Bowles-Simpson: What am I missing?

The Bowles-Simpson deficit reduction plan is causing consternation among people with whom I usually agree.  But it has a couple of important features that I like--it cuts tax expenditures that tend to be both distortionary and regressive (such as the mortgage interest deduction) and it taxes investment income at the same rate as ordinary income.  This second feature essentially ensures implementation of the Buffet rule.

As it happens, the Tax Policy Center at the Urban Institute and the Brookings Institution evaluated the distributional impact of Bowles-Simpson relative to current policy.   Here is what they found:

Look at the column entitled "Percent Change in After-Tax Income."  Everyone takes a hit, but the hit in the lowest quintile is near zero--for the top one percent, the hit is almost three times higher than average; for the top 0.1 percent, it is four times higher than average.   This looks awfully progressive to me...

Can a name depress rents?

I needed to go to the Brazilian Consulate to apply for a visa yesterday--it is located at 8484 Wilshire Blvd.  The building at that address is called The Flynt Building, as in Larry Flynt.  I can't help but wonder if the name discourages tenants from locating there, and whether that in turn means it commands lower rents than it otherwise might.

It would be hard to know--if one ran a hedonic regression, there would not be sufficient degrees of freedom to determine whether the name mattered or not.

Dependence

So far as I can tell, Casey Mulligan and I have but two things in common: an economics degree, and eyeglasses (he is wearing a pair in the picture on the UofC web site).

I don't know about Professor Mulligan, but I am completely dependent on my glasses.  The first thing I do before I get out of bed is put them on, and the last thing I do before turing off the light is take them off.  I cannot do the basic functions of modern existence without them.  I suppose this reflects badly on my character.

Frank Popper on Academia

He comments on my friend Lisa Schweitzer's blog:

As an alternative to this kabuki, let me describe specific kinds of experiences I see a lot, but that rarely show up in journalists’, academics’ or adminsitrators accounts:
1. Right- or more usually leftwing bigotry to the point where it becomes part of the intellectual air one breathes. A few years ago I took part in a search that produced a candidate who was mildly libertarian. S/he was treated as a Martian. The questions at the presentation were patronizing, extended to actual laughter. The initial daylong interview schedule ended at midday, sending the candidate home early. 

2. The vacuous meetings, where nothing of substance gets discussed and everyone–EVERYONE–would rather be somewhere else. Precisely because the meetings are so comprehensively boring, no one ever admits it at them, though there is plenty of backchat afterward. Somewhere there must be a Balzac of American boredom, perhaps whiling away time in the Ohio Public Roads Department or a backwater of the Gates Foundation or maybe even a university, who could convey all this. We need this person to emerge soon. 

3. The public corridor conversations about students in general, which are public, deeply insulting, and clinical. They seem to get worse when students are in earshot. 

4. The lack of knowledge about popular culture, which of course is most of it and the part likeliest to last. (Shakespeare in his time was popular culture, as was the Bible.) I have run across professors ignorant of Barbra Streisand, Clint Eastwood, American Idol, Saturday Night Live, etc., far into the night and keeping on ’til morning. They invariably have firm opinions about where America or the world is going or should do. It is hard to argue with them because, well, they don’t have much of a fact base and don’t care about it anyway. The comparison with Sarah Palin or Glenn Beck seems inevitable. 

5. It’s startling how much overt anti-intellectualism exists at the middle and top ranks of American universities. I know deans who couldn’t tell you two coherent sentences about what most of their professors do or why they do it. But they can give you precise figures about the grants (some of) them bring in. They actually remark on how dull the professors’ work is, not that they’ve lifted a finger to try to find out about it. Most professors themselves are remarkably ignorant about what their colleagues do and feel no guilt about it. 

6. The mistreatment and bullying of graduate students: an endless topic. One of the (many) low points of my graduate experience was submitting the first draft of my thesis to a committee member, who sneered at me that it read like “a long piece in the New Yorker,” as if that was bad. This fellow told me that I should “look to my education,” his phrase, then refused to be part of my committee. He was for some time quite well-known, and one of the joys of my adult academic experience has been watching the utter eclipse of his reputation. Another faculty member then took me on as a project, told me that part of my problem was that I “wrote better than 95% of our graduate students,” thus arousing controversy others avoided. He gave me tips on how to make my writing better while academically grounding it so as to anticipate people like his grump colleague. My savior died recently, got remarkable obituaries and had a spectacular memorial service, which I went out of my way to attend. 

7. There’s a softness in intellectual culture as universities purvey it. That is, one can get away with studying topics or subjects (in our field e.g., zoning, Chicago, Robert Moses) without having any actual ideas about them. All you have to do is write about them, and after a while you doesn’t even have to do that. One of the results is large numbers of high-status mediocrities who’ve never really done or contributed much and who, like the I-want-out committee member described, typically find their reputations slipping by late middle age and mercifully don’t get to see them disappear posthumously. Other results: dull papers in dull journals, both with microscopic readerships; ditto for dull books published by dull university presses; vacuous presentations at conferences; a general sense that almost anything is good enough for academic work if only it is sufficiently pedantic or obscure; and ceremonial for-wider-consumption overpraise for ordinary work (“This pathbreaking idea,” when no one can credibly tell you what the idea is, much less what the new path is or what old path it supplants.) 

I’m sure others can add further items, but that seems like enough from me for the day.

Let me say one nice thing about my place--I think the profs here really like our students.  It is certainly part of the culture for faculty to spend time with students (and not just Ph.D. students).  The students here are also pretty easy to like--while there is certainly variation in intellectual capacity and work ethic, the students here seem happy to be here, and I hear very little whining.    

Why do lenders and borrowers do things like this?

I was talking with a real estate broker today about the process of short sales, and why they are so difficult to do, and she told me a rather sad (and she said typical) story.  A borrower in Compton had an $800,000 mortgage, and was about to close a short sale for $170,000.

Everything was all set to go, when the lender told the borrower that if she didn't sell, she would get a modification.  The borrower in the end did not sign off on the short sale; she never did get the modification, and was foreclosed on 60 days later.  Both the borrower and the lender would have been better off had the short sale happened--the borrower's credit history would have taken a smaller hit, while the lender would almost surely recover more money.

A Painting by Morgan Green

Could Ted afford his apartment? Probably not.

In the movie Ted (one that I am embarrassed to say I rather liked), Ted has a minimum wage job as a checker.  In Massachusetts, that means he makes $8 an hour, or around $1360 a month (I assume 4.25 weeks per month and no overtime). 

His apartment in Boston is pretty bad, so I am going to put it at the 25th percentile of the rent distribution, which puts it at around $750 per month.  This means Ted is spending far more than  half his money on his apartment (so I am not sure where he is getting his, ahem, beer money from).

Jonathan Haskel, Robert Z. Lawrence, Edward E. Leamer, and Matthew J. Slaughter on Globalization and Wages

Read the whole thing.  Here is the conclusion:

We hope that readers will take from our paper three main conclusions about  the recent trends in U.S. real and relative incomes. First, to date there is little evidence that globalization through the classic channel of international trade in goods, intermediates, and services has been raising inequality between more-skilled goods, intermediates, and services has been raising inequality between more-skilled and less-skilled workers. Second, there is at least suggestive evidence that globalization has been boosting the real and relative earnings of superstars. The usual trade mechanisms probably have not done this, but other globalization channels—in particular, the combination of greater tradability of services and larger market sizes abroad—may be playing an important role.  Third, our analysis sheds new light on the sobering fact of pervasive real-income declines for the large majority of Americans in the past decade.  These real-income declines may be part of the same globalization and innovation forces shaping returns to superstars and to capital.  

These conclusions must be placed in the proper context, which is  “there is so much more we need to know from future research.”  A good deal of recent empirical work investigates the effects of trade on the adjustment process of particular workers, occupations, and industries (which simple models ignore), and documents workers, occupations, and industries (which simple models ignore), and documents (the sometimes long-lasting) adverse effects.  Our goal here, however, has been to advance some basic models describing the economywide evolution of, for example, widespread real-wage declines but rising earnings of superstars.  Of course, future research will hopefully explore not only the experience of the United States but that of many other countries as well—both developed and developing.  

For superstars, we do not yet fully understand product prices in sectors that employ superstars relatively intensively. This is both because existing industry data do not distinguish highly talented individuals well (if at all), and because many of the sectors in which we presume superstars are concentrated  consulting, athletics, and entertainment do not have reliable data on product prices (or much else). Nor do we have good data on personal attributes that make individuals potential superstars.  We suspect that for at least some of these superstar intensive industries, globalization has played an important role in boosting demand  for their services—both via the information technology revolution reducing their natural trade costs and thus boosting their tradability, and via fast economic growth around the world boosting demand for their services. But these conjectures await  additional analysis. 

With regard to the sobering falls in real income for the large majority of Americans, our framework does add some new insights.  We agree with Autor (2010a) that explaining falling real income for so many American workers remains a daunting empirical challenge. Much research to date has focused on income inequality, not income levels. We argue that this focus should change, because the post-2000 real-income declines are pervasive, new, and troubling. Our enriched trade framework offers some possible explanations for how globalization and/or innovation work offers some possible explanations for how globalization and/or innovation can boost superstar real earnings yet reduce real earnings of so many others.

 The last paragraph is particularly, as the author's say, sobering.  But it also suggests that the outsourcing debate is more or less irrelevant--I doubt that China and India (other than Bollywood) are much in the superstar business yet.

How Los Angeles works better than you think

One of the keys to maintaining one's sanity when living in LA is to know how and when to avoid freeways.  When the 110 runs clear, it takes about 15 minutes to drive from my house to USC; when it is clogged, it can take an hour.  But that is OK, because I have a (largely) non-freeway route home that takes at most 35 minutes.

One of the reasons surface streets (outside of the West Side) in most of Los Angeles run pretty well, even at rush hour, is that 90 percent of the traffic lights in LA are synced.  By the end of the year, all lights will be synced.  As a conseqeunce, despite its traffic, in most parts of LA, one needs to wait for only one light cycle to get through an intersection.  Again, this is usually even true on downtown streets during rush hour.

The cost of syncing all the lights in Los Angeles will come to $350,000,000.  Let's do a back-of-the-envelope here.  If syncing saves the average Angelino (there are 4 million) even one minute per day, and time is worth $15 per hour, syncing basically pays for itself within a year.  That is government spending everyone should be happy supporting.

Those who own their houses with equity also get a tax break.

Matthew Yglesias, who wrote a terrific piece on the benefits of off-shoring yesterday, also wrote a piece on why Mark Zuckerberg has a mortgage:

Bloomberg writes that "wealthy individuals often choose to finance a home purchase rather than pay cash because of the overall low cost of mortgage debt and the additional access to liquidity," which is true but I think only scratches the surface. Another important issue is that interest payments are tax deductible, which is a very big deal if you have a very high income and live in a high-tax state like California.

But owning with equity gives the same tax break as owning with debt--the return one earns on her house (the rent she pays herself) go untaxed. Consider the following experiment: suppose you and your neighbor own your houses free-and-clear. Now you swap houses and charge each other market rent--you are now responsible for paying income taxes on that rent. The value of the tax break by staying in your own home is your marginal tax rate multiplied your return on equity. The return on equity is generally called net imputed rent.

The mortgage interest deduction places debt and equity on a level playing field when it comes to homeownership. Thus the many countries without a mortgage interest deduction, such as the UK, Canada, and Australia, still subsidize owner housing--they simply encourage people to own with equity instead of debt. This may be a very good idea.

What would game theory say about LIBOR?

On days like to day, I wish I were a game theorist.  The I could figure out what a Nash game would predict about LIBOR reporting, and how that would vary from honest reporting.

The rules of the game are well set out and mostly symmetric, although it is the mostly part that creates a problem.  Suppose there are N reporters and the LIBOR that is produced is based on the interquartile mean of what is reported.  Each bank is then seeking to maximize some objective function that depends on that interquartile mean, over which it has some influence.  If all banks have the same objective function, then symmetry will mean they all choose the same rate, which is not particularly interesting.

But each individual bank is gets some draw from a distribution, that it turn determines its optimal play.  This will produce heterogeneity in rates chosen.  Alas, I am not good enough at math to go any further than that...

[update: found a paper that does the exercise here.]  

Let's push 15 year refinances.

If someone refinances a 30 year 6 percent mortgage (with 27 years of payments left on it) into a 15 year 2.86 percent mortgage, the payment goes up by 10 percent, which is not nothing.  But within 5 years, more than 25 percent of the principal  on the 15 year mortgage is paid down.  For those who can afford the payment, this would largely solve the underwater mortgage problem.

Three reasons not to be crazy about hypothesis tests

(1)  With large samples, unimportant treatments can be "statistically significant."  If we precisely measure that a treatment has an influence of .00001 percent on an outcome, the treatment can appear significant, while not really mattering very much.

(2) Relying on hypothesis tests produces publication bias.  Suppose 20 different researchers run one regression each, but use different samples (I will assume they are independently drawn).  They are all examining a particular treatment effect--say the impact of divorce on child outcomes.  If one measures significance at p < .05, there is around a 65 percent chance that one regression will produce a "significant" coefficient, simply because of the random aspects of the coefficients.  The researcher who gets the "significant" coefficient is more likely to get her results published than those who do not.

(3) The fact that we don't generally do randomized trials on things like marital status means it is hard to draw inferences about the non-treated group based on those who are in the treated group.  In what may be my favorite book on applied social science work, Manski shows that the confidence intervals one should develop are much broader than those that are typically used.  His work also suggests that applying hypothesis tests in the social sciences is really problematic.  This is consistent with the theme that sometimes we can draw better conclusions from plots than test statistics.

To a large extent, one could deal with (1) and (2) by reporting Box-and-Whiskers plots of coefficient estimates across studies.  Dealing with (3) is much harder.

Mark Thoma reminds me of something Art Goldberger taught me: R-squared is over-rated

Mark posts a letter from Stephen Ziliak:

The chief finding of the Soyer-Hogarth experiment is that the expert econometricians themselves—our best number crunchers—make better predictions when only graphical information—such as a scatter plot and theoretical linear regression line—is provided to them. Give them t-statistics and fits of R-squared for the same data and regression model and their forecasting ability declines. Give them only t-statistics and fits of R-squared and predictions fall from bad to worse.

It’s a finding that hits you between the eyes, or should. R-squared, the primary indicator of model fit, and t-statistic, the primary indicator of coefficient fit, are in the leading journals of economics - such as the AER, QJE, JPE, and RES - evidently doing more harm than good.

This reminds me of Art Goldberger's teaching in Econ 612.  After I took that class, he turned his class notes into a book.  From page 177:

From our perspective, R2 has a very modest role in regression analysis, being a measure of the goodness of fit of a sample of LS (least squares) linear regression in a body of data.  Nothing in the CR (classical regression) model requires R2 to be high.  Hence a high R2 is not evidence in favor of the model, and a low R2 is not evidence against it...

...In fact, the most important thing about R2 is that is is not important in the CR model.  The CR model is concerend with parameters in a population, not with the goodness of fit within the sample. 

I also remember Gary Chamberlain was not crazy about t-statistics--he said he didn't want to see any "damn stars" in our papers.  We should care more about confidence intervals than hypothesis tests. 

The practical problem with San Bernardino County using eminent domain to acquire mortgages.

Joe Nocera writes about Housings Last Chance?

As for fair value, since the home has dropped dramatically in value, the mortgage is worth a lot less than its face value. On Wall Street, in fact, traders are buying securitized mortgage bonds at a steep discount — reflecting the true value of the mortgages they’re buying. Yet the homeowner remains saddled with a mortgage that is unrealistically high. The plan calls for the county to buy mortgages at a steep, but fair, discount to its face value, and then to offer the homeowner a new mortgage that reflects much, though not all, of that discount. (Fees and costs would be paid for by the spread.) The money to buy the mortgages would come from investors; indeed, Mortgage Resolution Partners is in the process of raising money...

But if the county effectively originates mortgages that are more valuable than the amount it pays to investors in eminent domain proceedings, it is hard to see how it is paying fair value.  I don't know how this works without the county losing money--the value of what the county buys has to be equal to the value of what it sells, but it will also be taking on a bunch of fees, legal and otherwise.

If the threat of eminent domain gets lenders to modify more loans, the threat could produce a better outcome.  But eminent domain itself...

Tiebout sure knew what he was writing about

I went to my 35th high school reunion last weekend, in La Crosse, Wisconsin.  It was very pleasant--people were very nice.  But a large number of my classmates were puzzled that I enjoyed living in Los Angeles (OK, Pasadena)--they figured that I lived there only because I had to for my job.  I had to assure them that beyond weather, LA had many attributes that I liked, including the fact that it is a large city.  (I also like the mountains, the ocean, the food, the music, and the wide variety of people).

On the other hand, I always figured that people stayed in La Crosse because of family ties.  While it is a lovely place (it is on a stunning spot on the Mississippi River), it is, well, small, and pretty homogeneous.  It was quite clear to me, however, that the people who stayed there generally enjoyed living there. 

And so we sort.  Having lots of variation in cities almost certainly allows people to be happier, as they (often) find or stay in the place that best suits them. 

Let me finish the post with a picture of a sign one will certainly not see in Los Angeles.

I am glad I do not live in a battleground state

Because national election results in California are pretty much a foregone conclusion, we don't get too much in the way of campaign advertising at this time of year.

I am in Wisconsin at the moment, however, and the airways here are already flooded. The quality of the "discourse" is disgusting. I am not surprised at being appalled at the xenophobic anti-Chinese Koch brothers stuff, but I was also appalled at the xenophobic anti-Chinese stuff being run by Tammy Baldwin. She should know better.

Marlon Boarnet on his Wal-mart study

He tells me:

WalMart wages were very difficult to get, but we found nothing to indicate that WalMart adjusted wages by cost of living. So if the article did not make it clear, the comparison is the wage gap if WalMart entered the Bay Area paying their nationally prevailing wage. We focused on benefits because a lot of the compensation gap was benefits, and assuming WalMart would enter Bay Area with their national prevailing benefits policy seemed even more reasonable.

and

On my re-read, we handled [whether comparing Wal-mart wages to SF wages was ok] on p. 441 and footnote 10. 

The part that is amazing to me now, and was evident then, is that half the gap was benefits. I wonder how much of this issue is attenuated with Obamacare?

More to come.

Yes, wages at Wal-mart are awful.

My colleague Marlon Boarnet and co-authors show that they are: in the Bay Area, Wal-mart grocery workers' total compensation is a little over half the compensation of unionized workers (Table 4).  Wal-mart also initially offers grocery costs that are between 8 and 20 percent lower than the stores with which they compete, and lead other stores to reduce their prices by 5 to 13 percent (Table 2).

I am prepared to accept the argument that higher wages are more important than lower grocery prices, although it is not an overwhelming argument to me.  Nevertheless, there are good reason reasons not to like Wal-mart (which is one of the reasons I don't shop there).

On the other hand, it makes no sense to me to bundle a bunch of weak arguments with a strong one, and yet that is what anti-Wal-mart activists often do.  And zoning should be zoning--if one entity has the right to use land for a particular use, others should as well, whether they are liked or not.

 

Some evidence of the decline of civilization

Many years ago, I watched the Today Show on a regular basis.  I hadn't watched it at all for years, however, until a day a few months ago when I was so sick that all I wanted to do was watch TV.  I turned on the Today Show, and it was absolutely awful.

This morning, I read this:

NBC News chief Steve Capus candidly told THR that he thought Curry had not been right for the job in many respects. He said he agreed with interviewer Marisa Guthrie that Curry had faltered in the cooking segments, movie star interviews and fluffy features that make up a large portion of "Today." 

"I think her real passion is built around reporting on international stories," he said. "It’s tough to convey a sincere interest in something if you don’t possess it ... and you could tell with her, you can tell with any anchor, whether they’re into it or not. And I think we’ve now come up with a role that will play to her strengths.”

What I essentially learned, then, is that Ann Curry got fired for being too serious and too smart. I guess the good news is that NPR gets good ratings. (OTOH, the top two on the list are further evidence of civilization's decline).