Sympathy for the Devil

To me, there are three reasons to get cable television: HBO, ESPN and C-Span. One of the best things about C-Span is question time, during which the British Prime Minister is asked pointed questions and sometime is (gasp) heckled.

Heckling has been a source of consternation since the town hall meetings started veering out of control this August; then a minor congressman's rude shout-out during the President's terrific speech last night captured disproportionate coverage on the news this morning.

I like President Obama a lot; I am pretty sure I wouldn't like Congressman Wilson at all. But could we get a grip? Elected officials are supposed to be big girls and boys, and they should be able to take control of events. Barney Frank showed us just how to do it a few weeks ago:

http://www.youtube.com/watch?v=nYlZiWK2Iy8

In the end, the heckler looks just plain stupid. And Nancy Pelosi did pretty well with the daggers she sent out into the House chamber--she reminded me of Mrs. Athnos when my 3rd grade class misbehaved (Mrs. Athnos was one of my all-time favorite teachers).

Should there be limits? Of course--whenever violence is threatened or implied, heckling goes beyond the pale. Congressmen (and Presidents) should be able to handle shouters, but people should not be allowed to brandish guns at political events, and effigy burnings are unacceptable. But yelling opinions (even inane ones) at politicians is part of the essence of democracy.

During my first year as an assistant professor, I lost control of a class to a couple of hecklers. Part of what they were heckling about was unfair: I was following in the footsteps of an influential and beloved teacher--James Graaskamp--and I really couldn't help the fact that I wasn't him. But part of the heckling was justified--I was trying to teach Sherwin Rosen's hedonic pricing paper to real estate MBAs, and it was simply inappropriate material given the goals of an MBA degree. I am not saying that I liked being heckled, but it made me think hard about how to teach what I was assigned to teach. I have never been treated rudely in class since then.

It won't be consumption this time

Jim Puzzanghera and Jerry Hirsch wrote a story in this morning's LA Times about the rapid speed at which consumers are paying off their credits cards:

The amount Americans owe on credit cards and other consumer loans plunged a record $21.6 billion in July, clouding prospects that the budding economic recovery would soon extend to Main Street.
The drop in consumer debt for the month was the largest since the Federal Reserve began tracking the data in 1943 and the sixth straight monthly decline in outstanding consumer debt, the longest streak since 1991.

The amount of the decrease -- five times what analysts had predicted -- along with continued job losses and an uncertain housing market show that consumers are still skittish about borrowing money for big-ticket purchases, even though economic data show that the deep recession may have technically ended.

Consumer spending accounts for roughly 70% of the nation's economic activity.

That last sentence may seem like a throwaway line, but it actually underscores an important long term problem. While consumption this decade has been a little more than 70 percent of GDP, in the 50s and 60s it was around 63 percent of GDP, and as recently as the 90s, it was about two-thirds of GDP. The driver of consumption was consumer debt: the ratio of consumer debt to GDP rose from about 60 percent in 1995 to over 100 percent in 2007.

Recent levels of consumer debt and consumption are likely not sustainable in the long term. Investment and exports are in the end going to have to pick up the GDP slack. This is good news for the long-term outlook for industrial real estate; it is bad news for retail real estate.

Has greater competition for colleges increased learning?

John Bound, Brad Hershbein and Bridget Long are not so sure:

The increasingly competitive environment in higher education has increased the level of anxiety that many high school students and their families experience (Lombardi, 2007; Kaufman, 2008). Beyond this, it is natural to wonder whether the increasingly competitive environment has made the typical high school student experience more productive. On one hand, an increasingly competitive environment could induce students to work harder at school and, as a result, to learn more during their high school years; on the other hand, certain mechanisms might lead to the opposite outcome. For example, capable students may spend time on activities that will enhance the chance they obtain admission to selective colleges at the expense of spending time on other activities that might be more productive; Holmstrom and Milgrom (1991) represent the classic formal model of this general phenomenon.

One thing student pretty much must do now to get into selective colleges is take AP courses. I am not sure this is such a bad thing--I look at the AP curriculum, and it is superior to what I got when I was in high school (and I had some outstanding teachers in high school--thanks Mrs Braithwaite, Mr Sipe and Mr Heath). Worrying too much about the AP tests may not be a productive use of time, but I think the courses are worthwhile. I can also really tell when students have been forced to write in high school, and the International Baccalaureate program puts lots of emphasis on writing. But if we could get rid of SAT prep classes, I think it would be a good thing.

Lisa Schweitzer on Alex Marshall

She writes:

Amongst the pop culture urbanists like Richard Florida and Jane Holtz-Kay, there are some that do good, accessible, interesting work and others that produce self-indulgent jeremiads (not to mention any names cough JamesHowardKuntsler cough …). Alex Marshall belongs in the former category. His book on suburbanization, How Cities Work, is both intelligent, accessible, entertaining, well-written, and delightfully non-histrionic in world full of repetitive screeds about the evils of American suburbs...

...Here, he discovers the roots of urban density that go way, way back. He provides a timeline for each city with major events, and the best part: cross-sections of the city by infrastructure era. So for Moscow, you have ascending from the bedrock: the secret subway system, the subway, the secret tunnels, Ivan the Terrible’s secret library and torture chambers, the sewer, water lines, and river culverts.

His thesis is that density doesn’t come through design or through policy. It’s the product of centuries-long urbanization processes. So perhaps my beloved Los Angeles can be forgiven for its settlement pattern given the fact that no planner visiting here in the late 1950s could have foreseen the millions of new people who would arrive, en masse, over the next few decades. Perhaps we should check in after another 100 years and see what LA looks like then.

Two Comments:

(1) Policy has I think driven urban form in post-War American cities. Transportation policy, housing finance policy (i.e., VA and FHA rules) and zoning must have something to do with the way we have spread out.

(2) That said, I do not understand the snobbery against suburbs. People like quiet, leafiness and privacy, and there is nothing wrong with any of these things. I just dropped my daughter off to live in Chinatown for her second year at NYU, and we rented an apartment in Greenwich Village for a few days. I think Greenwich Village is one of the best places on earth, but for day-to-day living, I prefer my quiet street in Pasadena. If that makes me banal, so be it.

The ultimate moral hazard?

[Investment] bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to “securitize” these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds.

So says a story by Jenny Anderson in yesterday's New York Times. Does anyone else see a problem with this? Benefits paid earlier are more valuable than benefits paid later (because of discounting). Doesn't this give investors an incentive to encourage people to die earlier? My colleague Larry Harris taught me that laws prohibit me from buying life insurance on a third party's life that leaves me as a beneficiary, for pretty obvious reasons. This kind of proposed securitization strikes me as a similar sort of thing.

Perhaps I am too paranoid, but events of the past few years leaves me good reason to be so.

"It's really distressing...these things need to be addressed"

Ninety percent of people in La Crosse, Wisconsin have advance directives. Alec MacGillis writes in the Washington Post:.

The town's biggest hospital, Gundersen Lutheran, has long been a pioneer in ensuring that the care provided to patients in their final months complies with their wishes. More recently, it has taken the lead in seeking to have Medicare compensate physicians for advising patients on end-of-life planning.

The hospital got its wish this spring when House Democrats inserted that provision into their health-care reform bill -- only to see former Alaska governor Sarah Palin seize on it as she warned about "death panels" that would deny care to the elderly and the disabled. Despite widespread debunking, those warnings have led lawmakers to say they will drop the provision.

"It's really distressing," hospital official Bud Hammes said. "These things need to be addressed."

The way certain politicians have preyed upon people's fear of death is just infuriating.

[Full disclosure note: my dad practiced cardiology at Gundersen for many years].

I sometimes scratch my head at how accountants think

I went to listen to Stan Ross give a talk at lunch--as always, it was very good. Among other things, Stan taught me how banks are required to impair troubled long-term assets.

It turns out that they forecast undiscounted cash flows and compare them to the loan balance. (This is indeed what FAS Statement 121 says). If the undiscounted cash flows are greater than the balance, they are not required to mark down the troubled loan. This makes no sense to me, and also implies that bank balance sheets are worse then they appear.

David Wessel knows taxes

"He writes:"

Hard numbers and recent history suggest two facts. One, the deficit is too wide to be closed exclusively by raising taxes on "the rich." Two, "the rich" do have a lot of money, even after the bust, and raising their taxes would raise significant sums without hampering the economy.

Fun with real estate leverage and diversification

A few years ago, I had a REIT CEO speak to one of my classes. He is a very smart guy, with an MIT degree. He opened his talk with the following rhetorical question:

You guys don't believe that Modigliani-Miller bullshit, do you?

I felt the need at the time to defend M&M, even though REITS--especially leveraged REITS--were earning terrific rates of return at the time. In the end, it just took a year or two for M&M to bite those who thought leverage was a free lunch.

But leverage can be a risk management tool, because it allows owners to diversify across more than one property. Consider an investor who has enough equity to buy one building with cash, or two buildings with a 50 percent LTV loan. Suppose real estate earns an 8 percent return, and mortgage rates are 6 percent (this is hypothetical). Also suppose that each property has a standard deviation of 5 percent on returns, and the correlation of the returns is .5. An unlevered portfolio with both properties would have a standard deviation of a little under 4 percent (the magic of diversification).

But the fifty percent LTV loans necessary to obtain both property doubles the volatility of equity returns, to a little under 8 percent. On the other hand, because of positive leverage, the six percent loans help push up return on equity to ten percent. So in exchange for a 3 percentage point increase in risk, one gets a two percentage point increase in returns [we should subtract some risk-free rate from returns in this analysis, but I am not certain what the correct risk free rate is right now. The fed funds rate is close to zero]. One also avoids a total loss should one building burn down.

Diane Lim Rogers is very smart

Around three weeks ago, she expressed well a point that I have not expressed so well:

That’s why the two concerns Bruce has about the Bush tax cuts–(1) that they were and are unaffordable; and (2) that they did not permanently reduce marginal tax rates and hence weren’t true “supply side” tax cuts–lead to only one conclusion, and that’s that we need to be thinking more seriously about fundamental (truly base-broadening, keep-rates-low) tax reform.

But of course, now it’s the Obama Administration who’s in charge, and they’ve decided to include $2 trillion worth of deficit-financed Bush tax cuts in their own 10-year budget–that’s $2 trillion of the possible $2.6 trillion of the entirety of the Bush tax cuts.

So left-leaning commentators are reiterating their disdain towards the Bush tax cuts:

[by Robert Creamer on Huffington Post:] [L]et’s be clear, the Bush tax cuts didn’t just produce fewer jobs than advertised. They didn’t produce any private sector jobs at all. The whole experiment in handing over money to the wealthiest people in America so they could use it to benefit the rest of us was a colossal - empirically verifiable - failure.

Turns out that when given the chance to use all of those tax cuts, the top two percent of the population used them to speculate in exotic derivatives, to drive up the prices of high end real estate, pay exorbitant prices to the designers of $4,000 blouses and $2,000 shoes. There is absolutely no evidence that they made any more investments in new manufacturing plants, or started up any more businesses than they would have had they paid the same tax rates that they did when Ronald Reagan took office and private sector job growth was 3% per year.

No, instead the rich used the Bush Tax Cuts to create the gigantic economic “bubble” that ultimately burst and caused immeasurable hardship and suffering to millions of average Americans and everyday people across the globe.

Bottom line is that the rich sold America a bill of goods. Give us big tax cuts and we’ll give you jobs growth, they told us. America kept its end of the bargain, and the rich reneged entirely on theirs.

In a word, the economic theories of the Republicans and the Right were simply wrong. In fact, they were elaborate intellectual justifications for the richest among us to enrich themselves even more…

…but are failing to recognize that almost all of the tax cuts that President Obama has proposed–and in fact all of the deficit-financed tax cuts President Obama has proposed–are in fact the old “Bush tax cuts,” which will now become the “Obama tax cuts” as soon as President Obama signs the extension into law before the end of next year. And while those who have hated the Bush tax cuts but love President Obama would like to believe that President Obama is letting the worst part of the Bush tax cuts (those “for the rich”) expire, the truth is that the “Obama tax cuts” will still go disproportionately to “the rich,” even with the upper tax brackets expiring.

Yep. The Bush/Obama tax cuts are a sad truth that all of us (Reagan supply-siders, Clinton fiscal conservatives, and even the most liberal of Obama supporters) don’t want to believe our new President who stood for “change” could let happen.

Talking about baseball and watching game, with Bill James - Joe Posnanski - SI.com

Bill James does not have, er, sophisticated econometric skills. But he thinks about and writes about data as well as anyone in existence. For me, the triumph of Moneyball is the triumph of evidence-based decision making over "gut-feel."


Talking about baseball and watching game, with Bill James - Joe Posnanski - SI.com

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Diane Swonk has a nice, short, colloquial history of the Fed's management of the crisis.

It begins:

* August 1, 2007: BNP Paribas, one of Europe's largest banks released better-than-expected earnings...
* August 9, 2007: Bloomberg reported that BNP Paribas halted withdrawals from three funds because they could no longer "fairly" value their holdings...

This news, coupled with the fact that the CEO of the bank seemed oblivious to the situation just eight days prior, sent European markets into a tail spin. Trust between banks was shattered, and the overnight loans that banks provide to one another all but disappeared.

In response, the European Central Bank (ECB) was forced to intervene to stabilize markets and provide liquidity.

The piece is entertaining and short, and does a nice job of capturing some of the personalities involved.

The dilemma of classical music

Thanks to the urging of my daughters, I went to see Modest Mouse in Anaheim on Saturday. They were very good, and I had a lot of fun.

Two things I care about are demographics and music. The only genre music I don't like is country-western (although I like Willie Nelson). At Modest Mouse's show at the Grove of Anaheim, I was (I would guess) in the top decile of the age distribution. When I saw Jethro Tull at the Greek last year, I was about median. When I see the LA Phil (or any other symphony orchestra), I am in the bottom decile (or at least quintile). I worry about its audience dieing.

I am convinced that part of the problem is that when one goes to hear classical music, he is expected to keep a stick up his butt. Yet classical music is full of dances. Bach wrote loads of Gigues, Sarabandes and Courantes; Wagner called Beethoven's 7th "the apotheosis of the dance;" Stravinsky's music was commissioned by Diagolev.

So maybe classical music concerts need to change so that people can move while listening. But as Jan Swafford notes, part of what makes classical music great is silence. I don't know the answer.

How much revenue would scaling back the Mortgage Interest Deduction raise?

Less than static analysis would suggest. Even in the absence of the mortgage interest deduction, homeowners get a tax preference because imputed rent goes untaxed. If the MID were scaled back or eliminated, some households would sell assets with taxable returns to pay down their mortgages, thus reducing the net tax revenue arising from the policy change.

Jim Follain was the first (I think) to arrive at this insight, and Pat Hendershott and I found that people in Australia (where there is no MID) pay off their mortgages faster than Americans. The reduction in leverage is probably a good thing, and I know of no compelling argument for the mortgage interest deduction (it does almost nothing to encourage homeownership), but we should not delude ourselves into thinking that its elimination would produce a great revenue windfall.

From Ken Harney: Ideas to cut the federal deficit could cost homeowners billions -- latimes.com

Ideas to cut the federal deficit could cost homeowners billions -- latimes.com

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This makes sense to me. Base broadening (particularly in a progressive manner) is better that rate raising. Those whose marginal tax rate is 15 percent of less would be basically held harmless.

Housing inside the Beltway seems to be different

IAS 360 puts out data on house prices at the county level for 360 counties around the country. I am in the process of finding out more about how their data are put together, but one thing in their data really stood out for me: all but two places covered on their home page have seen house price declines since 2006.

Those two places are Will County, IL and the District of Columbia. House prices in DC are 30 percent higher, by the IAS 360 measure, than they were at the national peak in 2006. I find this plausible, because my GW colleague Paul Carrillo showed me hedonic regressions that demonstrated that prices in DC remained flat in 2008, while prices were falling rapidly elsewhere in the region.

Why is DC different? Part of it may be that transportation infrastructure within DC is pretty good (lots of public transportation and taxis), while in the suburbs, particularly the far flung ones, it is bad. Part of it is that its amenities continue to improve. I am sure it helps a lot that Michelle Rhee seems intent on making the schools better. But for it to be such an outlier? That is still a mystery.

Should we be excited about the July new home sales number?

The short answer is no. The July number was the worst July number since 1982; it just wasn't as bad as the June number, which wasn't as bad as the May number.

Everybody wants to know if we have hit bottom. There are three indicators suggesting we have--and three suggesting not. The good: prices in many markets have fallen below replacement cost (which is a pretty robust fundamental in the absence of population declines). Morris Davis at Wisconsin has shown that rent to price ratios have returned to be more in line with long term ratios, and given how low mortgage rates are, this is comforting. And resale inventories in California have dropped to under 4 months.

On the down side, we may have a lot of foreclosed houses coming at us in the next year. The employment picture is still atrocious. And if rents keep falling, prices will follow.

I would also guess that the first-time homebuyer tax credit is time-shifting sales, rather than raising them for the long term, but we shall see. On the other hand, the nature of investor sales is actually a positive indicator: investors are buying with cash and renting out units at decent rates of return. This is very different from the borrow, buy and flip model from the earlier part of this decade.

FWIW, I would assign a subjective probability of .7 that we are at bottom. On the other hand, around 2005, I assigned a .35 probability that we were about to face serious trouble.

To see the whole speech

Go to http://www.americanrhetoric.com/speeches/tedkennedytruth&tolerance.htm

Ted Kennedy at Liberty Baptist College

Why Ben Bernanke was (and should have been) reappointed

The Ted Spread has returned to normal (actually, a little less than normal). The A2P2 spread is getting there.