union goes forward, a common currency will eliminate the adjustments now made by nominal exchange rates, and the central bank will control money with an iron fist. Labor markets will do the adjusting, a mechanism bound to fail, given those markets' inflexibility in Europe.

He wrote the piece in 1996. It is now behind a pay-wall, but if you have access to a university library, you can probably get access to the piece.

I know this makes me elitist, but...

2011-11-13T07:45:00.000-08:00

...people running for president should actually know stuff. Jon Huntsman does, which seems to disqualify him immediately.

What's the real difference between Brookings and AEI?

2011-11-11T10:46:00.001-08:00

With Brookings, I need to read the study to know how it turns out.

With AEI, I don't need to read the study to know how it turns out.

Do Richwine and Briggs show that, on average, teachers are overpaid? I don't think so. (Warning: a little wonky)

2011-11-09T11:37:00.000-08:00

A recent study by John Richwine and Andrew Biggs of the Heritage Foundation and the American Enterprise Institute purports to show that teachers are on average overpaid. I do not find their evidence convincing, and the reasons have less to do with their affilitations than the technical nature of their work. My problems with their paper are:

(1) They estimate a reduced form, which means it is difficult to interpret the meaning of their coefficients.

(2) Even if we accept their reduced form, there are issues in how the authors specify their explanatory variables.

(3) The authors' specification has a serious selectivity problem and

(4) Most disturbingly, they ignore their most convincing spefication, a specification that supports the idea that teachers get paid 10 percent less in wages than those in other professions.

Let's turn to each problem in turn:

(1) Underlying any wage equation is a supply curve for labor and a demand curve for labor. Let's write these out:

L(s) = a + bw +cX1+ e1
L(d) =d - fw +gX2 + e2

X1 and X2 are vestors of explanatory variables, e1 and e2 are residuals from a regression equation.

Let's say one of the elements in X2 is years of education--the demand for labor goes up in years of education after controlling for wages. The coefficient g that is multiplied by years of education is thus easy to interpret--it is a wage premium associated with education.

The problem is that the authors estimate a reduced from, where they put L(s)=L(d). The resulting equation they arrive at is

w = d/(b+f)+gX2/(b+f)+e2/(b+f)-a/(b+f)-cX1/(b+f)-e1/(b+f)

If X2 is education, and is in both the supply and deman equation, the reduced form wage equation reduces to:
w=(d-a)/(b+f) +(g-c)X1/(b+f)+(e2-e1)/(b+f)

So the coefficient on X1 is (g-c)/(b+f). This coefficient helps with prediction of wages, but it does not allow us to disintangle the stuctural foundation of wages. This why why when we are trying to determine the impact of policy on outcomes, reduced forms are problematic.

(2) The authors assume that wages are linear in years of education. This is clearly not true--the impact of education on wages tends to fall into "buckets;" < 12 years, 12-15 years, 16 years, and > 16 years. You get the idea. Their mis-specification of the educational variable could bias their other findings.

(3) People who select themselves into teaching might have skills that do not show up in educational levels or on aptitude tests. I have lots of education and do well on aptitude tests, but I think I would be at sea teaching second graders and REALLY at sea teaching middle schoolers. Teaching students at these levels requires patience, insight and social skills that are not measured by aptitude tests.

The authors point to the interesting fact that people generally make less money when they move from teaching to non-teaching jobs. There are alternative interpretations to there. One is that teaching is a hard job, and so people willingly leave at lower wages. The second is that those who select out of teaching are those who have decided they are not very good at it.

(4) The most disturbing part of the paper is this:

"Table 2 shows how teacher salaries change depending on whether education or AFQT is included in the regression. The first row is the "standard" regression based on our CPS analysis in the previous section: Years of education are controlled for, but AFQT is not. The standard regression shows a teacher salary penalty of 12.6 percent.

The second row includes both education and AFQT in the same regression. The impact on teacher wages is small: The penalty decreases by less than two percentage points. The third row again includes AFQT but now omits education. With this specification, the change is dramatic: The teaching penalty is gone, replaced by a statistically insignificant premium.

How to interpret these results? On the one hand, the difference in IQ between teachers and other college graduates

by itself has only a small effect on estimates of the teacher penalty. As the second row indicates, teachers with both the same education and AFQT score as other workers still receive 10.7 percent less in wages.

However, as we have shown, education is a misleading measure of teacher skills in several ways. In addition to the IQ difference between teachers and non-teachers, the education major is among the least challenging fields of study, and years of education subsequently have little to no effect on teacher quality. This suggests that eliminating education as a control variable and letting AFQT alone account for skills (as in the third row) may provide the most accurate wage estimates.

Replacing education with an objective measure of skills eliminates the observed teacher penalty, indicating that non-teachers with the same education as a typical teacher will likely have more applicable skills. We emphasize that a job is not necessarily less important or less challenging when the credentials for it are easier to obtain. Indeed, effective teachers are highly valuable to society and the economy."

So the authors have a regression with both education (which reflects Spence-type signalling, among other things) and IQ. The reduction in the R-squared when education is dropped suggests that after controlling for IQ, the coefficient on education continues to be statistically different from zero. When both IQ and education are included, teachers suffer a 10 percent wage discount relative to the private sector. Yet the authors ignore this result for the rest of the paper.

(FWIW, I really admire Michelle Rhee).

Pulling out David Min's Graph from Mike Konczal's piece

2011-11-03T12:56:00.000-07:00

Beyond reproducing Mike's post, I want to underline this graph from David Min:

This punches a hole in the argument that Pinto and Wallison make that Fannie and Freddie were making "dangerous loans" when they moved to higher LTV and lower FICO lending. Their models allowed for offsets--if one had a very low LTV, one could get by with a relatively low FICO, and vice versa. The private label market allowed for lending standards that were crappy in all dimensions.

Mike Konczal gives Six Reasons not to believe the meme that Fannie and Freddie caused the crisis

2011-11-03T12:49:00.000-07:00

Reproduced with his kind permission:

1. Private markets caused the shady mortgage boom: The first thing to point out is that the both the subprime mortgage boom and the subsequent crash are very much concentrated in the private market, especially the private label securitization channel (PLS) market. The Government-Sponsored Entities (GSEs, or Fannie and Freddie) were not behind them. The fly-by-night lending boom, slicing and dicing mortgage bonds, derivatives and CDOs, and all the other shadiness of the mortgage market in the 2000s were Wall Street creations, and they drove all those risky mortgages.
Here’s some data to back that up: “More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions… Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.”
As Center For American Progress’s David Min pointed out to me, the timing doesn’t work at all: “But from 2002-2005, [GSEs] saw a fairly precipitous drop in market share, going from about 50% to just under 30% of all mortgage originations. Conversely, private label securitization [PLS] shot up from about 10% to about 40% over the same period. This is, to state the obvious, a very radical shift in mortgage originations that overlapped neatly with the origination of the most toxic home loans.”

2. The government’s affordability mission didn’t cause the crisis: The next thing to mention is that the “affordability goals” of the GSEs, as well as the Community Reinvestment Act (CRA), didn’t cause the problems. Randy Krozner summarized one of the better studies on this so far, finding that “the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis.” The CRA wasn’t nearly big enough to cause these problems.
I’d recommend checking out “A Closer Look at Fannie Mae and Freddie Mac: What We Know, What We Think We Know and What We Don’t Know“ by Jason Thomas and Robert Van Order for more on the GSEs’ goals, which, in addition to explaining how their affordability mission is a distraction, argues that subprime loans were only 5 percent of the GSEs’ losses. The GSEs also bought the highly rated tranches of mortgage bonds, for which there was already a ton of demand.

3. There is a lot of research to back this up and little against it: This is not exactly an obscure corner of the wonk world — it is one of the most studied capital markets in the world. What has other research found on this matter? From Min:

Did Fannie and Freddie buy high-risk mortgage-backed securities? Yes. But they did not buy enough of them to be blamed for the mortgage crisis. Highly respected analysts who have looked at these data in much greater detail than Wallison, Pinto, or myself, including the nonpartisan Government Accountability Office, the Harvard Joint Center for Housing Studies, the Financial Crisis Inquiry Commission majority, the Federal Housing Finance Agency, and virtually all academics, including the University of North Carolina, Glaeser et al at Harvard, and the St. Louis Federal Reserve, have all rejected the Wallison/Pinto argument that federal affordable housing policies were responsible for the proliferation of actual high-risk mortgages over the past decade.

The other side has virtually no research conducted that explains their argument, with one exception that I’ll cover below.

4. Conservatives sang a different tune before the crash: Conservative think tanks spent the 2000s saying the exact opposite of what they are saying now and the opposite of what Bloomberg said above. They argued that the CRA and the GSEs were getting in the way of getting risky subprime mortgages to risky subprime borrowers.

My personal favorite is Cato’s “Should CRA Stand for ‘Community Redundancy Act?’” from 2000 (here’s a write-up by James Kwak), which argues a position amplified in its 2003 Handbook for Congress financial deregulation chapter: “by increasing the costs to banks of doing business in distressed communities, the CRA makes banks likely to deny credit to marginal borrowers that would qualify for credit if costs were not so high.” Replace “marginal” with Bloomberg’s “on the cusp” and you get the same idea.

Bill Black went through what AEI said about the GSEs during the 2000s and it is the same thing — that they were blocking subprime loans from being made. In the words of Peter Wallison in 2004: “In recent years, study after study has shown that Fannie Mae and Freddie Mac are failing to do even as much as banks and S&Ls in providing financing for affordable housing, including minority and low income housing.”

5. Expanding the subprime loan category to say GSEs had more exposure makes no sense: Some argue that the GSEs had huge subprime exposure if you create a new category that supposedly represents the risks of subprime more accurately. This new “high-risk” category is associated with a consultant to AEI named Ed Pinto, and his analysis deliberately blurs the wording on “high-risk” and subprime in much of his writings. David Min broke down the numbers, and I wrote about it here. Here’s a graphic from Min’s follow-up work, addressing criticism:

Even this “high risk” category isn’t risky compared to subprime and it looks like the national average. When you divide it by private label, the numbers are even worse. Private label loans “have defaulted at over 6x the rate of GSE loans, as well as the fact that private label securitization is responsible for 42% of all delinquencies despite accounting for only 13% of all outstanding loans (as compared to the GSEs being responsible for 22% of all delinquencies despite accounting for 57% of all outstanding loans).” The issue isn’t this fake “high risk” category, it is subprime and private label origination.
The Financial Crisis Inquiry Commission (FCIC) panel looked carefully at this argument and also ended up shredding it. So even those who blame the GSEs can’t get the numbers to work when they make up categories.

6. Even some Republicans don’t agree with this argument: The three Republicans on the FCIC panel rejected the “blame the GSEs/Congress” approach to explaining the crisis in their minority report. Indeed, they, and most conservatives who know this is a dead end, tend to take a “it’s a whole lot of things, hoocoodanode?” approach.

Peter Wallison blamed the GSEs when he served as the fourth Republican on the FCIC panel. What did the other three Republicans make of his argument? Check out these released FCIC emails from the GOP members. They are really fun, because you can see the other Republicans doing damage control and debating whether Wallison and Pinto were on the take for making this argument — because the argument makes no sense when looking at the data.

There are lots of great quotes: “Re: peter, it seems that if you get pinto on your side, peter can’t complain. But is peter thinking idependently [sic] or is he just a parrot for pinto?”, “I can’t tell re: who is the leader and who is the follower,” “Maybe this email is reaching you too late but I think wmt [William M. Thomas] is going to push to find out if pinto is being paid by anyone.” And then there’s the infamous event where Wallison emailed his fellow GOP member: “It’s very important, I think, that what we say in our separate statements not undermine the ability of the new House GOP to modify or repeal Dodd-Frank.”

The GSEs had a serious corruption problem and were flawed in design — Jeff Madrick and Frank Partnoy had a good column about the GSEs in the NYRB recently that you should check out about all this — but they were not the culprits of the bubble

It is time to kill California High Speed Rail

2011-11-02T10:45:00.000-07:00

Lisa Schweitzer notes that the cost estimate has been raised to nearly $100 billion (which she says still might understate the cost).

Let's do a little math about this--$100 billion throws off about $5 billion per year. If low income people work ~~200~~ 250 days a year, and we were to fully subsidize the $5 LA metro day pass (and if I have my zeros right), we could fund 5 4 million people's transit per year.

Well, that straightens things out

2011-10-31T14:36:00.001-07:00

I found this on my cousin's web page:

How my taxes are raised matters

2011-10-30T09:38:00.000-07:00

I need to pay higher taxes. To get to fiscal balance, I need to pay higher taxes. To fund the things I support, such as national health insurance, more Section 8 housing, and a robust military, I need to pay higher taxes. But I am not paying them alone--to pay more without others paying more is a gesture, and would not solve anything.

The federal government can get at me one of two ways: it can scale back or eliminate my deductions, or it can raise my rates. If my mortgage interest deduction goes away, for example, my federal tax liability would increase by around 10 percent; alternatively, the federal government could just charge me a ten percent surtax on income.

If my income is taxed, the impact on my desire to work is ambiguous. On the one hand, because the cost of leisure would fall, I would have an incentive to work less. On the other hand, if I want to restore my previous after tax standard of living, I would have an incentive to work more.

If you take away my mortgage interest deduction, however, the impact is not ambiguous--I will have an incentive to work more. Leisure is no less expensive (there is no substitution effect), but my desire to restore my previous income remains as before.

A picture to inform tax policy for closing the deficit

2011-10-26T18:15:00.000-07:00

From CBO:

The new HARP might help...

2011-10-24T08:41:00.000-07:00

From this morning's New York Times:

The Federal Housing Finance Agency, which oversees mortgage finance giants Fannie Mae and Freddie Mac, said it was easing the terms of the two-year-old Home Affordable Refinance Program, which helps borrowers who have been making mortgage payments on time but have not been able to refinance as home values have dropped...

...To encourage banks to participate in the program, FHFA is revamping it to protect lenders from having to buy back HARP loans if underwriting problems are later found. Banks will only have to verify that borrowers have made at least six of their last mortgage payments and the new rules eliminate the need for appraisals in most cases.FHFA said government-controlled Fannie Mae and Freddie Mac will waive certain fees for borrowers that refinance into loans with a shorter term, such as 15 years, aiming to spur homeowners to pay down the amount they owe at a faster rate.

The elimination of the requirement for an appraisal will make a big difference. So will the waiver of fees for those who shorten terms. Lower interest rates and shorter terms will help borrowers get right-side up faster.

Type I error, Type II error, and voting

2011-10-22T15:42:00.000-07:00

No matter how our registration laws are set up, we will make errors: either people who are eligible to vote will be prevented from doing so, or people who are not eligible to vote will be allowed to do so. Type I error falsely rejects a null hypothesis, while Type II error falsely fails to reject a null hypothesis.

If the null is that people who should be eligible to vote should be allowed to vote, then the new voter registration laws being propagated around the country will produce more Type I error. Two points here--I suspect that the new laws will create a lot more Type I error than precent Type II error. Also, to me, Type I error is more serious than Type II error--preventing eligible voters from voting is a more egregious error than allowing ineligible voters to vote.

Another impediment to short sales?

2011-10-20T21:28:00.000-07:00

This morning, I participated in a conference in Lakewood on housing sponsored by Rep. Linda Sanchez. A HUD representative made me aware of an issue I hadn't known about before: how mortgage insurance is giving lenders an incentive to foreclose, rather than agree to short sales.

Apparently, a number of lenders bought mortgage insurance on particular mortgages from private mortgage insurance companies. To clarify, the lenders did not require borrowers to purchase the mortgage insurance, but rather bought mortgage insurance (and paid the cost) on their own.

Under the terms of the policies, the lenders get a pay-off from the PMI companies is they foreclose on a property, but not if they modify a loan or allow for a short sale. Consequently, lenders are better off foreclosing than modifying, even if the foreclosure produces lower proceeds than a modification.

This is yet another perverse incentive that is contrary to the policy aim of stabilizing the housing market. I have no idea how widespread this is, but if it is common, it is yet another problem.

Plane and train envy

2011-10-17T16:36:00.000-07:00

One of the privileges of my job is I get to travel a lot. In the past year, I have been to Hong Kong, Seoul and Singapore. All three cities have great airports, and nice, clean, comfortable, fast rail transportation from their central cities to their airports.

By comparison, many airport terminals in the US--including two of our biggest international airports, LAX and JFK--are embarrassing, and transportation options to them are limited. Perhaps such things don't matter much to economic performance--it is easy to overstate the wonders of nice infrastructure when the cost is being hidden via subsidies. Nevertheless, there is something about the ability of Asian cities to do infrastructure well that makes me envious.

Lucid is the eye of the beholder

2011-10-16T09:49:00.000-07:00

Ed Glaeser celebrates Tom Sargent in a recent Bloomberg column (h/t my father). The following statement really struck me:

Two of his lucid monographs, “Macroeconomic Theory” and “Dynamic Economic Theory,” have long been mainstays of macroeconomic education

I am guessing pretty much anyone who went to grad school in econ in the late 1980s was subjected to "Macroeconomic Theory." It has indeed become a useful reference to me, but lucid is about the last word I would use to describe it. Lucid writers (within the realm of their academic work) include Paul Krugman, Milton Friedman and....Ed Glaeser. Michael Intriligator manages to make dynamic optimization intuitive. I just don't see how Sargent gets in the same category.

For free trade to fulfill its promise, the national government must redistribute income

2011-10-14T03:28:00.000-07:00

As a card-carrying economist, I like trade--overall, it potentially enriches countries that engage in it. The problem is the meaning of enrichment.

Trade theory says that trade enlarges the pie that people share. But among the most important contributions to trade theory is the Samuelson-Stolper Theorem, which says that relatively scarce factors of production see their returns fall when trade is introduced. In the context of an economy like the US, this means that low skilled workers see their wages fall in the presence of trade. The trajectory of wages in the US over the past 20 years or so is consistent with the predictions of Samuelson and Stolper.

NAFTA was sold to the US public as something that would make everyone better off. And in principle, it could have done so, had some of the gains to those who benefited from NAFTA been redistributed to those who lost as a result of it. Instead we got the NAFTA but not redistribution. This likely explains the widening disparity of incomes.

Why Einstein was wrong about being wrong

2011-10-11T21:21:00.000-07:00

Why Einstein was wrong about being wrong

h/t Mark Thoma. The piece is a lot of fun.

Urban Population Share and Carbon Footprints

2011-10-08T16:41:00.000-07:00

I am teaching Ed Glaeser's Triumph of the City to my undergrads right now; he has a chapter called "Is there anything greener than blacktop." Just for fun, I plotted urban land share by state (source Demographia) against CO2 emissions per capita by state. Here is what you get:

The regression line is log-linear. An R2 of .28 on a bivariate relationship is not awful. One should never make claims based on such things, but they are kind of fun to look at.

A couple of thoughts on the passing of Steve Jobs

2011-10-08T14:41:00.000-07:00

(1) I wish we could have a tax code that could somehow discriminate between the truly productive rich and the, well, rich. While I agree with Elizabeth Warren that no one gets rich by himself, there are rare people who really do know how to spend their own money better than the government. The social returns to Steve Jobs must be remarkable.

(2) When politicians (and others) pay fealty to a market economic, their implicit assumption is that markets are competitive and exhibit, among other things, industrial (if not firm specific) constant returns to scale. But successful enterprises like Apple often exhibit increasing returns to scale, at least for awhile, and certainly do not produce commodities sold into a competitive market. Apple's innovation gives ii market pricing power, which is why it is so successful. Without that pricing power, there might never be an Apple. Yet the fact that success often requires market power implies that policies based on an assumption of a competitive equilibrium might be misplaced, perhaps disastrously so.

My testimony to Senate Finance Committtee on Housing and Tax Reform

2011-10-06T09:20:00.000-07:00

I testified today. Here is how the written testimony opens:

Chairman Baucus and Ranking Member Hatch, I want to thank you for the opportunity today to present my views on the issue of housing and tax reform. My name is Richard Green, and I am a professor in the School of Policy, Planning and Development and the Marshall School of Business at the University of Southern California. I have published extensively on the issue of the Mortgage Interest Deduction, and in particular published a paper co-authored with Dennis Capozza and Patric H. Hendershott on housing and fundamental tax reform for the Brookings Institution[1].

My general philosophy is that the tax code should be as broad-based and efficient as possible, while maintaining vertical and horizontal equity to the best extent possible. I find many of the ideas proposed by Robert Hall and Alvin Rabushka to be quite appealing, and to me, in an ideal world, we would have something quite similar to the tax code they propose, albeit with an earned income tax credit added. That said, we are manifestly not in an ideal world, and issues of transition matter. As I wrote in 1996, a rapid change in tax policy could have a traumatic impact on the economy, so it is important that congress phase in any major changes to tax policy involving housing.

That said, I have long thought that the Mortgage Interest Deduction is a residual of the 1913 tax code, accomplishes little that its supporters claim for it, pushes capital away from plant and equipment toward housing, and benefits high income (although perhaps not very high income) households more than the remainder of the country.

I will divide my remarks into 8 parts; (1) I will argue that the Mortgage Interest Deduction is a residual of the 1913 tax code, and was not created to encourage homeownership; (2) that those on the margin of homeowning get little-to-no benefit from the Mortgage Interest Deduction, and that the policy therefore does little to encourage homeownership; (3) that the Mortgage Interest Deduction does encourage those who would be homeowners anyway to purchase larger houses than they otherwise would; (4) that even in the absence of the Mortgage Interest Deduction, owner-occupants receive a large tax benefit; (5) that phasing out the Mortgage Interest Deduction would encourage households to pay down their mortgages more quickly, and would therefore encourage households to rely less on leverage; (6) household deleveraging would lead to greater market stability, but would also mean that the revenues generated by the elimination of the deduction would be smaller than static estimates suggest; (7) at a time when the housing market remains quite weak, it is important that the Mortgage Interest Deduction be phased out carefully; (8) that if we do wish to encourage homeownership via tax policy, a targeted, refundable credit would be more effective than the current Mortgage Interest Deduction.

[1] Dennis Capozza, Richard Green and Patric Hendershott (1996), Taxes, Mortgage Borrowing and Residential Land Prices in H. Aaron and W. Gale, ed. The Economic Effects of Fundamental tax Reform, Washington, DC Brookings Institution Press: 171-210

There is no reason to be upset with BofA for its new debit-card fees.

2011-09-30T15:26:00.000-07:00

The ~~ATM~~ Debit-card fee is transparent and easy to understand. This is far preferable to the spate of fees (such as overdraft insurance charges) that were opaque and confounding. If Bank of America wants to charge for a service, they should be free to do so.

Will the private market step in?

2011-09-30T15:16:00.000-07:00

Conforming loan limits in San Berardino and Riverside Counties in California will drop from $500,000 to $417,000 tomorrow; in LA and Orange Counties it will drop from $729,750 to $625,500.

So we have a natural experiment in "crowding in." Will the private lending sector fill the gaps?

Austerity is a problem, but so is fear

2011-09-30T11:38:00.000-07:00

Paul Krugman this morning argues that fear of fear is phony. He is almost certainly correct that fear is not the number one problem at the moment--if I had to pick a number one issue, it would be austerity measures at the state and local levels of government. Tracy Gordon of Brookings has a nice picture:

Cuts in state and local government jobs (police officers, school teachers, firefighters, DMV workers) are putting a drag on employment growth. Moreover, this picture understates the problem, because total compensation to many state and local workers has been cut.

But I do think fear is part of the problem, at least in one sector of the economy. It seems to me that there are business opportunities in lending that are going unanswered. The pendulum for underwriting has swung so far to caution that according to the Flow of Funds Accounts, net lending declined in the second quart of 2011. More specifically, net bank lending dropped by $181 billion on an annualized basis in the first quarter and by $129 billion in the second quarter. Net lending is the difference between volume of new loans and volume of repayment of old loans. I do find it plausible that one of the sources of the tight lending environment is a fear of regulators.

One more point. if it weren't for lending by the monetary authority, net lending in the second quarter would have fallen by $860 billion on an annualized basis.

My friend (and co-author) Andy Reschovsky wins Steve Gold award

2011-09-30T08:32:00.000-07:00

It was nice to read about it this morning:

University of Wisconsin–Madison economist Andrew Reschovsky will be honored in November with the 2011 Steve Gold Award, which recognizes a person who has made a significant contribution to public financial management in the field of intergovernmental relations and state and local finance.

The Association for Public Policy Analysis and Management, the National Conference of State Legislatures and the National Tax Association give the award each year in memory of Steve Gold, an active member of all three organizations whose career and life tragically were shortened by illness.
"I knew Steve Gold, which makes receiving this award even more meaningful," says Reschovsky, a professor of public affairs and applied economics in UW–Madison's La Follette School of Public Affairs. "As a public finance economist, Steve believed his role was to communicate to policymakers about research and analysis. His emphasis on the link between scholarship and practice and on policy-oriented work on public finance has very much influenced my career."

Boston Fed President Eric Rosengren on the need to facilitate refinances (h/t Kurt Paulsen)

2011-09-28T14:08:00.000-07:00

He says at a meeting in Stockholm:

There are several proposals that attempt to facilitate refinancing for homeowners who have been negatively impacted by the drop in housing prices. These proposals do face hurdles, including how to address private mortgage insurance and second liens. However, a program that made it possible for many homeowners to refinance, even if they were upside down, would likely provide significant reductions in mortgage payments to individuals who are likely to have a relatively high propensity to consume. Clearly getting more money into the hands of homeowners who would spend it could help to fuel GDP growth. This would reduce one of the impediments to a more significant effect from the monetary policy actions taken to date.

I hasten to add that there is already a government program to allow underwater borrowers to refinance, the Home Affordable Refinance Program (HARP). This program allows underwater borrowers with Fannie Mae or Freddie Mac loans to refinance at lower rates. Unfortunately, the program has helped fewer borrowers than was originally hoped. Fed Governor Betsy Duke outlined some of the potential reasons why, in the talk I mentioned earlier. They include loan-level price adjustments (LLPAs) that raise interest rates for many borrowers and thereby reduce the benefit of refinancing; originator worries about “buybacks” forced on them by Fannie Mae and Freddie Mac; junior lien-holder resistance to re-subordinating their loans; and mortgage insurance policies.

The Federal Housing Finance Agency (FHFA) is now investigating whether there are ways to enhance the program to benefit more borrowers.[Footnote 15] As this work proceeds, I hope the FHFA considers dropping or reducing LLPAs in cases when a GSE loan is refinanced into another GSE loan. Such a refinance actually reduces the GSE’s credit risk (they already guarantee the existing mortgage and the homeowner will be able to take advantage of lower rates, freeing up cash flow).

Am I posting this because I agree with it? Yes.

Hard Choices

2011-09-26T11:49:00.000-07:00

Los Angeles (and other large cities) have food deserts--places with limited access to fresh, healthful, relatively inexpensive food. Low-income people living in food deserts are at a particular disadvantage, because they can't afford cars, and therefore often do not have access to supermarkets. A common hypothesis is that poor kids eat unhealthy food because they don't have access to healthy food. (I think this is only partially true--kids also eat unhealthy food because they like it. For that matter, I still love McDonald's fries, I just try to limit my intake, and am in part able to because I have access to better alternatives).

Tesco's Fresh and Easy, a chain that develops and operates small grocery stores that feature fresh fruit and vegetables at reasonable prices, has decided on a business strategy of locating in food deserts. This is potentially a great thing for kids who live in these places (especially if Fresh and Easy can figure out how to take WIC vouchers). But this begs the question of how they are able to sustain such a business model. Two answers present themselves--they are a non-union shop, and they rely heavily on automation. Specifically, Fresh and Easy features self check-out, and so the store doesn't have to hire checkers. Self check-out also makes it hard for Fresh and Easy to accept paper certificates, such as WIC vouchers, as payment.

So the cost of Fresh and Easy is that it may drive down wages for grocery workers a bit, and it may reduce employment for grocery workers. The benefit is that it gives low-income children access to reasonably priced, good quality, fresh foods. My personal social welfare function says to me that feeding kids inexpensively and well dominates most other considerations, but let's not pretend that there isn't a trade-off.

Michio Kaku on CERN's Challenge to Relativity

2011-09-26T09:11:00.000-07:00

In this morning's WSJ:

Reputations may rise and fall. But in the end, this is a victory for science. No theory is carved in stone. Science is merciless when it comes to testing all theories over and over, at any time, in any place. Unlike religion or politics, science is ultimately decided by experiments, done repeatedly in every form. There are no sacred cows. In science, 100 authorities count for nothing. Experiment counts for everything.

A reminder: Ronald Reagan raised capital gains taxes

2011-09-22T08:27:00.000-07:00

The Tax Reform Act of 1986 actually did two things that required the affluent to pay higher taxes: it raised the effective tax rate on long-term capital gains from 20 to 28 percent, and it eliminated the ability to write passive losses against ordinary income. This meant that after 1986, Warren Buffett's taxes would have been at least as high as his secretary's.

Read Taylor Branch's Atlantic Piece on the NCAA

2011-09-20T09:34:00.000-07:00

Let me pull out two paragraphs from the powerful story:

Educators are in thrall to their athletic departments because of these television riches and because they respect the political furies that can burst from a locker room. “There’s fear,” Friday told me when I visited him on the University of North Carolina campus in Chapel Hill last fall. As we spoke, two giant construction cranes towered nearby over the university’s Kenan Stadium, working on the latest $77 million renovation. (The University of Michigan spent almost four times that much to expand its Big House.) Friday insisted that for the networks, paying huge sums to universities was a bargain. “We do every little thing for them,” he said. “We furnish the theater, the actors, the lights, the music, and the audience for a drama measured neatly in time slots. They bring the camera and turn it on.” Friday, a weathered idealist at 91, laments the control universities have ceded in pursuit of this money. If television wants to broadcast football from here on a Thursday night, he said, “we shut down the university at 3 o’clock to accommodate the crowds.” He longed for a campus identity more centered in an academic mission.

and

“Scholarship athletes are already paid,” declared the Knight Commission members, “in the most meaningful way possible: with a free education.” This evasion by prominent educators severed my last reluctant, emotional tie with imposed amateurism. I found it worse than self-serving. It echoes masters who once claimed that heavenly salvation would outweigh earthly injustice to slaves. In the era when our college sports first arose, colonial powers were turning the whole world upside down to define their own interests as all-inclusive and benevolent. Just so, the NCAA calls it heinous exploitation to pay college athletes a fair portion of what they earn.

I love college athletics (I am thrilled that I have gotten to attend three Rose Bowls in which Wisconsin played) and admire many college athletes. I not only envy their athletic prowess, I am amazed at the varsity athlete who can manage a B average in a difficult major while playing a sport.

But the NCAA system gives these athletes a raw deal. Among other things, the system makes it difficult for athletes in revenue generating sports to get a real college experience--practice and games can leave students too tired to focus on class (yes, I know some athletes have no interest in class to begin with, but in my experience they are a distinct minority). If the "pay" is supposed to be an education, the least we as colleges and universities can do is make sure athletes get one.

Allowing underwater borrowers to refinance could improve investors' Sharpe Ratio

2011-09-17T16:58:00.000-07:00

Consider borrowers with 6 percent 30-year mortgages that are 20 percent underwater. Assume that the probability that any one borrower will default in any one month is .2 percent, and that the cost of default to the lender conditional on default is 50 percent. Assume that at the end of five years, any remaining long balance is paid off). A security containing such mortgages will have an IRR of 4.83 percent (I am happy to share the spreadsheet for the details.

Now let us convert the borrowers into people with 4 percent mortgages with 20 year terms. The payment from such mortgages will be essentially the same as before, and the mortgage balance will be paid off more quickly. The good news for investors is that this lowers the probability of default; the bad news is that it reduces the yield before default. Assuming default probabilities in any one month go down to .1 percent, the IRR for investors goes down to 3.45 percent. This seems like a bad deal for investors, except that they will have more certainty about their cash flows; the standard deviation of their investment falls. Because default is binomial, we can calculate that the variance of returns will be p*(expected loss)*(1-p*expected loss). The variance of not refinancing is thus .0099 and of refinancing is .004975, which translate into standard deviations of .1 and .07. Because the riskless rate is currrently zero, when we substitute into the Sharpe formula, we find

Sharpe no refinance = .048/.1; Sharpe refinance = .0345/.07.

This is about .5 in both cases, suggesting that investors are getting the same risk adjusted return whether refinancing becomes easy of not, assuming the assumptions are correct. I am not saying they are; I am saying that in making policy we need to think about these sorts of implications.

Testimony to Senate Banking Committee on the Need for Mortgage Guarantees

2011-09-14T13:51:00.001-07:00

I testified yesterday.

If the Walt Disney Company ran LA Metro...

2011-09-13T10:27:00.000-07:00

People would pay $80 a day to leave their cars in a garage, and then walk from one mode of rail transit to another. And the rail trips would leave you where you started.

Jim Follain has a proposal for empirical macro

2011-09-09T13:36:00.000-07:00

He writes:

First, let’s do more research to help reduce the uncertainty regarding the fiscal situation we face and the new, modern and more complex economy in which we live. This step will involve de-emphasizing a number of metrics underlying macroeconomics built around national totals, such as national income, GDP and the aggregate unemployment rate. Instead, we are wise to take a more geographically granular view of our economy that measures regional, state and local economic activity and adapts policies specific to these areas. Focusing upon the national aggregate or the national average masks the extraordinary variation among markets in this country and, indeed, can even make it harder to identify seriously stressful events until it’s too late. This is difficult to do, but c’est la vie.

Ten-Year Treasury Below 2 percent!

2011-09-06T20:26:00.000-07:00

If I am reading this graph correctly, we are at a 130 year record:

Those bond vigilantes sure are being vengeful. And how about that S&P downgrade?

The good news graph of the day, though, comes from the Fed:

This is the average financial obligation ratio, which is debt service plus rent over disposable income. Lower interest rates do seem to be helping, although it would be useful to know what has happened to the median, as opposed to average, household. I refinanced my mortgage earlier this year, and it was great, and meant my financial obligation ratio fell by ten percent or so. But underwater borrowers who can't refinance (or households whose income fell enough to precent qualification for a new mortgage) may be worse off than before. It is hence possible that while the average has improved, the median has not.

Where are the Medicis when you need them?

2011-09-05T17:00:00.000-07:00

Richard White's Railroaded: The Transcontinentals and the Making of Modern America, is a wonderful book. In it he shows how the railroad barons were crooks and swindlers who suckled on the federal teat every bit as much as the deposed yet still wealthy CEOs of failed Wall Street and mortgage firms.

But at least the Huntingtons (well, Collis' nephew Henry, anyway) left us with the Huntington Library and Gardens, an institution that by itself makes a trip to Pasadena worthwhile. And Leland Stanford left us with, well, Stanford. Angelo? Dick? We're waiting.

Realtors should love school spending

2011-09-05T11:23:00.000-07:00

In the most recent Wisconsin gubernatorial election, Realtors and homebuilders were the leading campaign contributors to Scott Walker. As governor, Walker has shown hostility toward public education in general and school teachers in particular. If one were to analyze what ails Wisconsin, public education would not rise to the top of the list, because Wisconsin has among the highest high school graduation rates in the country (or conversely. among the lowest drop-out rates), along with strong SAT and ACT scores. Milwaukee public schools are another matter, but somehow I do not think the school children of Milwaukee are among the top of Governor Walker's concerns.

Beyond all this, however, it puzzles me as to why real estate people would support someone hostile to public education. There is a very long literature that shows that spending on schools produces higher property values, particularly in the suburbs that are the places where Realtors and homebuilders make most of their money. Lisa Barrow and Cecilia Rouse:

In this paper we use a 'market-based' approach to examine whether increased school expenditures are valued by potential residents and whether the current level of public school provision is inefficient. We do so by employing an instrumental variables strategy to estimate the effect of state education aid on residential property values. We find evidence that, on net, additional state aid is valued by potential residents and that school districts do not appear to overspend on education. We also find that school districts may overspend in areas in which residents are poor or less educated, in large districts, and in districts with higher shares of rental property. One interpretation of these results is that increased competition has the potential to reduce overspending on public schools in some areas.

A money quote from the NBER digest on the paper:

… A $1.00 increase in per pupil state aid increases aggregate per pupil housing values by about $20.00, indicating that potential residents value education expenditure."

The Barrow and Rouse paper are not alone in their findings: starting with Wally Oates' seminal 1969 paper through Hilber and Mayer's recent work, the empirical literature finds that school expenditures produce higher property values.

Wisconsin's economy has real problems, among which is a startling poor culture of entrepeneurship: if one looks at venture capital, it ranks very poorly. As such, the children that it educates well leave for other states to find opportunity (despite the stellar performance of its schools, its adult labor force is below average in share of workers with a college degree). But to attack one of the things the state does well--public education--makes no sense. And for Realtors to abet an attack that diminishes their own earning power makes even less sense.

A point I wish I had made to NPR

2011-09-02T11:32:00.000-07:00

I just finished taping an interview with Robert Siegel on finding our way out of the housing crisis. I agreed with Elizabeth Duke about the need to blow out second liens, and with the Hubbard-Mayer-Gross plan to allow current underwater borrowers to refinance easily.

My contribution was that we needed to perform a kind of triage--that places that had massive house price declines and have very high unemployment (i.e., Miami, Las Vegas, Fresno) should get debt relief, lest it take forever for them to recover. What I didn't say (and I wish I had) is that one way or another, many loans in these places will fail, because it will be nearly impossible for borrowers to get above water. We might as well take the pain of the write-offs now, rather than have zombie-loans hanging around.

Allowing underwater borrowers to refinance could help

2011-08-30T11:46:00.000-07:00

Yves Smith and Adam Levitin, for whom I have enormous respect, argue that allowing underwater borrowers to refinance their mortgages at lower rates would not help the housing market very much. I am not so sure.

Consider a borrower with a six percent mortgage whose house is worth 80 percent of the mortgage balance. Let's also say that it is four years into its mortgage--so it has 26 years remaining on its term. If house prices remain flat, it will be 11 years and 9 months before the mortgage balance drops to the value of the house.

Suppose we were to convert the mortgage to a 4.5 percent mortgage but left the mortgage payment the same. In the first month, the amount of principal payment would increase by 2.35 fold. The borrower would be above water in 5 years and 5 months (I have a spreadsheet with the calculations, should anyone be interested). If house prices rise by two percent per year, the 4.5 percent borrower would be right-side up in less than four years. Helping borrower see a light at the end of the tunnel could really make a difference (I don't see borrower in Las Vegas ever seeing that light, but not everyone is in Las Vegas).

Personally, I would rather see some principal reduction too, but allowing free refinancings on Fannie and Freddie mortgages could materially benefit the housing market.

Top 10 Least-Polluting U.S. Metros

2011-08-29T14:32:00.000-07:00

From the Urban Land Institute:

Top 10 Least-Polluting U.S. Metros : As greenhouse gas (GHG) reduction policies
gain momentum at the federal and metropolitan levels, a new study about urban
areas’ GHG emissions levels could have implications for real estate
developers.

It is stirking that LA is among the best 10, and is not materially different from Portland and is even a little better than Boston and Seattle. To be fair, the climate here is mild in both winter and summer (while it can get hot during the day, it almost always cools into the 60s or lower at night), and this allows us to avoid cranking up furnaces and air conditioners. But Portland and Seattle have pretty mild climates, too.

One could argue (and some have), that LA has accomplished this by being anti-business, hence driving polluters--along with their jobs--to other states. This may be correct, but ultimately, everyone is going to have to control carbon emissions. Perhaps this will give LA a first mover advantage.

What does Warren Buffett know?

2011-08-25T21:46:00.000-07:00

When I first read this morning that Warren Buffett had invested $5 billion in Bank of America, I was puzzled. I didn't know how Buffett could figure out the costs of likely mortgage repurchases from securities issued by Countrywide/Bank of America.

I thought perhaps that Buffett had hired an army of analysts to go through the securities and figure out their value. But Nicholas Santiago (h/t Yves Smith) has the more likely explanation:

3. Warren Buffett has made a career of investing in troubled companies for the sake of the economy. The last time he made an investment such as this one was back in 2008 with Goldman Sachs Group Inc.(NYSE:GS). It is important to remember that Goldman Sachs was bailed out by the tax payer in what was called the TARP program. Buffett knows that the U.S. taxpayer will bail him out if he is wrong and Bank of America stock does go belly up.

[Disclosure: I own a few shares of Berkshire-Hathaway B-shares].

Robert E. McCormick and Robert D. Tollison on the NCAA's Subversion of the Academy

2011-08-25T10:10:00.000-07:00

This is worth reproducing (with the kind permission of the authors) in its entirety:

Two great American institutions are about to crank up. Freshman and their older classmates will soon start returning to campuses for fall classes. Soon thereafter or about the same time, fans will fill stadiums and the 2011 college football season will begin. These two events come together almost naturally and have for over 100 years. The former may be one of the best examples anywhere of competition among universities and colleges, but the latter is surely one of the best examples of a cartel. Recent athletic resignations and firings at Ohio State, Georgia Tech, and now most recently the University of North Carolina demonstrate that the corrupting influences of the NCAA cartel on the academy have reached the highest levels of our public universities. Doubtless there are few people on earth who care less about the University of North Carolina in Chapel Hill than us (since it is a prime competitor in intercollegiate sports), but in spite of this, the time has come to stand up and be counted on the athletic scandal that has engulfed UNC-CH and so many other institutions of higher learning in our country (including Georgia Tech and Ohio State). UNC-CH is not just a university, it is regularly rated as one of the top five public universities in the United States.

What is the root of the problem here? We assert it is the enormous economic rents, or free money, that have been created by the NCAA cartel. Moreover, no college or university can be expected to withstand the ill-gotten gain that lurks underneath the NCAA banner. The NCAA is a cartel of the major athletic universities in the United States that sets wages, playing conditions, and other aspects of intercollegiate athletics. Most prominently of these is a restriction on payments to football and basketball players. These two sports create billions of dollars in local and national revenues via gate receipts, TV contracts, and ancillary merchandise, not to mention millions of dollars annually at member schools in donations by alumni and other supporters of athletic programs.

Coaches sign multi-year multi-million dollar contracts while players get tuition, room and board, and recently, only because of an important court case (White v. NCAA), some pocket money to cover the cost of living. Big chunks of these revenues also go to support other men and women athletic teams on campuses, swimming, track, golf, soccer, and the like. None of this would be possible but for the overarching cartel agreement between all of the major U.S. colleges and universities operated under the umbrella of the NCAA.

Both of us have long held, along with numerous other economists (such as Gary Becker and Robert Barro), that the NCAA’s cartel harms the market, the world, and the athletes, but now we are prepared to claim more. To wit, this crisis in athletics puts the American system of higher education at risk.

Despite our earlier disclaimer, UNC-CH is an incredible academic institution, a virtual colossus of graduate education, research, and professional education. Yet with all its storied history and social importance, the school has put its institutional credibility and brand name at risk by succumbing to the perverse incentives created by the cartel, a cartel whose primary function is to maintain a façade of amateurism on the one hand while aggressively pursuing commercial profits on the other. Never mind the morality of the arrangement. Focus instead on what this temptation has done to the University, and remember that this has been happening at lesser schools for a long time. Now that it has reached the ranks of most elite universities, it is hard to argue that any school is immune from becoming ensnared in the inevitable trap that lies in the huge gulf between amateur inputs (the lowly paid players) and professional outputs (massive TV contracts, alumni donations, and ticket prices).

Hear us clearly, we are NOT arguing to pay players. We are lamenting the diminution of the reputation of a top ranked public university and the warning signal that it sends about the dangers of the incentives created in this case. We believe in amateurism, deeply. But we believe that it should apply broadly to the coaches, the fans, and all the rest of the participants in intercollegiate sports. If amateurism is a shrine, then let us all worship it. The fans should get to see the games for nothing or nearly so (the costs of facilities and game day services). The coaches should be faculty or volunteers as they are in Little League and in local neighborhoods. It is not amateurism, but the business of intercollegiate athletics is a growing cancer bound to infect other storied American institutions of higher education.

Where does the fault lie? It lies plainly on the shoulders of the NCAA cartel. We propose that our school, Clemson, and the rest of the schools in the ACC leave the organization, sit down, take stock and decide whether the Ivy League approach is better for the ACC (no athletic scholarships) or whether the players should receive reasonable compensation. We do not take a position on the issue. Each league within the NCAA should do the same, and we doubt that they will all choose the same course. Some will go the Ivy route, others the payment route. And that is as it should be. There should NOT be one authority in control of almost all collegiate athletics in the United States. Competition is salutary, and it should prevail both on and off the field.

Cartels are a bad bargain. They raise price to consumers, reduce output and social welfare, and enrich one class of participants at the expense of another, creating envy and strife. The NCAA cartel is especially perverse because it disadvantages young people (often from challenging backgrounds) to the advantage of adults. And worse, it is morally corrupting to these same young people, compounded by the fact that it derives from the same university institutions society has charged to nurture them to adulthood.
At present, coaches, even those trying to live by the rules, daily confront moral dilemmas and choices. But the nature of the restrictions creates two sets of rules (written and unwritten), and our young college students, both the athletes and their classmates, are not being taught to play by the rules. They are being taught, “everyone cheats, we got caught, it is no big deal.” Paying under the table is okay. Having tutors write term papers is okay for athletes who are working their rear ends off to practice especially if they are good and the team is winning.

Students are being taught that ends matter, but means do not. Our educational system is built upon honor, integrity, and the search for truth as bedrocks. Yet these same foundations are washed away on a regular basis by phenomenal dollars made available by the cartel. What is a young person to believe? That it is wrong to crib on a test or plagiarize a term paper, but okay to lie to the NCAA investigator? That it is right and proper to offer a helping hand to those less fortunate or in need, but wrong to do so if they have signed an athletic scholarship? Our universities need to stand for our culture, and our culture should not be about lying, half-lying, deviousness, and cheating. There is only one way to end cheating- resolve the conflict between amateurism and professionalism, either by making both sides professional or both sides amateur. But the current situation is unsustainable and puts institutions of higher education at risk.
We contend that the moral fiber of the university is one of its most powerful social virtues. It helps bring young people to adulthood with a care and concern that things are done correctly and on the up and up ethically.

There is a clear positive implication of our argument. Cheating teaches cheating, and it is a mistake to think that our kids will not watch what we do instead of what we say. The scandals that now infect the best universities in the land will almost surely lead to more and more academic dishonesty and disregard for the basic traditions of the academy if something does not happen to reverse course. Cheating in the athletic department begets cheating in the classroom and perhaps generally in life. This is a prediction of our argument albeit a depressing one.

It is critical to note that we are big fans of the coexistence of athletics and academics. Our research speaks loudly and clearly on this. We support athletics as part of university education and think the two together make for the best organizational arrangement. Our cry is NOT about athletics, but about the NCAA cartel that creates the rents and free money that shred the moral underpinnings of our home, the academy.
A la Ronald Reagan, we say tear down the wall around truth and dignity. Clemson, UNC, Georgia Tech, and all the rest should refuse the financial inducements offered by the NCAA. Return to amateur intercollegiate sports, or pay the players. Nothing less than the integrity and quality of our universities is at stake.

The passage that really hits home to me is: "Students are being taught that ends matter, but means do not. Our educational system is built upon honor, integrity, and the search for truth as bedrocks. Yet these same foundations are washed away on a regular basis by phenomenal dollars made available by the cartel. What is a young person to believe?"

Two cents (or maybe a nickel) on Texas.

2011-08-23T09:27:00.000-07:00

Texas is doing well relative to the country. Its jobs creation rate is second only to North Dakota, a state whose population is smaller than Austin's. It has large in-migration because of jobs, and as one blogger points out, wages are rising faster in Texas than [most] other states, so one cannot credibly make the argument that its success is entirely a "race to the bottom outcome." The fact that Texas only relies a little more than average on construction for its employment base shows that its job performance is not the result of an unsustainable housing construction boom of the Arizona, Florida, Nevada and Central California variety.

In an ideal world, we would run some regressions explaining Texas' growth, but we haven't sufficiently up-to-date data to do that. We do know that some things matter in general for growth: climate (which I don't think even Rick Perry is claiming credit for); fraction of the population with a BA, and, if I may refer to work I did five years ago, availability of air transportation.

Texas does well in two out of three indicators: since World War II, people and jobs have moved to warmer places such as Texas, and Dallas is a hub for two airlines and Houston is a hub for one. Texas is below average, however, in the share of adults with BAs and graduate degrees.

So why is Texas doing well? First, it has managed to maintain its state and local government spending far better than most other states, and has not had the negative stimulus arising from massive layoffs. Over the past decade, government job growth in Texas has outpaced private sector job growth by about 2 to 1.

Second, Texas has among the most stringent consumer protection laws in finance in the country--likely arising from a long-standing Western mistrust of bankers. As a consequents, consumers were essentially forbidden from using their homes as piggy banks. As Mike Konczal shows, this means Texans have far less debt to pay off (it also shows how we in California are still in the soup). So "heavy-handed" regulation helped keep Texas out of trouble.

Finally, it is simply easier to develop everything in Texas--housing, businesses, etc. This is the one part of the conservative view of Texas that I buy--as one Los Angeles planner said to me, it takes 18 months in LA to do what it takes six weeks to do in Dallas. LA doesn't even have by-right zoning. It is here where I think Texas has an enormous advantage for business development over California.

That said, California has a greater share of people with BA's than Texas. Part of the reason why may be that well-educated people, who can afford to live in a place that takes environmental protection seriously, do so. There is actually some good reason for California's stringent environmental rules--the air quality here, while much better than it used to be, is still not good enough. Of the ten cities with the worst air quality in the country, six are in California. But the cities with the worst air quality outside of California are Houston and Dallas; someday voters in those cities are going to demand better. I do think California can do a better job of protecting its environment while making business development easier, but that is the subject of another post.

Cost and benefit

2011-08-21T13:16:00.000-07:00

I listened to a colleague of mine on Friday discuss how nothing adds to our carbon footprint like flying-and I have little doubt that he is right. Mark Twain one wrote, “Travel is fatal to prejudice, bigotry, and narrow-mindedness.” I am pretty sure that is right too.

Triumph of the Rentier City?

2011-08-21T09:17:00.000-07:00

I am teaching a senior honors seminar this fall. Among the readings is Ed Glaeser's new book, TheTriumph of the City. It is a perfect book for smart undergraduates--it is well written, thoughtful, and thought-provoking. It is also packed with fun facts.

Early on in the book, Ed celebrates the resiliency of Manhattan, noting that "[b]etween 2009 and 2010, as the American economy largely stagnated, wages in Manhattan increased by 11.9 percent, more than any large county."

This passage brought to mind Vernon Henderson's pioneering work on large cities and favoritism. He writes:

This enhanced role of government in the urbanization process over the years has resulted in a corresponding bias, where certain regions and cities are heavily favored in terms of capital and fiscal allocations, giving favored regions a cost advantage.

New York is wonderful, but it has been given an enormous cost advantage in the aftermath of the financial crisis. It's institutions received cheap capital in the form of TARP; a near zero Federal Funds Rate also amounts to a large subsidy for financial institutions. Banks can currently make profits just by playing the yield curve. These profits have helped restore Wall Street bonuses (and hence incomes of everyone else in Manhattan), but that doesn't mean they reflect productive activity.

I don't want to make too much of this: TARP was necessary, and the low Federal Funds rate is necessary too. New York is a great and resilient city. But it is also home to many too big to fail institutions, and thus has political and financial advantages that, say, Chicago and San Francisco lack.

Even in principle, figuring out a fair tax system is hard

2011-08-17T11:12:00.000-07:00

How does one set up a system such that everyone pays their fair share of taxes? Let us suppose that a "fair" tax is one where everyone gives up the same share of utility to pay for public goods. One could formulate this such that

U(X(L)-L-t)/U(X(L)-L) = K

The idea is that the fraction of utility one keeps after taxes is the same for everyone. X is consumption; the amount one gets to consume is a function of effort, L. To make things easy, we will assume people consumer their incomes, so that income and consumption are the same. Assume that utility function has the shape U' > 0 and U" < 0. K is dependent on how much society wishes to spend on public goods.

Just this simple formulation presents three problems. First, the fair rate of progressivity will be a function of the magnitude of U". For instance, if we assume log utility, U' = 1/(X-L) = U" = -1/(X-L)^2. This means U" gets very small very rapidly, which also means that the need to increase marginal tax rates in income to maintain the above definition of fairness gets quite small. We do know that taking money away from people at or below subsistence levels of income will lead to substantial diminution of utility, but beyond that point it is hard to say how sharply progressive taxes need to be in order to be fair.

Second, the correspondence between consumption and effort is not one-to-one. If the correlation between consumption and effort is less than one--and I will go out on a limb and say that it certainly is--taxing income actually only approximates taxing utility. The lower the correlation, the worse the approximation.

Finally, defining effort is a problem. As Matthew Yglesias notes, NYU professors make a lot less money than Wall Street bankers, but their life might well be better. Perhaps I am wrong, but it seems to me that the -L in a steel worker, coal miner, or line worker is a lot bigger than mine, and so looking at income alone is adequate for approximating utility.

So what to do? Here is why, despite my liberal leanings, I find a flat tax with a large exemption and a large earned income tax credit appealing. The rate would have to be sufficient to raise revenue, and would apply equally to all type of income. Deductions would be limited. Such a set up would assure that Warren Buffett would pay no less a share of his income than anyone else. Bob Hall proposed a similar plan 15 years ago. I would dress it up with the earned income tax credit.

Two GOP Governors stuck in a 1950s Economy

2011-08-15T17:34:00.000-07:00

I heard Wisconsin governor Scott Walker speak in Madison a few months ago. His economic strategy for the state? Smokestack chasing and belittling Illinois--in fact, I think he said "Illinois" (followed by various synonyms for "sucks") more often than he said "Wisconsin." He did say he loved teachers though--sort of the way husbands say they love their wives after they are arrested for assaulting them.

Now Rick Perry says in his campaign announcment:

The change we seek will never emanate out of Washington, D.C. It will come from the windswept prairies of Middle America, the farms and factories across this great land, from the hearts and minds of the goodhearted Americans who will accept not a future that is less than our past…patriots who will not be consigned to a fate of less freedom in exchange for more government. We do not have to accept our current circumstances. We will change them. We are Americans.

Farms now produce a little more than one percent of GDP. And while the US is still the world's leading manufacturer by output, automation has continued to reduce jobs in manufactuning--a reduction that will continue in the years to come, regardless of the health of the economy.

Where does change come from? From Silicon Valley. From Route 128. From the Research Triangle. From labs at Cal Tech and MIT and, yes, the University of Wisconsin and the University of Texas. Also from Hollywood, from fashion designers in New York, from sneaker designers in Oregon, and, like-it-ot not, from Pharmaceutical Companies in New Jersey, New York and Indianapolis. These are things we do that the rest of the world envies. These are things that happen in cities. And yet not a word about any of it.

PPD 498 Fall Syllabus

2011-08-15T16:34:00.000-07:00

PPD 498: Senior Honors Seminar in Policy, Planning and Development
University of Southern California
Professor Richard K. Green
richarkg@usc.edu
Keynesian.richard@gmail.com
213-740-4093

This is a senior honors course on topics in Urban Development. This emphasis of the course is on reading, presenting and critically reviewing some classics, old and new, on issues important to those who wish to do research on cities and their regions.

The requirements of the course are three:
(1) Doing the reading before class and participating in class. Your performance in participating will determine 1/3 of your grade.

(2) Leading a ½ hour class discussion on a reading of your choice. You will need to get clearance from me on the reading, and you must let me know your proposed reading by October 1, 2010. This will determine another 1/3 of your grade.

(3) A critical literature review of a topic of interest to you involving an urban topic. The lit review must discuss a minimum of five papers (more would be better) and should be 15-20 double spaced, 12-font, pages long. This will determine the final 1/3 of your grade.

All of USC’s academic conduct rules apply to this course; because you are choosing to be in it, I am assuming this will not be an issue with any of you.

Topics and Readings
August 25 Lenses of Social Science
George Orwell, Why I write.

September 1 New York
Jane Jacobs, The Death and Life of Great American Cities I

September 8 Growth in Cities
Jane Jacobs, The Death and Life of Great American Cities II
John Quigley (1998) Urban Diversity and Economic Growth, Journal of Economic Perspectives, 12(2):127-38.

September 15 Urbanization and Development
J. Vernon Henderson (2004), Urbanization and Growth, Brown University Working Paper
Marianne Fay and Charlotte Opal (1999), Urbanization without Growth, World Bank Research Working Paper.

September 22 Sprawl
Reid Ewing (1997), Is Los Angeles-Style Sprawl Desirable? Journal of the American Planning Association, 63:1, 107-126.
Peter Gordon and Harry Richardson (1997) Are Compact Cities a Desirable Planning Goal? Journal of the American Planning Association, 63:1, 95-106.
George Galster, Royce Hansen, Michael Ratcliffe, Harold Wolman, Stephen Coleman and Jason Freihage (2001), Wrestling Sprawl to the Ground, Housing Policy Debate, 12(4), 681-717.

September 29 Anti-Sprawl
Ed Glaeser, The Triumph of the City I

October 6 Agglomeration
Ed Glaeser, The Triumph of the City II
Paul Krugman, Development, Geography and Economic Theory

October 13 Guest

October 20 Housing
Stephen Malpezzi (1996) , Housing Prices, Externalities and Regulation in US Metropolitan Areas, Journal of Housing Research, 7(2) 209-242.
Richard K. Green (1996), Should the Stagnant Homeownership Rate be a Source of Concern, Regional Science and Urban Economics.

October 27 Cities and Health
Charles Rosenberg, The Cholera Years.

November 3
William Cronon, Nature’s Metropolis I

November 10
William Cronon, Nature’s Metropolis II

November 17
Student Led Discussions I

December 1
Student Led Discussions II

Current Construction of the New World Trade Center Site

2011-08-14T10:17:00.000-07:00

Around 8.3 million square feet of space is currently under construction at the World Trade Center Site. To put this in context, downtown St. Louis and downtown Milwaukee both have a total of 11 million square feet of office space, so New York is building the equivalent of a medium city downtown in less than 5 years.

Is this too much building? Perhaps not. The other contextual number is the amount of current space in Manhattan; the total is about 350 million square feet. So by building a downtown St. Louis, Manhattan is expanding its office market by only two to three percent.

Jeremy Stein for Fed Governor

2011-08-14T08:00:00.000-07:00

Mark Thoma writes that the administration is considering nominating Richard Clarida and Jeremy Stein for the Federal Reserver Board. He cites an encouraging Clarida speech, but writes, "I know less about Stein, so I'll withhold judgment for the moment."

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.

William Malkasian

2011-08-12T21:29:00.000-07:00

My boss from 1987-1990, while I was finishing my dissertation and before I became an assistant professor, was Bill Malkasian. Bill introduced me to the world of real estate, and for that I will be ever grateful.

When I think of the people in the world who have taught me a lot, only members of my family supersede Bill. He helped me learn, in the phrase of Paul Krugman, how to "listen to the gentiles." He also helped make me a more sympathetic person, and allowed me to appreciate skills in others that I would otherwise have not appreciated.

Bill is leaving his position as president of the Wisconsin Realtors Association after more than 30 years in order to provide strategic planning consulting to real estate groups around the country (Bill also taught me the value of strategic planning). WRA will miss him a lot, but the rest of the country will be better off.

Anti-stimulus

2011-08-11T07:43:00.000-07:00

The Government Component of the National Income and Product Accounts for the past 6 quarters (QI 2010 through Q2 2011):

21	Government consumption expenditures and gross investment	-1.2	3.7	1.0	-2.8	-5.9	-1.1
22	Federal	2.8	8.8	3.2	-3.0	-9.4	2.2
23	National defense	0.5	6.0	5.7	-5.9	-12.6	7.3
24	Nondefense	7.8	14.7	-1.8	3.1	-2.7	-7.3
25	State and local	-3.9	0.4	-0.5	-2.7	-3.4	-3.4

Anyone see a problem here? It's not like we have seen a rip-roaring "crowding-in" of the private sector. For those who think we should cut government spending, well, we are, and more is to come thanks to the debt-ceiling deal. I hope I am wrong about this, but it is hard to see how this leads to a recovery in jobs any time soon.

Paul Krugman lives his words

2011-08-08T09:29:00.000-07:00

I hope that readers will forgive a personal anecdote.

Over the weekend, Paul Krugman wrote a blogpost entitled "Pulling Rank:"

I don’t have time right now to track down all the examples, but if you look at how many freshwater macroeconomists have responded to Keynesian arguments in this crisis, you find over and over again that they resort to assertions of privilege — basically, I am a famous macroeconomic expert and you aren’t — rather than really addressing the issues. And this is so ingrained a response, apparently, that they use it in situations where it’s truly ridiculous: Lucas accusing Christy Romer of not understanding basic macro, then demonstrating that he doesn’t understand Ricardian equivalence; Barro belittling the credentials of yours truly, just after forgetting that there was rationing and investment controls during World War II.

Now for the anecdote part. When I was a Ph.D. student in economics at Wisconsin, my advisor, Bob Baldwin, invited me to present a piece of our joint work at an NBER Conference called "Trade Policy Issues and Empirical Analysis."

I remember the night before the presentation--I had gotten to meet many of the people whose papers I had read in my graduate classes: Leamer, Feenstra, Rodrick...and Krugman. It was at once a thrilling and scary experience, and when I went to bed that night, contemplating my audience for the next day, the fear took over from the thrill. Let's just say that by the time morning rolled around, I am guessing my stomach had never been emptier.

I gave the presentation, and as best as I can tell, it went reasonably well. I very much doubt he would remember it, but afterward Krugman, the young MIT full professor new trade theory rock star, came up to me, the nobody, Wisconsin graduate student, to give me encouragement and advice on the paper. He was very respectful--even collegial. I will never forget it.

Robert Barro channels Marie Antoinette

2011-08-08T08:19:00.000-07:00

In his Wall Street Journal column this morning, Barro argues that after a generation of policies that have increased income and wealth disparities, what we really need are policies that further increase income and wealth disparities. For the sake of "liberals," however, he would countenance an exemption in his proposed VAT for food. I guess he is not willing to consider the importance of such an exemption to, say, people who don't have a lot of income.

Barro is among a class of economists to whom the median American is invisible. They could all be played in the movies by Lionel Barrymore.

Labor Statistics and Confidence Intervals

2011-08-06T08:51:00.000-07:00

According to the BLS establishment survey, non-farm private and public employment rose by 117,000 jobs in July. http://bls.gov/news.release/empsit.b.htm. This number was better than the consensus forecast of growth of 85,000 jobs. It led at least one business economist to say we have "avoided the precipice."

But can a monthly number really tell us that? The technical notes for the employment report says the 90 percent confidence interval for the establishment survey is 100,000 jobs. This means the estimate has a standard error of about 100,000/1.64 or about 61,000 jobs. To the distance between the consensus forecast and the actual number reported is slightly more than 1/2 a standard deviation. This means we can be only about 60 percent sure that the employment number was better than forecast, which is a little better than a coin flip.

Burn the Forest Down (Shot by Morgan Green)

2011-08-05T08:57:00.000-07:00

If that bridge, tunnel, runway, railway or road gets a 3 percent return

2011-08-04T14:58:00.001-07:00

...it is a substantial positive NPV opportunity. Who would have thought?

Yet another reason to never pay attention to interest rate forecasts

2011-08-01T19:43:00.000-07:00

Yields--especially long-term yields--were supposed to rise on news of a debt ceiling deal; at least that is what I read would happen.

Bloomberg's end-of day yield curve, along with changes in yields for the day, is above. Oh well.

This is not good for Los Angeles

2011-08-01T08:31:00.000-07:00

Bloomberg reports:

Container-Ship Plunge Signals U.S. Slowdown.

San Pedro and Long Beach are the largest container ports in the US.