I am watching the Milken Global Conference panel on tax reform, and I want to shout....

...the reason fewer people are paying federal income taxes is that more people are making low incomes.

Both George Will and Paul Krugman are right about the retirement/social insurance problem

I watched the economic panel on This Week with George Stephanopolous this morning.  Toward the end, both Will and Krugman made salient points about Social Security.  Will pointed out that increased life expectancies have produced longer average payout periods for Social Security to beneficiaries.  Krugman pointed out that the more affluent half of the country has seen life expectancy rise far more rapidly than the lower half.  Will used the former statistics to argue for raising the retirement age.  Krugman used the latter statistics to argue that raising the retirement age would be regressive policy.

At minimum, all this suggests that one "fix" to Social Security (which actually needs less fixing than a lot of other things, but never mind that for now) would be to lift the cap on incomes that pay into the retirement portion of FICA.  But I can't help but think there is something to what Will says about life expectancy--I really see no reason why people with cushy jobs and long life expectancies shouldn't retire at a later age.  I am just not sure how one creates a retirement policy that links retirement age to lifetime income without creating some really weird incentives effects.

The National Association of Realtors misrepresents how many people use the Mortgage Interest Deduction

An NAR Spokesperson says:

“NAR is actively engaged to ensure that the nation’s 75 million homeowners will continue to receive this important benefit, and we will remain vigilant in opposing any plan that modifies or excludes the deductibility of mortgage interest.”

The problem is that not all homeowners use the mortgage interest deduction.  Those without debt don't use it.  Those who don't itemize don't use it.  According to the US Treasury Department, in 2009, only about 37 million households took the mortgage interest deduction.

NAR is in the business of representing its members, who benefit from the mortgage interest deduction.  But they still need to get their facts right.  


(For data on number of returns with deductions, go to the SOI site, scroll down to "Individual Income Tax Returns with Itemized Deductions: Sources of Income, Adjustments, Itemized Deductions by Type, Exemptions, and Tax Items," choose 2009, and look at column CA in Table 2.1).

Has the Variable Rate Mortgage saved the European Mortgage Market?

Just as in the United States, many European countries have had large run-ups and crashes in house 

prices. Consider the data from the European Central Bank below: one sees in particular large price increases and declines in Spain and Ireland.

Remarkably, default rates in Ireland and Spain in 2009, while high by historical standards at 3.6 and 2.9 percent respectively, were substantially lower than in the United States, where the default rate was 13 percent (see Fiorante and Mortgage Bankers Association of America).  Dwight Jaffee has argued that this difference in performance is the result of the fact that mortgages in Europe give lenders recourse to the borrower.  I find it plausible that recourse matters, but not that it matters quite so much.  For example, while purchase money loans in California are non-recourse, refinance loans are not.  The preponderance of mortgages in California are refinance loans, and California's default rate is extraordinarily high.

So why haven't borrowers in Spain and Ireland defaulted more?  According to the European Mortgage Federation, more than 80 percent of loans in Spain and Ireland are variable rate mortgages.  As a consequence, as market interest rates fell, so too did mortgage interest rates.   The typical mortgage borrower in Ireland and Spain is currently paying considerable less than 4 percent on their mortgage.

s

 This has almost certainly been beneficial to Europeans, and suggests that robust TARP 2 program, where underwater borrowers can refinance their loans at lower interest rates, could help mitigate default.  On the other hand, as interest rates rise in Europe, we might have reason to become very, very concerned about defaults there in the months to come.

Hannah Green on racial profiling - The Daily Northwestern - Northwestern University

Green: Indian movie star’s detention shows profiling - The Daily Northwestern - Northwestern University

I like Romney's "secret" policy plan of the day.

Cutting back tax deductions (and especially the deduction for second homes) for the affluent?  What a good idea!

Thomas Phillipon asks why financial services are so expensive (h/t Tim Noah)

An abstract:

Despite its fast computers and credit derivatives, the current financial system does not seem better at transferring funds from savers to borrowers than the financial system of 1910.

Phillipon notes that while finance has grown rapidly as a share of GDP, stock prices have become no more informative of future cash flows, and risk sharing has not improved.  But as Paul Volker might say, at least we have the ATM now.

Mixed feelings about falling e-book prices

Amazon's cutting of e-book prices is a good thing for consumers.  But...

Here in Pasadena, there survive independent bricks and mortar book (Vroman's) and music (Canterbury's) stores.  It is great to have them around, because browsing is fun.  I spend more than I have to for books and cds because I want them to stick around (sort of like public radio, I guess).

Nevertheless, I have a Kindle, and I buy stuff from Amazon too, because of (1) convenience and (2) inventory.  Vroman's  is great, but it can't stock everything.  When I want to read something, given the choice between waiting for a special order  or waiting for some electrons to arrive, I will take the electrons.  When I travel, I find that electrons are lot lighter than books too.

Hence it is not price that drives my purchasing decisions, but I am enough of an economist to know that prices drive the decisions of most others.  If that price gap between Amazon and Vroman's grows even larger, I am not sure how Vroman's survives.  Pasadena without Vroman's is not quite as nice a place as Pasadena with Vroman's.

How apartment rents and vacancies can rise (or fall) simultaneously

We at the Lusk Center put out the Casden Forecast for apartment economics in Southern California every spring.  When we put out our San Diego numbers last week, we presented a result that confused people--we expect both rents and vacancies to rise in the next year.

The reason this can (and often does) happen is that real estate markets operate with lags, and feature "natural" rates of vacancy.  The "natural" rate is the rate at which real rents stay constant--if vacancies fall below the natural rate, real rents rise; if they rise above, rents fall.  Stuart Gabriel and Frank Nothaft did a nice paper on this some time ago.

Consider a tinker toy model of rents that is characterized by two equations (the ts in parentheses are subscripts for time):

Vac(t) = Vac(t-1)+(Rent(t-1)-1)*.05

and

Rent(t) = Rent(t-1)-(Vac(t-1)-.05)*Rent(t-1)

So when rents fall below $1, absorption picks up, otherwise it falls; the natural vacancy rate (the rate at which real rents rise or fall) is 5 percent.  This produces the following picture of rents and vacancies:

As one can see, this simple model shows periods where rents and vacancies rise and fall together.

Of course, this is all in real terms.  When there is inflation, nominal rents can rise even when the vacancy rate is above the natural rate, because rising nominal rents are masking real falling rents.  

When government is the solution

Having spent the past month in a country where one always has to be careful about what one eats and drinks, I have a renewed appreciation of first rate sewer and water systems.  Such things require
governments.

I can imagine, however, that there are people of a certain stripe would would argue that clean water and good public health should no more be fundamental rights than, say, broccoli.

Mr DeMarco, Would you consider a debt-equity swap?

From Bloomberg:

The U.S. government has spent $190 billion to shore up the companies since they were taken into federal conservatorship in 2008 after their investments in risky loans soured. DeMarco said adding to the firms’ costs would be a violation of his legal responsibility to restore them to financial health.

Using principal forbearance instead of forgiveness so far has been better for taxpayers, DeMarco said. Forbearance reduces monthly payments while requiring borrowers to pay back the full amount of the loan when they sell the house.

“If the borrower is successful on the modification, allows them to stay in their house and they stay in their house and start making mortgage payments, the taxpayer gets to share in the upside of that borrower’s success,” DeMarco said in the Bloomberg Television interview. “If we forgive the principal up front and the borrower is successful, that upside all goes to the borrower and is not shared with the taxpayer.”

There is another way to allow taxpayers to get the upside of borrowers' success--replace the debt they owe with a shared equity arrangement.  The taxpayer may be better off with principal forbearance for houses that are 10 percent underwater, because through amortization people can get themselves right-side up in a relatively short time (particularly if they can get a refinance at a low rate of interest).

But for places like Las Vegas and the Central Valley of California, where many people are 40-70 percent underwater,  it is hard to see how default and large losses aren't inevitable.  A debt-equity swap would allow people to move freely, which aligning incentives between lenders and borrowers.

  

Andrew Zimbalist on Frank McCourt's sale of the Dodgers

From ESPN:

"It's problematic," Zimbalist said. "He was looking for some kind of ongoing income stream and he got it. Here's a guy who borrowed practically all the money to buy the team for $430 million and now he's selling it for $2.15 billion and he's coming out with a healthy capital gain -- it's repulsive. This is someone who doesn't deserve to walk away with a healthy profit after eight years of running the Dodgers in the most egregious, the most inefficient, the most self-interested, and the most vainglorious, idiotic way possible. It really is repulsive that he will still be making a profit in some way."

If ever there were a parable about how some people can thumb their nose at the rules and make out like bandits, the story of McCourt's ownership of the Dodgers is it. 

A poignant moment from a poor country

The laundry here "ruined" a couple of my shirts--whoever ironed tore the collars a bit from the bodies of the shirts. Being an American, I threw them in my trash basket. 


The man who cleans my room, upon discovering them in the trash, asked if he could have them. I said, "of course." 


He then asked me to write a note, saying that I had explicitly told him he could have them, lest anyone think he might have stolen them. Of course I did that as well. He seemed extremely happy to have the shirts.

When liberals undermine liberalism

I consider myself a liberal.  On social issues, I am very liberal; on economic issues, while in general I like markets, I think governments can and should correct large market failures (such as failures in private insurance markets and negative externalities), that the one percent (maybe even the ten percent) should pay higher taxes than they do now, and that there should be a floor on living standards.

It therefore drives me crazy when liberals embrace waste and hypocrisy.  So the following paragraph in the LA Times caught my eye:

Instead, the rail authority has agreed to run fewer trains at slower speeds on tracks shared with commuter rail systems, Amtrak and freight trains. In the early years, passengers will probably have to transfer trains to get from one end of the system to the other. The concept, known as the blended approach, was pushed last year by Bay Area politicians, who fought the original plan to run high-speed trains through the region on 60-foot high viaducts over local neighborhoods. The idea has attracted support in Southern California as well.

So places that will rail against the automobile are doing everything possible to make sure "bullet train" service (whose potential for success I am skeptical about anyway) cannot possibly be a competitive transport mode. The "blended" system will also make freight rail relatively less competitive with trucks, and will waste a lot of money that could be better spent on places California really needs to spend money, such as K-12 education and state universities (and no, I do not work at one).

The whole thing reminds me of perhaps my all time favorite Onion headline.

Mark Twain on Monetary Policy (h/t Patricia Harris)

First published in 1879 as "Mark Twain as a Presidential Candidate."

My financial views are of the most decided character, but they are not likely, perhaps, to increase my popularity with the advocates of inflation. I do not insist upon the special supremacy of rag money or hard money. The great fundamental principle of my life is to take any kind I can get.

New data since I posted yesterday

From this morning's Economic Times (one of India's leading newspapers).

NEW DELHI: The number of India's poor fell to 29.8% of its population in 2009-10 from 37.2% in 2004-05, one of the sharpest falls ever. This suggests India has not only grown faster than the world economy, but that this growth has lifted millions out of poverty. 

In absolute terms, the number of poor in the country declined by around 13% to 354 million during the fiveyear period with rural poverty falling faster thanurban poverty. During the period, rural poverty declined by 8 percentage points to 33.8%, almost double the decline of urban poor by 4.8 percentage points to 20.9%. 

"This is not surprising. Such an outcome is on expected lines as this is the period when the government increased the expenditure on flagship programmes substantially. We gave money to the people and the result is a direct impact of that," said Mihir Shah, member, Planning Commission. 
The numbers also re-affirm the impact of the government's flagship Mahatma Gandhi National Rural Employment Guarantee Scheme that entitles 100 days of work at a minimum rate of Rs 100 per day to all rural households. The scheme was launched in 2006 and has single-handedly transformed rural India. 

It is interesting that India started a war on poverty in 2006, and it seems to be winning.  Not that one thing necessarily caused the other, but it is some coincidence.

What would Rawls say?

Since India liberalized its economy in 1991, PPP GDP per capita has increased from about 1400 in 1992 to about 3200 in 2009 (see Penn World Tables, I am using only two significant digits because the exact numbers depend on definition).  That is 5 percent per capita per year; by any standard this is an impressive performance.  Eyes, moreover, don't lie--I have been coming to India for eight years now, and one can see living standards improving.  This is gratifying.

But in an enormously important dimension, India has not improved at all.  According to the Food and Agriculture Organization of the United Nations, the share of undernourished people in India moved from 20 percent in 1992 to 19 percent in 2008; the number of hungry rose from 177 million to 224 million. 

China has done much better, having cut the rate of hunger nearly in half over the same time period (from 18 to 10 percent), despite the fact that its GINI coefficient is higher. 

  

Rail transit and what is physically possible

I have written posts in the past that reflect my admiration for John Kain's work in transportation economics.  He is known, among other things, for training legions of students: "bus good, trains bad."

In general, buses are cheaper and much more flexible to operate than trains.  But a visit to Bangalore made me wonder if it can really thrive as a city without a metro system (which it is currently in the process of building).  Bangalore is very dense and the streets are, for the most part, very narrow.  Congestion is already terrible, and is composed mostly of auto-rickshaws, motorcycles, and scooters. The city already has many buses, that move dreadfully slowly.  To get from the airport into the business district, a distance of 40 kilometers, takes a minimum of 90 minutes.

People who know these things better than I have told me metro systems are never cost effective.  In this particular case, however, I can't help but wonder.

"Green Jobs" will be real, but invisible

John Whitehead quotes Joe Romm:

Last week economist William Nordhaus slammed global warming deniersand explained that the cost of delaying action is $4 Trillion. As I wrote, Nordhaus’s blunt piece — “Why the Global Warming Skeptics Are Wrong” – is worth reading because, like most mainstream climate economists, he is no climate hawk. 

Those costs are real.  Those costs shift the supply curve for stuff in.  Those costs reduce employment.  So "Green Jobs" are largely not those building windmills and solar panels (the total number of these jobs will be small relative to the economy).  "Green Jobs" will be the jobs saved from cost reductions associated with reduced greenhouse gases.  This is why good environmental policy is also good economic policy.

(h/t Mark Thoma)

Why owning a house may not be the American Dream

Lots of societies outside of America seem to have a preference for home-ownership. I have spoken to policy makers and scholars in several countries--India, Bangladesh, South Africa, Peru--about the importance of a well functioning rental sector.  Rental housing allows for mobility, and for people to use savings to invest in such things as small businesses.  Rental housing is also a way for small entrepreneurs to earn a return on investment.

Yet everywhere I go, I am told that people don't want to rent, they want to own.  The principal reason seems to be security of tenure; in places where enforcement of contracts remains an issue, fear of abuse by landlords sours people on renting as an option.  And so it is that people want to be owners.

Many countries in Western Europe--Germany and Switzerland in particular--do not have fetishes about homeownership.  But tenant protections in these countries are strong (see this piece on Germany and this piece on security of tenure beyond lease terms in Switzerland), so renting is sort of "owning-light" in these countries.