The dilemma of classical music

Thanks to the urging of my daughters, I went to see Modest Mouse in Anaheim on Saturday. They were very good, and I had a lot of fun.

Two things I care about are demographics and music. The only genre music I don't like is country-western (although I like Willie Nelson). At Modest Mouse's show at the Grove of Anaheim, I was (I would guess) in the top decile of the age distribution. When I saw Jethro Tull at the Greek last year, I was about median. When I see the LA Phil (or any other symphony orchestra), I am in the bottom decile (or at least quintile). I worry about its audience dieing.

I am convinced that part of the problem is that when one goes to hear classical music, he is expected to keep a stick up his butt. Yet classical music is full of dances. Bach wrote loads of Gigues, Sarabandes and Courantes; Wagner called Beethoven's 7th "the apotheosis of the dance;" Stravinsky's music was commissioned by Diagolev.

So maybe classical music concerts need to change so that people can move while listening. But as Jan Swafford notes, part of what makes classical music great is silence. I don't know the answer.

How much revenue would scaling back the Mortgage Interest Deduction raise?

Less than static analysis would suggest. Even in the absence of the mortgage interest deduction, homeowners get a tax preference because imputed rent goes untaxed. If the MID were scaled back or eliminated, some households would sell assets with taxable returns to pay down their mortgages, thus reducing the net tax revenue arising from the policy change.

Jim Follain was the first (I think) to arrive at this insight, and Pat Hendershott and I found that people in Australia (where there is no MID) pay off their mortgages faster than Americans. The reduction in leverage is probably a good thing, and I know of no compelling argument for the mortgage interest deduction (it does almost nothing to encourage homeownership), but we should not delude ourselves into thinking that its elimination would produce a great revenue windfall.

From Ken Harney: Ideas to cut the federal deficit could cost homeowners billions -- latimes.com

Ideas to cut the federal deficit could cost homeowners billions -- latimes.com

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This makes sense to me. Base broadening (particularly in a progressive manner) is better that rate raising. Those whose marginal tax rate is 15 percent of less would be basically held harmless.

Housing inside the Beltway seems to be different

IAS 360 puts out data on house prices at the county level for 360 counties around the country. I am in the process of finding out more about how their data are put together, but one thing in their data really stood out for me: all but two places covered on their home page have seen house price declines since 2006.

Those two places are Will County, IL and the District of Columbia. House prices in DC are 30 percent higher, by the IAS 360 measure, than they were at the national peak in 2006. I find this plausible, because my GW colleague Paul Carrillo showed me hedonic regressions that demonstrated that prices in DC remained flat in 2008, while prices were falling rapidly elsewhere in the region.

Why is DC different? Part of it may be that transportation infrastructure within DC is pretty good (lots of public transportation and taxis), while in the suburbs, particularly the far flung ones, it is bad. Part of it is that its amenities continue to improve. I am sure it helps a lot that Michelle Rhee seems intent on making the schools better. But for it to be such an outlier? That is still a mystery.

Should we be excited about the July new home sales number?

The short answer is no. The July number was the worst July number since 1982; it just wasn't as bad as the June number, which wasn't as bad as the May number.

Everybody wants to know if we have hit bottom. There are three indicators suggesting we have--and three suggesting not. The good: prices in many markets have fallen below replacement cost (which is a pretty robust fundamental in the absence of population declines). Morris Davis at Wisconsin has shown that rent to price ratios have returned to be more in line with long term ratios, and given how low mortgage rates are, this is comforting. And resale inventories in California have dropped to under 4 months.

On the down side, we may have a lot of foreclosed houses coming at us in the next year. The employment picture is still atrocious. And if rents keep falling, prices will follow.

I would also guess that the first-time homebuyer tax credit is time-shifting sales, rather than raising them for the long term, but we shall see. On the other hand, the nature of investor sales is actually a positive indicator: investors are buying with cash and renting out units at decent rates of return. This is very different from the borrow, buy and flip model from the earlier part of this decade.

FWIW, I would assign a subjective probability of .7 that we are at bottom. On the other hand, around 2005, I assigned a .35 probability that we were about to face serious trouble.

To see the whole speech

Go to http://www.americanrhetoric.com/speeches/tedkennedytruth&tolerance.htm

Ted Kennedy at Liberty Baptist College

Why Ben Bernanke was (and should have been) reappointed

The Ted Spread has returned to normal (actually, a little less than normal). The A2P2 spread is getting there.

Maybe pigs can fly

If I am forced to bet on who is correct in an argument, and all that I know is that Paul Krugman is on one side of it, and Robert Samuelson is on the other, I will pick Krugman. I am guessing that the net expected value of an even money $1 bet would be something like $0.95.

I also happen to like trains. For the semester I commuted from Washington to Philadelphia, I was very grateful that I had Amtrak, for driving up I-95 several times a week would have been stressful. When I lived in Washington, Metro allowed me to keep my car at home on all but the rarest occasions. When I go to Atlanta, I use MARTA to get to downtown from the airport; when I go to San Francisco, I take BART, etc. I even try to take transit one day a week to get to work here in LA, because I feel that I should (although it takes a lot more time than driving).

All that said, I think Samuelson is correct that high-speed rail in the United States would a be wasteful expenditure. He makes the argument that because the US is less dense the Europe and Asia, rail makes less sense for intercity travel. I am sympathetic to this argument, as I have made it myself. Krugman replies that the Northeastern United States has density similar to Europe, and that Samuelson's comparison is therefore spurious. I noted this as well.

Krugman's argument has two problems. First, Obama's high speed rail plan includes several places outside of the Northeast, including the South, Texas, Chicago-St. Louis-Kansas City, where densities are considerably lower than in Europe, let along Asia. Second, even in the Northeast, cities are considerably less dense than in Europe. The graph below is from Alain Bertaud.



An advantage rail has over air in Europe is that large numbers of people live close to rail stations, while airports are generally on urban peripheries (lots more people live near the Gare de Lyon than Charles de Gaulle airport). No matter where a rail station is placed in an American city, it will be far from a lot of people, at which point the speed of an airplane overtakes the speed of a high-speed train, in terms of determining total trip length.

Finally, even taking external costs into account, air costs much less than rail in a place as dense as California. Let's turn it over to David Levinson, David Gillen, Adib Kanafani and Jean-Michel Mathieu from UC-Berkeley [correction--the paper was posted in a UC-Berkeley series. Levinson is from the University of Minnesota]:

The Full Cost of Intercity Transportation Page ES-1 This study evaluates
the full cost of three modes of intercity transportation: air, highway, and high
speed rail. The evaluation is done within the context of the California Corridor,
connecting the Los Angeles Basin and the San Francisco Bay Area. The purpose
of evaluating full cost is to compare the economic implications of investment in,
or expansion of, any of these three modes. The scope of the analysis is full
transportation cost. Full transportation costs includes external, or social cost,
in addition to the internal costs of construction, operation and maintenance. In
this study we include estimates of four types of external, social costs: accidents,
congestion, noise, and air pollution. The 677 kilometer corridor for which these
estimates are computed represents one of the alignments of a proposed high
speed rail system between Los Angeles and San Francisco. The methodology
used is to construct cost functions that relate costs to levels of output, as measured by passenger-kms. or vehicle-kms.

Different types of costs are estimated as permitted by available data. These include short run costs, in which the physical capacity is held fixed; and long run functions in which capacity is allowed to expand to meet higher levels of demand. Average and marginal costs are computed for highway and for air transportation. But given the absence of high speed rail systems in California only average costs are estimated. The highway and air cost models are developed from basic principles and are estimated
with actual data and system design characteristics observed in the California
corridor. Rail costs are estimated with models that have been adapted from
estimates for the French high speed rail system, the TGV, using available data
for their estimation. Based on the results summarized in Chapter 7 and shown
in Table 7.1, we find that the full cost of air transportation for the California
Corridor ($0.1315 per passenger-kilometer traveled (pkt)) is significantly less
costly than the other two modes. The full cost of high speed rail and highway
transportation cost approximately the same; rail costs $0.2350/pkt and highway
costs $0.2302/pkt. The internal, or private, monetary costs comprising
infrastructure, carrier, and vehicle operating costs are clearly highest for rail
($0.19/pkt), followed by air ($0.11/pkt) and then highway ($0.10/pkt). And as
is to be expected, user time costs are highest for the slowest mode, the highway
system, followed by rail and then air. Adding user travel time costs to the
monetary costs results in the total internal system costs per passenger-km. of
$0.124 for air; $0.233 for rail; and $0.198 for highway.

In other words, if we disregard external costs then we find that high speed rail is nearly twice as costly as air and that the highway is not far behind. However, if we look at social costs alone – congestion, air pollution, noise, and accidents – we find that high speed rail is clearly less costly than the other modes. In this research the only measurable social cost of high speed rail is that of noise, which at $0.002/pkt, is
significantly lower than that of air at $0.0043/pkt and highway at $0.0045/pkt.
Highway transportation, on the other hand, has a relatively high cost in terms
of air pollution and accidents, two externalities which are virtually absent in
high speed rail. In this study, we consider that the pollution resulting from the
electric power generation used to drive a train is to be allocated to the energy,
and not the transportation sector. Thus, any pollution externality associated
with high speed rail should be already internalized in a higher price for electricity.

Similarly, a 100% safe system, such as high speed rail, implies higher capital
costs due to construction of grade separations, more intelligent systems, etc...
Hence, the avoidance of accidents by high speed trains is not “free”. Therefore,
high speed rail, while more costly than highway transportation in terms of internal
costs, primarily due to its high capital cost, is significantly less costly than
highway in terms of social costs. This comparison is illustrated in the following
figure, where full costs are broken down into three categories: internal, travel
time, and external.

Note that the full cost of rail (.23/pkt) is considerably more than air (.13/pkt) even though any pollution created by trains is attributed to the power plant that provides the electricity, rather than the train itself.

A couple of other points. I have yet to meet a transportation economist (and I talk to a fair number) who is thrilled by high-speed rail as a technology. John Kain was among the most rigorous and influential transportation economist of the past 50 years, and he was very skeptical about rail. I also think that we yet again have evidence that we don't come even close to internalizing the social costs of automobiles, but I see no political will for really reducing our dependence on the auto, in part because most people love their cars (this is hardly unique to America). High speed rail also seems to me to be a way to redistribute income from lower income Americans to higher income Americans, because lower-income Americans will choose Southwest Airlines (which will be cheaper) when they need to travel from one city to another.

Finally, I see that when Ed Glaeser expressed skepticism about high speed rail, he was accused of being a "hack," so I guess I will join his company. But while Paul Krugman is indeed much smarter than Robert Samuelson, I would have a very hard time choosing (not that I would want to) between Glaeser and Krugman.

How the world likely views arguments among academics

I am guessing that, to the extent that it cares, the broader world sees the current argument between Richard Posner, on one side, and Paul Krugman, Brad Delong, Mark Thoma and Menzie Chinn, on the other, as some sort of esoteric pissing contest. This is because all of these people are very smart and write very well.

The problem is that Posner is just plain wrong--I mean, he gets his arithmetic wrong in so many ways, it is breathtaking. For instance, he doesn't understand the difference between a quarterly growth rate and a quarterly annualized growth rate. This does not particularly surprise me--very good lawyers are often not good at math. One of my dearest friends is a brilliant lawyer (and political analyst), and he couldn't calculate a present value if his life depended on it. He was also amazed that one had to strip the casing off of speaker wire before one hooked up a stereo. The other thing about lawyers is they are not particularly good at admitting when they are wrong--their entire training teaches them not to do so (although the friend I just mentioned is endearingly modest).

In the current context, this is a problem, because Posner is hurling ad hominems [h/t to William Adelman for correcting the spelling] while not knowing what he is talking about.

Tonight on CBS

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Naive question

When the economy settles down, why not return to the Clinton tax code? The economy did well, we had fiscal surplus, etc. Raising taxes on the top 5% is fine with me, but I don't think it is enough.

Just asking.

My all time favorite billboard

Mark Thoma has a post this morning on a silly billboard he saw while driving across Nevada.

The best billboard I ever saw was in northern Minnesota. I was driving down US 2, coming up on Grand Rapids, and saw a sign that read

Stop at the [restaurant name that I can't remember]

Why pay Duluth Prices?

It worked for me. I had the walleye pike dinner. It was something like $8 including the all you can eat salad bar. It was good, too.

The Problem with Condos

One interesting aspect of today's Existing Home Sales report is that while the inventory of single family homes is decreasing, the inventory of condos is increasing. This is consistent with past weak housing markets--the detached market tends to come back before the attached market.

One of the reasons for this may be that detached houses are in more desirable locations, and so when prices fall, people who could not afford houses in the single-family market before a price drop can do so afterward. But incomes are falling along with house prices now, so I am not sure that is the explanation.

Rather, it may be that people prefer detached houses because they afford a degree of control not present in the condo market. If you own your own house, and think it is time to repave the driveway, you can just do it. But when you are in a condo, you need to get your condo board to approve capital expenses-even when they are necessary. I have been at condo board meetings where people protested spending money to deal with curable depreciation (i.e., make capital expenses whose value is greater than cost). And so the entire complex deteriorates.

Dan Immergluck responds to Thomas Sugrue

In the Comments Section of the Wall Street Journal

I want to begin by pointing out that I respect Dr. Sugrue's work greatly and use it in my teaching.

However, I am afraid this piece is seriously misleading. While there is no doubt that federal policy -- especially the FHA, Fannie Mae and Freddie Mac , and the home interest deduction - led to overall increasing homeownership rates during the 20th century, the article provides much too much credence to the conservative canard that such programs (and policies like the Community Reinvesment Act) led to the mortgage and foreclosure crisis. These programs were generally consistent with stable, risk-limited homeownership for more than 60 years with relatively limited systemic problems. In fact the problems that did exist were usually in the form of discrimination and redlining (partly evidenced by Dr. Sugrue's Origins of the Urban Crisis book).

But the problems since the middle 1990s - including the current foreclosure crisis - were caused principally by deregulation that began in the 1980s and more recently. These led directly to high risk securitization and subprime lending typically through unregulated channels. Also, critically, there is ample evidence that loans encouraged (NOT compelled) by the Community Reinvestment Act (of 1977 NOT 1976) were NOT subprime loans and performed much better than subprime loans (see recent piece in the American Prospect by Ellen Seidman for a review of this evidence). Fannie Mae and Freddie Mac were major investors in subprime secruties (and should not have been allowed to be), but a relatively small fraction of their own lending activities were high risk and this activity lagged the major boom in high risk lending from 2003-2006.

Finally, comparisons to Europe are oversimplified and misleading. Most European countries have heavily subsdidized or social housing sectors where rental or cooperative forms of housing are state-supported. In the U.S., rental housing subsidy is extremely limited. Pulling back on homeownership subsidies ACCOMPANIED BY corresponding support for rental or coopeative housing would make sense BUT FOR two problems. One, it is very unlikely that Congress would provide such support. And two, local governments routinely zone out or limit rental or non-ownership housing making it difficult to provide in reality. These problems would need to be addressed to shift housing support to rental or cooperative housing. Otherwise, housing costs will rise, and those with modest incomes will be hurt most.

It is critical to get these issues right

It is also worth noting that for low income people, rental housing is more heavily subsidized than owner housing. I don't have a problem with this per se, but it hardly suggests that government resources have been poured into making low income people homeowners. Indeed, Fannie and Freddie's record for funding underserved borrowers was not particularly good, and the mortgage interest deduction is of little value to low income households, because they usually don't itemize, and even if they do, the marginal benefit of the deduction is quite small.

Finally, let's not be so eager to bash homeownership. Security of ternure does provide stability that can lead to good outcomes for families and neighborhoods. Even in the presence of controls, kids of owners do better than kids of renters, and owners are more likely to be civically engaged, almost certainly because they are equity holders in their communities. Amortizing mortgages, moreover, give people a default mechanism for saving. Richard Thaler has shown that such defaults are crucial for getting people to actually put away money and accumulate wealth. This might suggest that interest-only and option-ARM loans should be put to rest, but that is a separate issue from tenure per se.

Real Time With Bill Maher - Dana Gould reports on health care protests and Remote Area Medical

Whence came unstable housing finance?

Over the weekend, Thomas Sugrue, a highly regarded history professor at Penn, wrote a piece in the Wall Street Journal that implied that we over-subsidize homeownership, and that government programs have produced instability in the housing market. I am not sure either is true.

With respect to homeownership, for those at the margin of owning, net subsidies may flow more to rental than owner housing. Section 8 vouchers support renting, not owning, and the mortgage interest deduction provides no benefit to those who don't itemize--i.e., low income households. It is well established that Fannie and Freddie do no better, and perhaps worse, than the private when it comes to providing first time homebuyer with mortgages. The government does encourage overconsumption of housing for high income households, but that is a different matter.

As for stability, well, as Professor Sugrue correctly points out, it was the housing market of the 1920s, which was financed in the absence of any public sector support, that helped produce the Great Depression. And the preponderance of unstable mortgages originated in this decade were originated by purely private players.

The problem with professors becoming presidents

A lot of what our job is about is understanding the point of view of others, even when we disagree with them. A lot of our job is explaining to students a wide variety of viewpoints, and allowing them to choose from among them.

I don't think FDR worried so much about the point of view of others--Doris Kearns Goodwin said he "gloried in his enemies."

FDR also largely got what he wanted.

Alle Menschen Mussen Sterben

It is disgraceful that opponents of health care reform are exploiting people's fear of the inevitable to undermine a really good idea: Medicare funding of end-of-life consultations.

We all will ultimately die, and I, for one, would like to do so as painlessly, and with as much dignity, as possible. Once I am irreversibly ill, I want neither ventilators nor feeding tubes to keep me alive, and I know enough to say so in an advance directive. Others should know they have the ability to say so too. For those who want the tubes, that is their business.

As for those who argue that government health care will incentivize euthanasia, well, the incentives are of course already there, because all seniors have government insurance.

In general, I detest ad homonym, and hope that I have pretty much kept it out of this blog. But Sarah Palin is just plain evil.

Lisa Schweitzer explains (one reason) why I love LA

She writes:

Last night we went to Dodgers stadium to watch the Dodgers, who lost to Atlanta. Now my friend Casey is a fan of the Braves, having grown up in Atlanta and all, and he is by far one of the most genial, gracious, and decent men I have ever met. However, this woman behind us was a Braves fan, and she was obnoxious. Fine, cheer on your team, but not if God gave you a voice that sounds like a constipated muppet. She was entertaining visitors from out of town, so she was explaining her views on living in Los Angeles. At one point, she said in a loud voice, “LA is ****hole. I can’t imagine staying here because it’s just so…Mexican.”

Hellloooooooo racism!

Now there are million things that I would change about Los Angeles. The rats. The air. The hockey team. We need Trader Joe’s south of the 10 and east of the Harbor. But I wouldn’t change a thing about the people who live here. Not a thing. If I could move wealth around, I would, because I have always been a pinko, but Los Angeles is real cosmopolitanism. We fail at it again and again, but it’s not like we’re a metro area with a few little safe ethnic enclaves mixed in a reassuring way so we can give lip service to cosmopolitanism. It’s a place where people of color outnumber white people but where power is still inverted. LA burns, regularly, both physically and ideologically, and because it burns it requires us to take a hard look at ourselves and how we treat each other. It is a significant place because of these realities.

I, for one, like having my dogs blessed by priests with all my Mexican, south, and central American neighbors and their dogs, some dressed in little sombreros. I like the beautiful girls clacking up Broadway in their heels, all of whom look like they just got done filming something for Univision. I like the handsome old gentlemen in cowboy hats and ostrich-skin cowboy boots who try, with courtly grace, to give me their seat on the subway. I like the little old ladies that sell coconuts and tamales on the street corners.

I can only hope that she will, in fact, go away and grace somewhere else with her retch-inspiring presence. I generally don’t tell people how wonderful Los Angeles/North Mexico City is because I’d rather that people just stay away and indulge whatever biases they have based on whatever Mike Davis book they’ve skimmed or tv show they watch. There are enough people here already; I’m never going to be able to afford a house as it is, and the water situation–egads. But you shouldn’t stay away because it is “too Mexican.” That’s one of the best things about this place, along with it being “too Black” and “too Thai” and “too Korean” and “too Ethiopian” and “too Indian” and “too gay.” Suckitup if you don’t like the Other because the Other is in your face here–and should be.