Dependence

So far as I can tell, Casey Mulligan and I have but two things in common: an economics degree, and eyeglasses (he is wearing a pair in the picture on the UofC web site).

I don't know about Professor Mulligan, but I am completely dependent on my glasses.  The first thing I do before I get out of bed is put them on, and the last thing I do before turing off the light is take them off.  I cannot do the basic functions of modern existence without them.  I suppose this reflects badly on my character.

Frank Popper on Academia

He comments on my friend Lisa Schweitzer's blog:

As an alternative to this kabuki, let me describe specific kinds of experiences I see a lot, but that rarely show up in journalists’, academics’ or adminsitrators accounts:
1. Right- or more usually leftwing bigotry to the point where it becomes part of the intellectual air one breathes. A few years ago I took part in a search that produced a candidate who was mildly libertarian. S/he was treated as a Martian. The questions at the presentation were patronizing, extended to actual laughter. The initial daylong interview schedule ended at midday, sending the candidate home early. 

2. The vacuous meetings, where nothing of substance gets discussed and everyone–EVERYONE–would rather be somewhere else. Precisely because the meetings are so comprehensively boring, no one ever admits it at them, though there is plenty of backchat afterward. Somewhere there must be a Balzac of American boredom, perhaps whiling away time in the Ohio Public Roads Department or a backwater of the Gates Foundation or maybe even a university, who could convey all this. We need this person to emerge soon. 

3. The public corridor conversations about students in general, which are public, deeply insulting, and clinical. They seem to get worse when students are in earshot. 

4. The lack of knowledge about popular culture, which of course is most of it and the part likeliest to last. (Shakespeare in his time was popular culture, as was the Bible.) I have run across professors ignorant of Barbra Streisand, Clint Eastwood, American Idol, Saturday Night Live, etc., far into the night and keeping on ’til morning. They invariably have firm opinions about where America or the world is going or should do. It is hard to argue with them because, well, they don’t have much of a fact base and don’t care about it anyway. The comparison with Sarah Palin or Glenn Beck seems inevitable. 

5. It’s startling how much overt anti-intellectualism exists at the middle and top ranks of American universities. I know deans who couldn’t tell you two coherent sentences about what most of their professors do or why they do it. But they can give you precise figures about the grants (some of) them bring in. They actually remark on how dull the professors’ work is, not that they’ve lifted a finger to try to find out about it. Most professors themselves are remarkably ignorant about what their colleagues do and feel no guilt about it. 

6. The mistreatment and bullying of graduate students: an endless topic. One of the (many) low points of my graduate experience was submitting the first draft of my thesis to a committee member, who sneered at me that it read like “a long piece in the New Yorker,” as if that was bad. This fellow told me that I should “look to my education,” his phrase, then refused to be part of my committee. He was for some time quite well-known, and one of the joys of my adult academic experience has been watching the utter eclipse of his reputation. Another faculty member then took me on as a project, told me that part of my problem was that I “wrote better than 95% of our graduate students,” thus arousing controversy others avoided. He gave me tips on how to make my writing better while academically grounding it so as to anticipate people like his grump colleague. My savior died recently, got remarkable obituaries and had a spectacular memorial service, which I went out of my way to attend. 

7. There’s a softness in intellectual culture as universities purvey it. That is, one can get away with studying topics or subjects (in our field e.g., zoning, Chicago, Robert Moses) without having any actual ideas about them. All you have to do is write about them, and after a while you doesn’t even have to do that. One of the results is large numbers of high-status mediocrities who’ve never really done or contributed much and who, like the I-want-out committee member described, typically find their reputations slipping by late middle age and mercifully don’t get to see them disappear posthumously. Other results: dull papers in dull journals, both with microscopic readerships; ditto for dull books published by dull university presses; vacuous presentations at conferences; a general sense that almost anything is good enough for academic work if only it is sufficiently pedantic or obscure; and ceremonial for-wider-consumption overpraise for ordinary work (“This pathbreaking idea,” when no one can credibly tell you what the idea is, much less what the new path is or what old path it supplants.) 

I’m sure others can add further items, but that seems like enough from me for the day.

Let me say one nice thing about my place--I think the profs here really like our students.  It is certainly part of the culture for faculty to spend time with students (and not just Ph.D. students).  The students here are also pretty easy to like--while there is certainly variation in intellectual capacity and work ethic, the students here seem happy to be here, and I hear very little whining.    

Why do lenders and borrowers do things like this?

I was talking with a real estate broker today about the process of short sales, and why they are so difficult to do, and she told me a rather sad (and she said typical) story.  A borrower in Compton had an $800,000 mortgage, and was about to close a short sale for $170,000.

Everything was all set to go, when the lender told the borrower that if she didn't sell, she would get a modification.  The borrower in the end did not sign off on the short sale; she never did get the modification, and was foreclosed on 60 days later.  Both the borrower and the lender would have been better off had the short sale happened--the borrower's credit history would have taken a smaller hit, while the lender would almost surely recover more money.

A Painting by Morgan Green

Could Ted afford his apartment? Probably not.

In the movie Ted (one that I am embarrassed to say I rather liked), Ted has a minimum wage job as a checker.  In Massachusetts, that means he makes $8 an hour, or around $1360 a month (I assume 4.25 weeks per month and no overtime). 

His apartment in Boston is pretty bad, so I am going to put it at the 25th percentile of the rent distribution, which puts it at around $750 per month.  This means Ted is spending far more than  half his money on his apartment (so I am not sure where he is getting his, ahem, beer money from).

Jonathan Haskel, Robert Z. Lawrence, Edward E. Leamer, and Matthew J. Slaughter on Globalization and Wages

Read the whole thing.  Here is the conclusion:

We hope that readers will take from our paper three main conclusions about  the recent trends in U.S. real and relative incomes. First, to date there is little evidence that globalization through the classic channel of international trade in goods, intermediates, and services has been raising inequality between more-skilled goods, intermediates, and services has been raising inequality between more-skilled and less-skilled workers. Second, there is at least suggestive evidence that globalization has been boosting the real and relative earnings of superstars. The usual trade mechanisms probably have not done this, but other globalization channels—in particular, the combination of greater tradability of services and larger market sizes abroad—may be playing an important role.  Third, our analysis sheds new light on the sobering fact of pervasive real-income declines for the large majority of Americans in the past decade.  These real-income declines may be part of the same globalization and innovation forces shaping returns to superstars and to capital.  

These conclusions must be placed in the proper context, which is  “there is so much more we need to know from future research.”  A good deal of recent empirical work investigates the effects of trade on the adjustment process of particular workers, occupations, and industries (which simple models ignore), and documents workers, occupations, and industries (which simple models ignore), and documents (the sometimes long-lasting) adverse effects.  Our goal here, however, has been to advance some basic models describing the economywide evolution of, for example, widespread real-wage declines but rising earnings of superstars.  Of course, future research will hopefully explore not only the experience of the United States but that of many other countries as well—both developed and developing.  

For superstars, we do not yet fully understand product prices in sectors that employ superstars relatively intensively. This is both because existing industry data do not distinguish highly talented individuals well (if at all), and because many of the sectors in which we presume superstars are concentrated  consulting, athletics, and entertainment do not have reliable data on product prices (or much else). Nor do we have good data on personal attributes that make individuals potential superstars.  We suspect that for at least some of these superstar intensive industries, globalization has played an important role in boosting demand  for their services—both via the information technology revolution reducing their natural trade costs and thus boosting their tradability, and via fast economic growth around the world boosting demand for their services. But these conjectures await  additional analysis. 

With regard to the sobering falls in real income for the large majority of Americans, our framework does add some new insights.  We agree with Autor (2010a) that explaining falling real income for so many American workers remains a daunting empirical challenge. Much research to date has focused on income inequality, not income levels. We argue that this focus should change, because the post-2000 real-income declines are pervasive, new, and troubling. Our enriched trade framework offers some possible explanations for how globalization and/or innovation work offers some possible explanations for how globalization and/or innovation can boost superstar real earnings yet reduce real earnings of so many others.

 The last paragraph is particularly, as the author's say, sobering.  But it also suggests that the outsourcing debate is more or less irrelevant--I doubt that China and India (other than Bollywood) are much in the superstar business yet.

How Los Angeles works better than you think

One of the keys to maintaining one's sanity when living in LA is to know how and when to avoid freeways.  When the 110 runs clear, it takes about 15 minutes to drive from my house to USC; when it is clogged, it can take an hour.  But that is OK, because I have a (largely) non-freeway route home that takes at most 35 minutes.

One of the reasons surface streets (outside of the West Side) in most of Los Angeles run pretty well, even at rush hour, is that 90 percent of the traffic lights in LA are synced.  By the end of the year, all lights will be synced.  As a conseqeunce, despite its traffic, in most parts of LA, one needs to wait for only one light cycle to get through an intersection.  Again, this is usually even true on downtown streets during rush hour.

The cost of syncing all the lights in Los Angeles will come to $350,000,000.  Let's do a back-of-the-envelope here.  If syncing saves the average Angelino (there are 4 million) even one minute per day, and time is worth $15 per hour, syncing basically pays for itself within a year.  That is government spending everyone should be happy supporting.

Those who own their houses with equity also get a tax break.

Matthew Yglesias, who wrote a terrific piece on the benefits of off-shoring yesterday, also wrote a piece on why Mark Zuckerberg has a mortgage:

Bloomberg writes that "wealthy individuals often choose to finance a home purchase rather than pay cash because of the overall low cost of mortgage debt and the additional access to liquidity," which is true but I think only scratches the surface. Another important issue is that interest payments are tax deductible, which is a very big deal if you have a very high income and live in a high-tax state like California.

But owning with equity gives the same tax break as owning with debt--the return one earns on her house (the rent she pays herself) go untaxed. Consider the following experiment: suppose you and your neighbor own your houses free-and-clear. Now you swap houses and charge each other market rent--you are now responsible for paying income taxes on that rent. The value of the tax break by staying in your own home is your marginal tax rate multiplied your return on equity. The return on equity is generally called net imputed rent.

The mortgage interest deduction places debt and equity on a level playing field when it comes to homeownership. Thus the many countries without a mortgage interest deduction, such as the UK, Canada, and Australia, still subsidize owner housing--they simply encourage people to own with equity instead of debt. This may be a very good idea.

What would game theory say about LIBOR?

On days like to day, I wish I were a game theorist.  The I could figure out what a Nash game would predict about LIBOR reporting, and how that would vary from honest reporting.

The rules of the game are well set out and mostly symmetric, although it is the mostly part that creates a problem.  Suppose there are N reporters and the LIBOR that is produced is based on the interquartile mean of what is reported.  Each bank is then seeking to maximize some objective function that depends on that interquartile mean, over which it has some influence.  If all banks have the same objective function, then symmetry will mean they all choose the same rate, which is not particularly interesting.

But each individual bank is gets some draw from a distribution, that it turn determines its optimal play.  This will produce heterogeneity in rates chosen.  Alas, I am not good enough at math to go any further than that...

[update: found a paper that does the exercise here.]  

Let's push 15 year refinances.

If someone refinances a 30 year 6 percent mortgage (with 27 years of payments left on it) into a 15 year 2.86 percent mortgage, the payment goes up by 10 percent, which is not nothing.  But within 5 years, more than 25 percent of the principal  on the 15 year mortgage is paid down.  For those who can afford the payment, this would largely solve the underwater mortgage problem.

Three reasons not to be crazy about hypothesis tests

(1)  With large samples, unimportant treatments can be "statistically significant."  If we precisely measure that a treatment has an influence of .00001 percent on an outcome, the treatment can appear significant, while not really mattering very much.

(2) Relying on hypothesis tests produces publication bias.  Suppose 20 different researchers run one regression each, but use different samples (I will assume they are independently drawn).  They are all examining a particular treatment effect--say the impact of divorce on child outcomes.  If one measures significance at p < .05, there is around a 65 percent chance that one regression will produce a "significant" coefficient, simply because of the random aspects of the coefficients.  The researcher who gets the "significant" coefficient is more likely to get her results published than those who do not.

(3) The fact that we don't generally do randomized trials on things like marital status means it is hard to draw inferences about the non-treated group based on those who are in the treated group.  In what may be my favorite book on applied social science work, Manski shows that the confidence intervals one should develop are much broader than those that are typically used.  His work also suggests that applying hypothesis tests in the social sciences is really problematic.  This is consistent with the theme that sometimes we can draw better conclusions from plots than test statistics.

To a large extent, one could deal with (1) and (2) by reporting Box-and-Whiskers plots of coefficient estimates across studies.  Dealing with (3) is much harder.

Mark Thoma reminds me of something Art Goldberger taught me: R-squared is over-rated

Mark posts a letter from Stephen Ziliak:

The chief finding of the Soyer-Hogarth experiment is that the expert econometricians themselves—our best number crunchers—make better predictions when only graphical information—such as a scatter plot and theoretical linear regression line—is provided to them. Give them t-statistics and fits of R-squared for the same data and regression model and their forecasting ability declines. Give them only t-statistics and fits of R-squared and predictions fall from bad to worse.

It’s a finding that hits you between the eyes, or should. R-squared, the primary indicator of model fit, and t-statistic, the primary indicator of coefficient fit, are in the leading journals of economics - such as the AER, QJE, JPE, and RES - evidently doing more harm than good.

This reminds me of Art Goldberger's teaching in Econ 612.  After I took that class, he turned his class notes into a book.  From page 177:

From our perspective, R2 has a very modest role in regression analysis, being a measure of the goodness of fit of a sample of LS (least squares) linear regression in a body of data.  Nothing in the CR (classical regression) model requires R2 to be high.  Hence a high R2 is not evidence in favor of the model, and a low R2 is not evidence against it...

...In fact, the most important thing about R2 is that is is not important in the CR model.  The CR model is concerend with parameters in a population, not with the goodness of fit within the sample. 

I also remember Gary Chamberlain was not crazy about t-statistics--he said he didn't want to see any "damn stars" in our papers.  We should care more about confidence intervals than hypothesis tests. 

The practical problem with San Bernardino County using eminent domain to acquire mortgages.

Joe Nocera writes about Housings Last Chance?

As for fair value, since the home has dropped dramatically in value, the mortgage is worth a lot less than its face value. On Wall Street, in fact, traders are buying securitized mortgage bonds at a steep discount — reflecting the true value of the mortgages they’re buying. Yet the homeowner remains saddled with a mortgage that is unrealistically high. The plan calls for the county to buy mortgages at a steep, but fair, discount to its face value, and then to offer the homeowner a new mortgage that reflects much, though not all, of that discount. (Fees and costs would be paid for by the spread.) The money to buy the mortgages would come from investors; indeed, Mortgage Resolution Partners is in the process of raising money...

But if the county effectively originates mortgages that are more valuable than the amount it pays to investors in eminent domain proceedings, it is hard to see how it is paying fair value.  I don't know how this works without the county losing money--the value of what the county buys has to be equal to the value of what it sells, but it will also be taking on a bunch of fees, legal and otherwise.

If the threat of eminent domain gets lenders to modify more loans, the threat could produce a better outcome.  But eminent domain itself...

Tiebout sure knew what he was writing about

I went to my 35th high school reunion last weekend, in La Crosse, Wisconsin.  It was very pleasant--people were very nice.  But a large number of my classmates were puzzled that I enjoyed living in Los Angeles (OK, Pasadena)--they figured that I lived there only because I had to for my job.  I had to assure them that beyond weather, LA had many attributes that I liked, including the fact that it is a large city.  (I also like the mountains, the ocean, the food, the music, and the wide variety of people).

On the other hand, I always figured that people stayed in La Crosse because of family ties.  While it is a lovely place (it is on a stunning spot on the Mississippi River), it is, well, small, and pretty homogeneous.  It was quite clear to me, however, that the people who stayed there generally enjoyed living there. 

And so we sort.  Having lots of variation in cities almost certainly allows people to be happier, as they (often) find or stay in the place that best suits them. 

Let me finish the post with a picture of a sign one will certainly not see in Los Angeles.

I am glad I do not live in a battleground state

Because national election results in California are pretty much a foregone conclusion, we don't get too much in the way of campaign advertising at this time of year.

I am in Wisconsin at the moment, however, and the airways here are already flooded. The quality of the "discourse" is disgusting. I am not surprised at being appalled at the xenophobic anti-Chinese Koch brothers stuff, but I was also appalled at the xenophobic anti-Chinese stuff being run by Tammy Baldwin. She should know better.

Marlon Boarnet on his Wal-mart study

He tells me:

WalMart wages were very difficult to get, but we found nothing to indicate that WalMart adjusted wages by cost of living. So if the article did not make it clear, the comparison is the wage gap if WalMart entered the Bay Area paying their nationally prevailing wage. We focused on benefits because a lot of the compensation gap was benefits, and assuming WalMart would enter Bay Area with their national prevailing benefits policy seemed even more reasonable.

and

On my re-read, we handled [whether comparing Wal-mart wages to SF wages was ok] on p. 441 and footnote 10. 

The part that is amazing to me now, and was evident then, is that half the gap was benefits. I wonder how much of this issue is attenuated with Obamacare?

More to come.

Yes, wages at Wal-mart are awful.

My colleague Marlon Boarnet and co-authors show that they are: in the Bay Area, Wal-mart grocery workers' total compensation is a little over half the compensation of unionized workers (Table 4).  Wal-mart also initially offers grocery costs that are between 8 and 20 percent lower than the stores with which they compete, and lead other stores to reduce their prices by 5 to 13 percent (Table 2).

I am prepared to accept the argument that higher wages are more important than lower grocery prices, although it is not an overwhelming argument to me.  Nevertheless, there are good reason reasons not to like Wal-mart (which is one of the reasons I don't shop there).

On the other hand, it makes no sense to me to bundle a bunch of weak arguments with a strong one, and yet that is what anti-Wal-mart activists often do.  And zoning should be zoning--if one entity has the right to use land for a particular use, others should as well, whether they are liked or not.

 

Some evidence of the decline of civilization

Many years ago, I watched the Today Show on a regular basis.  I hadn't watched it at all for years, however, until a day a few months ago when I was so sick that all I wanted to do was watch TV.  I turned on the Today Show, and it was absolutely awful.

This morning, I read this:

NBC News chief Steve Capus candidly told THR that he thought Curry had not been right for the job in many respects. He said he agreed with interviewer Marisa Guthrie that Curry had faltered in the cooking segments, movie star interviews and fluffy features that make up a large portion of "Today." 

"I think her real passion is built around reporting on international stories," he said. "It’s tough to convey a sincere interest in something if you don’t possess it ... and you could tell with her, you can tell with any anchor, whether they’re into it or not. And I think we’ve now come up with a role that will play to her strengths.”

What I essentially learned, then, is that Ann Curry got fired for being too serious and too smart. I guess the good news is that NPR gets good ratings. (OTOH, the top two on the list are further evidence of civilization's decline).

Why are liberals so romantic about small business?

There is a protest today in Los Angeles against the construction of a new Wal-mart in Chinatown.  The store would be part of a mixed use development near a transit station on a lot that has sat vacant for some time.

I am no fan of Wal-mart.  Among other things, I wish that those who attempt to bring a class action suit against Wal-mart pay discrimination had prevailed in the Supreme Court case of Wal-mart vs Dukes.   Nevertheless, it also concerns me that Los Angeles has had essentially no job growth in two decades, and that urban redevelopment is very difficult to do here.  According to the leading scholar on the economics of Wal-mart, Emek Besker, Wal-mart creates more jobs than it destroys (BTW, I don't think Emek is a particular fan of Wal-mart either).  It also allows households to buy goods at low prices. On balance, I think the construction of the Wal-mart in Chinatown will be good for that particular neighborhood and the city.

One of the arguments advanced against Wal-mart is that it hurts small business.  I particularly hear this from fellow liberals, who love to extol the virtue of small business.  Yet, according to Kelly Edminston at the KC Fed, job quality is much worse at small business than large firms. The average wage at a small firm (< 100 workers)was $15.69 an hour in 2004; for large firms (>500 workers) it was $27.05. Moreover, small businesses paid 1/4 of their labor force less than $8 per hour; for large businesses it was 3 percent of their labor force.

Meanwhile, no one lobbies harder against the minimum wage than small business trade associations. The National Federation of Independent Business was also the lead plaintiff against the Affordable Care Act.  So to those liberals who extol small business: what's the deal?

How life has gotten better

I am in the middle of editing a paper that is due to a funder on Monday. 

I am also thinking about how miserable it was back when cutting and pasting literally meant cutting and pasting.

Downtown Los Angeles' population is growing at a rapid clip, but....

...it is still is a small fraction of the city, let alone the metropolitan area.  According to the census, zip codes 90012, 90013, 90014, 90015, 90017, 90021 and 90071 grew between 2000 and 2010 from 82,000 to 97,000, a gain of 18 percent.  This compares with a gain of less than three percent for the city.

Nevertheless, the residential share of downtown remains only 2.6 percent.

Laurence Ball provides an explanation for why Ben Bernanke is pursuing (non)policies that disappoint Ryan Avent

Ryan Avent writes:

Fed members claim to care equally about the employment and inflation sides of their mandate, yet the unemployment rate has been at least 2 percentage points above the FOMC's estimated natural unemployment rate for nearly 4 straight years while inflation has scarcely wandered more than a half percentage point away from target since late 2009. Fed members claim that the 2% target is not a ceiling, but inflation has been below 2% much more often than it has been above it over the past 4 years, inflation is projected to be at most 2% in 2013 and 2014, and inflation is projected to be substantiallybelow 2% in 2012. In other words, the Fed is actively pursuing a policy of disinflation despite the fact that annual inflation is roughly at target while unemployment is well above its structural rate. That is, the Fed has gone from merely failing at its job toaggressively failing at its job.

Second, it is difficult to pin blame for this on anyone other than Chairman Ben Bernanke. The June policy vote ran 11-1, suggesting that Mr Bernanke is not getting the most expansionary policy for which he can find a majority. One is forced to conclude that this is the policy, and by extension the recovery, that Mr Bernanke wants.

All of this is particularly discouraging given that Bernanke's own magnificent scholarly work calls for the Fed to be more aggressive at the zero-bound, if necessary.  Lawrence Ball perhaps has some insights into what is going on:

"There is no doubt that Ben Bernanke's views on zero-bound policy have changed over time.  Once, he called for targets for long-term interest rates a "policy I personally prefer"; later, he "agreed 100%" with opposition to that policy.  Bernanke once advocated a 3-4% inflation target for Japan; as Fed chair, he says "that's not a direction we're interested in pursuing."...he no longer argues that a central bank can easily overcome the zero-bound problem "if the will to do so exists." 

At one level, the primary reason for these changes is also clear: Bernanke was influenced by the work of the Fed staff... 

...The puzzle about this history is why Bernanke so quickly and completely dropped his previous views and adopted those of Fed Staff.  We cannot be sure, but social psychology suggests two possible factors: groupthink and Bernanke's shy personality."

I am a big fan of Bernanke's scholarly work, and as a result was thrilled when he was appointed Fed Chair.  My understanding, however, is that he hasn't a whiff of arrogance about him, a characteristic that makes him a wonderful scholar and, from all I can tell, a wonderful human being.  But Chairman Bernanke really is the smartest guy in the room, and it would be nice if he remembered that. If the views he (along with Mark Gertler) developed over many years informed monetary policy, we would all be better off.

A thought for Amazon

If you buy a real book, you get the Kindle version for a nominal cost beyond the real book. This would encourage people to continue to buy real books, while at the same time allowing people not to lug them around while travelling. Given that the marginal cost of an e-book is near zero, this should be a profitable strategy. The margin on the real book remains, and a small margin is added for the e-book.  The bundling should encourage more sales.  The losses are from those who currently buy both versions, but I am guessing such buyers are small in number.


No charge, Jeff Bezos. And you're welcome. [Update: my friend Frank Yellin tells me this idea is often expressed in Kindle forums.]

The frustration of following "affordable housing" policy in California

The United States is sufficiently rich that all people should have decent housing they can afford.  Decent means sanitary, safe, and, if not spacious, not overcrowded either.  This housing should be available such that when households pay for it, they have money left over for other things, like food and education.

In Los Angeles, this is not the case.  Absent housing assistance, a renter at the 25th percentile of the income distribution must pay more than 45 percent of income in order to rent a unit at the 25th percentile of the rent distribution.

The vast majority of those eligible for housing assistance do not get it, because housing is not an entitlement, and budgets for housing assistance are, in the overall scheme of things, small.

Yet we can do far better in Los Angeles than we do.  For starters, even though we are the second largest and second densest metropolitan area in the United States, the impediments to building dense housing here are enormous.  I just judged a case competition for our RMPIRE executive program here at USC, and was impressed at the creativity of a team that wanted to use a particular lot's floor area ratio allowance of 6 to build densely packed units on a site no more than one mile from downtown Los Angeles.  The residential use would require a zoning change, however, and many judges felt that getting such zoning approved would be next to impossible.  It depresses me to say so, but I happen to agree with them.

But there is another problem as well.  While I have little doubt that allowing denser housing would lower rents in LA, it still wouldn't solve the problem--there would still be a "gap" between the present value of rents lower income households could afford to pay and the cost of building units.  This gap would need to be filled by government financing.

And so we come to the next problem--when we build "affordable housing" here, we do so in a remarkably inefficient fashion.  Government financing rarely comes from a single source, but rather comes in layers of financing from various local, state, and federal agencies.  Each slice of financing involves fees that go to consultants who arrange for the financing.  All of this adds to the amount of time and expense that are required to get financing, which ultimately pushes up the cost of bringing a project to market.  At the same time, communities require "affordable" units to have design amenities and, worse, covered parking.  This can drive the cost of production of an affordable unit to $400,000 and more.

Meanwhile, the median sales price of a house in Los Angeles County is $287,000.  See the problem here?  To provide "affordable housing," it would actually be cheaper to purchase the median priced home (hardly a bad house) than it would be to build something new.  But of course, there are many people who gain when $400,000 is spent to bring an affordable unit to market--just not taxpayers or low income users of houses.

Vicky Been on why underwater borrowers don't default

She has been doing a study that shows that people do not know how underwater they are. Cognitive bias can be helpful sometimes.

Lew Ranieri on why the REO rental business is tougher than you think

When renters turnover, the cost of getting the house ready for the next tenant can be 10 times higher than getting an apartment ready.

The problem with a widespread principal reduction program

Chris Mayer points out that 90 percent of underwater borrowers are current on their mortgages. A broad principal write-down program would surely change this.

The irony of Victor Davis Hanson

Hanson complains that universities suffer under the iron grip of "grandees."

So far as I know, the only sort of person who would use a word as pretentious as "grandees," would fancy himself a grandee.

Hanson also doesn't care for the fact that white guys can't do whatever they damn well please anymore.

What is Zachary Woolfe talking about?

In his review of the LA Phil's Don Giovanni, he writes, "silence greeted Mozart’s winking quotation of his own “Nozze di Figaro” during the final scene. It was an opera in-joke in search of an opera audience."


At the performance I attended, the audience giggled at the reference.  Perhaps New Yorkers can't imagine that the city that attracted Schoenberg, Mann and Faulkner can have a subtle sense of humor.

FDR on preventing a bank run

What is a "middle-class house" in California?

Alex Lazo had a nice story in this morning's LA Times about the absence of housing supply in Southern California. One person he interviewed was frustrated because he could not find anything he wanted at $525,000. As he pointed out, he is a "middle-class" guy.

This underlines a problem with California. Even after the crash, large swaths of the state (not just Malibu) have expensive houses.

Let us think about what a middle-class household can afford. The median income for a family of four in California is about $70,000. Once upon a time (i.e., before around 2002), the "front-end" ratio for a mortgage borrower was supposed to be no more than 28 percent of gross income. The front-end ratio is the ratio of principal, interest, property taxes and insurance to gross income.  If one assumes that a borrower can get a 30-year mortgage at a 3.75% rate, pays 1.1% of property value in property taxes, and an insurance premium of 0.2% per year, AND assumes that the borrower has a 20 percent down payment, a household earning $70,000 per year can afford a $250,000 house.  So the value of a "middle-class" house is $250K.  This is a long way from $525,000.

Pushing refinancing can really help

Recent news reports suggest current borrowers are still having some difficulties getting a HARP 2.0 refinancing.  This is too bad, because HARP 2.0 can potentially help a lot in getting many people out from under their troubles.

Consider someone who is 20 percent underwater on her house.  If she moves from a six percent loan to a 3.5 percent loan (today's rate on Zillow), and if house prices go up by only one percent per year (something that I think likely will happen in most markets, for reasons I stated a week or so ago) and if the borrower keeps her payment constant, she will be right-side-up in around four years.  If she remains in the six percent mortgage, however, she won't be right-side up for about nine years.

Note the HARP 2.0 is not rewarding "bad behavior."  It is program for people who are current on their payments but who are also upside down.  Many people can look at four years and see a tunnel's end--I am not sure that is true about nine years.

Of course, refinancing will not solve the Vegas-Phoenix-Inland Empire problem, where many borrowers are 30 percent underwater and more.  But for a whole lot of the country, HARP 2 could be a game changer.

Joan Ling at UCLA tells me transit ridership's share in LA is falling...

...and two car families are rising.  Zero car families are falling too.  This after about $12 billion of spending on rail transit.  Hmmmm.

Having just finished Robert Caro's magnificent The Passage to Power, I have two questions:

(1) Absent LBJ, would we have civil rights laws even now?

(2) Absent LBJ's awful personality traits, would we have civil rights laws even now?

To Boskin and Cogan: California does not attract non-taxpayers (earlier post corrected)

I was listening to an industry type give a speech on the woes facing California, and heard him state that a "Stanford study" show that while 10 million people had migrated here since 1985, only 150,000 people more paid taxes.  This made absolutely no sense to me, so when I got home, I did a little Googling, and found an ob-ed from Michael Boskin and John Cogan that said:

From the mid-1980s to 2005, California's population grew by 10 million, while Medicaid recipients soared by seven million; tax filers paying income taxes rose by just 150,000; and the prison population swelled by 115,000.

The 150,000 number made no sense to me, so I went to the IRS SOI tax stats page to see what was up.  The data there go back to 1997, and in any event, I am not sure what year the authors mean by "mid-1980s."

So here are the data (download the spreadsheets and go to line 94 for 1997 and 108 for 2009)--from 1997 until 2009, the number of individual tax returns with taxable income in California fell  from 10.8 million to 10.3 million, suggesting that California was a land attracting non-taxpayers.  But the number of individual tax returns with taxable income nationally fell from 98.5 million in 1997 to 91.0 million in 2009, or by more in percentage terms than California.  The reasons for these declines are the rise of the Earned Income Tax Credit (which is good) and a reduction in incomes at the bottom of the income distribution (which is bad).

I do need to figure out where to get data from the middle 1980s, but going back to the late 90s seems more relevant at this point.  In any event, context matters.

Maybe I am too eager to believe it, and...

..I expect to be smote down for saying it, but I think the two month old, mediocre, Case-Shiller number that came out today is consistent with the idea that the housing market will really come back big this year (I said so in the paper and on the radio today, so I might as well say it here).


Inventories in many hard hit markets are now low by historical standards.  Time on market has fallen.  HARP II can accelerate amortization (which is its most important feature).  Prices are really cheap, both when the user cost they produce is compared with rent, and when compared with incomes (by World standards).

State growth and the composition of spending

Paul Krugman rightly calls out Arthur Laffer's junk economics on the impact of state and local taxes on economic growth (I have no idea about why anyone listens to Laffer about anything, but that is for another day).  At the same time, however, a good, liberal friend of mine told  me yesterday that for the first time in his life, he will vote against a tax increase in California--the temporary tax increase proposed by Jerry Brown that will be on the ballot on November 6.

My friend has no issue with government spending per se; his problem is that he gets to observe the doings in Sacramento quite closely, and as he puts it, "it is even worse than you think up there."

California's state and local governments spend a lot of money.  We ranked 4th in 2010 among the 50 states in per capita state and local spending.     Yet if one looks at education spending, we are only average.  Even worse (from the standpoint of my parochial pride, anyway), we trail Texas in education spending per capita.

My understanding is that once upon a time, California had among the most efficient and accountable governments in the country.  The public schools were a particular source of pride.  But the vast amounts of money are not being well managed now--such mismanagement is harmful whether it occurs in the public or private sector.  How well government money is spent may be just as important as how much money is spent.

Hannah Green:What is the purpose of protesting? - The Daily Northwestern - Northwestern University

She writes:

As we took the Red Line back from the protest, I continued to have mixed feelings about it. I thought that the rally especially had been too disorganized and too angry. I thought that Salek was making fun of me when he said that a protest wasn’t the same thing as an academic forum (He later told me that he wasn’t). A rally isn’t meant to convince people of anything, he said, but to get people who were already convinced energized. He said that there wasn’t enough time during the rally for all those with important issues to completely clarify their positions subtlety. There had been forums and discussions earlier in the week for that.

I then became nostalgic for a time that I had never lived in. I thought of protests from the ’60s and ’70s that I’d heard about. Protesters were convincing because they made their cases by showing their humanity rather than their anger. But this is a different kind of protest, Salek said. There was a wider variety of problems on the table. Part of the point was to just make people aware of the diversity of the issues and stake, and, yes, to give people a place to (peacefully) channel their anger. That’s how a movement can gain its momentum.

Omit needless words...

My dear friend Steve Malpezzi on John Quigley

He writes:

I first encountered Professor Quigley through his research; later, we connected through our mutual friend the late Steve Mayo. I was honored to count John as a friend, but he was also a professional and scholarly inspiration to me, and to many, many others. Professor Quigley was an active researcher and teacher for over four decades; a long career by some standards, but he left those of us who knew him, and his work, wishing we could have had a fifth, if not a sixth.

In the history of the allied fields of urban economics, real estate economics and finance, after the original generation of William Alonso, Richard Muth, Edwin Mills and John Kain, John Quigley shaped our field like no one else. The breadth of his contributions, in urban, housing, public finance, finance, and many other fields, is breathtaking.

I’m not alone in that judgment, and those of us that hold it can easily show that it’s not simply sentiment for a passed friend. Many colleagues share my high opinion of John Quigley, and have said so, unbidden, for years, long before his illness. Several years ago, for fun, I asked six PhD students to write down the name of the person who, according to their study, all-in, made the greatest contributions to our field. (I told them they couldn’t name anyone from Wisconsin, but of course that was to save face :-).

Five wrote “Quigley.” Well, it wasn’t all six, but I’m not going to stretch the truth for the sake of the story!

Read the whole thing.

Yongheng Deng, Gary Painter, and Christian Redfearn on the Life of John Quigley

Yongheng, Gary and Chris write a lovely tribute for AREUEA:

Monday, May 14, the community of AREUEA was deeply saddened to learn that John Quigley passed away on Saturday, May 12, 2012.

Since our early years at Berkeley, John has been a wonderful mentor and friend to us. John has been a member of 84 PhD committees since 1990, chairing 26 of them (including the three of us). He was a distinguished academic, a mentor for his students throughout their entire career. He excelled in each of the areas we value: research, teaching, and service. He published 22 articles in just the past three years alone, and his work has earned more than 10,000 citations. His service to the profession is unparalleled.

Within AREUEA, John served in many capacities including President and most recently as the chair of the International Selection Committee. He served as the chair of the Department of Economics at UC Berkeley, the editor of Regional Science and Urban Economics, and as a role model to many. Beyond these which can be counted, John's mix of conviction, energy, and laughter made him a singular character in our worlds. We will remain ever grateful for his guidance and advice, but beyond all of it, we also just liked him. He was good company--on a panel just as he was on the train from Shanghai to Beijing. John made life fun. He not only helped us join a profession, but helped us become part of a community. Simply put, we would not be the academics that we are today, if it not for him. We feel so fortunate that we have had him as a teacher, mentor, friend and collaborator.

We will always cherish the memory of John in our heart as a great scholar, a wonderful human being, a man of great intelligence, kindness, dedication, generosity, and profound integrity. We will forever miss him and miss him dearly.

Yongheng Deng (NUS), Gary Painter (USC), and Chris Redfearn (USC)

AREUEA Officers and Board Members

$920 million for 12 mph

I have taken the new Expo line now three times from USC to downtown LA.  According to Google Maps, the distance is 2.5 miles.  The trip has, on average, taken 13 minutes.  This works out to 11.5 mile per hour.

Metro spent $920 million on a line that does not get signal priority at traffic lights--in other words, it expended huge capital costs on a large bus that is stuck on one route. 

Should Ohio Taxpayers assure that Ohio State students assume less debt?

The New York Times had a story yesterday about a "generation hobbled by the soaring cost of college."

The piece featured some disturbing stories--particularly about a student who had $120,000 in debt as the result of attending a college that I had never heard of before.  On the other hand, I also read that, "Three out of five undergraduates at Ohio State take out loans, and the average debt is $24,840."


Ohio State is a world class research university.  I am quite sure that graduates of Ohio State earn much higher lifetime incomes than the average Ohioan.  So higher subsidies to Ohio State students from Ohio taxpayers would effectively be a regressive transfer.  


Should the state subsidize the University?  Almost surely, because its research and its college graduates produce positive externalities.  But does an average debt load of $24,840 keep large numbers of students away from Ohio State?  Enough that it diminishes the positive externalities created by their attendance?  That would be a much tougher argument to make.  My guess is that almost everyone who goes to Ohio State would go to some college, one way or another (just as it is the case that nearly every homeowner who takes the mortgage interest deduction would be a homeowner in its absence).


In order to stimulate upward mobility, there must be financial aid (in the form of grants, not loans) to students coming from low-income households.  But for everyone else, well, it seems like $25K in debt in exchange for an Ohio State education is a very good financial proposition.

Dowell Myers: Those born in California stay in California. Nevadans, not so much.

From Dowell's piece in Zocalo Public Square:

Do Californians really care how many New Yorkers move back to New York or on to Las Vegas? For the most part, no. What local residents care about is how many of our own friends, especially our children, leave the state. If native Californians start fleeing, then we know we are in trouble. So what do the data tell us on this?

California, in fact, holds its own. When it comes to retaining native sons and daughters, California has the fifth-strongest attraction of all 50 states. Among California-born adults who were at least 25 years of age and old enough to have moved away, fully 66.9 percent were still choosing to reside in the Golden State in 2007, the last year of high migration before the recession held people down. Texas, with 75.1 percent of native Texans still living in the state, has the strongest loyalty, and the other three rounding out the top five are Wisconsin, North Carolina, and Georgia. California’s top-five ranking is all the more impressive when you take into account the state’s high living costs and other negatives. We must have something going for us.

Nevada, as you can see here, ranks in the bottom five of states’ retention of native-born population, despite being touted as a beacon for those fleeing California. If you can’t hold your own, you’re not worth the chips you’re built on. On this key measure, California is a full house, Nevada a busted inside straight. And yet you’d never know how enticing California is for its native-born residents from the overwrought narratives.

This is indeed cheering news for those of us who live in California.  It is also striking how good Texas looks..again.

If it is all about age, what should the homeownership rate be?

Last week's report of a continuing drop in the homeownership rate to its 1997 rate of 65.4 percent made me decide to revisit a question I looked at in a paper some years ago: holding demographics constant, would should the homeownership rate be?

I don;t think anyone would argue that 1990 was a year in which the homeownership rate, at 64.2 percent, was unnaturally high.  In fact, the rate had been stuck around 64 percent for around 20 years.

One of the reasons for this is that the country at the time was moving through a period with lots of young adults.  In 1990, the homeownership rates by age were as follows:

15 to 24 years	17.1%
25 to 34 years	45.3%
35 to 44 years	66.2%
45 to 54 years	75.3%
55 to 64 years	79.7%
65 to 74 years	78.8%
75 and more years	70.4%

Source: 1990 Census of Population and Housing

At the time time, the age shares of household heads at the time were:

15 to 24 years	5.5%
25 to 34 years	21.6%
35 to 44 years	22.2%
45 to 54 years	15.6%
55 to 64 years	13.5%
65 to 74 years	12.5%
75 and more years	9.2%

Source: 1990 Census of Population and Housing

Now let us look at age shares in 2010.  They are:

15 to 24 years	4.6%
25 to 34 years	15.4%
35 to 44 years	18.2%
45 to 54 years	21.3%
55 to 64 years	18.3%
65 to 74 years	11.6%
75 and more years	10.6%

Source: 2010 Census of Population and Housing

If we apply those population shares to the homeownership rate by age in 1990, we get an "age-predicted" homeownership rate of 67.0 percent.  This suggests that the rate has fallen below where it "should be."  Why might this be?  Let's look at the ownership rate among non-hispanic whites and everyone else in 1990:

White (non-hispanic)	69.1%
Non-white or hispanic	44.6%

Source: 1990 Census of Population and Housing and my tabulations.

In 1990, 80 percent of household heads were non-hispanic whites; according to the 2009 American Housing Survey, 70 percent of household heads that year were non-hispanic white.  If we hold ownership rates by race constant (as well as age) and allow race/ethnicity of household heads to vary, we would have seen a decline in the ownership rate to 61.9 percent.  Age by itself therefore pushed up the rate by 2.8 percentage points, and race/ethnicity reduced it by 2.3 percentage points, so if the effects of age and race stayed constant (and we ignore interactions of age and race for now), we would expect the ownership rate in 2010 to be about 64.7 percent.

I do wish to emphasize that the difference in ownership rates across races and ethnicities is NOT acceptable; one cannot explain difference by just looking at such things as economic status and marital status.  My reading of the literature is that African-Americans and hispanics continue to suffer from discrimination in the housing market.  All that said, it is not difficult to explain why the ownership rate is returning back to where it was.  I also think there is no reason to believe it will settle at a much lower rate than where it is right now.

  

Who (or what) is an insider?

Christopher L. Foote, Kristopher S. Gerardi, and Paul S. Willen have a paper on the mortgage crisis that argues that most commentary about the sources of the crisis has been misguided, if not outright wrong.  They produce twelve things they call facts in order to support their point of view.  Among the most pointed is Fact 10: that "insiders" were the big losers in the crisis.  Therefore, the argument goes, there could have been no "inside job."

But their evidence that the insiders lost is that large financial institutions--Citigroup, UBS, etc.--were large losers.  But this suggests that the institutions--and their shareholders--were insiders.  I think it more likely that the shareholders were outsiders.  The insiders were corporate senior management, traders, and mortgage brokers.  I don't know for sure whether they came out ahead or not, but I sure have my suspicions...

Update: the paper does note that Bear Stearns executives invested in (and lost money on) mortgage backed securities.  That is the only evidence that executives might have been net losers from the mortgage business.

  

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

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

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

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

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

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

An NAR Spokesperson says:

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

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

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


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

Has the Variable Rate Mortgage saved the European Mortgage Market?

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

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

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

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

s

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

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

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

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

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

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

An abstract:

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

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

Mixed feelings about falling e-book prices

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

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

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

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

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

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

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

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

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

and

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

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

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

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

When government is the solution

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

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