More detail on the MID and House Prices (long and wonky)

Capozza, Hendershott and Green (1997) developed a model of determining whether federal tax policy would be capitalized into house prices.  The foundation for their analysis was an estimating of the user cost model of housing.  In the user cost model, in equilibrium, the costs of owning and renting the same house must be the same.  This means that:

Rent = Value*(after tax cost of capital + property tax rate + maintenance rate – expected house price growth).

After tax cost of capital is a blend of return on equity and the cost of debt, taking into account tax preferences.  The equity return to homeowner is imputed rent (i.e., the rent the homeowner pays herself).  Because imputed rent is not taxed, it receives a tax preference.  The return to debt—mortgage interest—also receives a tax preference in the tax code, at least for homeowners who itemize their deductions (only about half of homeowners are itemizers).

The effective property tax rate facing owners is the ad valorem rate less the tax preference.  Expected house price growth and maintenance are difficult to observe, but we will model them using a method described below.

We may rewrite the equation above to produce the foundation for an estimating equation:

Rent/Price = R*(1-ty)+PT*(1-ty)+M-π.

We estimate

R/P = α + β1*R*(1-ty) + β2*)T(1-ty) + MSAi + T + ε

Where R/P is the rent to price ratio, the α soaks up maintenance costs, R is an interest rate, ty is the marginal tax rate for those taking the mortage interest deduction, PT is the ad valorem property tax rate, MSAi are MSA fixed effects, which proxies for price expectations, T is a time fixed effect, and ε is a residual.

When Capozza, Green and Hendershott estimated an equation similar to (X), they found B1 and B2 were not statistically different from one, which is the prediction of the model.  From this, they concluded that taxes do get capitalized into house prices, and ran simulations based on that conclusion.

The most recent data available in CGH was the 1990 census.  The American Community Survey will allow us to do a much more timely estimate.

Data

We use the most recent-five year American Community Survey to find mean rents and mean house prices for 255 metropolitan areas in the United States.  The smallest sample we have among these MSAs is 1912 observations over five years, so we have sufficiently large samples to draw inferences about mean values and prices.

For the before tax cost of capital, we use the Freddie Mac 30-year fixed interest rate series.  For average marginal tax rates by state, we use the results produced by the NBER TAXSIM web site, which gives the average marginal rate of those who use the mortgage interest deduction and the average marginal rate of those who use the property tax deduction.  NBER TAXSIM gives estimates by state and by year; for those MSAs in more than one state, we take the population weighted average of the TAXSIM rates.

It is worth spending a little time discussing the TAXSIM data.  It contains a number of surprising, including the fact that the average total state and federal marginal tax rate for California among those taking the deduction was only slightly higher than for Texas.  This is surprising because (1) California has a state marginal top tax bracket of xx percent, while Texas has no state income taxes and (2) nominal incomes in California are on average higher than in Texas.

I conferred with Dan Feenberg, who runs the NBER model, to make sure I was interpreting the data correctly, and be confirmed that I was.  The following might explain why we see the peculiar data phenomenon.

California relied very heavily on subprime lending, while Texas, owing to its heavily regulated mortgage market, did not.  Subprime lenders specifically targeted minority borrower and lower income borrowers—they also originated loans for borrowers who self reported their incomes.  Because California has a high state income tax, and because mortgages were large, borrowers in low tax Federal brackets in California had an incentive to itemize; those in Texas did not.   

As we shall see below, we have difficulty finding a relationship between the after tax cost of capital and house prices.  We present our regression results below.

Regressions

We begin by presenting rent-to-price ratios.  

We will show four sets of regressions: simple linear regressions with year fixed effects that are both population weighted and non-population weighted; linear regressions for each year individually, and panel regressions.  Let us begin with a set of “base” regressions, where the rent-to-value ratio is explained by the after tax cost of capital (atcc1) and the “after-tax” property tax rate (ptrate1). 

Specifications (1) and (3) include dummy variables for years; (1) and (2) treats each MSA as an equal observation, while (3) and (4) weight MSAs by population.

	(1)	(2)	(3)	(4)
	Unweighted	Unweighted	Weighted	Weighted
atcc1	-0.190***	0.266	-0.226***	1.191***
	(-3.60)	(1.30)	(-4.12)	(4.73)
ptrate1	0.965***	0.954***	1.018***	0.985***
	(13.75)	(13.58)	(13.0)	(12.7)
y1		-0.00584*		-0.0195***
		(-2.02)		(-5.59)
y2		-0.00708*		-0.0196***
		(-2.53)		(-5.79)
y3		-0.00636**		-0.0161***
		(-2.68)		(-5.66)
y4		-0.00227*		-0.00500***
		(-1.99)		(-4.06)
_cons	0.0488***	0.0325***	0.0430***	-0.00917
	(19.02)	(4.21)	(15.7)	(-0.97)
N	1275	1275	1275	1275

t statistics in parentheses

·      p < 0.05, ^** p < 0.01, ^*** p < 0.001

In equilibrium, the signs on both coefficients should be positive, and the magnitude of the coefficient should be one.  The property tax coefficient works quite nicely across all four specifications—it is statistically different from zero at the 99.9 percent level of confidence, and is quite close to zero.  The coefficients on after-tax cost of capital are another matter, however.  They are in two instances negative, and in one instance not different from zero.  The predicted result only occurs in specification (4).  While one might argue that this is the best specification, it also would amount to cherry picking to rely on it when the three others are so different.  It is thus worth investigating other regression techniques.

We next turn to panel techniques, where we allow the intercept of the regression to vary with MSA; this could reflect differences in expectations about house prices from one MSA to the next.  Now our after tax cost of capital is either not different from zero, or has the wrong sign.  Interestingly, property taxes now become even more important, and their magnitude is too large—it suggests full capitalization and then some.  This also does not comport with economic theory.

	(1)	(2)	(3)	(4)
	rvratio1	rvratio1	rvratio1	rvratio1
atcc1	-0.0618**	0.143	-0.144***	0.128
	(-3.07)	(1.25)	(-7.48)	(1.09)
ptrate	2.632***	2.713***	1.720***	1.782***
	(21.14)	(22.30)	(18.54)	(19.33)
y1		-0.00191		-0.00290
		(-1.23)		(-1.83)
y2		-0.00326*		-0.00422**
		(-2.17)		(-2.75)
y3		-0.00361**		-0.00418**
		(-2.88)		(-3.26)
y4		-0.00128**		-0.00151**
		(-2.77)		(-3.17)
_cons	0.0227***	0.0145**	0.0366***	0.0260***
	(11.10)	(3.17)	(20.95)	(5.67)
N	1275	1275	1275	1275

t statistics in parentheses

^* p < 0.05, ^** p < 0.01, ^*** p < 0.001

Finally, we run regressions separately for each year (both weighted and unweighted). 

Unweighted

	(2006)	(2007)	(2008)	(2009)	(2010)
	rvratio1	rvratio1	rvratio1	rvratio1	rvratio1
atcc1	-0.319	-0.992*	0.951	2.090***	1.529*
	(-0.87)	(-2.20)	(1.91)	(4.18)	(2.42)
ptrate1	1.322***	1.288***	1.006***	0.679***	0.590***
	(7.61)	(7.95)	(6.62)	(4.87)	(4.02)
_cons	0.0532**	0.0859***	-0.00737	-0.0415*	-0.0113
	(2.85)	(3.83)	(-0.31)	(-2.03)	(-0.48)
N	255	255	255	255	255

t statistics in parentheses

^* p < 0.05, ^** p < 0.01, ^*** p < 0.001

Weighted by Population

	(2006)	(2007)	(2008)	(2009)	(2010)
	rvratio1	rvratio1	rvratio1	rvratio1	rvratio1
atcc1	0.355	-0.967	2.045***	4.137***	4.145***
	(0.81)	(-1.79)	(3.34)	(6.70)	(5.38)
ptrate1	1.423***	1.343***	0.998***	0.643***	0.604***
	(7.62)	(7.76)	(5.88)	(4.11)	(3.80)
_cons	0.00997	0.0769**	-0.0666*	-0.131***	-0.116***
	(0.45)	(2.84)	(-2.25)	(-5.18)	(-4.01)
N	255	255	255	255	255

t statistics in parentheses

^* p < 0.05, ^** p < 0.01, ^*** p < 0.001

To say the coefficient on the after tax cost of capital are unstable is an understatement.  The series of regressions listed above suggest that we cannot currently reliably estimate the impact of changing the tax treatment of mortgage interest on house prices.  

I try to find a relationship between the after tax cost of a mortgage and house prices, and can't.

Some years ago, I wrote a paper with Pat Hendershott and Dennis Capozza looking at the impact of tax policy on house prices.  We ran the following regressions using a panel of cities across three census years:

Rent/Price = alpha + Beta1*ATCC + Beta2*NPT + Beta3*E[g] + e

where Rent/Price was the average rent to average housing price for an MSA, ATCC was the after tax cost of capital, NPT is the net average property tax rate after deductions, E[g] is expected house price growth net of depreciation, and e is an error term.  This is just the user cost model: Beta1 and Beta2 should equal one (and they did) and Beta3 should equal -1 (and it didn't, but we never got a decent measure of expected house price growth, and so it is not surprising that it didn't work).  Our results implied that removing tax advantages for housing would push rents up or drive prices down, or, most likely, both.

I have been redoing this exercise using American Community Survey Data from 2006-2010.  I get the following scatter plot, where each dot is an MSA at a different time:

The x -axis, the after tax cost of capital, is a function of two things: the mortgage rate for each period, and the effective rate at which mortgage interest is deducted (which is taken from the NBER TAXSIM model, Table 2).  Do you see a relationship between the after tax cost of capital and house price to income ratios? I don't.  Here is a regression with MSA and year fixed effects:

Fixed-effects (within) regression               Number of obs      =      1275

Group variable: msa                             Number of groups   =       255

R-sq:  within  = 0.4535                         Obs per group: min =         5

       between = 0.1258                                        avg =       5.0

       overall = 0.1387                                        max =         5

                                                F(6,1014)          =    140.25

corr(u_i, Xb)  = -0.6549                        Prob > F           =    0.0000

   rvratio1 |      Coef.   Std. Err.      t    P>|t|     [95% Conf. Interval]

-------------+----------------------------------------------------------------

       atcc1 |   .1972777   .1165485     1.69   0.091    -.0314262    .4259817

     ptrate1 |   3.075967   .1451177    21.20   0.000     2.791202    3.360733

The coefficient on the after tax cost of capital is much smaller than one, and is not different from zero at the 95 percent confidence level.  But even if we take this coefficient at face value, it suggests that capitalization effects now are about 1/5 of what they were when Pat, Dennis and I wrote our paper.  I am curious about feedback (I should also note that the coefficient floats around depending on specification, and sometimes has the wrong sign).

Sherman Maisel on how Fannie Mae "left" the government in 1968

Go to 3:55

Southwest CEO Gary Kelly understands price elasticity

I am at the ULI conference in Denver, and reading the local magazine, which features an interview with Gary Kelly. His quote on why Southwest doesn't charge for baggage: "it takes the loss of one customer to offset about ten bag fees."

I enjoy it when an executive talks about demand curves.

A gentle rebuke to Paul Krugman--she was referring to Oakland, not Los Angeles

Tomorrow I am teaching a book I admire--Paul Krugman's Development, Geography and Economic Theory.  The book contains three Olin Lectures that are beautifully written, accessible and insightful.  But on page 58, he quotes Gertrude Stein as having said that Los Angeles had "no there there."  

She actually was referring to her home town.  Specifically, she wrote:

What was the use of my having come from Oakland it was not natural to have come from there yes write about it if I like or anything if I like but not there, there is no there there.

I am not sure Oakland deserves the insult either, but still, LA gets enough abuse as it is.

Rub ́en Herna ́ndez-Murillo, Andra C. Ghent, and Michael T. Owyang show that the Community Reinvestment Act did not induce subprime lending.

They look at lending originations and loan performance on either side of the CRA thresholds.  If CRA encouraged subprime lending, one should see a discontinuity at the thresholds, but there is none.

These are originations for 2-28 subprime loans.  Under CRA, lenders received credit for originating and funding loans in census tracts whose median incomes were below 80 percent of area median income.  If the CRA was inducing lending, we should see a jump in lending to the left of the 80 percent cut-off--there isn't (either visually or econometrically).  They find the same result when looking at pricing and default.   

Was Paul Ryan a math major?

Ryan says it is too complicated to explain his budget numbers. Imaginary numbers are indeed complex.

The final installment of the Oswald-Green debate on home-owning in The Economist

It is here.

The Oswald-Green Debate in the Economist: Rebuttals

Andrew says:

If high levels of home-ownership impair the efficiency of the labour market, then the costs are potentially huge. It is the job of economists to point that out.

I say:

Does home-ownership gum up labour markets? A number of papers sought to test Mr Oswald's conjecture and my takeaway is that the impact of tenure on labour markets is marginal.

[Note: as an American, I never myself would write "labour," so The Economist changed spellings to conform to their style].

Ed Glaeser weighs in

He advocates neutrality:

The government should neither encourage nor discourage home-ownership. Significant public interventions require evidence of significant market failure, and confidence that the costs of state action will be less than the costs of those market failures. These conditions are not met in the housing sector, whether we are contemplating pro or anti home-ownership policies. 

The case for home-ownership often begins with the view that home-owners are better citizens, who create social benefits by investing more in their communities and their governments. My work with Denise DiPasquale does find that home-owners are more likely to work to solve local problems, to vote and to know the names of local leaders. These effects reflect both home-owners' stake in their community and their tendency to live in one place longer. 

If Apple is so cool...

...why doesn't their new map ap give public transit directions?

Andrew Oswald and I debate the merits of homeownership in The Economist

Ryan Avent moderates:

The view of home-ownership as a pillar of economic and social welfare is deeply ingrained across much of the rich world. It seems natural to think a household that owns its home is invested in society in a way a renting family never could be. It is bound to be richer, thanks to the ability to accumulate equity. Its members are sure to take a greater interest in the health of their neighbourhood and the quality of local institutions, if only to help protect the value of their property. And because of that interest in property value, home-owners may be more politically active, to help secure sound and stable governance....

Andrew Oswald defends discouraging ownership:

Home-ownership has reached inefficiently high levels; it has become a distorting totem; modern generations have been brainwashed to believe there is something wrong with them if they rent. We do not want developing countries to mimic the West's post-war obsession with owner-occupation.

There are five reasons to discourage home-ownership. Let's call them: look at the data; efficiency of the labour market; macroeconomic stabilisation; sensible lifetime budgeting; entrepreneurial supply; the common sense of diversity...

I argue against discouraging homeownership:

The motion "Should home-ownership be discouraged?" takes a novel formulation. Generally, the question policymakers ask is whether home-ownership should be encouraged, which suggests that there are social benefits to owning a home. In this case, the affirmative position is that home-ownership should be discouraged. This implies that having people own their homes is socially costly. Thus, my task is to show that home-owning is not socially costly.

I can think of three potentially legitimate arguments for why home-owning might be socially costly; I do not think that any of them are straw men, but I also think that none of them is convincing.

Are ballots more democratic than markets?

I really don't know.  But Parris Glendening made an interesting point at a conference I participated in at GW last week: that in Los Angeles, people decided to tax themselves (via Measure R) to build a light rail system.  So while such systems fail to pass the cost-benefit test, and often worsen the bus service that low income riders rely on, they do, in the case of LA, reflect the will of the people.

I am guessing most people don't read the works of John Kain before they vote; they also don't read IEEE journals before buying PCs.  Los Angeles is implementing measure R in the manner described when it was on the ballot, which makes it very different from the high-speed rail initiative.  I think I need to make my peace with light rail in LA (although I sure wish the Expo line worked better).

Why doesn't cheap RAM hurt SAS?

I don't use SAS anymore because I can now fit large datasets in RAM using Stata.  But SAS sales are doing well.  I wonder why?

How life really has gotten better for researchers

The first non-thesis project I worked on as an assistant professor used the 1 in 1000 Public Use Microdata Sample of the US Census.  My recollection is that the sample had about 63,000 observations; I had to spin a tape to read data into a big iron VMS machine using SAS, and it took about 10 hours to do so.  The year was 1990.

Yesterday, I read five year ACS household data into my Macbook Pro using Stata.  It is broken into four files with about 1.5 million observations each.  Each file took about 2 minutes to read. This is really, really nice.

  

Chris Leinberger reels off a nice line

I was on a panel with him at GW on Tuesday, and he said something like, "when people think of New York, they think people live like Woody Allen Jerry Seinfeld, when in fact most people live like Tony Soprano."

My favorite National League team is the Dodgers....

...and my favorite American League team is whatever team has Billy Beane as its general manager--which is still the Oakland As.

The As have the same won-lost record as the Yankees with 1/4 the payroll.  That is the kind of austerity I can get behind, because it is austerity based on statistics.  But what is remarkable is that after Michael Lewis' Moneyball ( a terrific book) and Bennett Miller's Moneyball ( the highly enjoyable movie version of the book), what Beane is doing is no secret, and yet most other teams have not been able to figure it out, showing that information inefficiencies can stick around for a long time.

The Red Sox were able to combine money with moneyball for awhile to banish to curse of Ruth, but, well, not reason to dwell on others' misery.

(BTW, even though I have only lived in LA for four years, I have been a Dodger fan for much longer, because my wife, a native Angelino, grew up in a Dodger household.  Giving up the Cubs was not a hard thing to do).

On Labor Day, it is worth revisiting Lipsey and Lancaster (1956)

From The General Theory of Second Best, by R. G. Lipsey and Kelvin Lancaster, The Review of Economic Studies, Vol. 24, No. 1 (1956 - 1957), pp. 11-32

It is well known that the attainment of a Paretian optimum requires the simultaneous fulfillment of all the optimum conditions. The general theorem for the second best optimum states that if there is introduced into a general equilibrium system a constraint which prevents the attainment of one of the Paretian conditions, the other Paretian conditions, although still attainable, are, in general, no longer desirable. In other words, given that one of the Paretian optimum conditions cannot be fulfilled, then an optimum situation can be achieved only by departing from all the other Paretian conditions. The optimum situation finally attained may be termed a second best optimum because it is achieved subject to a constraint which, by definition, prevents the attainment of a Paretian optimum.

Everyone who takes Econ 1 (or its equivalent) learns this; it doesn't seem to me that people remember it very well.

A question for Joel Kotkin: What happened to choice?

Joel Kotkin, who often correctly defends auto-oriented suburbs as reflections of many people's preferences, has written that he opposes a new zoning code for Hollywood that would allow for it to become denser.

The code does nothing to force developers to build 50 story apartment buildings, it simply allows developers to build 50 story apartment buildings.  Hollywood is, as he notes, a bit scruffy, but it is also adjacent to  some very expensive real estate, with the Hollywood Hills to the north, Hancock Park to the south and West Hollywood to the west.  It also features two subway stops on a subway line that has pretty decent ridership.  It is entirely possible that market forces would lead developers to increase its density, were they allowed to do so.  These market forces also reflect preferences.


 

The events of the past few days lead me to think about Herman Melville

From The Confidence Man, Chapter 7:

The stranger was a man of more than winsome aspect. There he stood apart and in repose, and yet, by his mere look, lured the man in gray from his story, much as, by its graciousness of bearing, some full-leaved elm, alone in a meadow, lures the noon sickleman to throw down his sheaves, and come and apply for the alms of its shade.

But, considering that goodness is no such rare thing among men--the world familiarly know the noun; a common one in every language--it was curious that what so signalized the stranger, and made him look like a kind of foreigner, among the crowd (as to some it make him appear more or less unreal in this portraiture), was but the expression of so prevalent a quality. Such goodness seemed his, allied with such fortune, that, so far as his own personal experience could have gone, scarcely could he have known ill, physical or moral; and as for knowing or suspecting the latter in any serious degree (supposing such degree of it to be), by observation or philosophy; for that, probably, his nature, by its opposition, imperfectly qualified, or from it wholly exempted. For the rest, he might have been five and fifty, perhaps sixty, but tall, rosy, between plump and portly, with a primy, palmy air, and for the time and place, not to hint of his years, dressed with a strangely festive finish and elegance. The inner-side of his coat-skirts was of white satin, which might have looked especially inappropriate, had it not seemed less a bit of mere tailoring than something of an emblem, as it were; an involuntary emblem, let us say, that what seemed so good about him was not all outside; no, the fine covering had a still finer lining. Upon one hand he wore a white kid glove, but the other hand, which was ungloved, looked hardly less white. Now, as the Fidèle, like most steamboats, was upon deck a little soot-streaked here and there, especially about the railings, it was marvel how, under such circumstances, these hands retained their spotlessness. But, if you watched them a while, you noticed that they avoided touching anything; you noticed, in short, that a certain negro body-servant, whose hands nature had dyed black, perhaps with the same purpose that millers wear white, this negro servant's hands did most of his master's handling for him; having to do with dirt on his account, but not to his prejudices. But if, with the same undefiledness of consequences to himself, a gentleman could also sin by deputy, how shocking would that be! But it is not permitted to be; and even if it were, no judicious moralist would make proclamation of it.

This gentleman, therefore, there is reason to affirm, was one who, like the Hebrew governor, knew how to keep his hands clean, and who never in his life happened to be run suddenly against by hurrying house-painter, or sweep; in a word, one whose very good luck it was to be a very good man.

I should note that my mother, a retired English Professor and Melville mavin, led me to read this, Melville's last, novel, many years ago.  My understanding is that it is not widely read, but it should be.


 

Chris Christie yearns to be run by the Medicis

Since love and fear can hardly exist together, if we must choose between them, it is far safer to be feared than loved.

Niccolo Machiavelli, The Prince

A California Renaissance?

Here is the preliminary job growth rate by state from July 2011-July 2012, according to the BLS.  States are those for which there was a statistically significant change in employment from July to July.

Note that California outperformed Texas.

Orwell's six rules on writing.

From Politics and the English Language:

(1) Never use a metaphor, simile or other figure of speech which you are used to seeing in print. 

(2) Never use a long word where a short one will do. 

(3) If it is possible to cut a word out, always cut it out. 

(4) Never use the passive where you can use the active. 

(5) Never use a foreign phrase, a scientific word, or a jargon word if you can think of an everyday English equivalent. 

(6) Break any of these rules sooner than say anything outright barbarous.

The problem with the capital gains tax

Tax policy can be frustrating.  A major reason that Mitt Romney pays a lower effective tax rate than many working stiffs is that most of his income comes in the form of capital gains, which is taxed at a preferential rate (the top marginal ordinary income tax rate is 35 percent, while the long term capital gains rate is 15 percent).  It may therefore seem that the easy way to implement a "Buffet rule" would be to match the capital gains rate to the ordinary income tax rate.

There are three policy dilemmas here, along with a practical problem.

The first policy dilemma is that some capital gains are nominal--they don't reflect changes in purchasing power.  We recognize this problem in other places in the tax code--for example, we adjust tax brackets for inflation every year.  The problem could be solved using indexing--we could tax real capital gains at the ordinary income tax rate.

The second dilemma is perhaps more controversial.  In a Solow-Swan world of economic growth, more savings produce a larger and newer capital stock, both of which are key to growth (Barro and Sala-i-Martin have a lucid description).  If they are correct (and the consensus is that they are), then policies that encourage both savings and flexibility are good policies.  To some extent we do this with our retirement tax policies: so long as savings remain in a retirement fund, their returns go untaxed, even when securities within the fund are bought and sold.  With respect to capital gains policy, this implies that we should discourage the consumption of realizations of gains, but should encourage investment flexibility.  In other words, if someone sells her winners in order to buy a Jaguar, she should be taxed, but if she sells winners in order to reinvest somewhere else, she should not.

The second dilemma creates a third dilemma--the investor who makes smart decisions accumulates considerable wealth, which could lead to disproportionate political power.  Capital gains preferences accelerate this phenomenon.  This is particularly vexing.

Now for the practical problem--the statutory capital gains rate can be considerably different from the effective rate (my approach here follows the argument in Dave Geltner and Norm Miller's Textbook, Chapter 11).  Consider an investment that pays no dividends that grows in value at 10 percent per year in a world with a statutory capital gains rate of 20 percent.  Suppose the investor holds that investment for ten years, and then sells it.  To put some numbers on it, a $100 investment will grow to $259.37 in value.  The capital gains taxes will be $159.37*.2=$31.87, so the net to the investor after capital gains taxes with be $227.50.  The internal rate of return on the investment drops from 10 percent before tax to 8.6 percent after tax.  Consequently, the effective tax rate is not 20 percent, but 14 percent.

If we stretch out the investment horizon to 20 years, the effective rate drops to 10.3 percent; if we reduce it to 1 year, the effective rate matches the statutory rate of 20 percent.  The point is that regardless of the capital gains rate, investors have considerable discretion at determining their effective rate.  So it is almost certain that a behavioral response to a higher capital gains rate would be longer periods of time between realizations, hence lowering the effective rate.  When it comes to figuring out tax policy, nothing is easy.





  

Trending is dangerous

Niall Ferguson is horrified at the prospect that total Chinese GDP will catch the US in 2017.  Let us leave aside for a second the fact that if China's total GDP matches the US', its people will still be less than 1/4 as affluent, or the fact that maybe it would be a good thing if the most populace country in the world had living standards comparable to ours.  So far as I can tell, his 2017 projection comes from assuming growth in China will continue over the next several years at the same pace it has experienced since 1989.  Such projections are always problematic.

Let me give one example.  From 1890 until 1920, Los Angeles population grew by about 11 fold, from  50 thousand to 576 thousand.  If one assumed that this would continue, Los Angeles' population 90 years later, in 2010, would have been 576,000*11^3, or about 766 million, which is a shade under the population of the entire Western Hemisphere.  Its actual population is around 4 million.

Is this absurd?  Of course.  But I have been seeing similar forecasts based on similar foundations since I was in college (when a very well-known professor projected that the USSR would have a larger economy than the US by the year 2000).    This kind of "analysis" has been driving me crazy for years.

For this first time ever, I have put a blog post on my syllabus

It is Yves Smith's review of The Big Short.  That I have just done this now probably shows how behind the times I am.

Lall, Wang and da Mata find that reducing land use regulation in Brazil would increase the formal housing supply, but not necessarily reduce slum formation

I just finished a two day visit to Sao Paolo, where officials are concerned that constrained housing supply is exacerbating the size of favelas.  This lead me to read Lall, Wang and da Mata:

In this paper, we examine the effects of land use and zoning regulations on
housing supply and slum formation across Brazilian cities between 1980 and 2000. We
find very low price elasticities of housing supply in the Brazilian formal housing market,
which limits formal housing supply adjustments in response to demand increases, and is
linked with growth of informal settlements. The imputed Brazilian formal housing supply
elasticity is similar to those in Malaysia and South Korea, which have been regarded to
have restrictive regulatory environments.

We also find that land use regulations that manage densities – in particular,
minimum lot size regulations, have important effects in terms of housing supply and slum
formation. Contrary to conventional wisdom, lowering minimum lot size regulations do
not lead to a reduction in slum formation. If city population growth were exogenous and
households did not consider local regulations in their migration and residential location
decisions, then lowering minimum lot sizes would allow cities to accommodate more
residents into formal housing developments – and unambiguously reduce slum formation.
However, when we consider that regulations are a part of household migration
and residential choice decisions, the exact effects of lowering regulatory standards are not
obvious. In fact, our model suggests that the net effect of land regulations depends on the
extent to which new formal housing supply absorbs demand, both from current informal
sector residents and population growth induced by lowering regulations. Our estimation
strategy considers both effects, and we find that cities that lowered minimum lot size
regulations from the Federal stipulation of 125 m2 experienced higher growth in the
formal housing stock. However, this was also accompanied by higher population growth
from migration, and the resulting city population growth was higher than the formal
housing supply response, exacerbating the slum formation problem.

Local innovations that increase access to land for the poor – such as flexible land
sub divisions – are welfare enhancing as they allow houses with different specifications
to be available in the market, thereby allowing low income residents to benefit from
services that meet their preferences (and affordability). However, if some cities offer
improved access to land compared to their peers, these cities are likely to
disproportionately attract (poor) migrants. If the induced population growth is higher than
formal housing supply adjustment, informality is likely to grow. Cities that absorb
migrants increase welfare – and in this context the challenge is to identify strategies that
increase formal housing supply relative to population growth. The econometric results
should not be viewed as a failure of flexible zoning to reduce slum formation. Rather, the
focus should be on identifying pre existing distortions in the land and housing market that
reduce the formal housing supply response to additional demand. 

Two important issues for future research emerge from this analysis. First, to
understand why some cities deviated from the federally stipulated minimum lot
specification of 125 m2 to favor low income housing development. And second, to
identify sources of land and housing supply distortions that reduce the elasticity of formal
housing supply.

One fact about the Sao Paulo context: according to officials, the vacancy rate in the formal sector there is about 13 percent, suggesting excess housing supply.  But the construction cost of the minimum size house allowed under Brazilian law is simply too high for many Brazilians to afford.  Allowing smaller houses to be constructed would almost certainly improve housing welfare.

While I don't like the finding, I feel compelled to report that Matt Kahn finds liberals are more likely to be housing NIMBYs

I just caught up with his JUE paper on the subject.  The abstract:

Traditional explanations for why some communities block new housing construction focus on incumbent home owner incentives to block entry. Local resident political ideology may also influence community permitting decisions. This paper uses city level panel data across California metropolitan areas from 2000 to 2008 to document that liberal cities grant fewer new housing permits than observationally similar cities located within the same metropolitan area. Cities experiencing a growth in their liberal voter share have a lower new housing permit growth rate.

The paper is quite thorough, using a wide variety of specifications, and the results are quite robust. 

My research (and that of many others) shows that impediments to homebuilding are the largest cause of expensive houses.  By impeding home construction, liberals are contributing to the rent being too damn high.  Needless to say, this hurts low income households more than anyone else.

Holmes and Watson teams--an entirely subjective judgment

Basil Rathbone and Nigel Bruce--not good
Nicol Williamson and Robert Duval--OK
Douglas Wilmer and Thorley Waters--Oy
Jeremy Brett and Edward Hardwick--great
Vincent D'Onofrio and Katherine Erbe--very good
Robert Downey and Jude Law--OK
Benedict Cumberbatch and Martin Freeman--really great
Jonny Lee Miller and Lucy Liu--kind of eager to find out

Transit Oriented Development in Thailand (h/t Hasan Ikhrata of SCAG)

Why Paul Ryan is dangerous

I was on a panel with him at the University of Wisconsin last year.  Unlike his running-mate, he comes across as well-informed, and he knows how to play to his audience.  He is actually personally quite charming...just very, very wrong.

Who should be held harmless for deficit reduction?

At some point, once the unemployment rate really starts to fall, the US needs to get on a steady-state path to deficit reduction.  A question worth asking is what part of the income distribution should contribute to this reduction.  Certainly the one percent should make the major contribution, but it is hard to see how it can close the gap by itself.

The current budget deficit is about $1.3 trillion.  According to IRS SOI data for 2009 (the most recent available), households in the top one percent paid income taxes of $318 billion in that year (see Table 5).  Because that was an anomalous year, let's go back to 2007, when the top one percent paid the most is had paid under current law, which was $451 billion. If we adjust that for five years of CPI growth, that translates to about $497 billion in current dollars.  This means that doubling taxes on the top one percent would get us less than halfway toward closing the budget gap.

Of course, lower unemployment will mean less money going to unemployment insurance, and will add to the number of taxpayers, and these will help reduce the deficit.  But the taxing the one percent alone will not be enough--so how low do we go?  I would certainly hold the bottom two quintiles harmless--whatever mix of tax and spending changes come along, that group should be left no worse off than before (because they received no net benefit from the policies of the past decade or so).  How one divides it up among the rest?  I am not sure.

I don't understand Glenn Hubbard's Arithmetic

He says he wants federal spending to be reduced to 20 percent of GDP, along with "revenue-neutral" tax reform.  (I think revenue-neutral tax reform is code for reducing the after-tax income of the bottom half of the country further, because after all, Wall Street has suffered too much at the hands of ...well, never mind that for now).

The problem is that according to OMB, current revenues are less than 16 percent of GDP (see Table 1.2).  So is Hubbard advocating a steady-state budget deficit to GDP ratio of four percent per year in perpetuity?