Never thought I would live to see the day...

..that a politician would present a powerpoint that included a slide on the "lemons problem."

The Vice-President of Taiwan, Vincent Siew, was discussing the problem of trying to get that country's financial institutions to disgorge their bad assets. Amazing. No wonder it is such an impressive place.

Taipei has among the best public transit systems in the world

The MRT (heavy rail) system is fast, comprehensive and clean. It is busy in the middle of the day, suggesting feasibility.



The buses are very good too, and cost only about $0.45 US to ride. There are also lots of reasonably priced taxis. Of course, the fact that Taipei is among the world's densest cities helps make this all work.

Ten Facts about California

For pictures, go here. Thanks to Matt Moore for research assistance.

(1) Family of four median income in California ranks 15th among the states. Regardless of how income is measured, in California it is somewhat above average, but not extraordinarily so.

(2) Among the 50 states, California ranks 4th in per capita spending; add DC, and it ranks 5th.

(3) Per capita spending on K-12 education is about average.

(4) California's high school graduation rate is 10th from the bottom.

(5) This can be explained partially by the fact that California leads the nation in foreign born population.

(6) But even after controlling for foreign born population, educational attainment in California is average.

(7) California's incarceration rate is a bit above average, but not extraordinary by US standards.

(8) California relies less on property tax revenue to finance its government than the average state. Economists generally find the property tax to be less distortionary and unstable than other types of taxes.

(9) in 2005-06 (the last year for which I have data), California had more net business creation than any other state. After scaling for size, California's business creation was comparable to Texas'.

(10) California relies disproportionately on Information Technology and Professional and Technical Services for employment. These are high paying jobs that require a well educated labor force.

Is the Tax Credit + FHA a toxic combination?

It would be churlish not to think today's strong existing home numbers were good. But there is an aspect of it that worries me.

The tax credit is $8000. FHA loans require 3.5 percent down payments. Consider the position of an unscrupulous investor in housing. He gets someone to front for him as a first time buyer on a $200,000 house. He puts $7,000 down, and then collects the $8,000 credit. He pays the front person a commission of $500. So the investor gets $500 plus the house. If the house goes up in value, he sells; if not, he walks.

Of course, we have no recent experience with this kind of behavior....

I guest post at Paul Romer's charter city blog

The post begins:

Hong Kong, Singapore and Korea experienced great economic success: all have per capita GDP that is at least seven times higher than in 1960 (see Penn World Table for more information). All three economies also came to be relatively well housed. While we cannot draw a uniform lesson from their experiences, it is worthwhile to examine each case for clues about successful housing development...

Why government spending makes people angry

I was listening in to some proposals for building Section 42 Low Income Housing Tax Credit housing the other day. I heard three proposals: the construction cost per unit being proposed was between 400K to 500k.

It is expensive to build in LA, but downtown has luxury condos selling for less than 400K right now. The median price of a house in Southern California is around $275,000. I am all for providing poor people with good housing, but we could do it a lot more cheaply by buying existing houses and renting them out then building new units whose prices are beyond what a median income household in LA could ever expect to afford.

The reason this sort of thing bothers me is because I do think there is a role for government to do things, such as provide education, health care and networks (roads, sewers, etc.). But for this to happen, government must demonstrate that it spends money well. Building "low-income" housing for $400K a unit does not inspire confidence.

Can Corporate CEOs justify private jet travel?

The Washington Post had a story today about CEO perks at rescued banks. Among the most common, of course, is the use of a private jet for private purposes. But this begs a more fundamental question: is it possible to justify the use of private jets for business purposes?

I picked one CEO at random to try to figure it out. Dieter E. Zetsche, the CEO of Damler Benz, gets paid about $3 million per year (which actually seems reasonable to me, in light of his responsibilities). Let's say the typical CEO works 60 hours a week, 50 weeks per year. This means Zetsche earns about $1000 per hour.

I am going to take as a given that it is worth upgrading the CEO to first class on a commercial flight--it is hard to work while flying in coach, so on a round trip cross country flight, giving the CEO a reasonable environment for work is worth about $10K. The marginal cost of round trip first class tickets is a lot less than that.

Most of the time saving from flying a private jet comes at the airport. I got to fly on a corporate jet once (confession: it is fun). One drives right up to the plane and walks on--no ticket counter, no security. So let's say time saved at the airport on both ends of a round trip is 4 hours: $4000. According to one source, the cost of flying a private jet ranges from $1800 to $5000 per hour. Let's just use $2500. It takes about 5 hours to fly from LA to New York, so round trip, that it $25,000. Let's say the CEO take someone with him/her. Now the cost is down to $12,500 per person.

I just checked on Kayak, and first class airfare from NY to Los Angeles is $2250 on Virgin and Delta. So the marginal cost of the private plane is about $8,000, and the benefit is around $4,000. And of course the cost benefit calculation for the second person is even worse.

I do understand that CEO's on occasion need to go places without commercial airports, and that the time spent driving from a commercial airport to these places might make the private jet pencil out. But they could use shared ownership, or net jets, to take care of those cases. Most of the time, they should fly with the rest of us.

USC planning student Alexene Farol writes about why public transit is hard for LA

Lex Rail writes (h/t Lisa Schweitzer):

The biggest complaint I repeatedly hear about L.A. is that it has a poor public transportation system. News flash: that's true, we're not New York or Tokyo by any means. Yet I often feel compelled to protect L.A. from empty criticism. The people who complain about L.A.'s public transportation system are complaining due to what I see as three major factors: 1) the effect of hearing other people complain (to which I have nothing truly helpful to contribute), 2) the absence of a transportation culture, like the subway-state-of-mind of New York City or even the let's-take-BART-to-the-Giant's-game compulsion in San Francisco, and finally, 3) the feeling of disorder and general lack of safety surrounding the systems we already have. Here's my take on those things.

So let's face it: in Los Angeles, we drive our cars. Everywhere, all day, every day. We jam up our freeways and complain about commutes and argue about congestion but still, we drive our cars. Historically speaking, there is a reason for this. East Coast cities were designed with pedestrians in mind; they are planned to some extent, but largely that American grid pattern wasn't implemented until we started growing westward. People still had few options but to walk when those cities began to develop and subsequently explode in population; hence those cities have easily identifiable centers. Like many European cities, the center is actually in the middle, creating a smaller but more concentrated radius of things-that-are-important-to-get-to: financial buildings and offices, cultural offerings, commercial centers, etc. Los Angeles, however, is a totally different breed of city. Most significantly, by the time L.A. took off in terms of population, Americans were falling in love with the automobile. (Isn't it just like a bad romance novel? The honeymoon period is magical and then we find out that the objects of our affections are shredding the ozone layer. Typical.) This city is not designed for pedestrians but for vehicles, which explains our lack of green space and, obviously, our general difficulties with creating a truly cohesive transportation network. Additionally, L.A. is a highly stratified city, partially because it contains so many levels of specialization and industry. L.A. has many centers - Westwood, the financial district, etc. - and subsequently has a harder time connecting them except by vehicle lanes. Given that information, it's hardly surprising that our public transportation appears subpar. Do you realize how much harder that task is for L.A. than for New York? The concept of reducing VMT (vehicle miles traveled) is a very new concept that is miles away from what L.A. was really planned for. Oh and while we're facing facts, don't lie: those of you who are complaining, you wouldn't ride public transportation anyway.

And why wouldn't you ride public transportation in L.A.? Because there's no guarantee that you'll be as safe as you would be if you were driving. Many of the complainers are students I go to school with, and further, many of those are members of my sorority. This is where the AYF (Attractive Young Female, or as Michael Jackson might say, PYT) factor comes in. Pretty girls are the best way to judge the success of a public transportation system, because they are a) the most noticeable and b) the most vulnerable, for either real or imagined reasons. Pretty girls will not ride public transportation if they don't feel safe. So here we reach another issue with L.A. public transportation: the pretty girls don't trust it. Now part of that, I think, is that these PYTs are expecting the hip subway culture that is not typical of Los Angeles, and as I said earlier, there's nothing we can do about that. They're also expecting fancy light rails with Starbucks and Yogurtland in them. Here's the problem with that, though: who rides public transportation in L.A.? Largely it's the low-income minority population, and they're not riding the fancy light rails. They're riding the derelict, overcrowded buses - the non-glamorous option, and thus, the one with less funding. There are no PYTs on these, nor are there likely to be while they remain in that state. And L.A., in all its innovative glory, continues to invest in highway expansions that don't work or rail lines with low ridership because that's what the PYTs - and higher income residents - want. In the meantime, we force our bus riders to suffer inadequate resources while we develop for the people who complain and yet do not provide ridership.

I've talked for a while now, so in conclusion: to the city of L.A., please put more money into the bus systems. Make the bus stops safer, clean them up - throw in a Yogurtland if you want - invest in better, more fuel-efficient buses, and make sure the buses are always reliable. Maybe you'll attract more people to them; but even if you don't, at least we won't shove the majority of our population into grimy

outdated machines.

What is the optimal Rock Star status for a professor?

Greg Mankiw's blog led me to a piece in the Harvard Crimson on three of Harvard's most popular professors: Mankiw himself, Robert Lue and Niall Ferguson. The opening paragraph:

When History Professor Niall C. D. Ferguson begins his lecture at 10:07 a.m., he abandons the podium, choosing instead to pace in a slow, deliberate loop around the lectern. He speaks with the kind of proper British accent that makes Anglophiles swoon. As he makes an argument about the French Revolution, his throat wraps around certain words with a silky aggression that he punctuates by cocking an eyebrow or gesturing with his left hand, index finger and thumb closed into an “o” around a stub of chalk. His words are actually improvised. His paper schedule book, full of cross-country speaking engagements, is not.

The article also makes clear that Mankiw and Lue are around and available for students all the time, and they are well known. But from the perspective of undergraduate education, what is better--to have a famous professor who gives good lectures who is rarely around, or to have a not so famous professor who gives good lectures who is always around?

My friend Suzanne Gillespie sends me a story on the Las Vegas Housing Market.

CNBC reports that houses in Las Vegas are falling apart, and that at least one buyer went to a homebuilder for a new house because she couldn't find any existing home that was acceptable.

This is actually a good example of what Ed Olsen was writing about in his seminal paper, "A Competitive Theory of the Housing Market." When prices fall below replacement cost, housing deteriorates until its depreciated cost equals price. Once this happens, housing markets are in equilibrium. The fact that the inventory of houses available for sale in Las Vegas has dropped to four months suggests that it is near its equilibrium level.

We could just be happy that the market in Vegas had returned to normalcy where it not for the fact that the deodorization of houses has almost certainly produced negative externalities--i.e., blight. (I was last in Vegas late last spring, and it looks pretty awful). But it is amazing how quickly markets adjust.

Crooked Timber on Elinor Ostrom

Henry writes:

Lin’s work focuses on the empirical analysis of collective goods problems – how it is that people can come up with their own solutions to problems of the commons if they are given enough room to do so. Her landmark book, Governing the Commons, provides an empirical rejoinder to the pessimism of Garret Hardin and others about the tragedy of the commons – it documents how people can and do solve these problems in e.g the management of water resources, forestry, pasturage and fishing rights. She and her colleagues gather large sets of data on the conditions under which people are or are not able to solve these problems, and the kinds of rules that they come up with in order to solve them.

This is, as Kieran suggests, a vote in favor of detailed, working-from-the-ground-up, empirical work, which doesn’t rely on sharply contoured theoretical simplifications and flashy statistical techniques so much as the accumulation of good data, which reflects the messiness of the real social institutions from which it is gathered. Quoting from Governing the Commons:

An important challenge facing policy scientists is to develop theories of human organization based on realistic assessment of human capabilities and limitations in dealing with a variety of situations that initially share some or all aspects of a tragedy of the commons. … Theoretical inquiry involves a search for regularities … As a theorist, and at times a modeler, I see these efforts [as being] at the core of a policy science. One can, however, get trapped in one’s own intellectual web. When years have been spent in the development of a theory with considerable power and elegance, analysts obviously will want to apply this tool to as many situations as possible. The power of a theory is exactly proportionate to the diversity of situations it can explain. All theories, however, have limits. Models of a theory are limited still further because many parameters must be fixed in a model, rather than allowed to vary. Confusing a model – such as that of a perfectly competitive market – with the theory of which it is one representation can limit applicability still further. (pp.24-25)

One plausible characterization of her life’s work is that it is about demonstrating the empirical weaknesses of a ‘cute’ economic model (the Tragedy of the Commons) that assumed a role in policy discussions far out of proportion to its actual explanatory power, and replacing it with a set of explanations that are nowhere near as neat, but are far more true to the real world. It is also worth pointing out in passing (as an email correspondent has brought to my attention) that she has received roughly a dozen grants under the NSF program that Senator Tom Coburn wants to abolish. Tom Coburn vs. the Nobel committee as a judge of scholarly quality – you decide.

It is also a vote in favor of supplementing quantitative work with qualitative understanding...

It is important that the Nobel Committee recognizes that there is more than one approach to science in general, and social science in particular. It strikes me that Darwin used "detailed, working-from-the-ground-up, empirical work, which doesn’t rely on sharply contoured theoretical simplifications and flashy statistical techniques so much as the accumulation of good data," and he moved our understanding of how life on earth works. Real scientists tell me that an awful lot of his specific predictions have stood up, as well.

Jan Brueckner and Bob Helsley find that subsidized sprawl produces urban blight

Jan presented the paper at the first annual UCLA-UCI-USC real estate research day. The finding was straightforward but still interesting: if congestion for commuting to the suburbs is not priced at marginal cost, the urban center will be maintained at less than the social optimum, so the housing stock in the center will deteriorate below the social optimum.

For those who worry about whether this implies that taxing sprawl will reduce the stock of affordable housing, Jan points out that the mechanism for making housing cheaper is greater residential density: with optimal taxation of congestion, one gets very small high quality housing units in the center city.

Bob Shiller wonders what the turnaround in house prices means

He concludes:

WHAT should we conclude? Given the abnormality of the economic environment, the sudden turn in the housing market probably reflects a new home-buyer emphasis on market timing. For years, people have been bulls for the long term. The change has been in their short-term thinking. The latest answers suggest that people think the price slide is over, so there is no longer such a good reason to wait to buy. And so they cause an upward blip in prices.

At the moment, it appears that the extreme ups and downs of the housing market have turned many Americans into housing speculators. Many people are still playing a leverage game, watching various economic indicators as well as the state of federal bailout programs — including the $8,000 first-time home-buyer tax credit that is currently scheduled to expire before Dec. 1 — in an effort to time their home-buying decisions. The sudden turn could signal a new housing boom, but is more likely just a sign of a period of higher short-run price volatility.

My take is different: I wonder if we have actually seen a sudden turn. The mix of sales has recently included fewer distressed sales. If distressed sales are fundamentally different from others, changes in the mix will influence the index. I suspected before that prices for non-distressed transactions before fell somewhat less than CSI; for the same reason, they may not be rising quite as quickly as CSI now.

Paul Romer's radical idea: Charter cities

I like the idea of Canada turning Guantanamo Bay into Hong Kong.

William Brock, Cars Hommes and Florian Wagener show how hedging instruments can destabilize markets.

More hedging instruments may destabilize markets:

This paper formalizes the idea that more hedging instruments or derivative securities may destabilize a market when traders are heterogeneous and learn from experience based on realized returns. Here is a sketch of the idea. Consider a heterogeneous agent intertemporal asset market where risk averse agents are learning the structure of asset prices in the economy by using, for example, different prediction strategies of future asset prices under some kind of reinforcement or evolutionary learning, for instance as in Brock and Hommes (1997).

Let there be S states of the world and a finite number n of contingent claims or risk hedging instruments available. If n < S − 1 the market is incomplete. We model the risk hedging instruments as “Arrow” securities for state s, 1  s  n < S − 1, each paying 1 if state s occurs and 0 otherwise. Elementary Arrow securities are used here as a convenient analytical device, and a suitable combination of Arrow securities may serve as a proxy of more realistic financial instruments such as futures, derivatives or recently introduced collateralized debt obligations. Now
suppose that n < S − 2 and that a new risk hedging instrument, that is, a new Arrow
security, is added for state n + 1 < S − 1. Then, since agents are risk averse, and
since they can use the new Arrow security to hedge out “extra” risk, they will now
tend to place bigger positions on the market. Thus if an agent’s forecasting tool turns out to be on the “right side” of the market, it will return a larger profit (because a larger position has been placed on the market), and therefore it will receive a stronger reinforcement and more individuals will switch to using that particular forecasting tool. This, in turn, implies that the learning system is now more likely to “overshoot”, i.e. to become unstable, and consequently market volatility increases. This intuitive idea will be formalized in a stylized model.

On the other hand it has been argued that an increasing multitude of derivative securities has made it possible for rational speculators to help stabilize markets since they can take bets on market imperfections and hedge their risk. A second contribution of our paper is to investigate the potential stabilizing role of rational traders in a market with co-existing non fully rational traders. Can a perfectly rational trader employ a growing number of hedging instruments to stabilize the market? It turns out that, when the information gathering costs for full rational expectations are large, rational traders can not prevent destabilization.

In the mortgage context, information gathering is expensive. One either needs to set up a good underwriting model, which can take years of experience, or at least to careful loan-by-loan due diligence. Many of us believed that hedges (such as Credit Default Swaps) helped distribute risk better and mitigate against systemic risk. How I wish we had this paper then. (BTW, I took two classes in grad school from Brock. I learned maybe 1/3 of what he was trying to teach, because I am not that good at math. I still learned more from him than pretty much anyone).

Robert Solow on what is needed for growth

From an interview with the MIT Times.

Q. Your research made clear how much technology can contribute to economic growth. To what extent might we see technology driving growth now?
A. I actually think the situation of the economy calls for a surge in technologically oriented investment. We have to expect consumer spending to be weak in our economy, not just for six months, but for the next few years. It will not be as strong a driving force as it has been the past several years. Something has to take its place. Government spending can't, since government will have a hard time financing the inevitable deficits and is not in a position to aggressively increase its deficit spending.

That leaves two sources of expenditure to replace the pullback of consumers. One of those is net exports. That's a long story. The other is business investment. We need business investment to support the economy. We have every reason to want to divert our resources toward secure and renewable sources of energy, new materials and environmental improvement. It's our job, a place like MIT, to produce those new technologies, then it's the job of private industry to grab them, but I also think it's the job of the federal government to shift incentives, from incentives to consume more to incentives to invest more. Obama ran on this kind of platform, and if he can put some money behind that fundamentally correct view, he might generate something. It's going to take more than that to replace 5 percent of GDP, but that would be a neat place to start.

This is also why I really worry about the reduction in funding for our great public universities. Michigan, Wisconsin, Berkeley, UT-Austin, etc. have long been wellsprings of ideas. Once upon a time in Wisconsin, I think the broader population understood why research was so important, particularly when the Ag School was discovering innovations that were useful for farmers. As a political matter, universities must connect to the broader community so that it understands why their research matters so much. Continuing American dominance in Noble Prizes certainly helps, but I don't think the connection is sufficiently concrete for most taxpayers.

One of Mark Thoma's Best Posts

On how to think about research on modifications to the Efficient Markets Hypothesis:

http://economistsview.typepad.com/economistsview/2009/10/capital-market-theory-after-the-efficient-market-hypothesis.html


Principal agent problems (particularly involving asymmetric information) have been an enormous part of the problem, but as Mark notes, are likely not enough to by themselves explain the crisis. I think we also need to look carefully at prospect theory and norms, and the mechanisms households use to make decisions (for instance, the marketing literature shows us that many households make credit decisions based on initial monthly payment).

A first step toward making California governable?

Last week I discussed a talk by Isaac Martin (UCSD) on the political durability of Proposition 13. Isaac pointed out that Proposition 13 contains a whole set of policies: a cap on the property tax rate, assessments based on acquisition value, rather than market value, limits on the growth of the property tax levy , and a 2/3 legislative supermajority for raising state taxes and a 2/3 popular vote supermajority for raising some local taxes.

The point of Isaac's talk was that most people look at Prop 13 as a monolith, when it is not. In particular, he showed that levels of support for each part of the proposition vary. While people are vociferously opposed to any change in the treatment of residential property taxes, they are not so opposed to reducing the supermajority requirement from two-thirds to 55 percent.

Reducing the supermajority requirement would make California more governable. The problem, however, is there seems to be no prospect of reattaching local spending to local revenue sources. This prevents the efficiency mechanisms of the Tiebout model, which predicts that local government compete based on services and their costs, from working in California.

Paul Harris of the Guardian writes that California may be a failed state

I found one paragraph especially disturbing:

Yet California is currently cutting healthcare, slashing the "Healthy Families" programme that helped an estimated one million of its poorest children. Los Angeles now has a poverty rate of 20%. Other cities across the state, such as Fresno and Modesto, have jobless rates that rival Detroit's. In order to pass its state budget, California's government has had to agree to a deal that cuts billions of dollars from education and sacks 60,000 state employees. Some teachers have launched a hunger strike in protest. California's education system has become so poor so quickly that it is now effectively failing its future workforce. The percentage of 19-year-olds at college in the state dropped from 43% to 30% between 1996 and 2004, one of the highest falls ever recorded for any developed world economy. California's schools are ranked 47th out of 50 in the nation. Its government-issued bonds have been ranked just above "junk".

Yet Harris writes something else that doesn't make sense to me: he says California may lose a congressional district after the 2010 census. But census estimates show that California's population has risen a little bit more than the country's (in percentage terms) over the course of this decade, so unless he has special insight into problems with census estimates, this statement does not make sense to me.

But the broader point still holds. California is currently engaged in an experiment testing whether a place with lots of advantages (including some of the most talented people in the world) can overcome disfunctional government. It would appear that the answer is no.

Nancy Franklin points out serious sex-discrimination in the joke market

In her New Yorker review of the Jay Leno show, she writes:

In other diversity news, Leno’s and the rest of the nighttime comedy shows are bizarrely lacking in women writers. Did a bomb go off and kill all the women comedy writers and leave the men standing? The other night on the Emmy Awards broadcast, the names of the nominees for best writing on a comedy or variety series were read, and, out of eighty-one people, only seven were women. Leno has no women writers on his show. Neither does David Letterman, and neither does Conan O’Brien. Come on.

My wife noticed the same thing (I think I did too, independently, but I can't be sure, because she voiced it before I did). The question is, why? This situation for women in comedy is even worse than for women trying to become tenured faculty at universities. I have no evidence that women are not as funny as men: my mother is funny, my wife is funny, my daughters are funny. I have worked at eight places as an adult. The sex of the funniest person I knew at each place? (1) man (2) woman (3) tie (4) man (5) woman (6) woman (7) woman (8) not positive yet. That's four women, two men, one tie, one where the jury is still out.

Why do cities want the Olympics?

It puzzles me, given that Vancouver is facing serious financial issues for its forthcoming Olympics, why major cities care so much about getting them. Olympic games also make life inconvenient for those living and working in the cities where they take place. It is not like Chicago, Madrid, Rio and Tokyo aren't high profile cities. Do we really think more highly about Atlanta because it had an Olympics?

I get permanent sports franchises--they become a source of common conversation in communities, and Carlino and Coulson show that people value this (although free agency and high ticket prices might screw this up). But the Olympics? I hear people talk around here about the 1988 Dodgers and Kirk Gibson's home run all the time; I almost never hear about the 1984 Olympics.

Madison has many things for which to be proud; being the birthplace of The Onion may top the list

Poll: Happy, Healthy Obamas Out Of Touch With Miserable Americans