I host a podcast.

It's a chat about Robert Galbraith's Career of Evil.  Panelists Lisa Schweitzer and Aubrey Hicks made is work.

Eight double spaced pages that might change the world.

Geoffrey Heal computes the cost of going entirely to renewables by the year 2050.  The paper is short and to the point.  His computations are:

US GDP is currently a shade under $20 trillion.  If Heal is correct, this means the cost of going to all renewables is ~ 11 basis points per year over the next 31 years.  It is hard to imagine that the negative externalities of fossil fuel are less than 11 bps.  Heal also argues that costs will, if anything, be lower than the computed costs.

Imagine--it is possible to stop greenhouse gas emission while improving the economy.  

Shopping

I just had a major home repair that illustrated (1) that law of one price doesn't always hold and (2) people should shop for expensive things.

The expensive thing was a new roof on my vintage 1911 house.  That the place needed a new roof (including a tear-off of the old roof) was not a question. 

I call up a handyman I know and like, and I got a quote of X.  His work is good, but it turns out he is not bonded and doesn't always see the need for permits.  So I decided to investigate further.

I call up roofing company A, and I get a quote of 3X.  But, as the salesman told me, "if I act now!" The price would be 2.5X.  I passed.

I call up roofing company B, and I get a quote of 2X.  I think I may be stuck with this, but I decide to call one more.

Company C gives me a price of 1.1X, with bonding and permitting included.  The new roof is beautiful too (and uses the same shingles offered by A and B).  It was very much worth the bother of shopping.

So roof shopping is like car shopping, mattress shopping and mortgage shopping--some people selling the products take advantage of the fact that there are people who don't have the ability to fend for themselves.  The sad thing is that those least able to afford absurd mark-ups are those most victimized by those mark-ups.  And that is why we need consumer protection.

Is the increasing cost of housing about productivity?

Construction productivity has long lagged productivity in other sectors.  For example, a McKinsey report has manufacturing productivity in several OECD countries increasing by 70 percent, while construction productivity has been flat.

Microeconomic theory holds that in a competitive economy, in equilibrium, the Marginal Rate of Physical Transformation between goods must equal the Marginal Rate of Substitution (that is, the tradeoff on the production side must equal the trade-off on the consumption side).  Prices equilibrate both.  So let's say in the case above, one could in 1994 trade one house for one bundle of manufactured products. By 2012, one could trade one house for 1.7 bundles.  For this to equilibrate, this means that the price of housing must rise to 1.7X the price of manufactured goods.  This might, in the end, lead people to consumer more housing (because increasing productivity in the manufacturing sector could raise incomes), or less housing (because its relative cost is housing).

The world is more complicated than this--for example, we have not seen overall productivity spill over anything like completely into wages.  But if you wonder why the rent is to damn high, the productivity story could well be a large part of the reason. 

What is it about LA?

Cities will make the following deal with developers: we'll give you more density, if you provide units that are deed restricted to be "permanently affordable," meaning will have rents below some ceiling that is tied to area median income.

I have now talked to developers who say the deal works in Seattle and New York, but not in Los Angeles, because city governments around LA specify so much of what must be done during the development process.

This argues (again) for the need for performance based regulation.  For instance, when the EPA requires auto makers to have a minimum MPG for their fleet, it doesn't tell the auto makers how to get there--it just says, "get there."  

Housing really is harder to afford

I have enjoyed reading Michael Kinsley's stuff for as long as I can remember.  The problem is that he inspired a group of young people to value cleverness and contrariness, and so we get stuff like Kevin Drum in Mother Jones saying that housing costs are not rising at an alarming rate.

Allow me to present two pictures (and again, let me acknowledge the people at IPUMS for making it easy to use census and American Community Survey Data).  The first is median rent to median renter income for about 225 MSAs in 2000.

The next is the same picture, but for 2016.

Notice how in 2000,  in the vast majority of MSAs, the median renter would spend less than 30 percent of income on the median rental unit.  By 2016, that had reversed: the median income renter pays more than 30 percent of income in rent in the majority of cities.  And while the 30 percent number is somewhat arbitrary, that fact that rents relative to incomes rose nearly everywhere is not.  It is easy to see why renters are upset.

Joel Kotkin, Housing Affordability, and the Fringe

Joel Kotkin notes quite correctly that housing is expensive relative to incomes in California--he is certainly not alone in this view.  His cure for this particular illness--make it easier to develop on California's metropolitan fringe.

At first glance, he has a point.  The median price of a house in Banning, California (which I think counts as the fringe), is $257,000, which seems pretty affordable.  Here is where Banning is:

There is not a lot of, um, public transit available in Banning.  The nearest job centers are in Riverside and Palm Springs, which are 31 and 23 miles away.  Riverside has about 170,000 jobs; Palm Springs has about 26,000 jobs.  So let's say average distance to jobs is about 30 miles.

What are the implications of this for affordability?  First, the cost of driving is, according to the Federal Government, about 58 cents per mile.  This means driving cost is about $35 per day.  Let's say people can work from home one day a week, so they drive to work 16 days per month.  Living in Banning adds $560 per month relative to living next to a job.

Now let's say you're a parent and need to pay for daycare.  As best as I can tell searching daycare websites, the least expensive late afternoon care costs about $8 per hour (feel free to correct me if I have this wrong).  Assuming an afternoon drive of 45 minutes to Banning, that is another $128 per month per kid.

We have now added $688 per month for a household with one young child in living costs by living at the fringe.  At a 4 percent interest rate, this "payment" translates into a $144,000 mortgage--that $260k house is similar in cost to a $400K house near jobs.

Note I haven't taken into account the opportunity cost of time, and I am only talking abou private costs.  Surely there are social costs to having people drive longer distances--particularly with respect to greenhouse gas emissions. 

Where are the half-million units?

One of the many useful things the people at the St. Louis Fed do is maintain the FRED page, which has a cornucopia of economic data that is easy to download and graph.   Tonight I just happened to be curious about this picture:

The red line is permitted housing units; the blue line is completed unit.  Let's assume that there is a lag of one year between permitting and completion (the length of the time series means that any reasonable lag assumption should be innocuous.  If we look at permits going back to 1967 and ending one year ago, we find that slightly more units were completed than permitted (this is OK, because small places do not necessarily report building permit data to the Commerce Department).  But since 2008, about 500,000 fewer units have been completed than permitted.  This is about a six percent melt from permitting to completion.

So the question is: why?  Very curious about this.

E.B. White on the definition of democracy (h/t Leslie Appleton-Young)

E.B. White in the New Yorker in 1943:

We received a letter from the Writers’ War Board the other day asking for a statement on “The Meaning of Democracy.” It presumably is our duty to comply with such a request, and it is certainly our pleasure.

Surely the Board knows what democracy is. It is the line that forms on the right. It is the don’t in don’t shove. It is the hole in the stuffed shirt through which the sawdust slowly trickles; it is the dent in the high hat. Democracy is the recurrent suspicion that more than half of the people are right more than half of the time. It is the feeling of privacy in the voting booths, the feeling of communion in the libraries, the feeling of vitality everywhere. Democracy is a letter to the editor. Democracy is the score at the beginning of the ninth. It is an idea which hasn’t been disproved yet, a song the words of which have not gone bad. It’s the mustard on the hot dog and the cream in the rationed coffee. Democracy is a request from a War Board, in the middle of a morning in the middle of a war, wanting to know what democracy is.

Lots of folks over 65 are spending a lot on housing.

The Census has a nice tool that allows one to map American Community Survey data by counties (at least counties with sufficient population to develop estimates based on samples).  I drew two today.  This first one is the share of those renters over the age of 65 who pay more than 30 percent of their income on rent.

The second one is the share of those owners over the age of 65 who spend more than 30 percent of their income on homeowning.

The picture for elderly renters is pretty grim: in most counties that are mapped 45 percent or more are spending more than 30 percent of their income on rent.  So one may take a small amount of comfort in the fact that the 78 percent of those over 65 are homeowners.  But in the median county mapped here,  a quarter of those over the age of 65 pay more than 30 percent on housing cost.  This is because such people have either not paid off their mortgage, or have high property taxes.

Altogether, about 55 percent of those 22 percent of the 65+ households who rent pay more than 30 percent of their income in rent, and 26 percent of the 78 percent who own pay more.  This means nearly 1/3 of those over the age of 65 live in an unaffordable house.

It is hard to imagine things getting better.  The old population is growing quickly--the very old population is growing even more quickly.  As people age, their incomes fall, so absent falling housing costs, the share that will be pressured by housing costs will increase in the years to come.