Friday, June 24, 2011

Does it make sense to build "affordable" housing in Santa Monica?

Among the people I admire most in the urban research business is Marjorie Turner.  I was talking to her at a conference sometime within the last year, and she put a difficult question to me: shouldn't housng policy allow everyone who wants to live in Bethesda, Maryland the opportunity to do so?  (Bethesda is among Washington, D.C.'s most affluent suburbs).

I have been pondering this question for some time, and it was thrown into relief for me when I witnessed a person bragging about building affordable housing units at $650,000 a pop in Santa Monica.  The presentation brought me around to the view that it is not society's responsibility to assure that everyone gets to live anywhere they like, just as it is not society's responsibity to buy everyone a Mercedes Benz (a night on the town every now and then might be something else).

Every household should have the opportunity to live in a clean, safe community with a decent school.  For this reason, expanding the Section 8 housing vouchers program, which allows low income households to rent market rate housing while paying no more than 30 percent of income, would make a lot of sense.  Given the fiscal realities of the moment, a sensible source for funding an expansion would be the Low Income Housing Tax Credit Program--a program that funds $650,000 properties in Santa Monica.

The median price of a house in Los Angeles County is around $275,000.  The median neighborhood in LA County is a fine neighborhood.  So one could put someone in a decent house and a decent neighborhood and still have $375,000 left over relative to Santa Monica.  That $375k could go toward better schools, more transportation options--or more housing! 

Do I wish everyone who wanted to live in Santa Monica could do so?  Sure.  I also wish everyone who wanted to take a vacation to Paris could take a vacation to Paris.  But when resoureces are scarce and getting scarcer, it is important to use them as effectively as possible.

Thursday, June 23, 2011

Do bond holders think it is all political theater?

The GOP pull-out of the budget talks today really worried me--it raises my subjective probability of a US default, which would be potentially catastrophic.  But when I looked at long-term bond prices on Bloomberg, they suggest the bond markets are completely calm.

Tuesday, June 21, 2011

How well off are Americans?

As Alice Rivlin notes, tax increases on the rich (which are, in my view, necessary and, in light of recent changes in income, appropriate) are not enough to bring about long-term fiscal balance (the short run is another matter--fiscal tightening at the moment makes no sense to me).  So the question is, in the long term, how far down the income distribution should we go when we ask Americans to sacrifice?

An OECD report, Growing Unequal? Income Distribution and Poverty in OECD Countries, provides country ranks for average income for ten income deciles.  For the top four deciles, seven, eight, nine and ten, Americans earn more than their counterparts in all other countries, save Luxumbourg, a country whose population is about the same as Dane County, Wisconsin.  For the next decile down, only people in the Netherlands and Luxembourg have higher average incomes.  One could argue, then, that anyone in the top five deciles is pretty well served by being an American.

Things turn a little worse after that: the fifth decile ranks five; the fourth ranks 6, the third ranks 10th, the second ranks 14th and the bottom decile ranks 19th!  In light of this, it seems reasonable to say that the median and below is about the place where we might not wish so ask for more sacrifice.

(BTW, thanks to my USC student Sarah Mawhorter for digging the data out of the report for me).

Alice Rivlin on the Budget (h/t Mark Thoma)

She writes:

Republicans worry that spending caps will threaten national security and Democrats that domestic needs will suffer. Both need to recognize that not all government money is well spent. Democrats are terrified of entitlement reforms and Republicans of tax increases, but there will be no solution without some of each. On entitlements, Democrats have to accept that the status quo is not an option and Republicans that draconian benefit cuts are not acceptable. On revenues, Democrats have to recognize that the debt can’t be stabilized just by taxing the very rich; the middle class will have to contribute too. Republicans have to recognize that in the face of a rapidly increasing older population, it is undesirable to hold spending at historic levels, so we need more revenues. Both parties should recognize that entitlements and earmarks in the tax code are the same as spending, and phasing them out can enhance growth.

No way out?

At a Rand meeting yesterday, Stuart Gabriel called housing the "tail that wags the dog" of the US economy.  He was likely referring to this paper or, perhaps, this paper.  In any event, the evidence from past business cycles powerfully supports residential construction as a leading indicator.

Here is the St. Louis Fed's depiction of housing starts going back to 1959:

In an average year, the US economy starts around 1.5 million houses.  It has started fewer than 600,000 per year since 2008, and is currently squiggling along at a bottom unprecedented in the St. Louis Fed series.

I find it hard to see how the economy can recover strongly without housing making a comeback.  Yet we still have too many houses--builders cannot compete with the inventory currently available. While they try to differentiate new houses from stuff in the foreclosure stock, it is tough to make a sale when price differences are very large.  The problem is that stimulating housing is a bad idea too, because we really don't need many more houses in the economy right now.  As my colleague Gary Painter points out, one of the reasons we don't need more houses is that household formations dropped dramatically--we actually lost households early in the recession while population grew.  Moreover, according to the Department of Homeland Security, illegal immigration dropped by 2/3 between 2000-2004 and 2004-2009.  Whatever one thinks about immigrants (personally, I like them), they do fill up houses.

We are left with a quandary.  For the economy to be restored to health, housing construction needs to return to normal--but there is no reason for it to return to normal.  The alternative--waiting--doesn't seem very appealing either.


Monday, June 20, 2011

There are days when it is hard to be a liberal

This afternoon I heard a woman say with a straight face that Santa Monica is committed to affordable housing.  This was after she bragged about the low density, high design standard, affordable housing that Santa Monica built.  What was the construction cost for the project?  More than $600,000 per unit--because each unit uses a lot of land, which is expensive in Santa Monica, and because of those "high design standards."

The median price of a house in Los Angeles County is about $300,000.    When a subsidized housing unit costs $600,000, the average person is implicitly paying a lucky family to live in a nicer than average house.  This is of course inefficient--it also undermines the consensus necessary to make sure everyone is housed adequately.

We do indeed have a huge problem in Southern California--many families do not have sufficient income to afford a reasonable unit in a location close to a job.  Building gold plated housing in Santa Monica does not help solve the problem.

Sunday, June 19, 2011

Places that voted for Obama have longer-lived women

The Washington post featured a story about life expectancy for women and men by county. The data come from the University of Washington's Institute for Health Metrics and Evaluation, and in particular a paper by Sandeep C Kulkarni, Alison Levin-Rector, Majid Ezzati and Christopher JL Murray.

The Post story contained a fun interactive map, and I could not help but notice that "blue" places appeared to have longer lived people. I couldn't help myself, so I downloaded data on elections from Mark Newman's website at the University of Michigan. Specifically, I downloaded data on the 2008 presidential vote by county.

I then drew a scatterplot in Stata of Obama's share of the Obama-McCain vote against women's life expectancy:

Again, the unit of observation is county.  The size of the dots reflects total votes by county.  The vote weighted correlation between women's life expectancy and share of Obama vote is .262, which is not insubstantial for a bivariate correlation.

One cannot draw any causal inference from any of this, of course, and my guess is that the Obama vote share is proxying for something else--perhaps educational attainment.   But drawing these pictures is fun (BTW, the correlation for Obama vote and men's life expectancy is a smaller .168).

In preparing a talk on the history of US Housing Policy, I found this...

Notice that it is serious and fairly lengthly, and was done by local TV news.

Two Newspaper articles prompt the question "when is enough, enough"

The Washington Post has a nice piece (that relies on a study by Jon Bakija, Adam Cole and Bradley T. Heim) about how executive compensation has been the principal driver behind the increasingly unequal income distribution in the United States.  It uses Dean Foods as a nice case study---the current CEO (who apparently runs the company well) makes ten times the income of the CEO from the 1970s (who also ran the company well).  One reason for the difference is that Kenneth Douglas, the 70s era CEO, turned down pay-raises, arguing that it if he made more than is $1 million per year, it would be bad for morale.

Immediately after reading this article, I read another in the Milwaukee Journal-Sentinel about the search to replace Biddy Martin as chancellor at the University of Wisconsin-Madison.  In that article, Jan Greenwood, a presidential search consultant is quoted:

UW-Madison "is a phenomenal university" with world-class status, said Jan Greenwood, a presidential search consultant.
But, "Wisconsin, at this point in its history, is one of the states that is having severe challenges because of compensation issues," she added.

Martin made $437,000 per year plus benefits plus a fully staffed large house.  One can live very well in Madison for $437,000 plus a house.  That is enough to take nice vacations, eat out wherever one wishes, and drive a nice car.  It is probably even enough for owning a boat or small plane if such things really mattered to someone.

Maybe my problem is that I am a homer--I got my Ph.D. in economics at Madison and then was on the business school faculty there for twelve years.  The place does have some serious issues, but is also quite extraordinary.  Getting to run it while being paid enough to enjoy lots of consumption seems like a pretty good deal to me.

Friday, June 17, 2011

As I watch people drive...

..I can't help but think about a problem with the Euler Equations for consumption.  Young people (especially young men) do dumb things on the road that can get themselves killed in much larger numbers than old people.   This is not just anecdotal, because insurance statistics back this up.  (Also, as one who drives in LA, my N for making this inference is pretty large).

But of course as we approach our cap T, we should be taking on more and more risks, because the expected losses get smaller and smaller.

Sure, the u(c(t),t) function can change with t, but then it also becomes sort of useless.

Thursday, June 16, 2011

Program note

I will be on Bloomberg tomorrow talking about foreclosures.  I look forward to the day when no one wants to talk to me about foreclosures.  

Monday, June 13, 2011

Stephen Malpezzi on "Sifting and Winnowing"

My longtime co-author, colleague and friend's opening remarks to last week's Wisconsin Real Estate conference has been mischaracterized, so I am reproducing the entirety of those remarks here:

I'm very proud to be associated with this conference. I want to thank all the speakers and presenters, and especially all of you in the audience, for making this conference a success.

The Wisconsin Idea tells us that the University needs to be connected to real problems and issues faced by Wisconsinites as well as those beyond our physical borders, in the rest of the nation and indeed around the globe. It is our basic job description. As I look over the agenda I think we've put together a meeting that does meet the test of the Wisconsin Idea.

Two years ago we changed the name of our annual conference from the Wisconsin Housing Conference to the Wisconsin Real Estate and Economic Outlook Conference, to recognize the deep connections among housing, other kinds of real estate, and the economy in general.

Over the next few years, as Morris Davis provides the academic leadership for the Graaskamp Center and Mike Brennan leads our connection to the industry, I'll be spending part of my time to strengthen the focus of the Graaskamp Center on economic development.

Details will follow in the months ahead. Today I want to simply bring this effort, and indeed this conference, back to the touchstone of "sifting and winnowing" that is part of our inheritance from our intellectual and institutional forbearers, beginning with Richard Ely. Most of you have heard the phrase, and many of you have seen the plaque atop Bascom Hill, from a century ago:

Whatever may be the limitations which trammel inquiry elsewhere, we believe that the Great State University of Wisconsin should ever encourage that continual and fearless sifting and winnowing by which alone the truth can be found. Taken from a report of the Board of Regents. 1894 [slide of the plaque projected]

As many of you know, this quotation, famous on campus and off, came out of afierce debate about (of all things) unionization, in 1894. In brief, Ely supported unionization, and some of the Regents did not. They never, to my knowledge, reached agreement on the specific issue, but they did, in the end, establish a firm principle that at Wisconsin, people had a right to speak on different sides of important issues; a right to be heard; and that we owe those with whom we disagree, as well as those with whom we agree, a duty to listen.

To be clear, "sifting and winnowing," doesn't mean that every idea is equal; but rather that ideas should be heard, and examined on their merits, rigorously, rather than reflexively. As Daniel Moynihan famously put it some years ago, everyone is entitled to their own opinion, but not their own facts. Sifting and winnowing helps us establish the facts, and helps us form opinions that are grounded in those facts as well as our values.

Now, in light of the principle of sifting and winnowing, today we aim to have some constructive conversations about housing, real estate, and our state's economic development.

I'm a professor, and I do research on these subjects. But economic development is not simply an abstraction, or merely an academic subject. It touches all of our lives, and our children's lives. Economic development is not just about economics, not just how much stuff we can produce or buy. It's also about how well housed we are, whether we're educated to reach our full potential, how well we attend to our health. It even touches on our basic security, and at the national and global level, questions of war and peace.

The key to understanding economic development is to start by understanding there is no key to economic development. There is no silver bullet. Economic development is complicated.

Unfortunately we live in a world where simple solutions get the headlines. All too often, we talk past each other, cherry picking research and arguments that support our preconceived notions, and ignoring research that challenges our preconceptions. Psychologists call this confirmation bias, and it's a very powerful part of human nature. We're all subject to it. We have to fight it, every day. The best way to fight confirmation bias is to hold to rigorous standards of evidence, and hold your own opinions to the same standard to which you hold others.

For example, if you're a Republican, or a fiscal conservative of whatever persuasion, you might think state tax cuts are a silver bullet. It's important that you know about the substantial body of research that tells us simple tax differences between states explain virtually none of the variation in state economic performance.

To pick another example, if you're a Democrat, or someone who worries about providing enough resources to schools, you might think that more dollars to our schools, perhaps for smaller class sizes, are a silver bullet. It's important that you know that of a number of careful studies done on this issue, so far I've only found one that finds statistically significant relationships between class size and performance, and that only in a few grades. Most careful studies are unable to find a simple relationship.

I can list another dozen silver bullets that aren't really silver. School vouchers, charter schools, passenger rail, spending on roads, less regulation of business, more regulation of business.

It gets even more complicated here. None of these is a silver bullet. None, by itself, are magic beans that take us up the stalk to Economic Development Nirvana. Yet each of these ideas contains some germ of truth, or at least can help us think harder and better about what kinds of things are likely to work, and in what combination. Tax cuts can help if we find ways to preserve essential services while reducing taxes. As a society, we haven't had that conversation yet. Some charter schools, and some public schools, do work as advertised; we need to make sure we figure out why, and replicate and encourage them. As a society, we haven't had that conversation yet. It's not about how much regulation we have so much as what kind of regulation, how we make regulations and taxes and other government interventions smarter. As a society, we haven't had that conversation yet.

Recognizing that some of the best ideas will come from people with whom you disagree, is an important step towards making these true conversations, productive conversations. We need, as Ely and the 1894 Board of Regents taught us, to sift and winnow. Fight your confirmation bias; help me see mine, but in a constructive way. Don't paint yourself, or others, into corners. Determine the facts, and what works, without regard to ideology; and then act on it.

This is why we are here today. Join us in a day of sifting, of winnowing, of learning. Let's move these conversations forward today. Listen, as well as talk. Do recognize that, if we're honest and careful about it, sometimes we'll initially be uncomfortable with what we find. Challenge yourself as well as others. Let's move the conversation ahead, not only today, but over succeeding weeks and months and years. Let's get Wisconsin's economy, and our people, moving FORWARD.

On Wisconsin!

Sunday, June 12, 2011

Congressman Ryan and I agree about three things

Much to my surprise, during our time on a panel together in Madison last Thursday, I found him to be less of an ideologue than I expected.  I will continue to disagree with him on a "premimum support" system to replace Medicare, and I don't think his budget adds up (he never says how he gets revenues to 19 percent of GDP or discretionary spending down from 12 percent to 3 percent).  Still:

(1) He and Julia Coronado (another economist on the panel) said that increased life expectancy meant that we should raise the retirement age for qualifying for social security.  I said I agreed except for the fact that simply raising the retirement age could be regressive, given that lower income people have shorter life expectancy.  Julia said this could be fixed with different indexing for different income levels.  Congressman Ryan suggested allowing blue collar workers, whose bodies take more punishment than those of us in cushier jobs, to retire earlier.  I was pleasantly surprised at this.

(2) I suggested that regulation should be based more on metrics than fiat.  In particular, I suggested robust a meaurable capital standards for banks, and Pigou taxes for banks as they increased in size.  He said he liked the idea of regulation based on metrics, and he did not agure my point about Pigou taxes.  He also went out of his way to note that large financial institutions have the ability to capture their regulators.

(3) We were all asked to name someone with whom we often disagree who has changed thier mind about something.  Congressman Ryan named Alice Rivlin.  I can thing of many worse people to name.

He was also extremely well prepared to answer questions spontaneously, and even cited academic studies to support some of his points. 

Wisconsin Governor Scott Walker's speech at the event, on the other hand, did nothing to improve my opinion of him. 

Sunday, June 05, 2011

What are basic economic principles?

Whenever someone says that all policy problems can be solved by markets, they appeal to something they call "basic economic principles."

If one goes to the open course page for the intermediate micro course offered at MIT, one finds the following topics on the syllabus:

Consumer Theory
2Choice, Preferences, Utility
3Demand, Revealed Preferences, Comparative Statics
4Consumer Surplus, Aggregation
5Variations to the Basic Choice Model (Time, Uncertainty)
Producer Theory
6Technology, Profit Maximization, Cost Minimization
7Supply, Aggregation
9Oligopoly and Game Theory
10Walrasian Equilibrium
Market Failures
12Public Goods
13Small Number of Agents, Nash Bargaining
Asymmetric Information
14Adverse Selection, Moral Hazard, Principal-Agent Model
15Auction Design
16Voting and Other Applications
Six out of fifteen of topics (8-9, 11-14) are about ways the market can produce suboptimal outcomes.  These topics are not esoteric any more (they are showing up in intermediate courses), and they have rigorous economic theory behind them.  It was time we stopped using the phrase "basic economics" to refer to idealized market conditions that often do not exist.

Saturday, June 04, 2011

A principle for deficit reduction

As I am preparing for a panel on the US budget I will be participating in on Thursday in Madison, a principle occurs to me.  Given that over the past 30 years the economy has disproportionately benefitted high income people far more than low income people, and holders of capital more than earners of wages, any deficit reduction proposal should be, on net, progressive, after considering both changes to the tax code and expenditures.  This is not easy to do analytically, and could still involve some sacrifice from most people, but it should at least be a point of departure.