Worth Reading: John DiNardo's piece on Freakonomics in the Newest JEL

The piece is very rich, and combines rigor with bon mots. My favorite: "This is not to deny that simple economic models can be put to good use, but economic theory--whatever it is--shouldn't be epistemologically privileged."

Michael Carliner has a Blog

It is here.

The Most Recent Case-Shiller data just came in

I decided to do the following exercise. Let us assume that house prices where fundamentally correct at the end of 2002 (I actually think this to be true), and four percent house price growth per annum is sustainable over the long run. Then how much would prices have to change from where they are now to get to the four percent growth path?

Here is what you get:

Phoenix -26.7%
Los Angeles -27.0%
San Diego -9.8%
San Francisco -11.7%
Denver 13.9%
Washington DC -20.9%
Miami -26.5%
Tampa -20.3%
Atlanta 6.5%
Chicago -4.6%
Boston 6.7%
Detroit 33.5%
Minneapolis 6.3%
Charlotte -1.3%
Las Vegas -26.5%
New York -12.5%
Cleveland 18.3%
Portland -24.7%
Dallas 13.2%
Seattle -24.7%

This says Denver, Atlanta and Minneapolis are OK, and Chicago is close to OK. Boston was probably overpriced in 2002 (see my paper with Chang and Cutts), but I find it plausible that it is near bottom, because it started its downturn before other markets. Four percent nominal growth is not in the cards for Detroit and Cleveland, and Dallas has never had a lot of house price growth, so don't get excited about their positive numbers. Florida, Las Vegas, Los Angeles and Washington appear to have a way to go (although Washington and LA are very fragmented, a point I will get to in another post). I am not sure whether the Pacific Northwest is seriously overpriced, or whether it, like San Francisco, can sustain higher house price growth than the rest of the country.

Peter Orszag on Mortgages

His testimony is here.

The following is particularly important:

Many of the losses in housing markets cannot be avoided because they are the result of lax credit standards and otherwise excessive underpriced risk taking in the past. Policymakers cannot undo all those losses, and attempting to do so would reward the excessive risk taking, which could encourage excessive risk taking in the future, and shift the losses from borrowers and lenders to taxpayers.

A possible role for policymakers is to help the housing and mortgage markets cope with the aftereffects of the end of the housing boom. Some actions (described below) have already been taken.38 Policymakers may consider other proposals for helping mortgage markets overcome impediments to changing terms of troubled mortgage loans, which could both reduce lenders’ losses and help homeowners. Policymakers may also consider increasing opportunities for subprime borrowers to refinance mortgage loans. Both actions would help avoid foreclosures, eliminating one source of downward pressure on house prices. Finally, policymakers might be able to help stabilize the subprime mortgage market by establishing or empowering an agency to buy subprime loans. Such an option, however, could significantly shift mortgage losses from current lenders and investors to taxpayers.

Important factors to note, however, are that house prices are likely to fall farther before the housing correction is complete and that misguided policies can make matters worse. Policies that work against the market’s necessary adjustments may delay the recovery of financial markets and impair the pace of economic activity. One example is the forbearance policy of Japanese bank regulators during Japan’s recession of the 1990s. By allowing Japanese banks to delay recognizing losses on real estate and other loans after Japan’s real estate boom ended in 1990, the policy helped delay the recovery of Japan’s banks.

A Tiny Glimmer in the New Home Sales Figures

The median price of new homes was down 10 percent in 2007. CPI grew by 4.1 percent, meaning that the real price of new homes declined by about 13.5 percent. This is remarkable adjustment speed for the new housing market. Moreover, with 5.5 percent mortgage rates, the median price of new houses ($215,000) is affordable to a substantial number of those in the market for new (as opposed to used) houses. Look at it this way--the after tax user cost of a median priced new house is now around $1276 per month (assume a 25 percent state and federal marginal tax rate, one percent property tax rate, two percent for depreciation and maintenance and NO nominal appreciation). I think that even in affordable markets, it would be difficult to rent a new house for $1276 per month.

I am not saying we have hit bottom yet, and some markets (Florida, the California Inland Empire) have some further price declines ahead, but I am just a little optimistic for the first time in awhile.

Extending the Orange Line to Dulles

Washington is abuzz because the Federal Government looks like it will refuse to sign off on funding for an extension of the Orange Line (the Metro line that goes west into Virginia) to Dulles airport. While there are legitimate issues about the lack of transparency in how the Federal Transit Adminstration made its decision, it almost certainly made the correct decision.

Heavy rail is not a good transporation option in the absence of high levels of density. John Kain showed years ago that inapporpriate heavy rail cannibalizes funding for other forms of transit, and tends to reduce public transportation ridership.

A rail line to Dulles is particularly inappropriate because there is already a dedicated four-lane highway to Dulles--a highway that is vitually never congested. This means a viable public transportation option--nice express buses that run frequently--could be put into place at relatively little expense. The problem now is that the buses don't run frequently enough to enough places, and so they are not an attractive option relative to driving. But $5 billion (the cost of the proposed extension) placed in treasury securities could fund an awfully large number of bus routes.

I am actually a little more sympathetic to heavy rail than was Kain--I am not sure his work captured all the general equilibrium benefits of rail under certain circumstances. But I am pretty sure that the proposed extension to Dulles is economically a non-starter.

Perhaps the Most Important Item in the Stimulus Package

The package proposes raising the conforming loan limit (the largest loan amount eligible for Fannie/Freddie purchase) by as much as 75 percent in some markets. The current jumbo-conforming spreads in Washington are here.

A person with a $500,000 mortgage would find an extra $4,000-$5,000 in her pocket before tax if she could refinance out of a recent jumbo into a conforming mortgage. This is much larger than the proposed tax rebate, and would also be permanent. The downside for consumption is that investors in jumbo loans would see their investment incomes fall, but still...

This is an amazing bunch of high school kids

I just happened to run across the Munch Brahms 4 yesterday (as I noted in this space), and it brought back memories of high school summers spent at Interlochen, where I learned I was much better at thinking about music (I even got to give a lecture on Mahler's 3rd in Milton Hehr's music history class) than I was at playing music. Alas, music is far more about playing than thinking.

Anyway, I looked up their web site tonight, and found this.
Given that the players range in age from 14-17, this is amazing. In fact, one needn't make much allowance for age at all.

Jeffrey Zax on being a Section Leader

This is excellent. It is from Brad Delong's site, and it is here.

One other thing from the Prof's point of view. New assistant professors are much more tooled up than older professors like me, and then (rightly) want to teach the latest and greatest knowledge. But it has been true for me that as I have grown older, my knowledge of what I teach has grown deeper (at least I hope so), which in turn has enabled me to make points in class that I could not have made when I started (again, at least I hope so).

To really appreciate Brahms 4

Read the chapter on its first movement in Bernstein's the Infinite Variety of Music. His description of the second subject as "the great German tango" alone makes the chapter worth reading. And thanks to that chapter (as well as the obsession described below), I have every note of the piece burned into my brain. For me the first sign of dementia will be when I start losing that piece.

A record I was obsessed with

The Charles Munch, Boston Symphony recording of Brahms 4th on RCA (shaded dog). I listened to this in the Interlochen music library over and over when I was a teenager. I still remember that catalog number: S-160. I bought my own copy in a used record store in LA (at Highland and Hollywood, I think) some years ago. The CD is now available on ebay. Buy it--you won't regret it.

Ralph Turvey on the Owner Occupied Housing Component of CPI

I heard a great talk the other day on how difficult it is to measure the owner-occupied housing component of CPI. This is not merely a technical point, as it makes up about 20 percent of the index.

Before the early 1980s, the owner-occupied housing component was measured as the user cost of housing: that is, the value of the housing stock multiplied by an appropriate rate of return plus depreciation and maintenance net of expected appreciation. This measure had the problem of being exceedingly volatile, in contrast to rents, which are not. So beginning in the 1980s, households were simply asked what they thought was the level of rent that their house would command. So how many of you out there know what your house would rent for, and by how much it would change each year? I thought so.

Turvey's point is that we have a major component of the CPI that is not directly observed in any market, and that this creates some serious issues as we try to figure out real incomes. He suggested looking at the cost of new houses, but this of course has the problem that (1) new houses are not very representative of the stock and (2) are in very different locations from the general stock. The problem remains in search of a solution.

I'm on Matthew Kahn's side on this

Matthews cites Ed Mill's negative review of his own book, Green Cities, here:

In his defense of his own book, Matthew makes the point that if economists fail to engage environmentalists rhetorically, they will be ineffective. But I think there is a more important point that Mills (who is, indeed, a giant in our area) misses: that environmentalists are able to advance policies that are demonstrably damaging to the environment (such as fixed railed transit systems in low density cities, land use regulation that effectively decreases density, and an at times antediluvian hostility toward urban development) because economists have so little credibility with the general public on environmental matters. Matthew's life work has been about combining credible economics with credible environmentalism. For that, reviewers, no matter how influential, should be grateful.

A 75 basis point cut

I think the European Central Bank needs to follow quickly, lest a further deterioratng dollar worsens inflationary expectations even more...

David Crowe estimates that the steady state demand for new housing units is 1.9 million

New construction is now at about 1 million a year, so inventory should be whittled down by about 900,000 units this year. This will get us about 1/4 of the way back to housing market equilibrium.

David Austin of the CBO has a study on the impact of Gas Prices on Driving Habits

It is here:

http://www.cbo.gov/ftpdocs/88xx/doc8893/01-14-GasolinePrices.pdf

The study finds that price effects on consumption and vehicle choice are small. This suggests that gas taxes fare poorly as a Pigou Tax--a tax put in place to cure an externality--but perform well as a Ramsey tax--a tax that doesn't distort behavior.

A policy that has made sense to me for a long time is one that would use higher gas taxes (which are salubrious whether Pigou or Ramsey) to fund lowering the payroll tax. Lowering the payroll tax would stimulate spending and encourage workers to work and hirers to hire. It does decouple Social Security Revenue from Spending, and as such creates political problems, but still..

Menzie Chinn has a nice Primer on Fiscal Stimulus

It is here:

http://www.econbrowser.com/archives/2008/01/a_textbook_anal.html

Different CPI's for Different Income Categories Again

I did a little experiment. I took the consumer expenditure survey data on expenditure shares for 2006 by income quintile, and lined them up as best I could with CPI categories. The match is not perfect, but pretty close: I was able to replicate CPI growth between November of 2006 to November 2007 within about a tenth of a percentage point. It turns out that for that period, those in the lowest quintile had slightly lower than average CPI growth (yes, it surprised me too). The reason is that housing costs over the past year have risen by less than CPI, and low income people spend disproportionately large amounts on housing.

My estimates:

CPI growth by Quintile relative to overall CPI growth, Nov '06-Nov '07.

Lowest 20% -.128%
Second Lowest .174%
Middle Quint .017%
Second Highest -0.017%
Highest 20% -0.094%

Someone out there should do this carefully--I would be happy to share my spreadsheet. It appears to be less of a big deal than I originally thought.

How appealing is the US Economy?

Paul Krugman this morning comments that Europe is doing fine just relative to the United States, and that is certainly true. Nevertheless, it occurs to me that a seldom mention measure of economic success might be net migration rates. One can get such rates from Nationmaster.

The top 50 countries in the World in net migration per capita are:


Rank Countries Amount (top to bottom)
#1 Liberia: 26.86 migrant(s)/1,000 populati
#2 United Arab Emirates: 26.04 migrant(s)/1,000 populati
#3 Cayman Islands: 17.34 migrant(s)/1,000 populati
#4 Kuwait: 16.05 migrant(s)/1,000 populati
#5 Qatar: 13.12 migrant(s)/1,000 populati
#6 San Marino: 10.57 migrant(s)/1,000 populati
#7 Aruba: 10 migrant(s)/1,000 populati
#8 Turks and Caicos Islands: 9.98 migrant(s)/1,000 populati
#9 Bosnia and Herzegovina: 9.65 migrant(s)/1,000 populati
#10 British Virgin Islands: 8.83 migrant(s)/1,000 populati
#11 Luxembourg: 8.64 migrant(s)/1,000 populati
#12 Singapore: 7.98 migrant(s)/1,000 populati
#13 Monaco: 7.65 migrant(s)/1,000 populati
#14 Northern Mariana Islands: 7.64 migrant(s)/1,000 populati
#15 Burundi: 7.13 migrant(s)/1,000 populati
#16 Andorra: 6.42 migrant(s)/1,000 populati
#17 Jordan: 6.11 migrant(s)/1,000 populati
#18 Canada: 5.79 migrant(s)/1,000 populati
#19 Botswana: 5.49 migrant(s)/1,000 populati
#20 Man, Isle of: 5.27 migrant(s)/1,000 populati
#21 Anguilla: 5.12 migrant(s)/1,000 populati
#22 Ireland: 4.82 migrant(s)/1,000 populati
#23 Liechtenstein: 4.73 migrant(s)/1,000 populati
#24 Hong Kong: 4.72 migrant(s)/1,000 populati
#25 Macau: 4.42 migrant(s)/1,000 populati
#26 Guernsey: 3.81 migrant(s)/1,000 populati
#27 Australia: 3.78 migrant(s)/1,000 populati
#28 New Zealand: 3.43 migrant(s)/1,000 populati
#29 Mayotte: 3.35 migrant(s)/1,000 populati
#30 Portugal: 3.31 migrant(s)/1,000 populati
#31 United States: 3.05 migrant(s)/1,000 populati
#32 French Polynesia: 2.81 migrant(s)/1,000 populati
#33 Brunei: 2.79 migrant(s)/1,000 populati
#34 Jersey: 2.74 migrant(s)/1,000 populati
#35 West Bank: 2.71 migrant(s)/1,000 populati
#36 Switzerland: 2.66 migrant(s)/1,000 populati
#37 Netherlands: 2.63 migrant(s)/1,000 populati
#38 Denmark: 2.5 migrant(s)/1,000 populati
#39 Rwanda: 2.41 migrant(s)/1,000 populati
#40 Greece: 2.34 migrant(s)/1,000 populati
#41 Bermuda: 2.34 migrant(s)/1,000 populati
#42 Germany: 2.18 migrant(s)/1,000 populati
#43 United Kingdom: 2.17 migrant(s)/1,000 populati
#44 Angola: 2.14 migrant(s)/1,000 populati
#45 Italy: 2.06 migrant(s)/1,000 populati
#46 Malta: 2.04 migrant(s)/1,000 populati
#47 Austria: 1.91 migrant(s)/1,000 populati
#48 Norway: 1.72 migrant(s)/1,000 populati
#49 Sweden: 1.66 migrant(s)/1,000 populati
#50 Croatia: 1.58 migrant(s)/1,000 populati

Note that the US is only 31st, and that Canada and Australia, two countries with lower incomes, have high net migration rates (although they also have more liberal immigration policies). Only one country of any size in Europe, Portugal, has higher net migration than the US, and it ranks only one place ahead. Migration to Germany, the UK and Italy are about 2/3rds the rate of the US.

I would not make too much of this, but it is an interesting indicator.

The Wall Street Journal loves the word "roils"

The paper has used it 16 times in January. I don't know that I use the word once a year.