Mike Konczal gives Six Reasons not to believe the meme that Fannie and Freddie caused the crisis

Reproduced with his kind permission:

1. Private markets caused the shady mortgage boom: The first thing to point out is that the both the subprime mortgage boom and the subsequent crash are very much concentrated in the private market, especially the private label securitization channel (PLS) market. The Government-Sponsored Entities (GSEs, or Fannie and Freddie) were not behind them. The fly-by-night lending boom, slicing and dicing mortgage bonds, derivatives and CDOs, and all the other shadiness of the mortgage market in the 2000s were Wall Street creations, and they drove all those risky mortgages.
Here’s some data to back that up: “More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions… Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.”
As Center For American Progress’s David Min pointed out to me, the timing doesn’t work at all: “But from 2002-2005, [GSEs] saw a fairly precipitous drop in market share, going from about 50% to just under 30% of all mortgage originations. Conversely, private label securitization [PLS] shot up from about 10% to about 40% over the same period. This is, to state the obvious, a very radical shift in mortgage originations that overlapped neatly with the origination of the most toxic home loans.”

2. The government’s affordability mission didn’t cause the crisis: The next thing to mention is that the “affordability goals” of the GSEs, as well as the Community Reinvestment Act (CRA), didn’t cause the problems. Randy Krozner summarized one of the better studies on this so far, finding that “the very small share of all higher-priced loan originations that can reasonably be attributed to the CRA makes it hard to imagine how this law could have contributed in any meaningful way to the current subprime crisis.” The CRA wasn’t nearly big enough to cause these problems.
I’d recommend checking out “A Closer Look at Fannie Mae and Freddie Mac: What We Know, What We Think We Know and What We Don’t Know“ by Jason Thomas and Robert Van Order for more on the GSEs’ goals, which, in addition to explaining how their affordability mission is a distraction, argues that subprime loans were only 5 percent of the GSEs’ losses. The GSEs also bought the highly rated tranches of mortgage bonds, for which there was already a ton of demand.

3. There is a lot of research to back this up and little against it: This is not exactly an obscure corner of the wonk world — it is one of the most studied capital markets in the world. What has other research found on this matter? From Min:

Did Fannie and Freddie buy high-risk mortgage-backed securities? Yes. But they did not buy enough of them to be blamed for the mortgage crisis. Highly respected analysts who have looked at these data in much greater detail than Wallison, Pinto, or myself, including the nonpartisan Government Accountability Office, the Harvard Joint Center for Housing Studies, the Financial Crisis Inquiry Commission majority, the Federal Housing Finance Agency, and virtually all academics, including the University of North Carolina, Glaeser et al at Harvard, and the St. Louis Federal Reserve, have all rejected the Wallison/Pinto argument that federal affordable housing policies were responsible for the proliferation of actual high-risk mortgages over the past decade.

The other side has virtually no research conducted that explains their argument, with one exception that I’ll cover below.

4. Conservatives sang a different tune before the crash: Conservative think tanks spent the 2000s saying the exact opposite of what they are saying now and the opposite of what Bloomberg said above. They argued that the CRA and the GSEs were getting in the way of getting risky subprime mortgages to risky subprime borrowers.

My personal favorite is Cato’s “Should CRA Stand for ‘Community Redundancy Act?’” from 2000 (here’s a write-up by James Kwak), which argues a position amplified in its 2003 Handbook for Congress financial deregulation chapter: “by increasing the costs to banks of doing business in distressed communities, the CRA makes banks likely to deny credit to marginal borrowers that would qualify for credit if costs were not so high.” Replace “marginal” with Bloomberg’s “on the cusp” and you get the same idea.

Bill Black went through what AEI said about the GSEs during the 2000s and it is the same thing — that they were blocking subprime loans from being made. In the words of Peter Wallison in 2004: “In recent years, study after study has shown that Fannie Mae and Freddie Mac are failing to do even as much as banks and S&Ls in providing financing for affordable housing, including minority and low income housing.”

5. Expanding the subprime loan category to say GSEs had more exposure makes no sense: Some argue that the GSEs had huge subprime exposure if you create a new category that supposedly represents the risks of subprime more accurately. This new “high-risk” category is associated with a consultant to AEI named Ed Pinto, and his analysis deliberately blurs the wording on “high-risk” and subprime in much of his writings. David Min broke down the numbers, and I wrote about it here. Here’s a graphic from Min’s follow-up work, addressing criticism:

Even this “high risk” category isn’t risky compared to subprime and it looks like the national average. When you divide it by private label, the numbers are even worse. Private label loans “have defaulted at over 6x the rate of GSE loans, as well as the fact that private label securitization is responsible for 42% of all delinquencies despite accounting for only 13% of all outstanding loans (as compared to the GSEs being responsible for 22% of all delinquencies despite accounting for 57% of all outstanding loans).” The issue isn’t this fake “high risk” category, it is subprime and private label origination.
The Financial Crisis Inquiry Commission (FCIC) panel looked carefully at this argument and also ended up shredding it. So even those who blame the GSEs can’t get the numbers to work when they make up categories.

6. Even some Republicans don’t agree with this argument: The three Republicans on the FCIC panel rejected the “blame the GSEs/Congress” approach to explaining the crisis in their minority report. Indeed, they, and most conservatives who know this is a dead end, tend to take a “it’s a whole lot of things, hoocoodanode?” approach.

Peter Wallison blamed the GSEs when he served as the fourth Republican on the FCIC panel. What did the other three Republicans make of his argument? Check out these released FCIC emails from the GOP members. They are really fun, because you can see the other Republicans doing damage control and debating whether Wallison and Pinto were on the take for making this argument — because the argument makes no sense when looking at the data.

There are lots of great quotes: “Re: peter, it seems that if you get pinto on your side, peter can’t complain. But is peter thinking idependently [sic] or is he just a parrot for pinto?”, “I can’t tell re: who is the leader and who is the follower,” “Maybe this email is reaching you too late but I think wmt [William M. Thomas] is going to push to find out if pinto is being paid by anyone.” And then there’s the infamous event where Wallison emailed his fellow GOP member: “It’s very important, I think, that what we say in our separate statements not undermine the ability of the new House GOP to modify or repeal Dodd-Frank.”

The GSEs had a serious corruption problem and were flawed in design — Jeff Madrick and Frank Partnoy had a good column about the GSEs in the NYRB recently that you should check out about all this — but they were not the culprits of the bubble

It is time to kill California High Speed Rail

Lisa Schweitzer notes that the cost estimate has been raised to nearly $100 billion (which she says still might understate the cost).

Let's do a little math about this--$100 billion throws off about $5 billion per year. If low income people work 200 250 days a year, and we were to fully subsidize the $5 LA metro day pass (and if I have my zeros right), we could fund 5 4 million people's transit per year.

Well, that straightens things out

I found this on my cousin's web page:

How my taxes are raised matters

I need to pay higher taxes.  To get to fiscal balance, I need to pay higher taxes.  To fund the things I support, such as national health insurance, more Section 8 housing, and a robust military, I need to pay higher taxes.  But I am not paying them alone--to pay more without others paying more is a gesture, and would not solve anything.

The federal government can get at me one of two ways: it can scale back or eliminate my deductions, or it can raise my rates.  If my mortgage interest deduction goes away, for example, my federal tax liability would increase by around 10 percent; alternatively, the federal government could just charge me a ten percent surtax on income.

If my income is taxed, the impact on my desire to work is ambiguous.  On the one hand, because the cost of leisure would fall, I would have an incentive to work less.  On the other hand, if I want to restore my previous after tax standard of living, I would have an incentive to work more.

If you take away my mortgage interest deduction, however, the impact is not ambiguous--I will have an incentive to work more.  Leisure is no less expensive (there is no substitution effect), but my desire to restore my previous income remains as before.  

A picture to inform tax policy for closing the deficit

From CBO:

The new HARP might help...

From this morning's New York Times:

The Federal Housing Finance Agency, which oversees mortgage finance giants Fannie Mae and Freddie Mac, said it was easing the terms of the two-year-old Home Affordable Refinance Program, which helps borrowers who have been making mortgage payments on time but have not been able to refinance as home values have dropped...

...To encourage banks to participate in the program, FHFA is revamping it to protect lenders from having to buy back HARP loans if underwriting problems are later found. Banks will only have to verify that borrowers have made at least six of their last mortgage payments and the new rules eliminate the need for appraisals in most cases.FHFA said government-controlled Fannie Mae and Freddie Mac will waive certain fees for borrowers that refinance into loans with a shorter term, such as 15 years, aiming to spur homeowners to pay down the amount they owe at a faster rate.

The elimination of the requirement for an appraisal will make a big difference.  So will the waiver of fees for those who shorten terms.  Lower interest rates and shorter terms will help borrowers get right-side up faster.

Type I error, Type II error, and voting

No matter how our registration laws are set up, we will make errors: either people who are eligible to vote will be prevented from doing so, or people who are not eligible to vote will be allowed to do so.  Type I error falsely rejects a null hypothesis, while Type II error falsely fails to reject a null hypothesis.

If the null is that people who should be eligible to vote should be allowed to vote, then the new voter registration laws  being propagated around the country will produce more Type I error.  Two points here--I suspect that the new laws will create a lot more Type I error than precent Type II error.  Also, to me, Type I error is more serious than Type II error--preventing eligible voters from voting is a more egregious error than  allowing ineligible voters to vote.

Another impediment to short sales?

This morning, I participated in a conference in Lakewood on housing sponsored by Rep. Linda Sanchez.   A HUD representative made me aware of an issue I hadn't known about before: how mortgage insurance is giving lenders an incentive to foreclose, rather than agree to short sales.

Apparently, a number of lenders bought mortgage insurance on particular mortgages from private mortgage insurance companies.  To clarify, the lenders did not require borrowers to purchase the mortgage insurance, but rather bought mortgage insurance (and paid the cost) on their own.

Under the terms of the policies, the lenders get a pay-off from the PMI companies is they foreclose on a property, but not if they modify a loan or allow for a short sale.  Consequently, lenders are better off foreclosing than modifying, even if the foreclosure produces lower proceeds than a modification.

This is yet another perverse incentive that is contrary to the policy aim of stabilizing the housing market.  I have no idea how widespread this is, but if it is common, it is yet another problem.  

Plane and train envy

One of the privileges of my job is I get to travel a lot.  In the past year, I have been to Hong Kong, Seoul and Singapore.  All three cities have great airports, and nice, clean, comfortable, fast rail transportation from their central cities to their airports.

By comparison, many airport terminals in the US--including two of our biggest international airports, LAX and JFK--are embarrassing, and transportation options to them are limited.  Perhaps such things don't matter much to economic performance--it is easy to overstate the wonders of nice infrastructure when the cost is being hidden via subsidies.  Nevertheless, there is something about the ability of Asian cities to do infrastructure well that makes me envious.   

Lucid is the eye of the beholder

Ed Glaeser celebrates Tom Sargent in a recent Bloomberg column (h/t my father).  The following statement really struck me:

Two of his lucid monographs, “Macroeconomic Theory” and “Dynamic Economic Theory,” have long been mainstays of macroeconomic education

I am guessing pretty much anyone who went to grad school in econ in the late 1980s was subjected to "Macroeconomic Theory."  It has indeed become a useful reference to me, but lucid is about the last word I would use to describe it.  Lucid writers (within the realm of their academic work) include Paul Krugman, Milton Friedman and....Ed Glaeser.  Michael Intriligator manages to make dynamic optimization intuitive.  I just don't see how Sargent gets in the same category.

For free trade to fulfill its promise, the national government must redistribute income

As a card-carrying economist, I like trade--overall, it potentially enriches countries that engage in it.  The problem is the meaning of enrichment.

Trade theory says that trade enlarges the pie that people share.  But among the most important contributions to trade theory is the Samuelson-Stolper Theorem, which says that relatively scarce factors of production see their returns fall when trade is introduced.  In the context of an economy like the US, this means that low skilled workers see their wages fall in the presence of trade.  The trajectory of wages in the US over the past 20 years or so is consistent with the predictions of Samuelson and Stolper.

NAFTA was sold to the US public as something that would make everyone better off.  And in principle, it could have done so, had some of the gains to those who benefited from NAFTA been redistributed to those who lost as a result of it.  Instead we got the NAFTA but not redistribution.  This likely explains the widening disparity of incomes.

Why Einstein was wrong about being wrong

Why Einstein was wrong about being wrong

h/t Mark Thoma. The piece is a lot of fun.

Urban Population Share and Carbon Footprints

I am teaching Ed Glaeser's Triumph of the City to my undergrads right now; he has a chapter called "Is there anything greener than blacktop."  Just for fun, I plotted urban land share by state (source Demographia) against CO2 emissions per capita by state.  Here is what you get:

The regression line is log-linear.  An R2 of .28 on a bivariate relationship is not awful.  One should never make claims based on such things, but they are kind of fun to look at.

A couple of thoughts on the passing of Steve Jobs

(1) I wish we could have a tax code that could somehow discriminate between the truly productive rich and the, well, rich.  While I agree with Elizabeth Warren that no one gets rich by himself, there are rare people who really do know how to spend their own money better than the government.  The social returns to Steve Jobs must be remarkable.

(2) When politicians (and others) pay fealty to a market economic, their implicit assumption is that markets are competitive and exhibit, among other things, industrial (if not firm specific) constant returns to scale.  But successful enterprises like Apple often exhibit increasing returns to scale, at least for awhile, and certainly do not produce commodities sold into a competitive market.  Apple's innovation gives ii market pricing power, which is why it is so successful.  Without that pricing power, there might never be an Apple.  Yet the fact that success often requires market power implies that policies based on an assumption of a competitive equilibrium might be misplaced, perhaps disastrously so.

My testimony to Senate Finance Committtee on Housing and Tax Reform

I testified today.  Here is how the written testimony opens:

Chairman Baucus and Ranking Member Hatch, I want to thank you for the opportunity today to present my views on the issue of housing and tax reform.  My name is Richard Green, and I am a professor in the School of Policy, Planning and Development and the Marshall School of Business at the University of Southern California.  I have published extensively on the issue of the Mortgage Interest Deduction, and in particular published a paper co-authored with Dennis Capozza and Patric H. Hendershott on housing and fundamental tax reform for the Brookings Institution[1].

My general philosophy is that the tax code should be as broad-based and efficient as possible, while maintaining vertical and horizontal equity to the best extent possible.  I find many of the ideas proposed by Robert Hall and Alvin Rabushka to be quite appealing, and to me, in an ideal world, we would have something quite similar to the tax code they propose, albeit with an earned income tax credit added.  That said, we are manifestly not in an ideal world, and issues of transition matter.  As I wrote in 1996, a rapid change in tax policy could have a traumatic impact on the economy, so it is important that congress phase in any major changes to tax policy involving housing.

That said, I have long thought that the Mortgage Interest Deduction is a residual of the 1913 tax code, accomplishes little that its supporters claim for it, pushes capital away from plant and equipment toward housing, and benefits high income (although perhaps not very high income) households more than the remainder of the country.

I will divide my remarks into 8 parts; (1) I will argue that the Mortgage Interest Deduction is a residual of the 1913 tax code, and was not created to encourage homeownership; (2) that those on the margin of homeowning get little-to-no benefit from the Mortgage Interest Deduction, and that the policy therefore does little to encourage homeownership; (3) that the Mortgage Interest Deduction does encourage those who would be homeowners anyway to purchase larger houses than they otherwise would; (4) that even in the absence of the Mortgage Interest Deduction, owner-occupants receive a large tax benefit; (5) that phasing out the Mortgage Interest Deduction would encourage households to pay down their mortgages more quickly, and would therefore encourage households to rely less on leverage; (6) household deleveraging would lead to greater market stability, but would also mean that the revenues generated by the elimination of the deduction would be smaller than static estimates suggest; (7) at a time when the housing market remains quite weak, it is important that the Mortgage Interest Deduction be phased out carefully; (8) that if we do wish to encourage homeownership via tax policy, a targeted, refundable credit would be more effective than the current Mortgage Interest Deduction.

---

[1] Dennis Capozza, Richard Green and Patric Hendershott (1996), Taxes, Mortgage Borrowing and Residential Land Prices in H. Aaron and W. Gale, ed. The Economic Effects of Fundamental tax Reform, Washington, DC Brookings Institution Press: 171-210

There is no reason to be upset with BofA for its new debit-card fees.

The ATM Debit-card fee is transparent and easy to understand.  This is far preferable to the spate of fees (such as overdraft insurance charges) that were opaque and confounding.  If Bank of America wants to charge for a service, they should be free to do so. 

Will the private market step in?

Conforming loan limits in San Berardino and Riverside Counties in California will drop from $500,000 to $417,000 tomorrow; in LA and Orange Counties it will drop from $729,750 to $625,500. 

So we have a natural experiment in "crowding in."  Will the private lending sector fill the gaps?

Austerity is a problem, but so is fear

Paul Krugman this morning argues that fear of fear is phony.  He is almost certainly correct that fear is not the number one problem at the moment--if I had to pick a number one issue, it would be austerity measures at the state and local levels of government.  Tracy Gordon of Brookings has a nice picture:

 Cuts in state and local government jobs (police officers, school teachers, firefighters, DMV workers) are putting a drag on employment growth.  Moreover, this picture understates the problem, because total compensation to many state and local workers has been cut.

But I do think fear is part of the problem, at least in one sector of the economy.  It seems to me that there are business opportunities in lending that are going unanswered.  The pendulum for underwriting has swung so far to caution that according to the Flow of Funds Accounts, net lending declined in the second quart of 2011.  More specifically, net bank lending dropped by $181 billion on an annualized basis in the first quarter and by $129 billion in the second quarter.  Net lending is the difference between volume of new loans and volume of repayment of old loans. I do find it plausible that one of the sources of the tight lending environment is a fear of regulators.

One more point.  if it weren't for lending by the monetary authority, net lending in the second quarter would have fallen by $860 billion on an annualized basis.

My friend (and co-author) Andy Reschovsky wins Steve Gold award

It was nice to read about it this morning:

University of Wisconsin–Madison economist Andrew Reschovsky will be honored in November with the 2011 Steve Gold Award, which recognizes a person who has made a significant contribution to public financial management in the field of intergovernmental relations and state and local finance.

The Association for Public Policy Analysis and Management, the National Conference of State Legislatures and the National Tax Association give the award each year in memory of Steve Gold, an active member of all three organizations whose career and life tragically were shortened by illness.
"I knew Steve Gold, which makes receiving this award even more meaningful," says Reschovsky, a professor of public affairs and applied economics in UW–Madison's La Follette School of Public Affairs. "As a public finance economist, Steve believed his role was to communicate to policymakers about research and analysis. His emphasis on the link between scholarship and practice and on policy-oriented work on public finance has very much influenced my career."

Boston Fed President Eric Rosengren on the need to facilitate refinances (h/t Kurt Paulsen)

He says at a meeting in Stockholm:

There are several proposals that attempt to facilitate refinancing for homeowners who have been negatively impacted by the drop in housing prices. These proposals do face hurdles, including how to address private mortgage insurance and second liens. However, a program that made it possible for many homeowners to refinance, even if they were upside down, would likely provide significant reductions in mortgage payments to individuals who are likely to have a relatively high propensity to consume. Clearly getting more money into the hands of homeowners who would spend it could help to fuel GDP growth. This would reduce one of the impediments to a more significant effect from the monetary policy actions taken to date.

I hasten to add that there is already a government program to allow underwater borrowers to refinance, the Home Affordable Refinance Program (HARP). This program allows underwater borrowers with Fannie Mae or Freddie Mac loans to refinance at lower rates. Unfortunately, the program has helped fewer borrowers than was originally hoped. Fed Governor Betsy Duke outlined some of the potential reasons why, in the talk I mentioned earlier. They include loan-level price adjustments (LLPAs) that raise interest rates for many borrowers and thereby reduce the benefit of refinancing; originator worries about “buybacks” forced on them by Fannie Mae and Freddie Mac; junior lien-holder resistance to re-subordinating their loans; and mortgage insurance policies.

The Federal Housing Finance Agency (FHFA) is now investigating whether there are ways to enhance the program to benefit more borrowers.[Footnote 15] As this work proceeds, I hope the FHFA considers dropping or reducing LLPAs in cases when a GSE loan is refinanced into another GSE loan. Such a refinance actually reduces the GSE’s credit risk (they already guarantee the existing mortgage and the homeowner will be able to take advantage of lower rates, freeing up cash flow).

Am I posting this because I agree with it?  Yes. 

Hard Choices

Los Angeles (and other large cities) have food deserts--places with limited access to fresh, healthful, relatively inexpensive food.  Low-income people living in food deserts are at a particular disadvantage, because they can't afford cars, and therefore often do not have access to supermarkets. A common hypothesis is that poor kids eat unhealthy food because they don't have access to healthy food.  (I think this is only partially true--kids also eat unhealthy food because they like it.  For that matter, I still love McDonald's fries, I just try to limit my intake, and am in part able to because I have access to better alternatives).

Tesco's Fresh and Easy, a chain that develops and operates small grocery stores that feature fresh fruit and vegetables at reasonable prices, has decided on a business strategy of locating in food deserts.  This is potentially a great thing for kids who live in these places (especially if Fresh and Easy can figure out how to take WIC vouchers).  But this begs the question of how they are able to sustain such a business model.  Two answers present themselves--they are a non-union shop, and they rely heavily on automation.  Specifically, Fresh and Easy features self check-out, and so the store doesn't have to hire checkers.   Self check-out also makes it hard for Fresh and Easy to accept paper certificates, such as WIC vouchers, as payment.

So the cost of Fresh and Easy is that it may drive down wages for grocery workers a bit, and it may reduce employment for grocery workers.  The benefit is that it gives low-income children access to reasonably priced, good quality, fresh foods.  My personal social welfare function says to me that feeding kids inexpensively and well dominates most other considerations, but let's not pretend that there isn't a trade-off.

Michio Kaku on CERN's Challenge to Relativity

In this morning's WSJ:

Reputations may rise and fall. But in the end, this is a victory for science. No theory is carved in stone. Science is merciless when it comes to testing all theories over and over, at any time, in any place. Unlike religion or politics, science is ultimately decided by experiments, done repeatedly in every form. There are no sacred cows. In science, 100 authorities count for nothing. Experiment counts for everything.

A reminder: Ronald Reagan raised capital gains taxes

The Tax Reform Act of 1986 actually did two things that required the affluent to pay higher taxes: it raised the effective tax rate on long-term capital gains from 20 to 28 percent, and it eliminated the ability to write passive losses against ordinary income.  This meant that after 1986, Warren Buffett's taxes would have been at least as high as his secretary's.  

Read Taylor Branch's Atlantic Piece on the NCAA

Let me pull out two paragraphs from the powerful story:

Educators are in thrall to their athletic departments because of these television riches and because they respect the political furies that can burst from a locker room. “There’s fear,” Friday told me when I visited him on the University of North Carolina campus in Chapel Hill last fall. As we spoke, two giant construction cranes towered nearby over the university’s Kenan Stadium, working on the latest $77 million renovation. (The University of Michigan spent almost four times that much to expand its Big House.) Friday insisted that for the networks, paying huge sums to universities was a bargain. “We do every little thing for them,” he said. “We furnish the theater, the actors, the lights, the music, and the audience for a drama measured neatly in time slots. They bring the camera and turn it on.” Friday, a weathered idealist at 91, laments the control universities have ceded in pursuit of this money. If television wants to broadcast football from here on a Thursday night, he said, “we shut down the university at 3 o’clock to accommodate the crowds.” He longed for a campus identity more centered in an academic mission.

and

“Scholarship athletes are already paid,” declared the Knight Commission members, “in the most meaningful way possible: with a free education.” This evasion by prominent educators severed my last reluctant, emotional tie with imposed amateurism. I found it worse than self-serving. It echoes masters who once claimed that heavenly salvation would outweigh earthly injustice to slaves. In the era when our college sports first arose, colonial powers were turning the whole world upside down to define their own interests as all-inclusive and benevolent. Just so, the NCAA calls it heinous exploitation to pay college athletes a fair portion of what they earn.

I love college athletics (I am thrilled that I have gotten to attend three Rose Bowls in which Wisconsin played) and admire many college athletes.  I not only envy their athletic prowess, I am amazed at the varsity athlete who can manage a B average in a difficult major while playing a sport.

But the NCAA system gives these athletes a raw deal.  Among other things, the system makes it difficult for athletes in revenue generating sports to get a real college experience--practice and games can leave students too tired to focus on class (yes, I know some athletes have no interest in class to begin with, but in my experience they are a distinct minority).  If the "pay" is supposed to be an education, the least we as colleges and universities can do is make sure athletes get one.

Allowing underwater borrowers to refinance could improve investors' Sharpe Ratio

Consider borrowers with 6 percent 30-year mortgages that are 20 percent underwater.  Assume that the probability that any one borrower will default in any one month is .2 percent, and that the cost of default to the lender conditional on default is 50 percent.  Assume that at the end of five years, any remaining long balance is paid off).  A security containing such mortgages will have an IRR of 4.83 percent (I am happy to share the spreadsheet for the details.

Now let us convert the borrowers into people with 4 percent mortgages with 20 year terms.  The payment from such mortgages will be essentially the same as before, and the mortgage balance will be paid off more quickly.  The good news for investors is that this lowers the probability of default; the bad news is that it reduces the yield before default.  Assuming default probabilities in any one month go down to .1 percent, the IRR for investors goes down to 3.45 percent.  This seems like a bad deal for investors, except that they will have more certainty about their cash flows; the standard deviation of their investment falls.  Because default is binomial, we can calculate that the variance of returns will be p*(expected loss)*(1-p*expected loss).  The variance of not refinancing is thus .0099 and of refinancing is .004975, which translate into standard deviations of .1 and .07.  Because the riskless rate is currrently zero, when we substitute into the Sharpe formula, we find

Sharpe no refinance = .048/.1; Sharpe refinance = .0345/.07. 

This is about .5 in both cases, suggesting that investors are getting the same risk adjusted return whether refinancing becomes easy of not, assuming the assumptions are correct.  I am not saying they are; I am saying that in making policy we need to think about these sorts of implications.

Testimony to Senate Banking Committee on the Need for Mortgage Guarantees

I testified yesterday.

If the Walt Disney Company ran LA Metro...

People would pay $80 a day to leave their cars in a garage, and then walk from one mode of rail transit to another.  And the rail trips would leave you where you started.

Jim Follain has a proposal for empirical macro

He writes:

First, let’s do more research to help reduce the uncertainty regarding the fiscal situation we face and the new, modern and more complex economy in which we live. This step will involve de-emphasizing a number of metrics underlying macroeconomics built around national totals, such as national income, GDP and the aggregate unemployment rate. Instead, we are wise to take a more geographically granular view of our economy that measures regional, state and local economic activity and adapts policies specific to these areas. Focusing upon the national aggregate or the national average masks the extraordinary variation among markets in this country and, indeed, can even make it harder to identify seriously stressful events until it’s too late. This is difficult to do, but c’est la vie.

Ten-Year Treasury Below 2 percent!

If I am reading this graph correctly, we are at a 130 year record:

Those bond vigilantes sure are being vengeful.  And how about that S&P downgrade?

The good news graph of the day, though, comes from the Fed:

This is the average financial obligation ratio, which is debt service plus rent over disposable income.  Lower interest rates do seem to be helping, although it would be useful to know what has happened to the median, as opposed to average, household.  I refinanced my mortgage earlier this year, and it was great, and meant my financial obligation ratio fell by ten percent or so. But underwater borrowers who can't refinance (or households whose income fell enough to precent qualification for a new mortgage) may be worse off than before.  It is hence possible that while the average has improved, the median has not.

Where are the Medicis when you need them?

Richard White's Railroaded: The Transcontinentals and the Making of Modern America, is a wonderful book.  In it he shows how the railroad barons were crooks and swindlers who suckled on the federal teat every bit as much as the deposed yet still wealthy CEOs of failed Wall Street and mortgage firms.

But at least the Huntingtons (well, Collis' nephew Henry, anyway) left us with the Huntington Library and Gardens, an institution that by itself makes a trip to Pasadena worthwhile.  And Leland Stanford left us with, well, Stanford.  Angelo?  Dick?  We're waiting.

Realtors should love school spending

In the most recent Wisconsin gubernatorial election, Realtors and homebuilders were the leading campaign contributors to Scott Walker. As governor, Walker has shown hostility toward public education in general and school teachers in particular.  If one were to analyze what ails Wisconsin, public education would not rise to the top of the list, because Wisconsin has among the highest high school graduation rates in the country (or conversely. among the lowest drop-out rates), along with strong SAT and ACT scores.  Milwaukee public schools are another matter, but somehow I do not think the school children of Milwaukee are among the top of Governor Walker's concerns.

Beyond all this, however, it puzzles me as to why real estate people would support someone hostile to public education.  There is a very long literature that shows that spending on schools produces higher property values, particularly in the suburbs that are the places where Realtors and homebuilders make most of their money.  Lisa Barrow and Cecilia Rouse:

In this paper we use a 'market-based' approach to examine whether increased school expenditures are valued by potential residents and whether the current level of public school provision is inefficient. We do so by employing an instrumental variables strategy to estimate the effect of state education aid on residential property values. We find evidence that, on net, additional state aid is valued by potential residents and that school districts do not appear to overspend on education. We also find that school districts may overspend in areas in which residents are poor or less educated, in large districts, and in districts with higher shares of rental property. One interpretation of these results is that increased competition has the potential to reduce overspending on public schools in some areas.

A money quote from the NBER digest on the paper:

… A $1.00 increase in per pupil state aid increases aggregate per pupil housing values by about $20.00, indicating that potential residents value education expenditure."


The Barrow and Rouse paper are not alone in their findings: starting with Wally Oates' seminal 1969 paper through Hilber and Mayer's recent work, the empirical literature finds that school expenditures produce higher property values.


Wisconsin's economy has real problems, among which is a startling poor culture of entrepeneurship: if one looks at venture capital, it ranks very poorly.  As such, the children that it educates well leave for other states to find opportunity (despite the stellar performance of its schools, its adult labor force is below average in share of workers with a college degree).  But to attack one of the things the state does well--public education--makes no sense.   And for Realtors to abet an attack that diminishes their own earning power makes even less sense.

A point I wish I had made to NPR

I just finished taping an interview with Robert Siegel on finding our way out of the housing crisis.  I agreed with Elizabeth Duke about the need to blow out second liens, and with the Hubbard-Mayer-Gross plan to allow current underwater borrowers to refinance easily.

My contribution was that we needed to perform a kind of triage--that places that had massive house price declines and have very high unemployment (i.e., Miami, Las Vegas, Fresno) should get debt relief, lest it take forever for them to recover.  What I didn't say (and I wish I had) is that one way or another, many loans in these places will fail, because it will be nearly impossible for borrowers to get above water.  We might as well take the pain of the write-offs now, rather than have zombie-loans hanging around. 

Allowing underwater borrowers to refinance could help

Yves Smith and Adam Levitin, for whom I have enormous respect, argue that allowing underwater borrowers to refinance their mortgages at lower rates would not help the housing market very much.  I am not so sure.

Consider a borrower with a six percent mortgage whose house is worth 80 percent of the mortgage balance.  Let's also say that it is four years into its mortgage--so it has 26 years remaining on its term.  If house prices remain flat, it will be 11 years and 9 months before the mortgage balance drops to the value of the house. 

Suppose we were to convert the mortgage to a 4.5 percent mortgage but left the mortgage payment the same.  In the first month, the amount of principal payment would increase by 2.35 fold.  The borrower would be above water in 5 years and 5 months (I have a spreadsheet with the calculations, should anyone be interested).  If house prices rise by two percent per year, the 4.5 percent borrower would be right-side up in less than four years.  Helping borrower see a light at the end of the tunnel could really make a difference (I don't see borrower in Las Vegas ever seeing that light, but not everyone is in Las Vegas).

Personally, I would rather see some principal reduction too, but allowing free refinancings on Fannie and Freddie mortgages could materially benefit the housing market.

Top 10 Least-Polluting U.S. Metros

From the Urban Land Institute:

Top 10 Least-Polluting U.S. Metros: As greenhouse gas (GHG) reduction policies
gain momentum at the federal and metropolitan levels, a new study about urban
areas’ GHG emissions levels could have implications for real estate
developers.

It is stirking that LA is among the best 10, and is not materially different from Portland and is even a little better than Boston and Seattle. To be fair, the climate here is mild in both winter and summer (while it can get hot during the day, it almost always cools into the 60s or lower at night), and this allows us to avoid cranking up furnaces and air conditioners. But Portland and Seattle have pretty mild climates, too.

One could argue (and some have), that LA has accomplished this by being anti-business, hence driving polluters--along with their jobs--to other states. This may be correct, but ultimately, everyone is going to have to control carbon emissions. Perhaps this will give LA a first mover advantage.

What does Warren Buffett know?

When I first read this morning that Warren Buffett had invested $5 billion in Bank of America, I was puzzled.  I didn't know how Buffett could figure out the costs of likely mortgage repurchases from securities issued by Countrywide/Bank of America.

I thought perhaps that Buffett had hired an army of analysts to go through the securities and figure out their value.  But Nicholas Santiago (h/t Yves Smith) has the more likely explanation:

3. Warren Buffett has made a career of investing in troubled companies for the sake of the economy. The last time he made an investment such as this one was back in 2008 with Goldman Sachs Group Inc.(NYSE:GS). It is important to remember that Goldman Sachs was bailed out by the tax payer in what was called the TARP program. Buffett knows that the U.S. taxpayer will bail him out if he is wrong and Bank of America stock does go belly up. 

[Disclosure: I own a few shares of Berkshire-Hathaway B-shares]. 

Robert E. McCormick and Robert D. Tollison on the NCAA's Subversion of the Academy

This is worth reproducing (with the kind permission of the authors) in its entirety:

Two great American institutions are about to crank up. Freshman and their older classmates will soon start returning to campuses for fall classes. Soon thereafter or about the same time, fans will fill stadiums and the 2011 college football season will begin. These two events come together almost naturally and have for over 100 years. The former may be one of the best examples anywhere of competition among universities and colleges, but the latter is surely one of the best examples of a cartel. Recent athletic resignations and firings at Ohio State, Georgia Tech, and now most recently the University of North Carolina demonstrate that the corrupting influences of the NCAA cartel on the academy have reached the highest levels of our public universities. Doubtless there are few people on earth who care less about the University of North Carolina in Chapel Hill than us (since it is a prime competitor in intercollegiate sports), but in spite of this, the time has come to stand up and be counted on the athletic scandal that has engulfed UNC-CH and so many other institutions of higher learning in our country (including Georgia Tech and Ohio State). UNC-CH is not just a university, it is regularly rated as one of the top five public universities in the United States.

What is the root of the problem here? We assert it is the enormous economic rents, or free money, that have been created by the NCAA cartel. Moreover, no college or university can be expected to withstand the ill-gotten gain that lurks underneath the NCAA banner. The NCAA is a cartel of the major athletic universities in the United States that sets wages, playing conditions, and other aspects of intercollegiate athletics. Most prominently of these is a restriction on payments to football and basketball players. These two sports create billions of dollars in local and national revenues via gate receipts, TV contracts, and ancillary merchandise, not to mention millions of dollars annually at member schools in donations by alumni and other supporters of athletic programs.

Coaches sign multi-year multi-million dollar contracts while players get tuition, room and board, and recently, only because of an important court case (White v. NCAA), some pocket money to cover the cost of living. Big chunks of these revenues also go to support other men and women athletic teams on campuses, swimming, track, golf, soccer, and the like. None of this would be possible but for the overarching cartel agreement between all of the major U.S. colleges and universities operated under the umbrella of the NCAA.

Both of us have long held, along with numerous other economists (such as Gary Becker and Robert Barro), that the NCAA’s cartel harms the market, the world, and the athletes, but now we are prepared to claim more. To wit, this crisis in athletics puts the American system of higher education at risk.

Despite our earlier disclaimer, UNC-CH is an incredible academic institution, a virtual colossus of graduate education, research, and professional education. Yet with all its storied history and social importance, the school has put its institutional credibility and brand name at risk by succumbing to the perverse incentives created by the cartel, a cartel whose primary function is to maintain a façade of amateurism on the one hand while aggressively pursuing commercial profits on the other. Never mind the morality of the arrangement. Focus instead on what this temptation has done to the University, and remember that this has been happening at lesser schools for a long time. Now that it has reached the ranks of most elite universities, it is hard to argue that any school is immune from becoming ensnared in the inevitable trap that lies in the huge gulf between amateur inputs (the lowly paid players) and professional outputs (massive TV contracts, alumni donations, and ticket prices).

Hear us clearly, we are NOT arguing to pay players. We are lamenting the diminution of the reputation of a top ranked public university and the warning signal that it sends about the dangers of the incentives created in this case. We believe in amateurism, deeply. But we believe that it should apply broadly to the coaches, the fans, and all the rest of the participants in intercollegiate sports. If amateurism is a shrine, then let us all worship it. The fans should get to see the games for nothing or nearly so (the costs of facilities and game day services). The coaches should be faculty or volunteers as they are in Little League and in local neighborhoods. It is not amateurism, but the business of intercollegiate athletics is a growing cancer bound to infect other storied American institutions of higher education.

Where does the fault lie? It lies plainly on the shoulders of the NCAA cartel. We propose that our school, Clemson, and the rest of the schools in the ACC leave the organization, sit down, take stock and decide whether the Ivy League approach is better for the ACC (no athletic scholarships) or whether the players should receive reasonable compensation. We do not take a position on the issue. Each league within the NCAA should do the same, and we doubt that they will all choose the same course. Some will go the Ivy route, others the payment route. And that is as it should be. There should NOT be one authority in control of almost all collegiate athletics in the United States. Competition is salutary, and it should prevail both on and off the field.

Cartels are a bad bargain. They raise price to consumers, reduce output and social welfare, and enrich one class of participants at the expense of another, creating envy and strife. The NCAA cartel is especially perverse because it disadvantages young people (often from challenging backgrounds) to the advantage of adults. And worse, it is morally corrupting to these same young people, compounded by the fact that it derives from the same university institutions society has charged to nurture them to adulthood.
At present, coaches, even those trying to live by the rules, daily confront moral dilemmas and choices. But the nature of the restrictions creates two sets of rules (written and unwritten), and our young college students, both the athletes and their classmates, are not being taught to play by the rules. They are being taught, “everyone cheats, we got caught, it is no big deal.” Paying under the table is okay. Having tutors write term papers is okay for athletes who are working their rear ends off to practice especially if they are good and the team is winning.

Students are being taught that ends matter, but means do not. Our educational system is built upon honor, integrity, and the search for truth as bedrocks. Yet these same foundations are washed away on a regular basis by phenomenal dollars made available by the cartel. What is a young person to believe? That it is wrong to crib on a test or plagiarize a term paper, but okay to lie to the NCAA investigator? That it is right and proper to offer a helping hand to those less fortunate or in need, but wrong to do so if they have signed an athletic scholarship? Our universities need to stand for our culture, and our culture should not be about lying, half-lying, deviousness, and cheating.  There is only one way to end cheating- resolve the conflict between amateurism and professionalism, either by making both sides professional or both sides amateur. But the current situation is unsustainable and puts institutions of higher education at risk.
We contend that the moral fiber of the university is one of its most powerful social virtues. It helps bring young people to adulthood with a care and concern that things are done correctly and on the up and up ethically.

There is a clear positive implication of our argument. Cheating teaches cheating, and it is a mistake to think that our kids will not watch what we do instead of what we say. The scandals that now infect the best universities in the land will almost surely lead to more and more academic dishonesty and disregard for the basic traditions of the academy if something does not happen to reverse course. Cheating in the athletic department begets cheating in the classroom and perhaps generally  in life. This is a prediction of our argument albeit a depressing one.

It is critical to note that we are big fans of the coexistence of athletics and academics. Our  research speaks loudly and clearly on this. We support athletics as part of university education and think the two together make for the best organizational arrangement. Our cry is NOT about athletics, but about the NCAA cartel that creates the rents and free money that shred the moral underpinnings of our home, the academy.
A la Ronald Reagan, we say tear down the wall around truth and dignity. Clemson, UNC, Georgia Tech, and all the rest should refuse the financial inducements offered by the NCAA. Return to amateur intercollegiate sports, or pay the players. Nothing less than the integrity and quality of our universities is at stake.

The passage that really hits home to me is: "Students are being taught that ends matter, but means do not. Our educational system is built upon honor, integrity, and the search for truth as bedrocks. Yet these same foundations are washed away on a regular basis by phenomenal dollars made available by the cartel. What is a young person to believe?"

Two cents (or maybe a nickel) on Texas.

Texas is doing well relative to the country.  Its jobs creation rate is second only to North Dakota, a state whose population is smaller than Austin's.  It has large in-migration because of jobs, and as one blogger points out, wages are rising faster in Texas than [most] other states, so one cannot credibly make the argument that its success is entirely a "race to the bottom outcome."  The fact that Texas only relies a little more than average on construction for its employment base shows that its job performance is not the result of an unsustainable housing construction boom of the Arizona, Florida, Nevada and Central California variety.

In an ideal world, we would run some regressions explaining Texas' growth, but we haven't sufficiently up-to-date data to do that.  We do know that some things matter in general for growth: climate (which I don't think even Rick Perry is claiming credit for); fraction of the population with a BA, and, if I may refer to work I did five years ago, availability of air transportation.

Texas does well in two out of three indicators: since World War II, people and jobs have moved to warmer places such as Texas, and Dallas is a hub for two airlines and Houston is a hub for one.  Texas is below average, however, in the share of adults with BAs and graduate degrees.

So why is Texas doing well?  First, it has managed to maintain its state and local government spending far better than most other states, and has not had the negative stimulus arising from massive layoffs. Over the past decade, government job growth in Texas has outpaced private sector job growth by about 2 to 1.

Second, Texas has among the most stringent consumer protection laws in finance in the country--likely arising from a long-standing Western mistrust of bankers.  As a consequents, consumers were essentially forbidden from using their homes as piggy banks.  As Mike Konczal shows, this means Texans have far less debt to pay off (it also shows how we in California are still in the soup).  So "heavy-handed" regulation helped keep Texas out of trouble.

Finally, it is simply easier to develop everything in Texas--housing, businesses, etc.  This is the one part of the conservative view of Texas that I buy--as one Los Angeles planner said to me, it takes 18 months in LA to do what it takes six weeks to do in Dallas.  LA doesn't even have by-right zoning.  It is here where I think Texas has an enormous advantage for business development over California.

That said, California has a greater share of people with BA's than Texas.  Part of the reason why may be that well-educated people, who can afford to live in a place that takes environmental protection seriously, do so.    There is actually some good reason for California's stringent environmental rules--the air quality here, while much better than it used to be, is still not good enough.  Of the ten cities with the worst air quality in the country, six are in California.  But the cities with the worst air quality outside of California are Houston and Dallas; someday voters in those cities are going to demand better.  I do think California can do a better job of protecting its environment while making business development easier, but that is the subject of another post.

Cost and benefit

I listened to a colleague of mine on Friday discuss how nothing adds to our carbon footprint like flying-and I have little doubt that he is right.  Mark Twain one wrote,  “Travel is fatal to prejudice, bigotry, and narrow-mindedness.”  I am pretty sure that is right too.

Triumph of the Rentier City?

I am teaching a senior honors seminar this fall.  Among the readings is Ed Glaeser's new book, TheTriumph of the City.  It is a perfect book for smart undergraduates--it is well written, thoughtful, and thought-provoking.  It is also packed with fun facts.

Early on in the book, Ed celebrates the resiliency of Manhattan, noting that "[b]etween 2009 and 2010, as the American economy largely stagnated, wages in Manhattan increased by 11.9 percent, more than any large county."

This passage brought to mind Vernon Henderson's pioneering work on large cities and favoritism.  He writes:

This enhanced role of government in the urbanization process over the years has resulted in a corresponding bias, where certain regions and cities are heavily favored in terms of capital and fiscal allocations, giving favored regions a cost advantage. 

New York is wonderful, but it has been given an enormous cost advantage in the aftermath of the financial crisis.  It's institutions received cheap capital in the form of TARP; a near zero Federal Funds Rate also amounts to a large subsidy for financial institutions.  Banks can currently make profits just by playing the yield curve.  These profits have helped restore Wall Street bonuses (and hence incomes of everyone else in Manhattan), but that doesn't mean they reflect productive activity.

I don't want to make too much of this: TARP was necessary, and the low Federal Funds rate is necessary too.  New York is a great and resilient city.  But it is also home to many too big to fail institutions, and thus has political and financial advantages that, say, Chicago and San Francisco lack.

Even in principle, figuring out a fair tax system is hard

How does one set up a system such that everyone pays their fair share of taxes?  Let us suppose that a "fair" tax is one where everyone gives up the same share of utility to pay for public goods.  One could formulate this such that

U(X(L)-L-t)/U(X(L)-L) = K

The idea is that the fraction of utility one keeps after taxes is the same for everyone.  X is consumption; the amount one gets to consume is a function of effort, L.  To make things easy, we will assume people consumer their incomes, so that income and consumption are the same. Assume that utility function has the shape U' > 0 and U" < 0.  K is dependent on how much society wishes to spend on public goods.

Just this simple formulation presents three problems.  First, the fair rate of progressivity will be a function of the magnitude of U".  For instance, if we assume log utility, U' = 1/(X-L) = U" = -1/(X-L)^2.  This means U" gets very small very rapidly, which also means that the need to increase marginal tax rates in income to maintain the above definition of fairness gets quite small.  We do know that taking money away from people at or below subsistence levels of income will lead to substantial diminution of utility, but beyond that point it is hard to say how sharply progressive taxes need to be in order to be fair.

Second, the correspondence between consumption and effort is not one-to-one.  If the correlation between consumption and effort is less than one--and I will go out on a limb and say that it certainly is--taxing income actually only approximates taxing utility.  The lower the correlation, the worse the approximation.

Finally, defining effort is a problem.  As Matthew Yglesias notes, NYU professors make a lot less money than Wall Street bankers, but their life might well be better.  Perhaps I am wrong, but it seems to me that the -L in a steel worker, coal miner, or line worker is a lot bigger than mine, and so looking at income alone is adequate for approximating utility.

So what to do?  Here is why, despite my liberal leanings, I find a flat tax with a large exemption and a large earned income tax credit appealing.  The rate would have to be sufficient to raise revenue, and would apply  equally to all type of income.  Deductions would be limited.  Such a set up would assure that Warren Buffett would pay no less a share of his income than anyone else.  Bob Hall proposed a similar plan 15 years ago.  I would dress it up with the earned income tax credit.  

Two GOP Governors stuck in a 1950s Economy

I heard Wisconsin governor Scott Walker speak in Madison a few months ago.  His economic strategy for the state?  Smokestack chasing and belittling Illinois--in fact, I think he said "Illinois" (followed by various synonyms for "sucks") more often than he said "Wisconsin."  He did say he loved teachers though--sort of the way husbands say they love their wives after they are arrested for assaulting them.

Now Rick Perry says in his campaign announcment:

The change we seek will never emanate out of Washington, D.C. It will come from the windswept prairies of Middle America, the farms and factories across this great land, from the hearts and minds of the goodhearted Americans who will accept not a future that is less than our past…patriots who will not be consigned to a fate of less freedom in exchange for more government. We do not have to accept our current circumstances. We will change them. We are Americans.

Farms now produce a little more than one percent of GDP.   And while the US is still the world's leading manufacturer by output, automation has continued to reduce jobs in manufactuning--a reduction that will continue in the years to come, regardless of the health of the economy.

Where does change come from?  From Silicon Valley.  From Route 128.  From the Research Triangle.  From labs at Cal Tech and MIT and, yes, the University of Wisconsin and the University of Texas.  Also from Hollywood, from fashion designers in New York, from sneaker designers in Oregon, and, like-it-ot not, from Pharmaceutical Companies in New Jersey, New York and Indianapolis.  These are things we do that the rest of the world envies.  These are things that happen in cities. And yet not a word about any of it.

PPD 498 Fall Syllabus

PPD 498: Senior Honors Seminar in Policy, Planning and Development
University of Southern California
Professor Richard K. Green
richarkg@usc.edu
Keynesian.richard@gmail.com
213-740-4093

This is a senior honors course on topics in Urban Development. This emphasis of the course is on reading, presenting and critically reviewing some classics, old and new, on issues important to those who wish to do research on cities and their regions.

The requirements of the course are three:
(1) Doing the reading before class and participating in class. Your performance in participating will determine 1/3 of your grade.

(2) Leading a ½ hour class discussion on a reading of your choice. You will need to get clearance from me on the reading, and you must let me know your proposed reading by October 1, 2010. This will determine another 1/3 of your grade.

(3) A critical literature review of a topic of interest to you involving an urban topic. The lit review must discuss a minimum of five papers (more would be better) and should be 15-20 double spaced, 12-font, pages long. This will determine the final 1/3 of your grade.

All of USC’s academic conduct rules apply to this course; because you are choosing to be in it, I am assuming this will not be an issue with any of you.

Topics and Readings
August 25 Lenses of Social Science
George Orwell, Why I write.

September 1 New York
Jane Jacobs, The Death and Life of Great American Cities I

September 8 Growth in Cities
Jane Jacobs, The Death and Life of Great American Cities II
John Quigley (1998) Urban Diversity and Economic Growth, Journal of Economic Perspectives, 12(2):127-38.

September 15 Urbanization and Development
J. Vernon Henderson (2004), Urbanization and Growth, Brown University Working Paper
Marianne Fay and Charlotte Opal (1999), Urbanization without Growth, World Bank Research Working Paper.

September 22 Sprawl
Reid Ewing (1997), Is Los Angeles-Style Sprawl Desirable? Journal of the American Planning Association, 63:1, 107-126.
Peter Gordon and Harry Richardson (1997) Are Compact Cities a Desirable Planning Goal? Journal of the American Planning Association, 63:1, 95-106.
George Galster, Royce Hansen, Michael Ratcliffe, Harold Wolman, Stephen Coleman and Jason Freihage (2001), Wrestling Sprawl to the Ground, Housing Policy Debate, 12(4), 681-717.

September 29 Anti-Sprawl
Ed Glaeser, The Triumph of the City I

October 6 Agglomeration
Ed Glaeser, The Triumph of the City II
Paul Krugman, Development, Geography and Economic Theory

October 13 Guest

October 20 Housing
Stephen Malpezzi (1996) , Housing Prices, Externalities and Regulation in US Metropolitan Areas, Journal of Housing Research, 7(2) 209-242.
Richard K. Green (1996), Should the Stagnant Homeownership Rate be a Source of Concern, Regional Science and Urban Economics.

October 27 Cities and Health
Charles Rosenberg, The Cholera Years.

November 3
William Cronon, Nature’s Metropolis I

November 10
William Cronon, Nature’s Metropolis II

November 17
Student Led Discussions I

December 1
Student Led Discussions II

Current Construction of the New World Trade Center Site

Around 8.3 million square feet of space is currently under construction at the World Trade Center Site.  To put this in context, downtown St. Louis and downtown Milwaukee both have a total of 11 million square feet of office space, so New York is building the equivalent of a medium city downtown in less than 5 years.

Is this too much building?  Perhaps not.  The other contextual number is the amount of current space in Manhattan; the total is about 350 million square feet.  So by building a downtown St. Louis, Manhattan is expanding its office market by only two to three percent.  

Jeremy Stein for Fed Governor

Mark Thoma writes that the administration is considering nominating Richard Clarida and Jeremy Stein for the Federal Reserver Board. He cites an encouraging Clarida speech, but writes, "I know less about Stein, so I'll withhold judgment for the moment."

Personally, I am a big fan of Stein's work. The shortest way to explain why is to list the titles of his five most cited papers:

• Herd Behavior and Investment
• A Unified Theory of Underreaction, Momentum Trading and Overreaction in Asset Markets
• Rick Management: Coordinating Investment and Financing Policies
• Bad News Travels Slowly: Size, Analyst Coverage and the Profitability of Momentum Strategies
• Internal Capital Markets and the Competition for Corporate Resources.

Stein has spent his career trying to figure out how capital markets really work instead of pledging fealty to models that don't work very well.  I can't think of a better intellectual qualification for a Federal Reserve Board member.

William Malkasian

My boss from 1987-1990, while I was finishing my dissertation and before I became an assistant professor, was Bill Malkasian. Bill introduced me to the world of real estate, and for that I will be ever grateful.

When I think of the people in the world who have taught me a lot, only members of my family supersede Bill. He helped me learn, in the phrase of Paul Krugman, how to "listen to the gentiles." He also helped make me a more sympathetic person, and allowed me to appreciate skills in others that I would otherwise have not appreciated.

Bill is leaving his position as president of the Wisconsin Realtors Association after more than 30 years in order to provide strategic planning consulting to real estate groups around the country (Bill also taught me the value of strategic planning). WRA will miss him a lot, but the rest of the country will be better off.

Anti-stimulus

The Government Component of the  National Income and Product Accounts for the past 6 quarters (QI 2010 through Q2 2011):

21	Government consumption expenditures     and gross investment	-1.2	3.7	1.0	-2.8	-5.9	-1.1
22	Federal	2.8	8.8	3.2	-3.0	-9.4	2.2
23	National defense	0.5	6.0	5.7	-5.9	-12.6	7.3
24	Nondefense	7.8	14.7	-1.8	3.1	-2.7	-7.3
25	State and local	-3.9	0.4	-0.5	-2.7	-3.4	-3.4

Anyone see a problem here? It's not like we have seen a rip-roaring "crowding-in" of the private sector. For those who think we should cut government spending, well, we are, and more is to come thanks to the debt-ceiling deal. I hope I am wrong about this, but it is hard to see how this leads to a recovery in jobs any time soon.

Paul Krugman lives his words

I hope that readers will forgive a personal anecdote.

Over the weekend, Paul Krugman wrote a blogpost entitled "Pulling Rank:"

I don’t have time right now to track down all the examples, but if you look at how many freshwater macroeconomists have responded to Keynesian arguments in this crisis, you find over and over again that they resort to assertions of privilege — basically, I am a famous macroeconomic expert and you aren’t — rather than really addressing the issues. And this is so ingrained a response, apparently, that they use it in situations where it’s truly ridiculous: Lucas accusing Christy Romer of not understanding basic macro, then demonstrating that he doesn’t understand Ricardian equivalence; Barro belittling the credentials of yours truly, just after forgetting that there was rationing and investment controls during World War II. 

Now for the anecdote part.  When I was a Ph.D. student in economics at Wisconsin, my advisor, Bob Baldwin, invited me to present a piece of our joint work at an NBER Conference called "Trade Policy Issues and Empirical Analysis."

I remember the night before the presentation--I had gotten to meet many of the people whose papers I had read in my graduate classes: Leamer, Feenstra, Rodrick...and Krugman.  It was at once a thrilling and scary experience, and when I went to bed that night, contemplating my audience for the next day, the fear took over from the thrill.  Let's just say that by the time morning rolled around, I am guessing my stomach had never been emptier.

I gave the presentation, and as best as I can tell, it went reasonably well.  I very much doubt he would remember it, but afterward Krugman, the young MIT full professor new trade theory rock star, came up to me, the nobody, Wisconsin graduate student,  to give me encouragement and advice on the paper.  He was very respectful--even collegial.  I will never forget it.

Robert Barro channels Marie Antoinette

In his Wall Street Journal column this morning, Barro argues that after a generation of policies that have increased income and wealth disparities, what we really need are policies that further increase income and wealth disparities.  For the sake of "liberals," however, he would countenance an exemption in his proposed VAT for food. I guess he is not willing to consider the importance of such an exemption to, say, people who don't have a lot of income.

Barro is among a class of economists to whom the median American is invisible.  They could all be played in the movies by Lionel Barrymore.

Labor Statistics and Confidence Intervals

According to the BLS establishment survey, non-farm private and public employment rose by 117,000 jobs in July.   http://bls.gov/news.release/empsit.b.htm.  This number was better than the consensus forecast of growth of 85,000 jobs.  It led at least one business economist to say we have "avoided the precipice."

But can a monthly number really tell us that?  The technical notes for the employment report says the 90 percent confidence interval for the establishment survey is 100,000 jobs.  This means the estimate has a standard error of about 100,000/1.64 or about 61,000 jobs.  To the distance between the consensus forecast and the actual number reported is slightly more than 1/2 a standard deviation.  This means we can be only about 60 percent sure that the employment number was better than forecast, which is a little better than a coin flip.

Burn the Forest Down (Shot by Morgan Green)

If that bridge, tunnel, runway, railway or road gets a 3 percent return

...it is a substantial positive NPV opportunity.  Who would have thought?

Yet another reason to never pay attention to interest rate forecasts

Yields--especially long-term yields--were supposed to rise on news of a debt ceiling deal; at least that is what I read would happen.

Bloomberg's end-of day yield curve, along with changes in yields for the day, is above.  Oh well.

This is not good for Los Angeles

Bloomberg reports:

Container-Ship Plunge Signals U.S. Slowdown.

San Pedro and Long Beach are the largest container ports in the US.