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It occurred to me that the arguments for Supply Side improvements as demand stimulus in a liquidity trap are stronger than I had originally thought.


Well as long as we are in the liquidity trap then the real interest rate is zero. This means that the value of Supply Side improvements after the liquidity trap are necessarily not discounted.

The liquidity trap is like a time warp in which in Discounted Present Value Terms, the end is always tomorrow. Even massively long dated supply improvement should affect demand now.

It means also that the carrying cost of real capital is simply depreciation.

What makes this doubly interesting is that among the slowest depreciating capital goods are structures.

Yet, it is precisely investment in structures that are in the dumps right now.

This wraps around in almost an obvious way, but it suggests that Minsky type moments of the kind Eggerston and Krugman model generally do not persist because if they occurred they would simply induce a boom in the building of structures.

Indeed, that is of course how the business cycle generally operates.

However, that makes bubbles in the price of structures very dangerous. Once the price of structures begins to fall this impedes their use as collateral. This in turn makes borrowing for the purpose of building structures risky and so raises the actual financing cost of structures well above zero even in a liquidity trap.

The key to a liquidity trap then is not that savers cannot be induced to spend, it is that builders cannot post collateral. If they could the slow depreciation of structures and the perpetual tomorrowness of the liquidity trap would induce more building.

This also shows why a currency zone with very slow or negative population growth can so much more easily get stuck in the trap. The demand for structures may actually be falling over time. This means that the distance until the end of the trap matters and you can’t necessarily produce the backwards cascading that would always call for an increase in construction.

What would be interesting is if historically there is a link between the length of a recessions and the speed of population growth/urbanization.

From WSJ

U.S. violent-crime rates fell for the fourth consecutive year in 2010, as police agencies across the country reported significant decreases in murders, robberies and property crimes, the federal government said Monday.

Among violent crimes, robberies registered the biggest decline, down 10% in 2010 compared with 2009, while rapes decreased 5%. Murders fell 4.2% during the same period.

Property crimes fell for the eighth consecutive year, with motor-vehicle thefts decreasing 7.4% in 2010 from a year earlier and burglaries down 2% during the period.

Like driverless cars I think the significance of this is underrated. Cities display increasing returns to scale. That is, the more people you pack into one area the more productive they are.

The obvious question then is – why isn’t the world just one big city?

There are a couple of issues

  • Provision of clean water
  • Removal of waste materials
  • Contagion
  • Congestion
  • Import of raw materials and food
  • Weakening of Social Monitoring

The first two were solved with modern plumbing and were the secret to the first big booms in cities. The third was solved with antibiotics and vaccination and allowed cities to have a net native population growth.

It used to be that cities were so dangerous that they were a net population sink. You went to the city to get rich, catch consumption and die early.

The last three are still a problem. Subways help with congestion and driverless cars probably still will more. Nonetheless, the extent of the city is limiting in part by congestion.

Transportation costs are falling but the United States still has multiple cities in large part because different areas of the country are close to different important resource areas.

The last one – the weakness of social monitoring – is why cities are great for artists but young couples raising a family are more hesitant. The anonymity of the city means you can get away with more. That might mean an alternative life style. It might mean rape and murder.

However, with violent crime falling another barrier to urbanization is falling and an opportunity to reap the gains of agglomeration will present itself. I haven’t read Ryan’s book yet but my feeling has been that the future belongs to the New Urban Sunbelt.

The crime to density ratio has always been high here and as it falls that’s good news for sunny cities in the South.

Yet the potential apartment boom may be slowed by land use regulations

From Multifamily News

Portland, too, has an urban growth boundary that has limited sprawl, points out Gail Neuburg, principal in the Portland office of Apartment Realty Advisors (ARA). “Oregon in general has very strict land-use planning,” she notes. “It’s very difficult to change the use of land, it’s very difficult to find apartment land, and there’s an urban growth boundary around every municipality that limits availability of land—and our fees have skyrocketed, making cost to build prohibitive.”

The Portland-Vancouver-Hillsboro metro area reported its unemployment rate at 8.6 percent in May. Intel recently announced its $4 billion to $6 million investment in a new plant in Hillsboro. This is expected to bring 6,000 construction jobs, as well as 800 permanent positions.

But where will the new workers live?

For reasons both Macro and Micro we should suspect that this period of unusually low GDP growth will be followed by a period of unusually high GDP growth.

From a disaggregated, but not quite micro, perspective my continuing thesis includes:

  1. Home construction is unsustainably low
  2. Household formation is unsustainably low
  3. Even given (2), (1) is so bad that vacancies are falling and rents are tightening
  4. Yet, (2) is implicitly caused by (1) because weak construction is depressing employment

Thus there are the makings of a boom stirring. Construction will pick up. This will lead to falling unemployment. This will lead to rising household formation. This will lead to ever more construction.

In a world of high gasoline prices, low crime and weak household balance sheets there is every reason to expect that we will see a historic increase in new urban apartment complexes.

This will be exacerbated by the public school flip that it will set off. Young couples will flood into low crime, cheap transportation and quite frankly the only available housing of the city. They will send their smart well prepared young children to public schools. They will show up at the local PTA. They will lobby the city government for reform.

This will cause a dramatic rise in the performance of city schools, making urban neighborhoods even more attractive. Gentrification will accelerate. The suburbs will reach a tipping point where the schools are worse and the neighborhoods less prestigious. The reversal will intensify as high status becomes associated with raising a family in the city.

In a relatively short time, American cities will have flipped inside out. Or right side out given your perspective. America has always been the outlier here. A flood new skyscrapers will be created.

While the North East corridor is primed for this type of thing given its current built environment, new building permitting may play a vital role. We may be looking at the new urban south. I am thinking Florida, Texas, Georgia and North Carolina. These are places where its still legally possible to raze whole neighborhoods to put up big shinny buildings. 

They also have not insignificant urban cores in Tampa, Miami, Houston, Dallas, Atlanta and Charlotte. Austin and Raleigh are much smaller but are hooked up to the fast growing tech industry.

This trend will be enhanced if driverless taxis are approved in the near term as this will take the pressure off of new mass transit construction.

This is of course, over the medium term. Over the longer term we get virtual schools and offices, tiny passengerless car-robots and cheap solar power which may promote a resuburbanization.

I sense that a bit of the blogosphere is warming up to the idea that there are not enough homes in America, but now they are saying: we have the wrong kind of homes. They admit there are not enough apartments in NYC but think that the rest of America is flush with homes.

This would make a lot of sense if you have a core belief that urbanism is the future and that the big cities are set to boom even bigger. For my money urbanism is a potential future but I am starting to take the possibility of radical ex-urbanism more seriously.

Nonetheless, getting into the weeds of “which are the right types of homes” is too much for me to do when I am in forecasting mode. Its enough to just try and read the trends and see which ones match up. Trying to forecast where people will want to live and what types of urban arrangements the market will reward is like throwing bones – that is to say pure blogging.

Right now I am in forecasting mode, and I want to reiterate that whatever you might think about the distribution of new homes, the total amount of units coming online was more about a shift away from mulit-family and manufactured homes towards single family homes than about an unsustainable increase in the total number of homes.

As always Calculated Risk has great charts

Even as the US added millions of new residents over the last decade, mutli-family construction stalled before falling off a cliff and manufactured homes have been on a steady downward trend.

Population growth was matched – and mildly exceeded – by growth in single family homes. Now that single family has fallen of a cliff as well, we simply are not producing homes at the rate we are adding people.

Unless living patterns shift dramatically, something has to give. That means a ramp up in construction. The longer home building is suppressed the larger the imbalance will become.

Economists like to say that buying a house is basically like becoming a landlord and then renting the home to yourself. This makes sense because landlords and tenants don’t always see eye-to-eye, but if you are your own landlord this problem goes away.

Consequently, in my mind,  the most important price in the housing market has always in my mind has always be then price-to-rent ratio. When I first started fretting about CDOs – and yes if you have forgotten it really was all about CDOs – was when the price-to-rent started to climb above 1.4.

My case at the time is that there was no way we could have faith that the models would hold in a world that no one had ever seen. The models only operate on data that they have, going to far out of sample, and you just don’t know what might happen.

Anyway, back to the question at hand – do we have too many homes. Hitherto my case has been based on units per person. We have been cranking out new homes at slower than average rates. It may look like we were building a lot of houses, but that was primarily offset by the fact that we weren’t building very many apartment buildings.

So in fact the number of housing units per person in the US is getting fairly tight. We can see something of that in the price-to-rent ratio.

The price-to-rent ratio is closing in on its long term average of 1-to-1.

However, it doesn’t look to me like there are any forces set to boost housing prices in the near term. Rates are only rising from what were record lows. Credit standards show no sign of loosening. Lots of folks have distressed credit and there are still likely a shadow inventory of used homes on the market.

On the other hand the fundamentals for rent look bright. Right now, rents are depressed primarily by a depressed economy and – in my opinion – a Fed that was slow in loosening monetary policy.

Both of those factors are set to change. Couple this with the shortage of units per person and we are looking ahead to a surge in rents. With that we will probably see a rapid increase in home building. Yet, I am betting that this time it is apartment homes that come roaring to the forefront. At the beginning this will likely contain a high fraction of build to rent, but unless rent prices can be held down we should expect a condo boom to run on its heels.

I am cuing Matt Yglesias to talk about how building restrictions over the next five to ten years are going to define cities for decades to come.

When the apartment boom comes – and the fundamentals suggest it is near at hand – will your locality be ready?

There seems to be a renewed interest in the city itself as green solution. Ryan Avent leads the charge, Kevin Drum comments.

For what it’s worth, I’d dial down the scorn and take this as an opportunity. Here’s the thing: my guess is that virtually nobody in the country thinks that cities are greener places than towns or suburbs. And by "virtually nobody," I mean maybe a few percent tops. For most people, it’s wildly counterintuitive on all sorts of levels to think of big, dirty, crowded, urban areas as "green." It just doesn’t compute.

Many years ago I gave a talk entitled, Green Manhattan, where I made the case that Metropolis was the greenest place in America.

Naturally, I got a lot of funny looks but the line that seemed to win a few converts was this: the best way to protect the environment is by keeping people out of it.

I admit I took a few liberties in the talk, not discussing how agriculture would be performed and supported, for example. Nonetheless, I think this framing breaks the intuition that green is about living with nature rather than letting nature live on its on.

An op-ed in the New York Times illustrates why those concerned about energy use and “sustainability” should not be concerned about farms and being locavores, but about households energy usage

Overall, transportation accounts for about 14 percent of the total energy consumed by the American food system.

Other favorite targets of sustainability advocates include the fertilizers and chemicals used in modern farming. But their share of the food system’s energy use is even lower, about 8 percent.

The real energy hog, it turns out, is not industrial agriculture at all, but you and me. Home preparation and storage account for 32 percent of all energy use in our food system, the largest component by far.

Driving to a nearby Walmart to buy factory foods may be more environmentally sound if it saves you a car trip because you’re going there anyway, or if it’s closer than wherever it is you buy local food. I don’t know if anyone has quantified the extent to which big boxes have helped the environment by allowing one-stop shopping, but it seems it would be significant.

And it sounds like foodies should be focusing on which ways to prepare food conserve the most energy. Is microwaving your food the most environmentally friendly thing you can do? Clearly, locavores and greens are focusing on the wrong part of the food production chain to wring energy savings out of. The urban farmer/locavore/foodie aesthetic is a high status one though; the Walmart shopper/microwaver is not.

The piece closes with this paragraph which I will second and should be repeated to urban farmers everywhere:

The best way to make the most of these truly precious resources of land, favorable climates and human labor is to grow lettuce, oranges, wheat, peppers, bananas, whatever, in the places where they grow best and with the most efficient technologies — and then pay the relatively tiny energy cost to get them to market, as we do with every other commodity in the economy. Sometimes that means growing vegetables in your backyard. Sometimes that means buying vegetables grown in California or Costa Rica.

There are two basic strategic problems I see with the current Republican party. First, the party establishment seems completely uninterested in winning the war over ideas. This mistake is indeed the more devastating of the two, as I believe in the end ideas determine reality.

Not in some squishy metaphysical sense but in the cold practical sense that someone must actually write policy and someone must educate the next generation of bureaucrats. If those people all have left wing ideas then you can pretty much bet dollars to donuts that you are going to have left wing government. It may come with enough right wing coating for the public to swallow it but ultimately the public neither authors nor administers the law.

The second mistake is more obvious. The GOP seems uninterested in appealing to the fastest growing demographic groups. Its problems with urban voters are well established and probably deeply rooted. However, its current trouble with Hispanics are of its own making.

Here are some charts I ganked from the Chicago Fed and they focus on the Midwest. However, I know of no particular reason the rest of the country should be any different.

New Urbanism is proceeding full throttle. Michael Steele says he wants to bring the GOP to a “hip-hop urban-suburban” audience. However, suburban doesn’t look like its going to cut it. The country is urbanizing. Whether its “re” urbanizing or continuing a long run trend towards density is a matter of debate.  I tend to think this is a new phenomena but that’s an argument for another day.

Urbanites clearly see government in more favorable lights than suburban and rural dwellers for the simple reason that proximity breeds externality. Spillovers of all sorts, positive and negative are more likely in the city and demands for a government capable of handling negative spillovers will increase.

So yes, this is perhaps a fundamental problem for the GOP. This, however, is not.

I hate to go all Comte but these demographics do look a whole lot like destiny. I mean good god man. There are basically no Hispanic senior citizens and a ton of — apparently fertile given the fraction of the population under age 4 — twenty-somethings.

The GOP seems to be doing its best to antagonize this tidal wave but as far as I can tell there is nothing inherently “Democrat” about Hispanics. They tend to be religious, family oriented, entrepreneurial and generally culturally conservative.

Hispanics look to me like the natural future of the GOP yet, the party seems hell bent on making permanent enemies.

Felix Salmon and Ryan Avent have a very interesting discussion going on the externalities of homeownership. Overall I agree with Felix that you could argue all night about the upsides and the downsides of homeownership, and I’m not going to try and estimate which is larger (not right now anyway). However, I do think that Felix is being too optimistic when he argues that the length of time renters stay in one location is increasing, or will be increasing, by enough to make them willing to make the long-term investments in their neighborhoods or energy efficient appliances that homeowners make.

According to the 2008 American Community Housing survey, the median year that homeowners had moved into their homes was 1998, whereas the median year that renters had moved in was 2005 and in fact, as a Census footnote mention, the later part of 2005.  So the median tenure was 10 years for homeowners, and let’s called it 2.5 years for renters. The chart below shows the percent of renters and homeowners by the year they moved in.

By comparison, in 2004 the median year homeowners moved into their current houses was 1995, and the median for renters was 2001. So the median tenure for homeowners was 9 years, and for renters it was 3. The following chart showing distribution by year moved in has a similar story as above:

This means that between 2004 and 2008 the average tenure for homeowners increased slightly (from 9 to 10), while the average tenure for renters decreased slightly from 3 to 2.5, but overall I would call these numbers relatively unchanged. The vast majority of renters, around 67% in 2004 and 2008, moved in within the last 3 years.

So I don’t see evidence here for Felix’s contention that renters are staying in their homes longer, and homeowners are staying for shorter periods of time. There are more ACS years, and if someone has the time to compile a time series of this data it may be that a story more consistent with Felix will show up, but the numbers I pulled don’t show it.

I share Tyler Cowen’s wariness regarding the morality of meat-eating. In a macro and realist sense, the morality is not so difficult: if the developed world stopped eating meat, then the prices of non-meat would skyrocket, and even if in equilibrium net food costs did not change for the undeveloped world, the dietary adjustment would be costly. Furthermore, since meat is such a cheap source of protein, in equilibrium net food costs probably would go up for the undeveloped world as production shifted to more expensive sources of protein.

On the margin though, I have always seen vegetarians as being more moral than non-vegetarians- I, by the way, am a meat-eater. Ceteris paribus, not killing must be preferred to killing, right?

There are two good counterarguments for this come. First, that the death experienced by animals in the wild is worse than the death experienced when they are hunted, fished, or slaughtered. This is the argument made by slaughterhouse engineer and famous autistic Temple Grandin, and by Tyler Cowen in his Bloggingheads with Peter Singer.

The second argument is that life is a good thing, and because we eat meat, there are billions of farm animals who live that would otherwise not have lived. From a strict utilitarian sense, I don’t think you can make this second argument, since we don’t know the utility of not being born. Nevertheless, intuitively I simply have a hard time believing that life itself is not a good thing.

In order for these counterarguments to defend the morality of carnivorousness, animals must live a life worth living. In that vein, I am glad to see urban hunting taking hold. Of course, in some ways it’s an extension of the silly fad of urban farming; upper class urbanites with time and money to waste looking for increasingly extravagant ways to signal their environmental ethics. On the other hand hunting does seem to require a particular type of person that it would be hard to fake for the sake of signalling- field dressing a deer is not for everyone. Either way, I think it’s a positive development towards more moral carnivorousness.

Via Ryan Avent, I just don’t know what to say about this

By requiring car drivers to pay a fee to drive in a city at peak hours, congestion pricing reduces traffic and raises money that can be used to support public transit—both worthy goals.

Yet congestion pricing has dubious environmental value. Traffic jams, if they’re managed well, can actually be good for the environment. They maintain a level of frustration that turns drivers into subway riders or pedestrians.

Ryan Avent discussing the urban decline from the point of view of disruptive technologies

Lee’s disruptive technology post offers us a glimpse at an explanation. When a metropolitan area has an old, successful, established industry as its economic driver, that area builds its infrastructure and institutions around that industry. These institutions are likely to be unwilling and unable to accomodate and support growth industries. We can think about legislators in a Rust Belt state who fight to protect old industries even when the protections they seek would undermine growth industries. Or banks in old manufacturing centers that are reluctant to invest in start-ups with sharply different practices from the old giants.

I tend to think this is important. I would take a further step back as well and ask “why is all is there some much institutional capital to being with.”

For example, nimble high tech firms famously have rather flat bureaucracy. The lack of many layers of management and hence institutional capital allows the to adapt more quickly to changes in the market.

However, most firms and government are not organized this way. There are large managerial structures, strict protocols for operation, quasi-feudalistic territorial disputes between managers and departments.

My sense as that these are all essentially anti-corruption mechanisms. When it is difficult to measure the individual contribution of each of an organizations parts then those parts will tend towards corruption unless placed under strict management or rigorous protocols.

To that end, I wonder whether or not a key to urban vitality is the ability to measure the effectiveness of individual public service operations. To the extent better measurement is available less bureaucracy is necessary and the community should be more able to adapt.

Several bloggers have pondered the question of vacant urban storefronts.

A few point to lock-in for both the landlord and the tenant. The landlord is afraid of locking in to low of a rent by offering a long term lease in a bad market.  Tenants are afraid of short leases because they have lock-in lots of investment to make their space just right and don’t want the landlord jacking up the rent.

Matt Yglesias doesn’t buy that answer

If you look at suburban strip malls, the same long lease dynamic applies, but widespread strip mall vacancies are normally a sign of specific economic distress. The current recession has less to a lot of them, but in normal economic times you tend not to see this. Instead, even depressed areas reach a low-rent equilibrium.

The difference is that a mall has a single owner who internalizes all of the externalites associated with vacant storefronts (and trash and crime, etc). An ugly mall is a less popular mall and thus commands lower rents overall. Typically its worth for the mall owner to take a hit on one store if he can make it up in higher rents for the others. This, of course breaks down when demand for the whole mall declines.

The externality problem means that, in general, communities will be more pleasant, though much more expensive, if one landlord owns the whole shebang. I think this one reason many people find University campuses to be so nice.

I don’t have a lot to add to Ryan’s take on Europe vs. America. However, I will say the tastes which determine whether or not you like Europe is whether or not you like people – lots of people.

European middle class life seem to be set up in ways that maximize your contact with other people. From cafes to public transportation to the economic reversal of suburbs and the urban core the society expects that you will be okay with being intermingling.

To a large extent I think ethnic anxiety is what keeps Americans from feeling as comfortable in those situations. However, a less other people focused America is more appealing to introverts. The US is in many ways a dork paradise.

Felix Salmon asks how rentals in Manhattan can be down 58% over last year.

First, if I am reading the report right, that refers to new units rented. So, there isn’t an over 58% vacancy rates. There are just 58% fewer lease singings.

More importantly, however, as incomes and income prospects go up people buy more housing. Not just more square feet of housing, more units of housing. Lower income folks tend to share housing – the dreaded roommate.

There are typically savings to be had by moving in with someone even if you are occupying the same total square feet as you were before because you are sharing utility shafts, hallway lineage, etc.  Now, those savings effect might be blunted in high price-per-square-foot Manhattan, but they probably still exist to some extent.

Moreover, most people who share an apartment do use less space per person, because they share spaces. They typically share kitchen and living space and often share a bathroom or at least a half-bathroom. This brings down the total cost per person.

So in a down economy we should expect the same number of people to cram into fewer housing unit. Housing may seem like its fixed but the consumption of housing is not. Housing supply curves slope upward.

Apologies to those who saw a previous unreviewed version

Ryan points out that our fast growing, Forbes award winning, highly educated hometown is pulling up the rear when it comes to light rail. If I remember correctly, however, we had a pretty aggressive light rail plan that was pulled because the Federal Transit Administration let us know that we probably weren’t going to meet their estimates for minimum ridership. This was of course right before gas went to $4 a gallon, ridership on light rail exploded and a stimulus package came through looking to fund anything shovel ready. Timing can be well, unfortunate.

Chris Bradford says everything that you need to know about a city’s desirability can be found by examining wages and home prices. Free Exchange disagrees

Let’s say you’re interested in a city, on the other hand, where the person earning the median income can afford the median home and can live the median lifestyle, that is, where something without a few million dollars in wealth can enjoy a pleasant life. How to choose, then? As Mr Bradford notes, simple price/income comparisons put very different cities like Pittsburgh and Atlanta in the same category. More information is needed to make an appropriate choice

Here’s the thing though. Suppose that living on a shoestring in San Francisco wasn’t as good as enjoying the high life in Atlanta. Why don’t people just move from San Francisco to Atlanta? The fact that they choose not to implies that either there is something about San Francisco that attracts them or something about Atlanta that repels them.

Now that having been said, markets aren’t frictionless. There are costs to moving, finding a new job, finding new friends and being far from family. Some people are living in San Fran in large part because they have always lived there and getting out would cost more than staying. On top of that, population isn’t static. Lots of people are moving to Atlanta. The wage / home price model only truly holds for communities that are equilibrium – a hypothetical situation where everyone has made their choices and they’re sticking with them. This doesn’t accurately describe the Southern boom towns or the Midwestern ghost towns.

Lastly there is the complexity of fixed capital. I don’t want to go to deeply into this but part of the reason Detroit is so cheap is not just because no one wants to live there but because no one wants to live there AND there are a bunch of already built houses and shops. If we suddenly swept away many of those buildings the price of housing in Detroit could rise even if livability feel. This is the story of New Orleans in the immediate aftermath of Katrina.

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