Tuesday, August 31, 2010

The wonders of academia

I became a full professor at the University of Wisconsin-Madison in 2001. Among the responsibilities of full professors are (1) to evaluate whether professor at schools other than ours merit promotion and (2) to chair and serve on promotion committees at our own schools.

So far as I can tell, senior faculty take these responsibilities very seriously. The strange part is that we take promotions of people at other schools very seriously, even though we compete with those very schools. I suppose one could make an argument that we at USC should try to blow up the cases of those who we deem to be good at other schools in California, while also waxing enthusiastic about weaker faculty at these schools. It is as if Honda were telling Toyota who to promote, and vice versa.

In the end, though, faculty at one school tend to recommend that faculty they deem meritorious at another receive promotion. While the process is certainly less than perfect, the good faith that most faculty show in these affairs helps explain why the US still has the best research universities in the world.

Sunday, August 29, 2010

Did Californians break their contract?

Mark Thoma, whom I admire, approvingly posts Michael O'Hare's letter to his students. Professor O'Hare says something that really bothers me:

...for a variety of reasons, California voters realized that while they had done very well from the existing contract, they could do even better by walking away from their obligations and spending what they had inherited on themselves. “My kids are finished with school; why should I pay taxes for someone else’s? Posterity never did anything for me!”

As Professor O'Hare correctly notes in the header to his blog, "everyone is entitled to his own opinion, but not his own facts."

So before we accuse middle-aged Californians of being greedy, we should consider four things. First, California ranks 4th in state and local per capita spending in the country (and number one is Alaska, where the tax price of government service is essentially zero). Second, about 2/3 of California bond referenda that go to the public receive the 2/3 super-majority necessary to get passed. Third, we in Los Angeles County voted two years ago, in the middle of a recession, to tax ourselves to pay for transportation infrastructure. Finally, we absorb more people from the rest of the world relative to our population than any other state. These facts are more consistent with generosity than greed.

I understand Professor O'Hare's frustration with California's state budget process and with the threats against the wonderful UC and Cal State systems. Those who know me know that I enthusiastically support all kinds of public spending. But Professor O'Hare's rhetoric could well alienate many whom he wants on his side, and may actually give aid and comfort to the Sarah Palins and Glenn Becks of the world.

Friday, August 27, 2010

Maybe we are more like Homer Simpson than Spock

I saw Juan Carrillo of the USC economics department present a very nice paper testing auction theory using experimental data. The only problem was that the people in the experiment were Cal Tech students, who are not exactly representative. But even Cal Tech students, while likely more rational than the general population, and who certainly understand experiments better than the general population, are still far less than perfectly rational.

Thursday, August 26, 2010

What is the correct downpayment?

If required down-payments are too low, we get the nonsense of the past several years. I am reasonably sure zero is too low. If required down-payments are too high, we, among other things, perpetuate wealth disparities (i.e., the only people who get credit are those that don't need it). I am reasonably sure that 25 percent is too high.

What is both socially optimal and just? We need to try to figure this out, but it would involve knowing the correct social loss function and then minimizing it. Social welfare functions are very, very tricky businesses.

Tuesday, August 24, 2010

In praise of Lawrence Yun

As Robbie Whelen notes in the Wall Street Journal, it could not have been fun to be Lawrence Yun, the National Association of Realtors chief economist, today. As Whelen notes, he must "toe the line between housing industry economist and housing industry motivational speaker."

I think Lawrence does this well--he is clearly on the side of the people who pay him, but he also takes his positions honestly. I assume that he had something to do with NAR's decision not to advocate for an extension of the home buying tax credit. More important, he is in charge of the data that NAR puts out, and bad days like today essentially prove that the data are credible (full disclosure: I, along with Orawin Velz and Kevin Thorpe, helped design the methods by which the Existing Home Sales data are produced, but I have nothing to do with the monthly estimates that NAR puts out). I am guessing that one or two members of NAR wish he would fudge the data, but he does not.

No more goosing with tax credits please.

The July Existing Home Sales number of 3.8 million units was abysmal--it was 1980s bad. I am guessing that a lot is it is that July gave back the tax credit driven boost of spring. If we look at average sales for the year, it is 5.1 million, which is pretty much normal. March, April, May and June were above normal, but all of that "strength" was given back in July. Credits just pull sales forward--they don't change the underlying dynamic, and they add to the deficit.

Sunday, August 22, 2010

Is housing the best way for low-income people to build wealth?

I was thrilled to be invited to the Future of Housing Finance conference held at the Treasury Department and co-sponsored by HUD this week. It was particularly nice to be seated next to Self-Help's Martin Eakes, whom I have admired for some time. Like Elizabeth Warren, Eakes long ago had insights into sub-prime lending that I wish more of us had taken seriously.

At the conference, Martin worried about a conversation that emphasized the need for robust underwriting standards for the mortgage market going forward. The three most important standards are loan-to-value ratio, payment-to-income ratio, and credit history. As Martin pointed out, African-Americans have less wealth available for down-payment than others (even after controlling for income), and have lower FICO scores than others, and therefore will be denied access to credit at a greater rate than others if underwriting standards are tough and uniform. Because much of the reason that African-Americans lack wealth is because they have been systematically stripped of wealth for many generations, policies that reduce access to credit disproportionately for African-Americans violate fairness.

The events of the past six or seven years show that loose underwriting does nobody any favors, either. Foreclosures are terrible things for the families who experience them and for the communities that have large numbers of them. The whole point of underwriting is to prevent default and foreclosure, and the unpleasant fact is that downpayment and FICO are predictors of likelihood of default.

In the era where almost all mortgages were self-amortizing, housing allowed families to build wealth because mortgages were a form of forced saving. Those who got a 20 year mortgage in 1960 owned their house free and clear in 1980; households gained wealth not because housing was such a great investment, but because they built equity, month after month. Housing was a particularly attractive way for those of modest means to save, because they could live in the very piggy bank they were building. In principle, however, these households could have rented and taken the difference between a mortgage payment and a rental payment and put it in another investment (a small business or the stock market). But we know that in the absence of nudges, people tend to save less.

Perhaps, then, the government could come at the savings issue more directly by giving low-income people a nudge toward saving. Suppose it developed a 401(k) type plan that matched the savings of those with below-median incomes at 2 to 1. This would encourage savings that then could be used for a down payment or a host of other investments (say a Vanguard index fund). This would cost taxpayers money, but perhaps less than mortgage programs built on thin underwriting standards. At the same time, getting people into the habit of savings could produce other social benefits as well. I am not sure such a plan is practical, but I think we do need to think about how we can help people who have been denied wealth for generations how to start accumulating assets without relying entirely on the housing finance system to do it.

Friday, August 20, 2010


The US News rankings of colleges came out the other day, and I will confess that I enjoyed the fact that we at USC moved slightly ahead of UCLA and were just one spot behind Berkeley. We also tied with Carnegie-Mellon.

I also enjoyed this piece by Colin Driver in the Atlantic on what it is like to run a place (Reed College) that refused to participate in the rankings: he finds it liberating, particularly after being the law school dean at Penn, where he had to fill out a survey rating every other law school in the country.

I have reservations enough about the US News college rankings, but the professional schools rankings are something else altogether--they are based heavily on reputation. When I was Associate Dean for Graduate Programs at GW, I had to fill out a survey rating every MBA program in the country. Of course, I was completely clueless about the vast majority of them (University of Utah? Could be great, could be awful, I just don't know). More important, I think it is hard to really know about a program unless you have worked in it for awhile. I do think I understand the strengths and weaknesses of Wisconsin, GW and USC, but that is about it. I probably can tell you whether a place is strong at research in my fields of interest, but that is about it.

Bill Gross' big idea

At Tuesday's conference on the Future of Housing Finance, Bill Gross suggested that anyone who was current on a Fannie/Freddie loan should automatically be refinanced to the current mortgage interest rate of about 4.5 percent. This should happen instantaneously, without underwriting.

I am trying to see the downside of this. It reduces the probability of default, because it reduces the present value of the loan balance and payments. It only rewards those who pay their mortgages on time. And as Bill Gross pointed out, it would amount to an enormous stimulus (what he didn't point out is that the stimulus would be at least partly funded by foreign holders of MBS).

Monday, August 16, 2010

Where should transit $$$ be spent?

I flew to Washington today for the big conference on the future of housing finance in the US. When I arrived at Dulles, I checked to see how long I would have to wait to catch the Washington Flyer bus to the Falls Church West Metro stop. It was five minutes, so I took it. It costs $10, and takes about 15-20 minutes from Dulles to the Metro.

Once I got to West Falls Church, I waited less than two minutes to catch an Orange Line train into town, so all seemed to be well, until not just one, but two trains broke down in front of us. It took about 45 minutes to get from Falls Church West to Foggy Bottom, a distance of perhaps eight miles. At that point, I left the Metro and caught a cab to my hotel in Dupont Circle.

Metro needs to spend money on maintaining and replacing cars and tracks in its current system; instead it is spending money on extending service to Dulles. There is a dedicated roadway to Dulles that makes bus travel fast and easy. The only problem is that the buses depart every 30 minutes; if they left the airport every ten minutes, they would be an attractive method of connecting to the rail system; such service would also be far less expensive than building heavy rail out to the airport.

The savings, then, could go to keeping curing the deferred maintenance of the current system. Alas, politicians don't seem to think that maintenance wins votes.

Saturday, August 14, 2010

What is a renter?

Richard Florida, among others, has suggested that the United States overindulges in homeownership, and that rental housing gives flexibility to people such that they become more creative. I have no quarrel with the idea that homeownership has been oversold. A paper I wrote with Shelley White that showed that owning could be good for children has gotten cited a lot; a paper I wrote with Dean Gatzlaff and David Ling (that I thought was just as good as the paper with Shelley) that suggests owners maintain their homes no better than landlords has barely gotten cited at all.

But a lot of the story about why renting is great involves New York City. There can be no doubt that New York is an innovative and creative place, and that it has a lot of renters by national standards. But about 2/3rds of rental units in New York City are rent controlled or rent stabilized. If one occupies a rent controlled or stabilized apartment, he gets a lot of the benefits of owner-occupancy: reduced housing cost risks, and security of tenure. Renters in New York share far more of the bundle of rights than renters in most parts of the country; they are almost like owners expect for the possibility of capital appreciation. San Francisco, San Jose and Los Angeles, three other cities one might count as innovative, also have some form of rent control (what's more, property tax law in California encourages owners to move less than they otherwise would).

The point is that the owner-renter dichotomy is really a false one, as there are shades of tenure in between. These shades might matter a lot.

Thursday, August 12, 2010


I keep running across pieces saying that urban farming can "save" Detroit. Agriculture makes up 1.3 percent of GDP for the United States, and there is a reason why it doesn't take place in cities--it is a low intensity land use. If Detroit really reverts to farming, it will only show that its economy really is gone forever.

Tuesday, August 10, 2010

One reason why Steven Slater might have lost it

I was listening to the inimitable Larry Mantle on KPCC this morning. The topic was spectacular job-quitting moments, and was, of course, inspired by Steve Slater's colorful departure from a jetBlue flight.

Because I fly a fair amount, I chat with flight attendants from time-to-time, and I have a few flight attendant friends who I met through other friends. They have been getting hammered: their wages, which were low before, are even lower, and many of the benefits they were counting on, such as pensions, have been severely reduced. At the same time, airplanes are getting more full, which means that the probability of encountering a rude passenger has gone up. It is no wonder people in the business feel more stress.

But it is not just flight attendants: it is workers in general. No matter how one looks at it, workers' share of the economic pie has been shrinking. The graph below is the ratio of total compensation to national income (data is from the BEA):
Note that the ratio peaked in 1980, and has been on a downward trend since.  Even more pronounced is the downward trend in the wage to national income ratio:

For those jobs (such as flight attendant) where benefits have gotten worse over time, the wage-to-national income data may be more relevant. Note that in 2006 this ratio fell to its lowest level in the post-World War II era.

Friday, August 06, 2010

Two stories in this morning's papers and the future of house prices

Firserve says that house prices will not regain their previous peaks in the sand state until 2025, and it will be even longer in places like Stockton.

This could well be right, except that I infer that Fiserv is looking at nominal house prices, whose dynamics are driven in part by the underlying general price level. As the New York Times notes this morning, Jan Hatzius predicts falling general price levels; Richard Berner says they will rise--if Hatzius is correct, it will of course take longer for house prices to return to the past peak; if Berner is right, it will take less time.

Thursday, August 05, 2010

Pithiness from Chicago

Diane Swonk is good at summarizing:

Moreover, government interventions (most notably regulation and austerity programs) are more likely to suppress growth than promote financial stability, which means we have learned very little from the crisis itself. The G-20 has been particularly bad at fostering coordination across country borders now that the crisis has passed. Financial reforms, in particular, are being implemented on a piecemeal basis, which could encourage--rather than discourage--the kind of regulatory arbitrage that got us into this mess in the first place.

The last point is important. While we still don't know the most important source of the crisis, regulatory arbitrage between shadow banks and regulated banks was almost surely a major contributor.

David Oser's take on Fannie and Freddie

The opening paragraph and closing paragraphs of his stimulating piece:

Some mistakes are so egregious and yet so uncorrectable that no one is willing to admit them. On Sunday September 7, 2008, US Treasury Secretary, Henry M. Paulson, made just such a mistake. He ordered Fannie Mae and Freddie Mac placed into “conservatorship,” an ambiguous category of quasi-receivership that still defies precise definition. To see why Paulson’ decision was so unwise, we’ll start by deconstructing a financial instrument that most people assume they understand perfectly well: the 30-year home mortgage....

....Here’s the bottom line. Before September 7, 2008, we had a mortgage system that, while rickety and obscured by smoke and mirrors, worked. It worked not because of an effective business model but because everybody—investors, lenders, and borrowers—realized it was in their best interest for it to work. Then Henry Paulson said, “Look, the emperor has no clothes,” as if that were news instead of common knowledge. Paulson chose conservatorship for Fannie and Freddie because it meant the Treasury only owned 79.9% of the two companies. One tenth more and their assets and liabilities would have gone into the federal balance sheet. That would have meant the federal government was explicitly guaranteeing all $5 trillion of Fannie and Freddie’s securitized mortgages and other debt. And that would have meant that the federal government was guaranteeing both sides of the consumer’s balance sheet: her bank accounts through FDIC insurance and now her mortgage.

If we were really Big Boys, we’d say, “Sorry. We messed up. We’re going to try to put it back the way it was.” But we aren’t that big and, as someone said to me recently, “Fannie and Freddie have become the third rail of American politics.” Instead, we’re going to let Fannie and Freddie totter along. In the words of Wall Street Journal editorialist Brian M. Carney, Fannie and Freddie are “money-losing zombie financial companies in the bosom of the federal government.” Maybe that criticism would be fair if Carney had a solution, but he doesn’t and neither does any one else. I don’t know that there is a solution. Fannie Mae, the older of the two companies, was created during the Depression when the typical mortgage had a five-year term with all the principal due at the end. Maybe that’s what we’ll go back to, so that only those who don’t really need a mortgage can get one.

I need to think about this a little. One thing, though, is that the Home Owners Loan Corporation and then Fannie Mae were the entities (along with FHA) that gave us the long-term, fixed rate mortgage. The HOLC mortgages generally had 15 years terms.

Monday, August 02, 2010

Add Metros to the Chinese List

From Planetizan:

With 420km of network, Shanghai's metro overtook the London Underground, which has a total of 402km. But the rate of expansion is more impressive: the first line was constructed in only 1995 and it is still expanding.

By 2020 Shanghai, "intends to have added over 350km in new lines and extensions, almost doubling its network length."

However, "there is no suburban commuter rail system in Shanghai that compares with those in cities like London, Paris and Tokyo, where the railway network is essentially operated as a secondary rapid transit system with longer station intervals than the subway, generally with an interchangeable fare system."

Chinese cities have 8-10 times the density of our densest cities, and so metros make lots of economic sense there.