What are basic economic principles?

Whenever someone says that all policy problems can be solved by markets, they appeal to something they call "basic economic principles."

If one goes to the open course page for the intermediate micro course offered at MIT, one finds the following topics on the syllabus:

Consumer Theory
2	Choice, Preferences, Utility
3	Demand, Revealed Preferences, Comparative Statics
4	Consumer Surplus, Aggregation
5	Variations to the Basic Choice Model (Time, Uncertainty)
Producer Theory
6	Technology, Profit Maximization, Cost Minimization
7	Supply, Aggregation
Markets
8	Monopoly
9	Oligopoly and Game Theory
10	Walrasian Equilibrium
Market Failures
11	Externalities
12	Public Goods
13	Small Number of Agents, Nash Bargaining
Asymmetric Information
14	Adverse Selection, Moral Hazard, Principal-Agent Model
15	Auction Design
16	Voting and Other Applications

Six out of fifteen of topics (8-9, 11-14) are about ways the market can produce suboptimal outcomes.  These topics are not esoteric any more (they are showing up in intermediate courses), and they have rigorous economic theory behind them.  It was time we stopped using the phrase "basic economics" to refer to idealized market conditions that often do not exist.

A principle for deficit reduction

As I am preparing for a panel on the US budget I will be participating in on Thursday in Madison, a principle occurs to me.  Given that over the past 30 years the economy has disproportionately benefitted high income people far more than low income people, and holders of capital more than earners of wages, any deficit reduction proposal should be, on net, progressive, after considering both changes to the tax code and expenditures.  This is not easy to do analytically, and could still involve some sacrifice from most people, but it should at least be a point of departure.

Is California's Housing Problem that it has too Many Houses?

No.

Below is a chart of residential vacancy rate by state from the 2010 US Census.

California has the second lowest vacancy rate among the 50 states and DC.  California builders may have built the wrong kind of housing in the wrong places, but overall, they did not build too many houses. 

Note that Florida and Arizona have very high rates, but their rates are always high, because so much of their housing stock is seasonal--I suspect vacation homes drive a lot of what is happening in Maine, Vermont and Alaska as well.  Nevada has had the largest increase in vacancy over the past 20 years, rising from about 10 percent to 14 percent. 

Are commercial property values rising or falling?

This might seem like a simple question.  But it is not.

The Moodys/REAL Commercial Property Price Index (CPPI), produced at MIT, says they are still falling:

Green Street's Commerical Property Price Index says they are rising:
 

 
Which one is correct matters.  If Green Street is right, and prices are only 12.6 percent off peak, then commercial properties by-and-large have equity (loan-to-value ratios rarely exceeded 80 percent on commericial properties).  If MIT is right, we are still in deep trouble.
 
Both sources do a good job explaining their methods.  For MIT:
 

The Moodys/REAL commercial property index (CPPI) is a periodic same-property round-trip investment price change index of the U.S. commercial investment property market based on data from MIT Center for Real Estate industry partner Real Capital Analytics, Inc (RCA). The methodology for index construction has been developed by the MIT/CRE through a project undertaken in cooperation with a consortium of firms including RCA and Real Estate Analytics, LLC (REAL). The index has been developed with the objective of supporting the trading of commercial property price derivatives. The index is designed to track same-property realized round-trip price changes based purely on the documented prices in completed, contemporary property transactions. The index uses no appraisal valuations. The methodology employed to construct the index is a repeat-sales regression (RSR), as described in detail in Geltner & Pollakowski (2007). The data source for the index is described in detail in a white paper available from RCA.


The set of indices developed so far includes a national all-property index at the monthly frequency, national quarterly indices for each of the four major property type sectors (office, apartment, industrial, retail), selected annual-frequency indices for specific property sectors in specific metropolitan areas, and primary markets quarterly indices for the top 10 metropolitan areas in the major property types. The annual indices are produced in four versions, beginning in January, April, July, and October of each year. These are respectively named the calendar year (CY) index, the fiscal year ending March (FYM) index, the fiscal year ending June (FYJ) index and the fiscal year ending September (FYS) index.

The RCA Database

The commercial property index is based on the RCA database which attempts to collect, on a timely basis, price information for every commercial property transaction in the U.S. over $2,500,000 in value. This represents one of the most extensive and intensively documented national databases of commercial property prices ever developed in the U.S.

The Moodys/REAL CPPI and the TBI

The Moodys/REAL CPPI index is a complementary information product to the transaction based index (TBI) also published on the MIT/CRE web site. Both the CPPI and the TBI are based purely on transaction price data. The TBI is based on NCREIF property sales prices data, while the CPPI is based on RCA sales prices data. Thus, the TBI is based on a smaller population of more purely institutionally held properties. The TBI is based on a hedonic regression methodology whereas the CPPI is constructed with a repeat-sales methodology. The TBI is published with history going back to 1984 but only at the quarterly frequency, and only at the national level (for the four major property types), whereas the CPPI includes monthly and annual frequencies and more geographic regional break outs. The CPPI is a variable-liquidity price-change (appreciation return) index, while the TBI includes total return and demand and supply-side indexes.

For Green Street:

Green Street’s Commercial Property Price Index is a time series of unleveraged U.S. commercial property values that captures the prices at which commercial real estate transactions are currently being negotiated and contracted.

Two features that differentiate this index are its timeliness and its ability to capture changes in the aggregate value of the commercial property sector.

• Timeliness: Other indices are based on closed transactions, and therefore convey info about market prices from several months earlier. Also, the Green Street index value for a given month is released within days of monthend, whereas other indices have a sizeable lag. As shown below, the Green Street index spots inflection points earlier than other indices.

• Weighting: This index is weighted by asset value within each property sector, and therefore it provides a gauge of changes in aggregate values. Most other indices are equally weighted.

So the big differences are: (1) MIT looks only at transactions, whereas Green Street looks at current negotiations; (2) MIT's valuation model gives equal weight to all properties, while Green Street's valuation gives greater weight to expensive properties than to cheaper properties; and (3) MIT has a much broader sample, because REITs would rarely buy properties as inexpensive as $2.5 million.

So which index is correct?  It all depends on context.  While I would be a little leary of using "negotiated price" as an indicator of value (as opposed to closed transactions), the timeliness of Green Street's data does give it an advantage.  For REIT's trying to determine strategy, the Green Street index is probably better.  For banks making loans to smaller properties--or for individual investors thinking of buying small office buildings--the MIT index is more relevant. 

Mortgage Defaulters can be good credit risks.

Transunion performed a study that shows that households whose only default is on their mortgage are pretty good credit risks. Reuters does a story about it, and I have seen the powerpoint deck on it, but I can't find a link to the powerpoint.

The long story short is that sometimes people stop making payments not because they are deadbeats, but because the economy kicked their legs out from under them. Such people are good prospective credit risks.

The problem with rubber meeting road

In general, high gas prices are a good thing, in that they partially internalize the externalities of driving. But in the middle of a recess... (ahem, recovery), they create a real problem--the people who can least afford them are hit particularly hard by them. I am glad that at least the payroll tax was cut, but it would have been better for the cut to have been targeted.

A Plot of Effective Marginal Tax Rates and Per Capita GDP by State

State Taxes and GDP 2

Jared Bernstein recently posted a scatter plot of Federal Marginal Tax Rates and GDP growth, and found no correlation between the two. The graph above depicts the top potential marginal effective tax rate by state as calculated by the Tax Foundation (I will explain their calculation below) against GDP per capita by state. The correlation is actually positive, at about .2. If one removes the "DC effect," the correlation drops to about .19.

The top rate number I use from the calculation is the number produced under the GOP tax plan from late 2010, since they essentially got everything they wanted from the president in their tax deal. State taxes also move fairly slowly, so there is some persistence in the data across time.

I would not use this plot to argue that taxes on the richest cause higher living standards; but it sure is hard to argue that they cause living standards to fall.

A testimonial to homeownership.

I am reading Howard Bryan's The Last Hero: A Life of Henry Aaron.  The first few chapters are especially interesting, as they are about life in Mobile, Alabama in the early 20th century.   

Henry's father, Herbert, did something that few African-Americans did in the American South after Reconstruction: he owned his own home:

For Herbert, ownership meant protecting his family from outside forces that could, at any time, take away what he had... 

Herbert purchased two adjascent lots for fifty-three dollars apiece on Edwards Street and began culling wood.  Herbert collected ship timber from Pinto Island.  Young Henry, all of six years old, collected wood from abandoned buildings.  Some of the wood came from houses that had partially burned down, and some of the original walls of the house still contained deeply discolored streaks, charred from fire.  Herbert construction a six-to-twelve-foot triangular gabled roof above the front door.  He used the smaller, miscellaneous pieces of wood for the inside walls.  The floor was made of yellow pine.  Like most of the houses of the South, the structure itself stood on concrete blocks...

"The only people who owned their houses," Henry would often day, "were rich people, and the Aarons...."

...Herbert fought for his space, but he used non-traditional weapons..."

Walkability

The word is ugly (can't we come up with something better?), but intriguing.  One can go to a web site, and get a "walk score" for any address in the country.  Stephanie Yates Rauterkus and Norm Miller have a paper that shows that in Birmingham, Alabama, walk scores in the center of town have a mild impact on property values. 

The concept of a "walk score," a metric for how easy it is to not use a car to do things, is fun.  But so far as I can tell, the walk score presented on the web site is somewhat arbitrary; I have no idea how it was calibrated (although they do say "Street Smart Walk Score gives more weight to amenities that are highly correlated with walking. In addition, multiple amenities in each category count towards your score—for example, we count 10 restaurants to reflect the depth of choice that walkable neighborhoods offer.")


What I can say is this: my house in Bethesda received a much lower walk score than my house in Pasadena, and yet I almost never used my car during the week in Bethesda, because I could walk the .85 miles to the Red Line metro stop to get to work, and because for me driving in Washington was a much worse option than driving in LA (believe it or not!).  Both places are comparable in terms to walking to amenities in the evening.

So if we are going to do walk scores, we need to look at how often people in different neighborhoods, well, walk.  I am guessing my USC colleagues Gen Giuliano, Lisa Schweitzer and Peter Gordon, have done some work along these lines, and there seems to be a trove of data at Minnesota.

Some stuff from Weimer School meetings worth thinking about.

1) Albert Saiz showed how rent is endogenous with respect to interest rates.  At the urban fringe, where land has no value, rent is equal to construction cost multiplied by the interest rate.  This pins down urban rents.  When interest rates fall, so do rents at the fringe.  Nevertheless, land values rise, because people want larger structures (because of falling rent), and so they demand more land.  Consequently, rent-to-value ratios fall as interest rates fall.

2) Ingrid Ellen showed that REO properties produce crime.  The interesting part--they induce violent crime, rather than property crime.  The data set she put together, which used block faces, instead of census blocks, was awesome.

3) Len Lin may have solved why real estate appears to have better Sharpe Ratios than stocks.  If they were really better, one could arbitrage between real estate and stocks.  But because real estate is illiquid--it takes a long time to sell it--one cannot arbitrage it.  When one adjusts formally for illiquidity, the Sharpe Ratio of real estate is the same as stocks.

4) Stephanie Yates Rauterkus presented some promising work that suggested that "walkability" near CBDs enhances value, but elsewhere might not.

It was a really good few days.  I learned a lot of other stuff too.

Chutzpah

I was talking to a reporter the other day about policies to write down principal for some home buyers.  He told me that banks objected, saying that it would create moral hazard.  Which is sort of like Newt Gingrich defending the sanctity of marriage.

Martin Feldstein says raise taxes, but not rates

While figuring out tax incidence-who actually bears the burden of the tax--is difficult, my guess is that his proposal, which would limit all deductions to two percent of adjusted gross income, would raise revenue, simplify the code, reduce deadweight losses (i.e., economic inefficiency), and produce a more progressive tax code.  It is the last of these that I am not sure about, but if we also raised the top rates to their Clinton-era levels, then one gets a more progressive code too.  I have seen no evidence that raising the top marginal rate from 35 to 39 percent would produce substantial deadweight loss.

I think such a proposal would need to be phased in--it would be a shock to lots of different markets, but I like the thinking behind it.  

My own beef with Trump

The Donald gives people the worst possible impression about the real estate business--the business that I study for a living. It is not principally about slapping your name on a gaudy building. It is about building 3 bedroom houses and apartment buildings; it is about building Targets and, yes, Walmarts; it is about managing class-B office buildings in suburbs; it is about distribution centers in Oconomowoc.  It is about providing environments where the bulk of people live, work, shop and build.  

Sudeep Reddy on Bernanke's Press Conference

He writes (correctly in my view):

This press conference looks like a more intelligent, faster-paced version of a congressional hearing. It's a lot of the same questions -- bond-buying, high oil prices, long-term unemployment -- except you would've gotten five lawmakers making speeches about gas prices before asking a single question. Bernanke looks the same as he does at a hearing. He's not exactly thrilled to be there, but happy to take questions as long as you want.

Wendell Cox on Municipal Boundaries

From comments:

The arbitrariness of the municipal boundaries that drive much of the historical core city and suburb analysis does indeed create significant problems. We commented on this in PERSPECTIVES ON URBAN CORES AND SUBURBS (http://www.newgeography.com/content/002123-perspectives-urban-cores-and-suburbs). 

We concluded: "An eventual more precise analysis of urban cores and suburban trends will be welcome. Yet, as our analysis of trends in New Jersey indicated, even the growth in more urban core oriented municipalities was minuscule compared to the state's suburban growth. Further, much of the urban core growth in the nation came from areas that, although formally located within “city limits” actually were on the suburban fringe. This was true, for example, in Kansas City, Oklahoma City and even Portland. This suggests that the small share of growth reported in urban cores would be even less if it were based on census tract data; and suburbanization, as a way of life, may indeed be even more prevalent than this year’s numbers suggest."

Deborah Popper on "Subtracted Cities"

She writes about how shrinking cities can take control of their destinies, while being realistic about what those destinies imply:

Detroit stands as the ultimate expression of industrial depopulation. The Motor City offers traffic-free streets, burned-out skyscrapers, open-prairie neighborhoods, nesting pheasants, an ornate-trashed former railroad station, vast closed factories, and signs urging "Fists, Not Guns." A third of its 139 square miles lie vacant. In the 2010 census it lost a national-record-setting quarter of the people it had at the millennium: a huge dip not just to its people, but to anxious potential private- and public-sector investors.

Is Detroit an epic outlier, a spectacular aberration or is it a fractured finger pointing at a horrific future for other large shrinking cities? Cleveland lost 17 percent of its population in the census, Birmingham 13 percent, Buffalo 11 percent, and the special case of post-Katrina New Orleans 29 percent. The losses in such places and smaller ones like Braddock, Penn.; Cairo, Ill.; or Flint, Mich., go well beyond population. In every recent decade, houses, businesses, jobs, schools, entire neighborhoods -- and hope -- keep getting removed.

The subtractions have occurred without plan, intention or control of any sort and so pose daunting challenges. In contrast, population growth or stability is much more manageable and politically palatable. Subtraction is haphazard, volatile, unexpected, risky. No American city plan, zoning law or environmental regulation anticipates it. In principle, a city can buy a deserted house, store or factory and return it to use. Yet which use? If the city cannot find or decide on one, how long should the property stay idle before the city razes it? How prevalent must abandonment become before it demands systematic neighborhood or citywide solutions instead of lot-by-lot ones?

Subtracted cities can rely on no standard approaches. Such places have struggled for at least two generations, since the peak of the postwar consumer boom. Thousands of neighborhoods in hundreds of cities have lost their grip on the American dream. As a nation, we have little idea how to respond. The frustratingly slow national economic recovery only makes conditions worse by suggesting that they may become permanent.

Subtracted cities rarely begin even fitful action until perhaps half the population has left. Thus generations can pass between first big loss and substantial action. Usually the local leadership must change before the city's hopes for growth subside to allow the new leadership to work with or around loss instead of directly against it. By then, the tax base, public services, budget troubles, labor forces, morale and spirit have predictably become dismal. To reverse the momentum of the long-established downward spiral requires extraordinary effort.

Fatalism is no option: Subtracted cities must try to reclaim control of their destinies. They could start by training residents to value, salvage, restore and market unused sites and the material found there. They might supplement school drug-free zones with subtraction-action ones by reacting quickly when nearby empty properties show neglect. Children who see debris-filled plots and boarded-up buildings learn not to expect much from life. Just planting a few trees often makes a deserted lot look cared for.

Chris Leinberger, Wendell Cox, Drunks and Lampposts

In a New Republic piece, Chris Leinberger says that Wendell Cox's statement that the census shows that central cities have had a small fraction of urban population growth is beside the point.  He argues, correctly, that the census definitions of urban and suburban are pretty arbitrary: if one is in the City of Los Angeles, she lives in an urban area, if she is in Santa Monica or Beverly Hills or Pasadena, she is in a suburban area.  One visit to LA reveals that this is silly.  Just because the light is there doesn't mean the missing keys are there.

But Leinberger then makes a statement that is also un-illuminating:

Likewise, the suburbs of those core cities include classic subdivisions and McMansions, like the home of Tony Soprano, but they also include booming places like Old Town Pasadena, Reston Town Center near Dulles Airport outside D.C., and revitalized Jersey City and Hoboken, NJ, on the other side of the Hudson River from Manhattan.

I now live in Pasadena, and before that, I lived in Bethesda.  They are both indeed wonderful places (for me anyway); they are also quite "walkable."  But neither strikes me as booming, so I looked up their population growth between 2000 and 2010.  The Bethesda Central Designated Place grew by  a little over 9 percent; Pasadena grew by 2.3 percent.  The country as a whole grew by a little less than 10 percent.  It is hard to make a case for booming.

But perhaps the issue is supply.  If no houses are available, then it is not surprising that population has not grown much.  Ryan Avent has correctly made this point.  But the residential vacancy rates in both Bethesda and Pasadena are in excess of 7 percent--not huge, but not exactly tight either.  And Pasadena's condominium market continues to face serious problems.

Personally, I love the kind a communities Leinberger favors--I seem to live in them.  But  some urbanists engage in hectoring that really bothers me.  Lots and lots of Americans appear to love their cars and their isolated houses.   So long as they interanalize the costs their lifestyle imposes (and I have long been for a tax that puts a floor on gasoline costs), people should be able to live how they like and where they like.

Raphael Bostic on a layered housing problem

He gives an interview here:

There is a triple threat facing the elder African American LGBT population in the Detroit area. Even though small in number, this particular group of people encounters difficulties in finding retirement homes, safety, recognition and financial security. Dr. Raphael Bostic, the assistant secretary of Housing and Urban Development, attended an April 16 summit organized by KICK (an agency for LGBT African Americans) to address such concerns. Dr. Bostic spoke to BTL about discrimination and other issues faced by these elders.

What were the common concerns discussed at the KICK summit?
The elder LGBT population has significant challenges. They don't have children who can offer them help and support. If they are with a partner they often don't have access to their (partner's) pension funds, so they can become extremely vulnerable rather quickly. This is a really important conversation, and a lot of the gay and lesbian elder population has not been a (focus) of that conversation. Somehow they are a hidden population.
Elders in African American communities have difficulties, elders in general have difficulties and LGBT elders have difficulties, so this really overlays three types of groups. We don't really know much about the challenges that this group faces and they are forced to be invisible because sexual orientation and gender identity are not protected classes, so landlords can and do discriminate against these (people). So sometimes they have to go back into the closet. One of the things we are trying work on is how often these issues arise so we can talk about it in an informed way and hopefully get to a place where that kind of discrimination happens a lot less frequently.

Why does S&P matter?

Are they telling us anything about the US fiscal condition that the whole world doesn't know?  Is there anything to suggest that their past insights have been particularly penetrating?  Just wondering...

All advice welcome

I am on a panel on budget issues with Paul Ryan on June 9 in Madison.  Needless to say, I am taking preparation for this very seriously.  I would therefore welcome any thoughts, links, etc. from anyone inclined to send them.  Don't worry if you think I have seen it before--I am looking for a dump of everything right now.

Robert E. Baldwin 1924-2011

He was my dissertation advisor.  From his obituary:

Baldwin was also an "academic father" to scores of students, inspiring them with his quiet but deeply held passion for combining academic rigor with real-world applicability. Many of his students have become professors in universities across the world. His vocation is also carried on by his son, Richard, and son-in-law, Gene Grossman, both of whom are professors of economics specialising in international trade.

I was very fortunate to be among those scores.   

A coincidence?

In 1959, the poverty rate among the elderly was 37.1 percent, or more than double the rate for all adults.  By 1969, it has dropped to 27.1 percent and by 1979 to 12.7 percent.  By 1999 it was 7 percent, or lower than the adult poverty rate.  Medicare, of course, came into being in the 1965.  

Rhonda Porter points out that a government shutdown would stop the mortgage underwriting process.

Lenders will not be able to order 4506Ts--tax transacripts--from the IRS.  This is the principal source of income verification.  Without it, lenders will not be able to underwrite borrowers.

 

Now for Metro Areas (which are harder to define)

The ten largest MSAs in 1960 (SMSA for everything except Chicago and New York, which are CMSAs) with current rank in parentheses.

1. New York (1)
2. Chicago (3)
3. Los Angeles (within a whisker of Chicago) (2)
4. Philadelphia (5)
5. Detroit (11)
6. San Francisco (13)
7. Boston (10)
8. Pittsburgh (!!)  (22)
9. St. Louis (18)
10. Washington (8)

San Francisco is just San Francisco-Oakland--if one added San Jose it would be in the same position in 1960 and further up the ranks now.  I forgot that Pittsburgh was once a top ten MSA.  There is obvously a lot more persistence here.

50 years of Population in in Ten Largest Municipalities in the US

Just for grins, I looked to see how the ten largest cities around the time I was born have changed in terms of rank.  The top ten in 1960 and their current rank:

1. New York (still # 1)
2. Chicago (now 3)
3. Los Angeles (now 2)
4. Philadelphia (now 5)
5. Detroit (now 18)
6. Baltimore (now 21)
7. Houston (now 4)
8. Cleveland (now 45)
9. Washington, DC (now 24)
10. St. Louis (now 58!)

New York is a bit larger now, and has for more than 50 years been more than twice as large as the second largest city, making the spirit of George Zipf happy. LA and Houston have gained population as well as rank; the other seven all lost.  St. Louis is hemmed in by a boundary that was drawn more than a century ago, but it doesn't lack land--the area north of downtown is basically field and forest.  Cleveland, Baltimore and, of course, Detroit have lots of empty space within their boundaries as well.

For symmetry, let's look at where the current top ten were in 1960.

1. New York (1)
2. Los Angeles (3)
3. Chicago (2)
4. Houston (7)
5. Philadelphia (5) (note: the top 5 were all in the top 7 in 1960).
6. Phoenix (29)
7. San Antonio (17)
8. San Diego (18)
9. Dallas (13)
10. San Jose (57)

The cities in the second five moved pretty dramatically.  They all had lots of available land in 1960 and are all, of course, sunbelt (although I suppose on could argue that northern California is not sunbelt).  

Note: All data come from 2010 Census and http://www.census.gov/population/www/documentation/twps0027/tab19.txt.

  

Ryan Avent doesn't believe 2.8 percent unemployment is a reasonable possibility

Ryan Avent on the assumptions underlying the Ryan plan:


http://www.economist.com/blogs/freeexchange/2011/04/facts_and_figures

A couple of other points: Ryan seems to think that the two basic problems facing the country are: (1) too many defined benefits and (2) too much equality.

Dalton Conley Talks about Intergenerational Wealth--and it is not pretty

Dalton gave a very nice talk at USC on Friday, presenting his Center for American Progress paper 

Wealth Mobility and Volatility in Black and White.  The CAP page on the paper summarizes the findings:

• What family an individual comes from ƒƒexplains about three-quarters of where they end up in the wealth distribution as adults. For African Americans, however, the impact of family background is substantially lower, at 37 percent.
• Individuals are more likely to mainƒƒtain wealth than to attain wealth, or more precisely, low-wealth children are unlikely to become high-wealth adults, while high-wealth children are very likely to be high-wealth adults. Looking at previous years’ data, less than 10 percent of children who grew up in families in the bottom wealth quartile, which had a maximal cut off of about $8,000 in 1984, reached high wealth levels by adulthood between 1999 and 2003 (when the top group’s minimal value was $82,501and the median was over $189,000). And over 55 percent of children who grew up in families in the top wealth quartile—over $155,000 of net worth back in 1984—held on to their high wealth levels by adulthood.
• The strongest predictor of an adult’s ƒƒrelative wealth status is his or her income, which in turn is highly predicated on his or her parents’ income and wealth.
• Wealthy white children are much more ƒƒlikely to become wealthy adults than wealthy African-American children: Over 55 percent of all white children raised by parents in the top wealth quartile hold onto the top wealth position as adults. This is contrasted to only the 37 percent of African-American children raised by parents in the top wealth quartile who hold onto the top wealth position as adults.

Soon-take Chang Describes South Korea's Countercyclical Housing Finance Policy

His paper is very interesting.  Section 3 begins:

Macroeconomic instability greatly affected the financial crisis in Korea at the end of 1997. The need for macroprudential supervision in Korea was highlighted by the bursting of the credit card bubble in 2003.

During the credit card lending boom, the supervisory authority did not respond adequately to the growth of household delinquencies stemming from the reckless behavior of credit card issuers.

The authority was not sensitive to systemic distress originating from households because its prudential oversight was primarily focused on the soundness of individual financial institutions (Lee, 2006). This case underlined the importance of placing greater emphasis on detecting early warning signs before the build-up of excessive imbalances continued for too long (Kang and Ma, 2009).

After the credit card bubble burst, there was a new, widespread appreciation of macroprudential policy. Mortgage loans had increased sharply since 2000, which undermined the stability of the overall housing market. The supervisory authority has taken steps to prevent overheating in mortgage lending and to minimize the risk of loan default.

First, the supervisory authority raised the risk weighting for mortgage loans. The authority also raised the minimum loan loss reserve ratios for banks’ household and corporate loans that were classified as normal and precautionary in November 2002 and in December 2006.

Second, in 2002, the authority started to reduce the maximum LTV ratio for mortgage loans, from approximately 75 percent to 40 percent in the Seoul metropolitan area.

The authority imposed additional measures, such as a ceiling of 40 percent on the DTI ratio for certain types of borrowers, as well as other restrictions on granting mortgage loans and maturity extensions on existing mortgage loans for properties in the Seoul metropolitan area. These various restrictions on mortgage lending were imposed on both banks and non-banking financial institutions.

Note that Korea's loan terms were conservative by OECD standards even before the tightening.   But given how well Korea's economy has survived the downturn, they may be onto something.

From The New Yorker: Wisconsin: The Cronon Affair

Wisconsin: The Cronon Affair

I was especially taken with this:

Second, the Republicans seem remarkably fragile. A professor writing a blog post gives them the shivers. It’s a good thing they chose politics, and not the kind of career where the going can really get rough. Professors, for example, teach their hearts out to surly adolescents who call them boring in course evaluations and write their hearts out for colleagues who trash their books in snarky reviews. These Wisconsin Republicans may never have survived ordeals like that. Happily, Cronon has been toughened by decades of academic life. He’ll be blogging—and teaching and writing—long after Wisconsin voters have sent these Republicans back to obscurity.

There are days when I wonder if tenure is an anachronism. The Cronon affair strongly suggests to me that it is not.

Shani Hilton on Gentrification in DC

Worth reading....

Confessions of a Black D.C. Gentrifier

The Census estimate for the US for 2009 was less than the Count for 2010

The estimate, at 307,006,550, was .6 percent less than the count of 308,745,538.  Yet for the ten largest cities, the estimate was 4 percent higher than the count.  Again, it would be nice no know whether cities were overestimated in 2009 or undercounted in 2010. 

To finish the previous post's thought.

The 2009 population estimate for Detroit was 821,792.  The 2010 count was 713,777.

Overestimates or Undercounts? Does this mean Detroit didn't lose quite so many people?

When the 2010 census count for New York City came out today, it struck me as a little light.  So I decided to compare the 2009 population estimates for the ten largest cities in the country againt that 2010 counts.  In all cases expect San Diego, the census count was lower than the 2009 estimate.  The average difference was four percent, which is four years of population growth at the national growth rate.  Here are the numbers: the first column of numbers is the 2009 estimate; the second is the 2010 count.  What is going on here?

New York City	8,391,881	8,175,133
Los Angeles	3,831,868	3,792,621
Chicago	2,851,268	2,695,598
Houston	2,257,926	2,099,451
Phoenix	1,593,659	1,445,632
Philadelphia	1,547,297	1,526,006
San Antonio	1,373,668	1,327,407
San Diego	1,306,300	1,307,402
Dallas	1,299,542	1,197,816
San Jose	964,695	945,942

Is Inside Job correct about the corrupting influence of money on the economics profession?

I think it may be, but not in the way implied by the movie.  Charles Ferguson makes a big deal out of the fact that Glenn Hubbard, Frederic Mishkin, Larry Summers and Martin Feldstein were paid well by financial institutions and governments who wound up becoming major contributors to the crisis.  HIs implication is that all of these well-known economists ignored the danger signals arising from financial deregulation because they were well paid to do so.

I really doubt this is true.  I say this because I remember thinking at the time it was passed that Gramm-Leach-Bliley was on net good policy, because is was (1) necessary in order to allow New York to compete with London and (2) I thought people at places like Goldman Sachs (especially Goldman Sachs) were smart and competent and would protect their franchise.  I was, at the time, very impressed with Alan Greenspan and Robert Rubin.    I had no financial stake at all in any of these beliefs, other than the fact that I wanted my kids' college fund and my wife and my retirement fund to do well.

And by all indications, the economy was doing well.  Unemployment fell to historically low levels, the employment to adult population ratio hit its zenith, and low wage workers were seeing increases in income.  I even remember walking to work in Madison in 1999 or so, and thinking to myself, "could the economy get any better than it is?"  I am thus in no position at call to complain about others having the same view.  All this said, Ferguson was spot on when he called for economists to disclose financial interests that might in any way be related to their research.

But the problem, I think, is far more insidious.  For people who are both successful and reflective, there must often be an undercurrent of doubt as to whether the success is "deserved:" is it a product of virtue or of luck. The neoclassical paradigm allows successful people to feel good about themselves.  It is not much of a leap to infer from it the proposition that people in a neoclassical world can make their own choices, and that when they make "good"choices, they are rewarded, and when they make "bad" choices, they are not.  The number of important choices available to us are, however, limited.  I try to remember that I did not get to choose the country where I was born, I did not get to choose that I had loving, well-educated parents, I did not get to choose that I grew up in a safe community, and I did not get to choose that I have never been seriously ill.  The problem with economics, I think, is not the money people take from various countries and companies, but a broader lack of reflection on the circumstances that produce outcomes.

To me the most disturbing aspect of Inside Job is not the revelation of consulting relationships, but the fact that the economists interviewed by Ferguson seem not to have changed their view of the world even a little.      Feldstein's statement that he had "no regrets" about AIG was the ultimate expression of this.    

Planes, Trains, Automobiles, George Will and Paul Krugman

I haven't blogged in awhile, so I am catching up a little....

Paul Krugman writes two blog posts about rail, one of which I like, and one of which I don't.

This one is, I think, correct:

Oh, boy — this George Will column (via Grist) is truly bizarre:

So why is America’s “win the future” administration so fixated on railroads, a technology that was the future two centuries ago? Because progressivism’s aim is the modification of (other people’s) behavior.

Forever seeking Archimedean levers for prying the world in directions they prefer, progressives say they embrace high-speed rail for many reasons—to improve the climate, increase competitiveness, enhance national security, reduce congestion, and rationalize land use. The length of the list of reasons, and the flimsiness of each, points to this conclusion: the real reason for progressives’ passion for trains is their goal of diminishing Americans’ individualism in order to make them more amenable to collectivism.


As Sarah Goodyear at Grist says, trains are a lot more empowering and individualistic than planes — and planes, not cars, are the main alternative to high-speed rail.

And there’s the bit about rail as an antiquated technology; try saying that after riding the Shanghai Maglev.


But anyway, it’s amazing to see Will — who is not a stupid man — embracing the sinister progressives-hate-your-freedom line, more or less right out of Atlas Shrugged; with the extra irony, of course, that John Galt’s significant other ran, well, a railroad.

Will nowadays seems to get the vapors over anything like a public good.  Air travel is indeed the alternative to rail, and it really is awful. The Acela in the Northeast is often prefrable to air travel, and my understanding is that it is profitable.  Perhaps similar quality service from, say, San Diego to Ventura County, along with a few other high density corridors, would work (I am skeptical about the ability of high speed rail to compete with Southwest Airlines, but let's leave that for another time).  Cars, moreover, do indeed produce environmental damage and congestion that is not priced properly,  European gas taxes and Singaporean congestion fees make lots of economic sense.  One could even use the revenue to hold low-income people harmless from the increased cost of auto transporation.

But in his next blog post, Krugman says:

And don’t get me started on how much more freedom of movement I feel in New York, with subways taking you almost everywhere, than in, say, LA, where you constantly have to worry about parking and traffic.

Well, trains take you almost everywhere on the West Side of Manhattan.  The trains are also mostly radial lines into Manhattan--try going from someplace in Queens to someplace in Brooklyn, and you will see that trains are not so wonderful.  Look, I think the New York City Subway System (and Metro North and the Long Island Rail Road and Path), are great things, but I am not sure how "liberating" it is to live in New York is you can't afford to live in Manhattan. My daughters lived in Brooklyn last summer, and getting around was not a walk in the park for them (except when they walked through a nearby park).

So I decided to look at American Community Survey Data (click on the spreadsheet) comparing the benighted among us who live in LA with those liberated New Yorkers.  The mean travel time for workers in Los Angeles County is 29 minutes.  In New York County it is 30 minutes.  In the four boroughs outside of Manhattan, it is 42 minutes in Kings, Queens, and Richmond Counties, and 41 minutes in Bronx County.  In metropolitan Los Angeles, 11 percent have a one-way commute of more than one hour; in metropolitan New York, almost 20 percent have such a long commute.  


[Update: in response to Minka's comment, I looked up the average one-way commute in metro San Francisco--it is the same as LA.  As for LA being a cultural wasteland, anyone who would say that after living here is willfully ignoring the music, theater and restaurant scene here.  LA is also far more diverse than San Francisco, which for me makes it a more interesting city.]

 


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Mike Lea and Tony Sanders diss the 30 year fixed rate mortgage

They do so in a paper.  I think Mike and Tony are smart guys.  But I think their reasoning is flawed here..

They basically argue that Fannie and Freddie were responsible for the 30-year fixed rate mortgage, and that they have been a catastrophe, and that therefore the 30-year fixed rate mortgage was a catastrophe.  But had FF done two things--stuck to prime 30-year fixed rate mortgages and matched the duration of their liabilities to the duration of their assets by using callable debt--they almost certainly would not have imploded.

FF imploded because they invested in AAA tranches of low quality mortgages (which were originated and securitized in the private sector) and Alt-A mortgages, and because they had to roll over too much short-term debt in 2008.

Lea and Sanders also argue that there is "nothing special about housing finance."  I am not sure I agree.  It is the one method households have to take on large amounts of leverage, and households are not in the position to hedge risk (not that our financial institutions proved to be particularly good at hedging).  

James Madison Harris 1915-2011

My father-in-law, James Madison Harris, died on Feb 26, 2011. As a young man in the Philippines, he was a cliff-diver. He played baseball and soccer professionally, and recorded 13 holes in one on the golf course. He was in the Army Signal Corp during World War II, and was a boilermaker on the Southern Pacific Railroad. He was in the railroad union and he played the violin. He was married to Flora Harris for 59 years. He was kind to everyone, and had a hell of a fine daughter.

Why aren't there more foreclosures in Europe?

Dwight Jaffee shows that mortgage foreclosures in Europe are still rare, even in distress countries such as Spain and the United Kingdom.  The question is why.  I have heard people in seminars suggest that it is because of recourse--it is ubiquitous in Europe.  But perhaps it is because the social safety net in Europe is stronger.   When Americans lose their jobs, it is hard for them to make mortgage payments.  When Europeans lose their jobs, it is still hard, but perhaps less so than in the US.  Just a thought....

Why I admire Mark Zandi

He work is speedy enough to be of use to the business community and policy debates; his work is rigorous enough to be credible.  He also doesn't take himself too seriously.  This short piece in Slate sums him up nicely.

Joel Kotkin cannot find evidence of a "Back to the City" movement

He puts together a table of suburban and core urban growth based on 2000 and 2010 census data.

MSA                   Core Growth                         Suburban Growth                             Total Growth

Austin	20.4%	56.1%	37.3%
Baltimore	-4.6%	9.9%	6.2%
Chicago	-6.9%	9.0%	3.9%
Dallas-Fort Worth	0.8%	30.2%	23.4%
Houston	7.5%	39.3%	26.1%
Indianapolis	5.0%	28.3%	15.2%
San Antonio	16.0%	43.7%	25.2%
Washington	5.2%	16.8%	15.4%
Total	3.2%	21.7%	15.7%

These are places for which the Census had released data by mid-February. Some of the places for which data has been released since then--St. Louis, Las Vegas and Birmingham--have the same pattern: in all cases suburban growth has outpaced central city growth. St. Louis' population has dropped to its lowest level since 1870.

The results seem particularly surprising for Chicago and Washington, which have had successful redevelopment in their urban cores. But redevelopment can actually reduce density. Gentrification often means that wealthy households rehabilitate mult-family properties into single family homes. This can lead to an increase in wealth in cities, but does not necessary translate into a relative increase in population.

I have long rooted for cities (although I confess that I myself live in an "urban" suburb). But facts are facts, and the facts from the 2010 census at this point do not support the idea of a reversal from suburbanization to urbanization.

From my daughter's blog: Hannah in Paris: Politics or nostalgia? » North by Northwestern

Hannah in Paris: Politics or nostalgia? » North by Northwestern

Property rights and time

When I moved to LA a bit more than two years ago, I bought a dryer.  Last week, the heating element went out.  The good news is that the dryer is still under warranty.  The bad news is that when the repair guy came to my house, he didn't have the part to fix it.  As I result, someone needs to be home a second time for the machine to get repaired.

The store from which I bought the dryer will only tell you what day they will come to do repairs--they won't give you a window of time for the day until the night before.  Consequently, to get a dryer that is under warranty repaired, one might well be required to give up two days. 

Because professors have a lot of flexibility in their jobs, this is not a huge deal for me.  For my wife, however, who is a phycician, this would be a big deal.  It would also be a big deal for any production or service worker who has little to no control over hours worked. 

The appliance store that sold and will repair the dryer has essetially asserted a property right to its customers' time--it is imposing costs that it is not forced to bear.  I am not sure whether it is true that this is happening over larger and larger swaths of the economy, but it sure seems so.  For instance, sometimes when I want to change a plane ticket, I am not allowed to do so on the web.  When I call the airline's number, I am sometimes required to wait on hold for a long time before I can talk to someone.  Now it is possible that the time saved on the web when I use it and the lower cost of airfare makes up for the cost of the dreadful phone service, but I am not sure.

Ryan Avent on Density and Skyscrapers

He writes:

This comparison encourages a lot of people (not necessarily Richard Green) to decide that we don’t need skyscrapers. Defenders of the Washington height limit often fall into this category. But there are two points worth making in response to this. One is that it would be harder to build Paris in America than it would be to build Manhattan. Paris’ tiny streets are more hostile to the automobile than anything in the US, including Manhattan. And Paris has relatively tall buildings over a vast area; it’s easier for me to imagine Washingtonians tolerating 30-story buildings downtown than 10-story buildings in a central neighborhood like Brookland. If you need 10-story buildings in every little Brookland-like neighborhood to generate the same density you achieve with 30-story buildings in a central business district, then you can basically forget about generating high densities in American cities. The NIMBYs are just too strong.


The second point is that Glaeser isn’t directing people to go out and build skyscrapers. He’s not a planner. He’s merely saying that, yes, allowing developers to meet demand with supply will often yield tall buildings, and that’s a good thing. It will increase densities relative to the alternative, supply-limited case, and it will improve affordability relative to the alternative, supply-limited case. People who read Glaeser lauding density and who go on to tout the advantages of Paris get his argument precisely backwards. Because density is good, it’s costly — in terms of the metropolitan economy and affordability — to adopt Parisian limits on growth. Unless your city is one of the architectural jewels of the modern world, and if you live in America it isn’t, you should work very hard to avoid such constraints.

I think the comment about Brookland is very much on point.  At the same time, I can't help but wonder if Washington would be a more attractive and affordable city if it allowed a bunch of six floor buildings almost anywhere, instead of skyscrapers in certain districts.  BTW, I think Washington is close to being one of the architectural jewels of the modern world--its vistas are among its best features.

But now let us consider Los Angeles, another expensive city that has relatively few skyscrapers. Because of regulations arising from seismic concerns, it is very expensive to build steel-framed glass-curtainwall buildings here.   At the same time, while land is expensive in LA, it is nowhere near as expensive as Manhattan.  The combination of high construction costs and (lower) land costs leaves me skeptical about whether high-rise buildings could be economically feasible here.

On the other hand, we should use our land more densely and efficiently here.  Lots of four-to-six story buildings would help.  Maybe narrowing some minor street would help--particularly in the San Fernando Valley and Orange County.

As I said in my original post, high rises are almost certainly the right hammer for very large cities, such as Mumbai, Cairo, Mexico City and Sao [Paulo].  Singapore and Hong Kong have proved that cities that rely on the skyscraper can be beautiful and livable (although affordable is actually still an issue in those places).  But not every city is a nail.

Are Skyscrapers Necessary for Density?

I just read Ed Glaeser's Atlantic piece on skyscrapers (which is excerpted from his new book on cities that I need to read).  I agree with nearly everything he says, particularly about the need for tall buildings in Mumbai, but I also think it is worth mentioning that one can get a lot of density without a lot of skyscrapers.  The municipality of Paris has a residential density of about 54,000 people per square mile; Manhattan has a residential densisity of about 71,000 people per square mile.  Paris has about 1.7 million workers, while Manhattan has about 2.1 million workers.  Yet as Ed notes, Manhattan has lots of skyscrapers, and Paris has few, and almost none outside of Le Defense.  How is this possible?

Let's look at a Google Earth image of Paris from 50,000 feet up:

Now lets's look at Manhattan from the same height:

Notice how at this scale you can see the minor streets of Manhattan pretty clearly, but not the minor streets of Paris?  Paris actually uses its land very efficiently--it does not waste space on streets or setbacks.  As a consequence, while it can be livable (if not affordable) with 3/4 of the denisity of Manhattan and a small fraction of the number of tall buildings of Manhattan.

There is no question that Ed is correct that mega-cities such as Mumbai, Cairo, Mexico City and Sao [Paulo] require skyscrapers to house people adequately and affordably.  But as he also notes, building skyscrapers is a lot more expensive than low-rise buildings.  For many cities, more efficient land-use could go a long way toward making cities more livable, more walkable, and less expensive.

Mark Zandi and Christian DiRitis on the Moral Hazard of a Hybrid Mortgage System

I think they get it right:

One potential weakness of a hybrid system involves moral hazard: If private investors believe the government will bail them out if things go badly, they will take inappropriate risks. Such concerns were illustrated by the recent experience with the two government-sponsored mortgage finance agencies, Fannie Mae and Freddie Mac. These institutions took on too much risk, holding too little capital for the kinds of investments they held in mortgage securities. While their private shareholders were effectively wiped out, bondholders were made whole when the federal government put Fannie and Freddie into conservatorship.

Moral hazard cannot be eliminated in a hybrid model, but it can be significantly mitigated. The system we support would require enough private capital to withstand losses associated with a 25% decline in house prices. Before the crisis, Fannie's and Freddie's capital levels were designed to withstand only a 10% decline. The hybrid system's catastrophic insurance would not kick in until losses reached levels consistent with a 25% price drop, providing significant financial incentive for private investors to make sound lending decisions. 

It is also important to recognize that moral hazard exists even in a fully privatized system. Investors in such a system are likely to assume that in extreme circumstances, the government would still step in, congressional pledges to the contrary notwithstanding. Recent experience has only reinforced this belief, as the government stepped in during the financial crisis to bail out the system. In the hybrid system plan, the government's backstop is explicit and paid for by private investors. 

Mark Thoma on Social Insurance

Mark's postings are reliably good, but today's is especially good:

...There is a need for social insurance. I had hoped this recession would show people that it can happen to anyone, that high moral character is not enough to protect you from the vagaries of the market system. One day a job can be gone, morals or not, savings can evaporate as a result, and all those years of doing the right thing -- putting a little away each month for the future -- provides little protection against financial ruin when there are no jobs to be found.




Don't get me wrong. I think it's good to make people aware of the amount of government services they consume, and that such awareness could help some in getting support for social insurance and other programs. So I'm not saying that making people aware of their own use of these services has no value. But I really do think the key to more widespread support is to make people aware of the need for social insurance, and the fact that insurance -- by it's very nature -- means that those people unlucky enough to need it will often consume more than they put in (just as would be the case under fire insurance if your house burns down), while others will consume less. That's how insurance works and we shouldn't resent those unlucky enough to need it.



The key here is to overcome the belief that the majority of people using these services are "gaming" the system to get handouts they don't deserve. If we are going to successfully defend the social insurance system, it is this belief that must be countered. Of course such behavior goes on, there will always be people who try to take advantage of any system that is put in place (in the public or private sector), but this is not the predominant feature of these programs. The share of "deadbeats" is not large, it is relatively small given all the good such programs do, and that's the message that needs to be delivered. The social benefits clearly exceed the costs of providing these services, but it will be tough to make this case convincingly -- the opposition can always find isolated cases where people take advantage of the system and surround them with negative publicity. This has been a successful strategy, and it will take a concerted effort to counter overcome such efforts.

Four quick points about Fannie-Freddie Reform

(1) Why have an explicit guarantee?  If TARP should have taught us anything, it is that there are implicit guarantees everywhere; it is better to be up-front about the fact that the government does provide backstops in times of crisis.

(2) How to price the guarantee?  Mark Zandi has a good explanation.  The hard part is going to be to keep fees up in times of low defaults.  In the early part of the last decade, Fannie and Freddie were criticized for earning excess profits on their guarantee fees, for the simple reason that defaults on prime mortgages essentially didn't exist in the 1998-2005 period.  Complaining about Fannie-Freddie's g-fees at that time would be akin to complaining the State Farm enjoys excess profits when Florida goes a year without a hurricane.

(3) In the absence of government intervention in the market, the long-term fixed-rate prepayable mortgage will likely go away.  These mortgages are expensive to households, but they also provide a level of certainty that helps households manage risk.  Households are already facing more risk than before (defined benefit pensions, anyone?), so I am not sure it is a good idea to add even more.

(4) I worry about high downpayment requirements.  It is clear that households need to put some of their own money into a house for a mortgage to be safe (gifts and grants don't count).  But while the overall homeownership rate for the US is fine, the substantial gap between whites and minorities, more than 20 percentage points, is not.  Minorities have far less wealth than whites, and across the generations, have had wealth systematically expropriated; minorities have also been discriminated against by the government in credit markets.  Massey and Denton:

In rating the home, the FHA established minimum standards for lot size, setbacks and separation from existing structures that essentially eliminated many inner-city dwellings....in the late 1940s, the FHA recommended the use of application of racially restrictive covenants...per capita mortgage spending was 6.3 times greater [in St. Louis County relative to the city of St. Louis].

I suppose in light of history, direct payments to the heirs of those who have had wealth systematically stripped away makes more sense than trying to close the homeownership gap.  But the latter seems more politically doable than the former.

SIngapore Envy

Tom Friedman rhapsodizes too much about Singapore.  While it is hardly the least free society in the world, the People's Action Party for all intents and purposes has a political monopoly.  Singapore's GINI coefficient is higher than the United States for income, as is its ratio 90th percentile to 10th percentile income.

Nevertheless, every time I pass through the city-state (I just did for the third time), I am awed by its transportation infrastructure: beautifully landscaped expressways, congestion pricing for automobiles, and well-operated bus and trail transit.  Transit is very clean, fast and efficient, and runs frequently.  The trains are often crowded but somehow not too crowded.  Changi airport is a public works project of the sort that once filled American's with pride--it is to airports what Hoover Dam is to, well, dams.  Changi is also profitable.

So when I come home to Los Angeles, I find LAX to be a little embarrassing.  When I use transit from the airport, the Flyaway Bus, I find it to be unreliable and less than spotless.  The process of buying a ticket (at the end of the journey) is cumbersome.  It would be one thing if LA were unusually bad about such things for US cities, but it is not.  The fact that New York is having a hard time getting a second rail tunnel built under the Hudson also reflects America's seeming inability to provide necessary public works.